MGMT 303 - Chapter 10

How can a company increase its ROI (return on investement)?

- increase sales - reduce operating expenses

Financial performance measures:

- may cause managers to make decisions that won't be optimal in the long run - focus on past, not future performance

Which of the following statements regarding the balanced scorecard is true?

- objectives and measures in each category should be linked so that performance in one area leads to performance in another - the learning and growth perspective typically contains leading indicators of future performance

ROI can be calculated as:

- profit margin multiplied with investment turnover - net operating income divided by average invested assets

T/F In strongly decentralized organizations, even the lowest-level manager can make decisions.

True

According to the ________ ________ managers should only be held accountable for what they are actually in charge of.

controllability principle

The manager of a(n) ______ center does not have control over revenue or the use of investment funds.

cost

When managers are evaluated on residual income, rather than on return on investment (ROI), they will be ______ (more/less) likely to pursue projects that will benefit the entire company.

more

Net operating income/Sales revenue =

profit margin

In order to fully evaluate ROI, managers should compute both _____ ______ and _____ _____

profit margin and investment turnover

The net operating income that an investment center earns above the amount required to earn the minimum required rate of return is:

residual income

Managers are evaluated based on the performance of the part of the business that they are responsible for under the concept of _______ _______.

responsibility accounting

The process of holding lower-level managers accountable for part of the business over which they have control is referred to as _______ _______.

responsibility accounting

The most common method used to evaluate profit center managers is based on:

segmented income statement

Which of the following statements are true?

- a profit manager is accountable for direct fixed costs - common fixed costs are commonly incurred at higher levels of an organization - a direct fixed cost supports a specific business segment

The required rate of return:

- considers the risk of an investment - considers financing costs

Which of the following statements regarding decentralized organizations are correct?

- decentralization helps lower-level manager develop better management skills - decentralization often allows decisions to be made faster, since not as many layers of management are needed for approval - decentralized organizations often use responsibility accounting systems to evaluate lower-level manager - managers in decentralized operations may make decisions that are good for their department, but not for the organization as a whole

When calculating ROI, net operating income:

- does not include interest expenses - includes income from normal operations

Economic value added (EVA):

- uses total capital employed as the measure of investment - is similar to the residual income calculation - uses the cost of capital as the hurdle rate

Macey Inc's investment center had invested assets at the beginning of the year of $300,000. Ending invested assets totaled $400,000. Total revenue for the year was $1,050,000 and net operating income was $70,000. Return on investment was:

20% $70,000 / (($300,000+$400,000)/2)

Carlos Inc. requires a minimum rate of return of 10% on its average operating assets. The housewares department currently has average invested assets of $200,000 and a net operating income of $24,000. The department's residual income is $______.

4000 net operating income x (average invested assets x hurdle rate)

Choose the four groups of performance measures typically used in the balanced scorecard approach.

Financial, customer, internal business processes, and learning and growth

Profit center

Manager has control over both costs and revenue, but not over the use of investment funds

Cost center

Manager has control over costs, but not over revenue or the use of investment funds

Investment center

Manager has control over costs, revenues, and the investments in assets

Revenue center

Manager has control over generating revenues, but not over costs or investment funds

Which of the following statement is incorrect regarding responsibility accounting?

Responsibility accounting refers to the process of evaluating top management on the decisions made by lower-level managers.

Net operating income / average invested assets =

Return on investment

Valley manufacturing reported sales of $800,000, net operating income of $40,000, and average invested assets of $400,000. Based on this, Valley's turnover is _____, its profit margin is _____%, and its ROI is _____%.

Turnover is 2 (sales revenue/average invested assets) 5% profit margin (net operating income/sales revenue) 10% ROI (net operating income/average invested assets)

Decision-making authority lies mostly with higher-level managers in strongly:

centralized organizations

The link between internal business processes and financial results is the _____ perspective of the balanced scorecard.

customer

Lower-level management goals that are inconsistent with company goals are possible disadvantages of _______.

decentralization

A performance evaluation system can create _______ _______ or a conflict of interest between what is best for a division and best for the company as a whole.

goal incongruence

In order to increase ROI, the company must _____ (increase/decrease) sales and/or _____ (increase/decrease) operating expenses and/or ______ (increase/decrease) average operating assets.

increase, decrease, decrease

Measuring the percentage of new products launched evaluates the ______ perspective of the balanced scorecard.

internal business processes

ROI is a measure used to evaluate managers of _____ centers

investment

The manager of a(n) _______ center has control over costs, revenues, and investments in operation assets.

investment

Evaluating how the company will sustain the ability to change and improve is part of the _____ perspective of the balanced scorecard

learning and growth

When a manager is evaluated on residual income, an investment is acceptable when:

net operating income for the investment is above the minimum required return on average operating assets

Which of the following business segments would not be considered a cost center?

retail outlet

Sales revenue minus all costs that are directly attributable to a particular product line or region of its business is its _______ ________.

segment margin

Revenue center managers are evaluated primarily on:

their ability to meet sales goals