ACCT CH 15

Measuring performance on the basis of residual income is likely to lead to suboptimization. This statement is

False

An ROI of 15% means that a company received fifteen cents for every dollar it invested. This statement is

True

Residual income is a technique that is designed to avoid the suboptimization that frequently occurs when return on investment is used as the sole measure of performance. This is

True

Suboptimization is likely to occur when there is a conflict between what is in the best interest of a company and what is in the best interest of one of its managers. This statement is

True

The return on investment (ROI) is measured by dividing the amount of operating income by the amount of the return. This statement is

True

Kelfour Enterprises has divided its operations into two divisions. Relevant accounting data for each division is as follows: Divisions Sales OA OI Western Division $ 150,000 $ 100,000 $ 15,000 Eastern Division $ 300,000 $ 150,000 $ 16,500 Kelfour has an additional $50,000 of funds to invest. The manager of the Western Division believes that she can invest the funds at a rate of return (ROI) of 14% while the manager of the Eastern Division has found a new investment opportunity that is expected to yield a 12% ROI. Kelfour uses residual income (RI) to evaluate managerial performance. The company wide desired ROI is 10%. Based on this information a. The manager of the Western Division would accept the $50,000 additional investment opportunity because it would increase the Division's RI by $2,000. b. The manager of the Eastern Division would accept the $50,000 additional investment opportunity because it would increase the Division's RI by $2,000. c. The CEO would be indifferent because the $50,000 additional investment would increase the RI of the company as a whole regardless of which Division receives the additional investment. d. All of the answers represent true statements.

a. The manager of the Western Division would accept the $50,000 additional investment opportunity because it would increase the Division's RI by $2,000. Western Division: Residual Income =($50,000 x 14%) - ($50,000 x 10%) = $2,000 Eastern Division: Residual Income =($50,000 x 12%) - ($50,000 x 10%) = $1,000 The CEO would want the addition funds to be invested in the Western Division because that investment would maximize the company wide RI.

Return on investment is equal to: a. (operating assets ÷ sales) x (sales ÷ operating income). b. (sales ÷ operating income) x (sales ÷ operating assets). c. (operating income ÷ sales) x (sales ÷ operating assets). d. (operating income ÷ sales) x (operating assets ÷ sales).

c. (operating income ÷ sales) x (sales ÷ operating assets).

Residual income is calculated by which of the following formulas: a. Operating income - (Operating assets x Existing ROI) b. Operating income - (Operating assets x Expected ROI) c. Operating income - (Operating assets x Desired ROI) d. Operating income - (Operating assets x Historical ROI)

c. Operating income - (Operating assets x Desired ROI)

Which of the following types of business is most likely to have a low margin and high turnover? a. a car dealership like a Mercedes sales organization b. a high end retail company like Saks Fifth Avenue c. a discount retail company like Walmart d. a jewelry store like Kay Jewelers

c. a discount retail company like Walmart discounters like Walmart make up for their lower margins by minimizing the investment in assets that are necessary to generate a dollar of sales.

Kelfour Enterprises has divided its operations into two divisions. Relevant accounting data for each division is as follows: Divisions Sales O A O I Western Division $ 150,000 $ 100,000 $ 15,000 Eastern Division $ 300,000 $ 150,000 $ 16,500 Kelfour has an additional $50,000 of funds to invest. The manager of the Western Division believes that she can invest the funds at a rate of return (ROI) of 14% while the manager of the Eastern Division has found a new investment opportunity that is expected to yield a 12% ROI. Currently Kelfour uses ROI as the sole measure of managerial performance. Based on this information a. The manager of the Western division is likely to reject an offer to have the funds invested her department. b. The manager of the Eastern division is likely to accept an offer to have the funds invested his department. c. The CEO of Kelfour is likely to favor having the funds invested in the Western Division. d. All of the answers represent true statements.

d. All of the answers represent true statements. The manager of the Western division is likely to reject an offer to have the funds invested her department --> because their existing ROI is MORE than her ROI when investing the funds The manager of the Eastern division is likely to accept an offer to have the funds invested his department.--> because their existing ROI is LESS than her ROI when investing the funds The CEO of Kelfour is likely to favor having the funds invested in the Western Division.--> because their existing ROI is MORE thank East's existing ROI

Which of the following statements is true? a. A higher margin suggests better performance. b. A higher turnover suggests better performance. c. The margin times the turnover is equal to the return on investment. d. All of the statements is true.

d. All of the statements is true.

Return on investment (ROI) may be calculated for investments made for a. a particular investment opportunity. b. a particular division of a company. c. a company taken as a whole. d. ROI is frequently calculated for all of the investments described in the answers.

d. ROI is frequently calculated for all of the investments described in the answers.