Chapter 11
Last year a company had sales of $400,000, a turnover of 2.4, and a return on investment of 36%. The company's net operating income for the year was:
$60,000
Given the following data: Return on investment (ROI) would be:
12%
CS Company has a profit margin of 11%. Sales are $320,000, net operating income is $35,200, and average operating assets are $128,000. What is the company's return on investment (ROI)?
27.5%
All other things being the same, which of the following would increase the residual income?
Decrease in average operating assets.
A balanced scorecard should not contain any performance measures concerning customer satisfaction since the extent to which customers are satisfied is beyond the control of any manager in the company.
False
A cost center is not a responsibility center.
False
A disadvantage of using ROI to evaluate performance is that it encourages the manager to reduce the investment in operating assets as well as increase net operating income.
False
All other things being the same, a decrease in average operating assets will decrease return on investment (ROI).
False
Because continuous improvement is very difficult, the emphasis in the balanced scorecard tends to be on meeting preset standards.
False
Move time is considered value-added time.
False
Net operating income is income after interest and taxes.
False
Operating assets include cash, accounts receivable, and inventory but not any depreciable fixed assets.
False
Process Time is the only non-value-added component of Throughput Time.
False
Queue time is considered value-added time.
False
ROI and residual income are tools used to evaluate managerial performance in profit centers.
False
Residual income is the net operating income that an investment center earns above the minimum required return on the investment in fixed assets.
False
Return on investment is superior to residual income as a means of measuring performance because it encourages managers to make investment decisions that are more consistent with the interests of the company as a whole.
False
To compute turnover in the decomposition of ROI, average operating assets is used in the numerator.
False
Which of the following would be an argument for the use of net book value in the computation of operating assets in return on investment calculations?
It is consistent with how plant and equipment items are reported on the balance sheet.
Managerial performance can be measured in many different ways including return on investment (ROI) and residual income. A good reason for using residual income instead of ROI is:
Managers are more likely to accept projects that are beneficial to the company.
Consider the following three conditions: I. An increase in sales II. An increase in operating assets III. A reduction in expenses Which of the above conditions provide a way in which a manager can improve return on investment?
Only I and III
Which of the following performance measures will decrease if the minimum required rate of return increases?
Option B
Throughput Time consists of:
Process Time, Inspection Time, Move Time, and Queue Time.
A manufacturing cycle efficiency (MCE) ratio close to 1.00 is desirable because this is the ratio of value-added time to throughput time.
True
A profit center is responsible for generating revenue and for controlling costs.
True
All profit centers are responsibility centers, but not all responsibility centers are profit centers.
True
Inspection Time is generally considered to be non-value-added time.
True
Land held for possible plant expansion would not be included as an operating asset when computing return on investment (ROI).
True
Margin equals net operating income divided by sales.
True
Residual income should not be used to evaluate a profit center.
True
Return on investment (ROI) equals margin multiplied by turnover.
True
Suppose a company evaluates divisional performance using both ROI and residual income. The company's minimum required rate of return for the purposes of residual income calculations is 12%. If a division has a residual income of $6,000, then its ROI is greater than 12%.
True
Throughput time is the amount of time required to process raw materials into completed products.
True
Wait time is considered non-value-added time. Group starts
True
When used in return on investment (ROI) calculations, operating assets do not include investments in land held for future use and investments in other companies.
True
Manufacturing Cycle Efficiency (MCE) is computed as:
Value-Added Time ÷ Throughput Time.
A company that is seeking to increase ROI should attempt to decrease:
average operating assets
Contribution income statements are used to measure the performance of:
both profit centers and investment centers.
Residual income:
is the net operating income earned above a certain minimum required return on average operating assets
Net operating income is defined as:
net income plus interest and taxes.
