CH. 10 Learnsmart
Which of the following statements is correct?
A manager might reject a proposal using ROI that the manager would accept using residual income.
Responsibilities of a profit center manager may include ___________.
contract negotiations involvement in strategic initiatives related to product success controlling division costs
A company can increase its return on investment (ROI) by ___________.
decreasing operating expenses increasing sales
There are many variances of ROI, including return on ___________.
equity assets capital employed
When calculating Return on Investment (ROI), net operating income ___________.
includes income from normal operations does not include interest expense
Authority to make decisions about how and where to invest the company's assets to drive long-term profitability manager rests with the manager of a(n) __________ center.
investment
The transfer pricing method that generally provides the most benefit to the seller is the ________ method.
market-price
The transfer pricing method that treats the two segments as if they were independent businesses is the __________ method.
market-price
The manager of a(n) __________ center has control over both costs and revenues, but not the use of investment funds.
profit
ROI can be calculated as _________.
profit margin × investment turnover net operating income ÷ average invested assets
The net operating income that an investment center earns above the minimum amount needed to meet the required rate of return is its __________ _________.
residual income
The price charged when one segment of a company provides goods or services to another segment of the same company is the _______ price.
transfer
The minimum acceptable transfer price using the cost-based method is __________.
variable cost
A balanced scorecard includes leading indicators but NOT lagging indicators.
False
Cost centers have no impact on revenue.
False
The required rate of return is also known as the _______ rate.
hurdle
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 $__________.
$4,000
Sales revenue ÷ average invested assets equals _________ ________.
Investment turnover
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 investment turnover is _________, its profit margin is _______%, and its return on investment is _________%.
2 5% 10%
Macey, Inc.'s invested assets were $300,000 at the beginning of the year and $400,000 at the end of the year. Total revenue was $1,050,000, and net operating income was $70,000. Return on investment was ________%.
20% Reason: Net operating income ÷ Average invested assets = $70,000 ÷ $350,000 = 20%.
Given beginning operating assets of $140,000, ending operating assets of $180,000, net operating income of $40,000, and tax expense of $8,000, return on investment is equal to ___________%.
25% Reason : 140,000 + 180,000 / 2 = 160,000 40,000 / 160,000 = .25
Responsibility centers can be based on _________ regions, __________lines, _____________ characteristics, or some combination of the three.
Geographic Product Functional
In order to increase return on investment (ROI), the company must _________ (increase/decrease) sales, and/or _________ (increase/decrease) operating expenses and/or ___________ (increase/decrease) average operating assets.
Increase Decrease Decrease
Net operating income is net income from normal operating activities, before other income, ___________ , and _________.
Interest Taxes
Which type of manager(s) have the authority to make purchase decisions regarding company assets?
Investment center managers only
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
The manager of a(n) ______________ center has control over both costs and revenues, but not the use of investment funds.
Profit
Net operating income ÷ Sales revenue =
Profit margin
In order to fully evaluate ROI, managers should compute both ___________ ___________ and ___________ turnover.
Profit margin Investment turnover
Which of the following business segments would not be considered a cost center?
Retail outlet
The amount that one division charges when it sells goods or services to another division of the same company is called a(n) __________ _________.
Transfer price
In strongly decentralized organizations, even the lowest-level managers can make decisions.
True
A comprehensive performance measurement system that is derived from an organization's strategic vision is ___________.
a balanced scorecard
Revenue center managers are evaluated primarily on their ___________.
ability to meet sales goals
Return on investment, residual income, and economic value added ________.
are all lagging measures of performance
The required rate of return _____________.
considers financing costs considers the risk of an investment
When a transfer price is based on cost plus a percentage markup, the method being used is __________.
cost-based
Marcos Co. is considering a project that will increase residual income by $15,000. The project has a 12% return on investment (ROI) which exceeds the company's 10% required rate of return. The division manager has a current ROI of 15%. Based on these facts, the _________.
division manager may not want to accept the project division manager currently has a positive residual income project should be accepted by the company because it increases residual income
Financial performance measures _________.
focus on past, not future performance may cause managers to make decisions that won't be optimal in the long run
A transfer price that falls somewhere between the variable cost and the wholesale priced was most likely developed using the ________ method.
negotiation
Inside information about the other division's costs, capacity, and demand will impact setting a transfer price using the _______ method.
negotiation
Residual income is equal to _________.
net operating income - (average invested assets × hurdle rate)
The net operating income that an investment center earns above the amount required to earn the minimum required rate of return is __________.
residual income
An area of business that a manager has control over and is accountable for is called a(n) ______________ center.
responsibility
Investment turnover × profit margin =
return on investment
Net operating income ÷ average invested assets =
return on investment
Sales quotas are often given to __________ center managers.
revenue
Sales revenue minus all costs that are directly attributable to a particular product line or region of a business is called the ___________ _________.
segment margin
A(n) _____________ income statement is broken down by product line, region, or other area of a business.
segmented
In decentralized organizations, decision-making authority is
spread throughout the organization
