Chapter 10. Performance Measurement in Decentralized Organizations

ROI can be calculates as _____.

ROI = Margin x Turnover ROI = net operating income/average operating assets

Which of the following statements is NOT a weakness of using return on investment (ROI) to evaluate performance?

ROI does not include the investment in nonoperating assets, such as land held for investment or stock in other companies.

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

$4000 $24,000 - ($200,000 x 10%) = $4,000

Which of the following statements is correct?

- A manager might reject a proposal using ROI that the manager would accept using residual income.

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

- Financial - Customer - Learning - Growth

How can a company increase its margin?

- Reduce operating expenses - Increase sales - Increase selling price

Which of the following evaluation measures are used for investment center managers only -- not for cost or profit center managers?

- Residual income - Return on Investment (ROI)

The balanced scorecard:

- incorporates both financial and nonfinancial measures - helps employees to understand the strategy of the company - may include ROI and residual income in its coordinated system of performance measures

The balanced scorecard:

- links the organization's strategy to its financial budgets - helps managers communicate the organization's strategy to their subordinates - helps to ensure employees understand the organization's strategy

Given Sales of $250,000, Net Operating Income of $25,000 and Average Operating Assets of $125,000, Margin = _____% and Turnover = _____.

10 2

Which of the following statements is INCORRECT regarding the use of financial indicators as performance measures?

Financial performance is the responsibility of lower-level supervisors and managers whoa re in charge of the company's daily operations.

Residual income =

Net Operating Income - (Average Operating Assets x Minimum Required Rate of Return)

Which of the following ratios are part of the ROI formula?

Net operating income/sales Sales/Average operating assets

Net operating income/average operating assets =

ROI return on investment

Given a margin of 12%, sales of $150,000 and average operating assets of $90,000, the ROI is _____%

ROI = Margin x Turnover ROI = (Net operating income/sales) * (Sales/Average operating assets) ROI = net operating income/average operating assets Turnover = sales/operating assets ~~~~~~~~ (150,000/90,000) * 12% = 20%

Why is using the gross cost of operating assets when calculating ROI preferable to using the net book value?

Replacing an existing asset will not automatically decrease ROI

Which of the following statements regarding a balanced scorecard is INCORRECT?

The scorecard should provide an opportunity for subordinates to evaluate their superiors

An integrated set of performance measures that are derived from the company's strategy is _____.

a balanced scorecard

The ROI formula typically uses _____.

average operating assets for the year

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

cost

The higher a business segment's return on investment (ROI), the greater the profit earned per _____ invested in the segments

dollar

Last year, Valley Manufacturing reported sales of $800,000, net operating income of $40,000, and average operating assets of $400,000. The company is considering the purchase of equipment that will reduce expenses by $20,000. The equipment will increase average operating assets by $100,000 and be purchased by issuing a notes payable. Sales will remain unchanged. If Valley accepts the project, its return on investment (ROI) after the purchase is projected to ______ (increase/decrease) from the current level of ______% to a new return on investment (ROI) of ______%.

increase 10% to 12% Last Year: $40,000/$400,000 = 10% This Year: $20,000 + $40,000 = $60,000 $400,000 + $100,000 = $500,000 $60,000/$500,000 = 12%

Using net book value (instead of gross cost) to calculate average operating assets ______.

increases ROI over time

Net operating income is income before _____ and ______.

interest taxes

Assembling products and handling baggage are examples of ______ processes.

internal business

Residual income is a measure used to evaluate managers of _____ centers.

investment

Turnover incorporates a crucial area of a manger's responsibility which is:

investment in operating assets

In order to fully understand how a manager's decisions can affect ROI, both _____ and _____ should be computed.

margin turnover

When a manager is evaluated by on residual income, an investment is acceptable when _____.

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

The performance of two different investment centers should be evaluated by comparing the _____ change in residual income from year to year for the two investment centers.

percentage

The manager of a(n) ________ center has control over both costs and revenues, but not over the use of _____ funds.

profit investment

Using a balanced scorecard, top management can translate the company's vision and _____ into _____ measures that the employees can understand and influence.

strategy performance