A306 SB Chapter 11

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

- Net operating income ÷ Sales - Sales ÷ Average operating assets

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

- Return on investment (ROI) - Residual income

Valid criticisms of evaluating performance based on return on investment (ROI) include managers may

- be put in charge of a business segment that includes committed costs over which a manager has no control - take actions that increase ROI in the short-run at the expense of long-term performance - reject investment opportunities that are profitable for the company but have a negative impact on a manager's ROI

Garnett, Inc. has a required rate of return on new projects of 12%. The Western division of Garnett is currently earning a combined return on investment (ROI) of 14.5% on the projects in its division. The manager of the Western division is considering a project that is projected to earn 13.25%. Which of the following statements regarding the manager's decision are correct? - Rejecting the project would be an example of the manager sacrificing the objectives of the overall company in order to improve his segment. - The project will improve the ROI for the Western division, since it is above the required rate of return that the company has specified. - The manager may decide to reject the project because it will lower the current ROI earned by his division.

- Rejecting the project would be an example of the manager sacrificing the objectives of the overall company in order to improve his segment. - The manager may decide to reject the project because it will lower the current ROI earned by his division.

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. Marcos Co. currently has an overall 15% ROI in the department where this project would be implemented. Which of the following statements regarding this potential investment are true? - The project should be accepted by the company because it increases overall residual income. - The project should be accepted because the residual income will help push the project's ROI above the projected 12%. - The project should be rejected by the company because its ROI is lower than the current departmental ROI. - The department manager may not want to accept the project because it will lower the overall ROI for the department.

- The project should be accepted by the company because it increases overall residual income. - The department manager may not want to accept the project because it will lower the overall ROI for the department.

In a decentralized organization

- changes in the operating environment can be responded to rapidly - lower-level managers are trained for higher positions. - top management can concentrate on issues such as overall strategy

ROI is a method used to evaluate

investment centers, but not cost or profit centers

Disadvantages of decentralization include

- lack of coordination - spreading innovative ideas may be difficult - clashing objectives between departments and the organization

Operating assets include

- accounts receivable - inventory - equipment

NOI divided by Sales =

Margin

EBIT is another term for

Net operating income

Return on investment =

Net operating income ÷ Average operating assets

Which of the following statements is incorrect regarding responsibility accounting?

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

Sales ÷ Average operating assets.

Turnover

Which of the following are disadvantages of decentralization?

- Coordination among departments may be lacking. - Lower-level managers may have objectives that differ from the objectives of the entire organization. - Lower-level managers may make decisions without understanding the big picture.

Which of the following will ordinarily improve margin (and ROI)?

- Increasing selling prices - Reducing operating expenses

ROI can be calculated as

- net operating income ÷ average operating assets - margin × turnover

Which of the following statements is correct? - A project that is not acceptable using residual income calculations may be acceptable when ROI is calculated. - A manager might reject a proposal using ROI that the manager would accept using residual income. - Managers will be more likely to pursue projects that will benefit the entire company when being evaluated on ROI instead of residual income.

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

True or false: Adams, Inc. has found that their managers are reluctant to replace old equipment with new, updated equipment. To stop this practice, Adams should compute ROI using assets' net book values.

False

Residual Income

NOI - (Average operating assets × Minimum rate of return)

Net operating income - (Average operating assets × Minimum required rate of return)=

Residual Income

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

Retail outlet

The ROI formula typically uses

average operating assets for the year

An organization in which decision-making authority is spread throughout the organization is

decentralized

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

increases ROI over time

Net operating income is income before

interest and taxes

Residual income is a measure used to evaluate managers of ______ centers

investment

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

investment

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

margin turnover

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

more

Comparing actual net income to budgeted net income is often done to evaluate the manager of a(n) ______ center.

profit

The net operating income that an investment center earns above the minimum required return on its average operating assets is

residual income

Lower-level managers' decision-making authority can be linked to the outcomes of those decisions through _________ accounting systems

responsibility

Net operating income ÷ Average operating assets =

return on investment

In decentralized organizations, decision-making authority is

spread throughout the organization

Managers of cost centers are evaluated on

their ability to control costs in their responsibility center

Operations are able to respond quickly to customers and changes in the environment in a decentralized organization because

there are fewer managers that must be consulted before a decision is made

Which manager has control over both costs and revenue, but not over decisions regarding major purchases and expansions?

Profit Center