Chapter 10

ROI is a method used to evaluate Blank______.

investment centers, but not cost or profit centers

Managers of cost centers are expected to ______.

minimize costs, while providing an acceptable level of service

EBIT is another term for Blank______.

net operating income

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

residual income

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

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

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 $____ . (Enter your answer as a whole number without decimal places.)

4000

Net operating income is income before ____ and ____ . (Enter only one word per blank.)

Blank 1: interest Blank 2: taxes or tax

The manager of a(n) ____ center has control over costs, revenue, and investments in operating assets. (Enter only one word per blank.)

Blank 1: investment

Computing ROI using the expanded model provides additional insights. ROI can be lowered by excessive operating expenses which can depress ____ and excessive operating assets which can depress ____. (Enter only one word per blank.)

Blank 1: margin Blank 2: turnover

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)

Operating assets include ______.

accounts receivable equipment inventory

The ROI formula typically uses Blank______.

average operating assets for the year

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

investment

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

more

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

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

ROI can be calculated as ______.

net operating income ÷ average operating assets margin × turnover

Last year, Valley Manufacturing reported sales of $800,000, net operating income of $40,000, and average operating assets of $400,000. The company's return on investment (ROI) for last year was ______.

10%

Macey, Inc.'s investment center had average operating assets of $350,000, revenues of $1,050,000 and net operating income of $70,000. Return on investment is Blank______.

20%

Which of the following statements is correct?

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

Toys, Trinkets and More requires a minimum rate of return of 12% on its average operating assets. The toy department currently has average operating assets of $300,000 and a net operating income of $42,000. The department's residual income is $ . (Enter your answer as a whole number without decimal places.)

Blank 1: 6,000 or 6000

The manager of a(n) ____ center does not have control over revenue or the use of investment funds. (Enter only one word per blank.)

Blank 1: cost

Service departments, such as the accounting department, are generally considered ____ centers, while sales offices are often considered ____ centers. (Enter only one word per blank.)

Blank 1: cost Blank 2: profit

In order to fully understand how a manager's decisions can affect ROI, both ____ and ____ should be computed. (Enter only one word per blank.)

Blank 1: margin Blank 2: turnover

Comparing actual net income to budgeted net income is often done to evaluate the manager of a(n) ____ center. (Enter only one word per blank.)

Blank 1: profit

The net operating income that an investment center earns above the minimum required return on its operating assets is its ____ income. (Enter only one word per blank.)

Blank 1: residual

When a manager accepts a project because the net operating income from the investment exceeds the minimum acceptable profit based on required rate of return, the investment was evaluated based on ____ ____. (Enter only one word per blank.)

Blank 1: residual Blank 2: income

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

Return on investment = ______.

Net operating income ÷ Average operating assets

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

Net operating income ÷ Sales Sales ÷ 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.

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

Net operating income ÷ Average operating assets = ______.

Return on investment

True or false: When ROI is calculated using the gross cost of assets, replacing a fully depreciated asset with a comparably priced new asset will not adversely affect ROI.

True

A disadvantage of the residual income approach is that it ______.

cannot be used to evaluate different sized divisions

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

increases ROI over time

A company can increase its return on investment (ROI) by ______.

increasing sales reducing operating expenses

Net operating income - (Average operating assets × Minimum required rate of return) = ____ ____. (Enter only one word per blank.)

residual income

The inability to compare divisions of different sizes is a major disadvantage of ______.

residual income only

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.

Blank 1: increase Blank 2: decrease Blank 3: decrease