ACG 2071 Test 3 Multi Choice (Chapter 11)

The Great Lakes Company reported the following operating data for the past year: Sales: $400,000 AVG operating assets: $200,000 SE: $160,000 Net Op. Income $50,000 Residual Income: $26,000 What was the company's minimum required rate of return? A) 11% B) 12% C) 13% D) 14%

A) 11% First, calculate the minimum required return as follow. Minimum required return = Net operating income - Residual income Minimum required return = $50,000 - $26,000 = $24,000 Then, the minimum required rate of return is determined as follows. Minimum required rate of return = Minimum required return ÷ Average operating assets Minimum required rate of return = $24,000 ÷ $200,000 = 12%

The Central Division of Burlington Company reported the following operating data for the past year: Sales: $600,000 AVG operating assets: $300,000 SE: $240,000 Net Op. Income $75,000 Residual Income: $39,000 What was the division's margin? A) 12.50% B) 13.00% C) 14.75% D) 15.00%

A) 12.50% The division's margin for the past year is determined as follows. Margin = Net operating income ÷ Sales Margin = $75,000 ÷ $600,000 = 12.5%

The Central Division of Burlington Company reported the following operating data for the past year: Sales: $600,000 AVG operating assets: $300,000 SE: $240,000 Net Op. Income $75,000 Residual Income: $39,000 (Note that this is the same data that was provided for the previous question.) What was the division's turnover? A) 2 B) 4 C) 10 D) 25

A) 2 The division's turnover for the past year is determined as follows. Turnover = Sales ÷ Average operating assets Turnover = $600,000 ÷ $300,000 = 2.0

Assuming that sales and net income remain the same, a company's return on investment will: A) increase if its operating assets increase. B) decrease if its operating assets decrease. C) decrease if its turnover decreases. D) decrease if its turnover increases.

A) increase if its operating assets increase. Return on investment is computed by multiplying its margin by its turnover. Margin is computed by dividing net operating income by sales. Turnover is computed by dividing sales by average operating assets. If operating assets increase, turnover decreases, and return on investment decreases (so Answer A is incorrect). If operating assets decrease, turnover increases, and return on investment increases (so Answer B is incorrect). If turnover decreases, return on investment also decreases (so Answer C is correct and Answer D is then incorrect).

The following data are available for the Appliance Division of Homeware Company and the single product it sells: Avg oper. asssets:$4,500,000 Annual fixed costs: 840,000 Unit Sell. Price: 60 Vari. Cost per unit:36 How many units must the division sell each year to achieve an ROI of 16%? A) 52,000 B) 65,000 C) 240,000 D) 1,300,000

B) 65,000 First, calculate, the company's required operating income as follows. ROI = Operating income ÷ Average operating assets or Operating income = Average operating assets x ROI Operating income = $4,500,000 x .16 = $720,000 Then, calculate the number of units (X) that must be sold to generate that operating income as follows. Operating income = Sales - Variable expenses - Fixed expenses Operating income = $60X - $36X - $840,000 = $720,000; X = 65,000 units

Which of the following is not considered an operating asset for purposes of calculating return on investment? A) Cash B) Investment in common stock C) Inventory D) Plant equipment

B) Investment in common stock Operating assets include cash, accounts receivable, inventory, plant and equipment, and all other assets held for productive use in an organization. Assets that are not held for operating purposes include land held for future use, investment in another company, and a building rented to someone else.

Which of the following statements is not correct? A) Delivery cycle time is a key concern to many customers. B) Manufacturing cycle time is made up of wait time, process time, inspection time, move time, and queue time. C) Non-value-added activities include inspecting, moving, and queuing. D) Manufacturing cycle efficiency is computed by dividing value-added time by throughout time.

B) Manufacturing cycle time is made up of wait time, process time, inspection time, move time, and queue time. Manufacturing cycle time is made up of process time, inspection time, move time, and queue time. Delivery cycle time is made up of wait time plus manufacturing cycle time.

Which of the following statements is not correct? A) Financial measures such as ROI and residual income may be included in a balanced scorecard. B) Operating measures such as delivery cycle time may be included in a balanced scorecard. C) Top managers who translate strategy into performance measures that employees understand and influence are following a balanced scorecard approach. D) Incentive compensation for employees, such as bonuses, should not be tied to balanced scorecard performance measures.

B) Operating measures such as delivery cycle time may be included in a balanced scorecard. Incentive compensation for employees, such as bonuses, can, and probably should, be tied to balanced scorecard performance measures.

The D'Azure Company uses residual income to measure the performance of one of its divisional managers. Which of the following would increase the division manager's performance measure? A) A decrease in the division's average operating assets B) A decrease in the division's net operating income C) An increase in the division's average operating assets D) An increase in the minimum required return

C) An increase in the division's average operating assets Residual income is the net operating income that an investment center earns above the minimum required return on its operating assets. A decrease in the division's net operating income would decrease its residual income (thus answer B is incorrect). An increase in the minimum required return would decrease residual income (thus Answer D is incorrect). The minimum required rate of return is computed by multiplying the minimum rate of return by the division's average operating assets. If the division's average operating assets decrease, the minimum required return on its operating assets would decrease and, as a result, its residual income would increase (thus Answer A is correct and Answer C is incorrect).

How is a company's return on investment computed? A) Margin divided by turnover B) Turnover divided by average operating assets C) Margin times turnover D) Margin times average operating assets

C) Margin times turnover A company's return on investment is computed by multiplying its margin by its turnover.