Chapter 11 - Test Bank

Chapter 11 - Performance Measurement in Decentralized Organizations
LO3: Operating performance measures
1 2 3 4 5 6 7 8 9 1) 11 12 13 14 15 16
Question Type T/F T/F T/F T/F T/F T/F T/F T/F T/F T/F T/F *o+,e-tu". M/* *o+,e-tu". M/* *o+,e-tu". M/* *o+,e-tu". M/* *o+,e-tu".
!rofessional "#am $dapted
LO4: Balanced scorecard
LO2: Residual income
Ot er topics
LO1: ROI
Difficulty
E H M M E M M M E E M M E M M E
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ID 3/e: 11-9 5/e: 11-8 4/e: 11-658 New, 1/31/95,E 4/e: 11-657 8/e:AT 12-23 11/26/97,E 11/26/97,( 11/26/97,M 1/e: 11-6 3/e: 11-2 7/e: 12-65 3/e: 11-2 5/e: 11-23 5/e: 11-29 5/e: 11-53
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Chapter 11 - Performance Measurement in Decentralized Organizations M/* *o+,e-tu". M/* *o+,e-tu". M/* *o+,e-tu". M/* *o+,e-tu". M/* *o+,e-tu". M/* M/* M/* M/* M/* M/* M/* M/* M/* M/* M/* M/* M/* M/* M/* Mu.t$-"rt M/* Mu.t$-"rt M/* Mu.t$-"rt
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Chapter 11 - Performance Measurement in Decentralized Organizations 3 11( 4 11( ) 11( * 11( + 11( , 11( 11( 1. 11( 11 11( 12 11( 13 11( 14 11( 1) 45 4647 4849 5)52 5355 5659 6)61 6264 6568 6972 7375 7678 7981 82 83 84 85 86 87 88 89 9) 91 M/* Mu.t$-"rt M/* Mu.t$-"rt M/* Mu.t$-"rt M/* Mu.t$-"rt M/* Mu.t$-"rt M/* Mu.t$-"rt M/* Mu.t$-"rt M/* Mu.t$-"rt M/* Mu.t$-"rt M/* Mu.t$-"rt M/* Mu.t$-"rt M/* Mu.t$-"rt M/* 5ro6.e7 5ro6.e7 5ro6.e7 5ro6.e7 5ro6.e7 5ro6.e7 5ro6.e7 5ro6.e7 5ro6.e7 5ro6.e7
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E.N. E.N. Authors Authors Authors Authors Authors E.N. E.N. E.N. Authors E.N. E.N. E.N. E.N. E.N. E.N. E.N. E.N. E.N. E.N. E.N.
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Chapter 11 - Performance Measurement in Decentralized Organizations 9/15/2))4 5ro6.e7 34 EN 4/21/2))3 54
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Chapter 11 Performance Measurement in Decentralized Organizations

True / False Questions
1. Residual income is superior to return on in estment as a means of measuring performance !ecause it encourages managers to ma"e in estment decisions that are more consistent #ith the interests of the compan$ as a #hole. %rue &alse
2. Residual income e'uals a erage operating assets multiplied !$ the difference !et#een the return on in estment and the minimum re'uired rate of return. %rue &alse
3. Consider a compan$ that has onl$ aria!le costs. (ll other things the same) an increase in unit sales #ill result in no change in the return on in estment. %rue &alse
4. %he use of return on in estment as a performance measure ma$ lead managers to ma"e decisions that are not in the !est interests of the compan$ as a #hole. %rue &alse
*. Residual income is the net operating income that an in estment center earns a!o e the minimum re'uired return on the in estment in operating assets. %rue &alse
+. Residual income should not !e used to e aluate a cost center. %rue &alse
11-4
,. %he performance measures on a !alanced scorecard tend to fall into four groups- financial measures) customer measures) internal !usiness process measures) and e.ternal !usiness process measures. %rue &alse
/. ( !alanced scorecard should contain e er$ performance measure that can !e e.pected to influence a compan$0s profits. %rue &alse
1. %he performance measures on an indi idual0s scorecard should not !e o erl$ influenced !$ actions ta"en !$ others in the compan$ or !$ e ents that are outside of the indi idual0s control. %rue &alse
12. Managers of cost centers are e aluated according to the profits #hich their departments are a!le to generate. %rue &alse
11. 3f e.penses e.ceed re enues in a department) then it #ould !e considered a cost center. %rue &alse
Multiple Choice Questions
12. Residual income is a !etter measure for performance e aluation of an in estment center manager than return on in estment !ecause(. the pro!lems associated #ith measuring the asset !ase are eliminated. 4. desira!le in estment decisions #ill not !e re5ected !$ di isions that alread$ ha e a high RO3. C. onl$ the gross !oo" alue of assets needs to !e calculated. D. returns do not increase as assets are depreciated.
11-*
13. %urno er is computed !$ di iding a erage operating assets into(. in ested capital. 4. total assets. C. net operating income. D. sales.
14. 6hich of the follo#ing statements pro ide7s8 an argument in fa or of including onl$ a plant0s net !oo" alue rather than gross !oo" alue as part of operating assets in the RO3 computation9 3. :et !oo" alue is consistent #ith ho# plant and e'uipment items are reported on a !alance sheet. 33. :et !oo" alue is consistent #ith the computation of net operating income) #hich includes depreciation as an operating e.pense. 333. :et !oo" alue allo#s RO3 to decrease o er time as assets get older. (. Onl$ 3. 4. Onl$ 333. C. Onl$ 3 and 33. D. Onl$ 3 and 333.
1*. 3n computing the margin in a RO3 anal$sis) #hich of the follo#ing is used9 (. ;ales in the denominator 4. :et operating income in the denominator C. ( erage operating assets in the denominator D. Residual income in the denominator
1+. 6hich of the follo#ing is not an operating asset9 (. Cash 4. 3n entor$ C. Plant e'uipment D. Common stoc"
11-+
1,. 3n determining the dollar amount to use for operating assets in the return on in estment 7RO38 calculation) companies #ill generall$ use either net !oo" alue or gross cost of the assets. 6hich of the follo#ing is an argument for the use of net !oo" alue rather than gross cost9 (. 3t is consistent #ith ho# assets are reported on the !alance sheet. 4. 3t eliminates the depreciation method as a factor in RO3 calculations. C. 3t encourages the replacement of old) #orn-out e'uipment. D. (ll of the a!o e.
1/. 6hich of the follo#ing #ill not result in an increase in the residual income) assuming other factors remain constant9 (. (n increase in sales. 4. (n increase in the minimum re'uired rate of return. C. ( decrease in e.penses. D. ( decrease in operating assets.
11. (ll other things the same) #hich of the follo#ing #ould increase residual income9 (. 3ncrease in a erage operating assets. 4. Decrease in a erage operating assets. C. 3ncrease in minimum re'uired return. D. Decrease in net operating income.
22. 6hich of the follo#ing three statements are correct9 3. ( profit center has control o er !oth cost and re enue. 33. (n in estment center has control o er in ested funds) !ut not o er costs and re enue. 333. ( cost center has no control o er sales. (. Onl$ 3 4. Onl$ 33 C. Onl$ 3 and 333 D. Onl$ 3 and 33
11-,
21. %he purpose of the Data Processing Department of &alena Corporation is to assist the arious departments of the corporation #ith their information needs free of charge. %he Data Processing Department #ould !est !e e aluated as a(. cost center. 4. re enue center. C. profit center. D. in estment center.
22. ( erage operating assets are <112)222 and net operating income is <23)122. %he compan$ in ests <2*)222 in ne# assets for a pro5ect that #ill increase net operating income !$ <4),*2. 6hat is the return on in estment 7RO38 of the ne# pro5ect9 (. 21= 4. 11= C. 1/.*= D. 22=
23. >ast $ear a compan$ had stoc"holder0s e'uit$ of <1+2)222) net operating income of <1+)222 and sales of <122)222. %he turno er #as 2.*. %he return on in estment 7RO38 #as(. 12= 4. 1= C. /= D. ,=
24. ;ales and a erage operating assets for Compan$ P and Compan$ ? are gi en !elo#-
6hat is the margin that each compan$ #ill ha e to earn in order to generate a return on in estment of 22=9 (. 12= and 1+= 4. *2= and 122= C. /= and 4= D. 2.*= and *=
11-/
2*. Reed Compan$0s sales last $ear totaled <1*2)222 and its return on in estment 7RO38 #as 12=. 3f the compan$0s turno er #as 3) then its net operating income for the $ear must ha e !een(. <+)222 4. <2)222 C. <1/)222 D. it is impossi!le to determine from the data gi en.
2+. ( compan$0s current net operating income is <1+)/22 and its a erage operating assets are </2)222. %he compan$0s re'uired rate of return is 1/=. ( ne# pro5ect !eing considered #ould re'uire an in estment of <1*)222 and #ould generate annual net operating income of <3)222. 6hat is the residual income of the ne# pro5ect9 (. 22./= 4. 22= C. 7<1*28 D. <322
2,. ;oder'uist Corporation uses residual income to e aluate the performance of its di isions. %he compan$0s minimum re'uired rate of return is 11=. 3n (pril) the Commercial Products Di ision had a erage operating assets of <122)222 and net operating income of <1)422. 6hat #as the Commercial Products Di ision0s residual income in (pril9 (. -<1)+22 4. <1)+22 C. <1)234 D. -<1)234
2/. 3n (ugust) the @ni ersal ;olutions Di ision of Augan Corporation had a erage operating assets of <+,2)222 and net operating income of <,,)*22. %he compan$ uses residual income) #ith a minimum re'uired rate of return of 12=) to e aluate the performance of its di isions. 6hat #as the @ni ersal ;olutions Di ision0s residual income in (ugust9 (. <2)122 4. -<2)122 C. -<1)322 D. <1)322
11-1
21. Di ision 4 had an RO3 last $ear of 1*=. %he di ision0s minimum re'uired rate of return is 12=. 3f the di ision0s a erage operating assets last $ear #ere <4*2)222) then the di ision0s residual income for last $ear #as(. <+,)*22 4. <22)*22 C. <3,)*22 D. <4*)222
32. Barnic" Corporation "eeps careful trac" of the time re'uired to fill orders. %he times recorded for a particular order appear !elo#-
%he deli er$ c$cle time #as(. 3.* hours 4. /., hours C. 34.1 hours D. 3+.1 hours
31. Balanis Corporation "eeps careful trac" of the time re'uired to fill orders. Data concerning a particular order appear !elo#-
%he throughput time #as(. 3/./ hours 4. 33.4 hours C. 14.1 hours D. *.4 hours
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32. Coster Corporation "eeps careful trac" of the time re'uired to fill orders. %he times recorded for a particular order appear !elo#-
%he throughput time #as(. /.1 hours 4. 1/ hours C. 4.* hours D. 22.* hours
33. 4otelho Corporation "eeps careful trac" of the time re'uired to fill orders. Data concerning a particular order appear !elo#-
%he deli er$ c$cle time #as(. 33.1 hours 4. 3., hours C. 12.+ hours D. 32.1 hours
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34. :iemiec Corporation "eeps careful trac" of the time re'uired to fill orders. %he times recorded for a particular order appear !elo#-
%he manufacturing c$cle efficienc$ 7MCD8 #as closest to(. 2.22 4. 2.2+ C. 2.12 D. 2.1+
3*. Mordue Corporation "eeps careful trac" of the time re'uired to fill orders. Data concerning a particular order appear !elo#-
%he manufacturing c$cle efficienc$ 7MCD8 #as closest to(. 2.1* 4. 2.*3 C. 2.2* D. 2.1+
(ide 3ndustries is a di ision of a ma5or corporation. Data concerning the most recent $ear appears !elo#-
11-12
3+. %he di ision0s margin is closest to(. 21./= 4. *.2= C. 23.2= D. 2/.2=
3,. %he di ision0s turno er is closest to(. 22.22 4. 4.3* C. 2.22 D. 3.*,
3/. %he di ision0s return on in estment 7RO38 is closest to(. 4.1= 4. 21.,*= C. 1,.1= D. 1.1=
%he Reed Di ision reports the follo#ing operating data for the past t#o $ears-
%he return on in estment at Reed #as e.actl$ the same in Eear 1 and Eear 2.
31. %he margin in Eear 2 #as(. 4/= 4. 32= C. 22= D. 12=
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42. ;ales in Eear 2 amounted to(. <2*2)222 4. <322)222 C. <32*)222 D. <3*2)222
41. ( erage operating assets in Eear 1 #ere(. <1+2)222 4. <1*2)222 C. <12*)222 D. <122)222
42. :et operating income in Eear 2 amounted to(. <+2)222 4. <*2)222 C. <42)222 D. <3*)222
4eall 3ndustries is a di ision of a ma5or corporation. >ast $ear the di ision had total sales of <22)1+2)222) net operating income of <1)*12)+42) and a erage operating assets of </)222)222.
43. %he di ision0s margin is closest to(. 31.,= 4. 4,.+= C. ,.1= D. 11.1=
44. %he di ision0s turno er is closest to(. 2.*2 4. 2.12 C. 2.22 D. 12.++
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4*. %he di ision0s return on in estment 7RO38 is closest to(. 11.1= 4. 1+.+= C. 1.+= D. *.,=
%he 6est Di ision of ;he"archi Corporation had a erage operating assets of <+22)222 and net operating income of </2)122 in March. %he minimum re'uired rate of return for performance e aluation purposes is 14=.
4+. 6hat #as the 6est Di ision0s minimum re'uired return in March9 (. </2)122 4. </+)/22 C. <11)214 D. <1/)214
4,. 6hat #as the 6est Di ision0s residual income in March9 (. -<+),22 4. <+),22 C. -<11)214 D. <11)214
%he Consumer Products Di ision of 6eiter Corporation had a erage operating assets of <*,2)222 and net operating income of <+*)122 in March. %he minimum re'uired rate of return for performance e aluation purposes is 12=.
4/. 6hat #as the Consumer Products Di ision0s minimum re'uired return in March9 (. <,)/12 4. <,+)212 C. <+/)422 D. <+*)122
11-1*
41. 6hat #as the Consumer Products Di ision0s residual income in March9 (. -<3)322 4. <3)322 C. -<,)/12 D. <,)/12
Dstes Compan$ has assem!led the follo#ing data for its di isions for the past $ear-
*2. Di ision (0s sales are(. <422)222 4. <+2*)222 C. <12*)222 D. <222)222
*1. Di ision (0s residual income is(. <22)222 4. <32)222 C. <3*)222 D. <4*)222
*2. Di ision 40s a erage operating assets is(. </1)222 4. <2)2/2)222 C. <1)333)333 D. <132)222
11-1+
Operating data from %indall Compan$ for last $ear follo#s-
*3. %he a erage operating assets amounted to(. <+22)222 4. <422)222 C. <*22)222 D. </22)222
*4. %he residual income #as(. <1/)222 4. <12)222 C. <12)222 D. <1+)222
**. %he margin used in RO3 calculations #as closest to(. 1/.22= 4. /.22= C. +.+,= D. 1*.22=
%he 4ail$ Di ision recorded operating data as follo#s for the past t#o $ears-
4ail$ Di ision0s turno er #as e.actl$ the same in !oth Eear 1 and Eear 2.
11-1,
*+. ;ales in Eear 1 amounted to(. <422)222 4. <122)222 C. <,*2)222 D. <1)222)222
*,. %he net operating income in Eear 1 #as(. <12)222 4. <13*)222 C. <142)222 D. <1*2)222
*/. %he margin in Eear 2 #as(. 1/.,*= 4. 2,.22= C. 22.*2= D. 12.22=
*1. %he a erage operating assets in Eear 2 #ere(. <,22)222 4. <,*2)222 C. </22)222 D. <122)222
%he follo#ing data are a aila!le for the ;outh Di ision of Redride Products) 3nc. and the single product it ma"es-
11-1/
+2. Co# man$ units must ;outh sell each $ear to ha e an RO3 of 1+=9 (. 242)222 4. 1)322)222 C. *2)222 D. +*)222
+1. 3f ;outh #ants a residual income of <*2)222 and the minimum re'uired rate of return is 12=) the annual turno er #ill ha e to !e(. 2.32 4. 2./2 C. 1.2* D. 1.*2
%he follo#ing data pertain to the 6halen Di ision of :orthern 3ndustries.
%he margin at 6halen #as e.actl$ the same in Eear 2 as it #as in Eear 1.
+2. %he a erage operating assets for Eear 2 amounted to(. <422)222 4. </22)222 C. <+22)222 D. <*22)222
+3. %he return on in estment in Eear 1 #as(. 4/.22= 4. 32.*2= C. ,.*/= D. 1.12=
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+4. %he minimum re'uired rate of return in Eear 1 #as(. 1/= 4. 1,= C. 1+= D. 1*=
Dic"onson Products is a di ision of a ma5or corporation. %he follo#ing data are for the last $ear of operations-
+*. %he di ision0s margin is closest to(. 2+.4= 4. 12.2= C. 2.4= D. 24.2=
++. %he di ision0s turno er is closest to(. 3.,/ 4. 41.+, C. 4.1+ D. 2.12
+,. %he di ision0s return on in estment 7RO38 is closest to(. 2.2= 4. 41.+= C. 12.2= D. 1.1=
11-22
+/. %he di ision0s residual income is closest to(. <7322)+428 4. <1)111)3+2 C. <311)3+2 D. <72)*1*)/428
Chace Products is a di ision of a ma5or corporation. >ast $ear the di ision had total sales of <21)322)222) net operating income of <*,*)122) and a erage operating assets of <*)222)222. %he compan$0s minimum re'uired rate of return is 12=.
+1. %he di ision0s margin is closest to(. 2+.2= 4. 23.*= C. 2.,= D. 11.*=
,2. %he di ision0s turno er is closest to(. 3./2 4. 4.2+ C. 2.12 D. 3,.24
,1. %he di ision0s return on in estment 7RO38 is closest to(. 41.2= 4. 11.*= C. 2.3= D. 2.2=
11-21
,2. %he di ision0s residual income is closest to(. <*,*)122 4. <1)1,*)122 C. <71)1/2)1228 D. <724)1228
Diorio Corporation "eeps careful trac" of the time re'uired to fill orders. %he times recorded for a particular order appear !elo#-
,3. %he deli er$ c$cle time #as(. 21.1 hours 4. 32.+ hours C. / hours D. 2., hours
,4. %he throughput time #as(. 4.2 hours 4. 1.* hours C. 32.+ hours D. 2+.4 hours
,*. %he manufacturing c$cle efficienc$ 7MCD8 #as closest to(. 2.1* 4. 2.2* C. 2.4* D. 2.1/
11-22
Cart Manufacturing operates an automated steel fa!rication process. &or one operation) Cart has found that 4*= of the total throughput 7manufacturing c$cle8 time is spent on non- alueadded acti ities. Deli er$ c$cle time is 12 hours) #aiting time during the production process is 3 hours) 'ueue time prior to starting the production process is 2 hours) and inspection time is 1.2 hours.
,+. %he manufacturing c$cle efficienc$ 7MCD8 for this operation is(. **= 4. 4*= C. +.+ hours D. *.4 hours
,,. 6hat is the mo e time recorded for the operation9 (. 1.* hours 4. +.* hours C. *./ hours D. 2./* hours
,/. 6hat is the throughput 7manufacturing c$cle8 time for the operation9 (. 12.2 hours 4. 1.2 hours C. 12.2 hours D. *./ hours
;affer Corporation "eeps careful trac" of the time re'uired to fill orders. Data concerning a particular order appear !elo#-
11-23
,1. %he throughput time #as(. 1.3 hours 4. 4.1 hours C. 32.1 hours D. 2+ hours
/2. %he manufacturing c$cle efficienc$ 7MCD8 #as closest to(. 2.1, 4. 2.2* C. 2.43 D. 2.11
/1. %he deli er$ c$cle time #as(. ,.* hours 4. 21.1 hours C. 32.1 hours D. 3.1 hours
Essay Questions
/2. Cea e$ &a!rication is a di ision of a ma5or corporation. >ast $ear the di ision had total sales of <21)122)222) net operating income of <2)22+)422) and a erage operating assets of <+)222)222. %he compan$0s minimum re'uired rate of return is 12=. Re'uired6hat is the di ision0s return on in estment 7RO389
11-24
/3. Bilde 3ndustries is a di ision of a ma5or corporation. >ast $ear the di ision had total sales of <23)3/2)222) net operating income of <2)/2/)1/2) and a erage operating assets of <,)222)222. %he compan$0s minimum re'uired rate of return is 12=. Re'uireda. 6hat is the di ision0s margin9 !. 6hat is the di ision0s turno er9 c. 6hat is the di ision0s return on in estment 7RO389
/4. &erris 6ares is a di ision of a ma5or corporation. %he follo#ing data are for the latest $ear of operations-
Re'uireda. 6hat is the di ision0s return on in estment 7RO389 !. 6hat is the di ision0s residual income9
11-2*
/*. &inancial data for 6indsor) 3nc. for last $ear appear !elo#-
%he compan$ paid di idends of <124)222 last $ear. %he F3n estment in Pine Compan$F on the statement of financial position represents an in estment in the stoc" of another compan$. Re'uireda. Compute the compan$0s margin) turno er) and return on in estment for last $ear. !. %he 4oard of Directors of 6indsor) 3nc. has set a minimum re'uired return of 2*=. 6hat #as the compan$0s residual income last $ear9
11-2+
/+. Dc"els 6ares is a di ision of a ma5or corporation. %he follo#ing data are for the latest $ear of operations-
Re'uireda. 6hat is the di !. 6hat is the di c. 6hat is the di d. 6hat is the di
ision0s margin9 ision0s turno er9 ision0s return on in estment 7RO389 ision0s residual income9
/,. 3les 3ndustries is a di ision of a ma5or corporation. %he follo#ing data are for the latest $ear of operations-
Re'uired6hat is the di ision0s residual income9
11-2,
//. %he Cas"et Di ision of Rosencranz Corporation had a erage operating assets of <1*2)222 and net operating income of <2,)/22 in March. %he compan$ uses residual income to e aluate the performance of its di isions) #ith a minimum re'uired rate of return of 1,=. Re'uired6hat #as the Cas"et Di ision0s residual income in March9
/1. Madrazo Corporation uses residual income to e aluate the performance of its di isions. %he minimum re'uired rate of return for performance e aluation purposes is 11=. %he Bames Di ision had a erage operating assets of <412)222 and net operating income of </+)222 in Aune. Re'uired6hat #as the Bames Di ision0s residual income in Aune9
11-2/
12. Aaster Corporation0s management "eeps trac" of the time it ta"es to process orders. During the most recent month) the follo#ing a erage times #ere recorded per order-
Re'uireda. Compute the throughput time. !. Compute the manufacturing c$cle efficienc$ 7MCD8. c. 6hat percentage of the production time is spent in non- alue-added acti ities9 d. Compute the deli er$ c$cle time.
11. During the most recent month at Coggan Corporation) 'ueue time #as *.3 da$s) inspection time #as 2.* da$) process time #as 1.1 da$s) #ait time #as 4.* da$s) and mo e time #as 2.* da$. Re'uireda. Compute the throughput time. !. Compute the manufacturing c$cle efficienc$ 7MCD8. c. 6hat percentage of the production time is spent in non- alue-added acti ities9 d. Compute the deli er$ c$cle time.
11-21
12. Dur"ee Corporation "eeps careful trac" of the time re'uired to fill orders. %he times re'uired for a particular order appear !elo#-
Re'uireda. Determine the throughput time. ;ho# $our #or"G !. Determine the manufacturing c$cle efficienc$ 7MCD8. ;ho# $our #or"G c. Determine the deli er$ c$cle time. ;ho# $our #or"G
13. 6altner Corporation0s management reports that its a erage deli er$ c$cle time is 22.2 da$s) its a erage throughput time is ,.* da$s) its manufacturing c$cle efficienc$ 7MCD8 is 2.32) its a erage mo e time is 2.2 da$) and its a erage 'ueue time is 4.2 da$s. Re'uireda. 6hat is the #ait time9 !. 6hat is the process time9 c. 6hat is the inspection time9
11-32
Chapter 11 Performance Measurement in Decentralized Organizations (ns#er He$
True / False Questions
1. Residual income is superior to return on in estment as a means of measuring performance !ecause it encourages managers to ma"e in estment decisions that are more consistent #ith the interests of the compan$ as a #hole. T !E
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: no!le"ge #earning $%&ective: ''()' Com*ute return on investment +R$I, an" sho! ho! changes in sales- e.*enses- an" assets affect R$I #earning $%&ective: ''()/ Com*ute resi"ual income an" un"erstan" its strengths an" !eaknesses #evel: 0as1
2. Residual income e'uals a erage operating assets multiplied !$ the difference !et#een the return on in estment and the minimum re'uired rate of return. T !E
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Com*rehension #earning $%&ective: ''()' Com*ute return on investment +R$I, an" sho! ho! changes in sales- e.*enses- an" assets affect R$I #earning $%&ective: ''()/ Com*ute resi"ual income an" un"erstan" its strengths an" !eaknesses #evel: 2ar"
3. Consider a compan$ that has onl$ aria!le costs. (ll other things the same) an increase in unit sales #ill result in no change in the return on in estment. F"#$E
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Com*rehension #earning $%&ective: ''()' Com*ute return on investment +R$I, an" sho! ho! changes in sales- e.*enses- an" assets affect R$I #evel: Me"ium
11-31
4. %he use of return on in estment as a performance measure ma$ lead managers to ma"e decisions that are not in the !est interests of the compan$ as a #hole. T !E
*. Residual income is the net operating income that an in estment center earns a!o e the minimum re'uired return on the in estment in operating assets. T !E
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: no!le"ge #earning $%&ective: ''()/ Com*ute resi"ual income an" un"erstan" its strengths an" !eaknesses #evel: 0as1
+. Residual income should not !e used to e aluate a cost center. T !E
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Com*rehension #earning $%&ective: ''()/ Com*ute resi"ual income an" un"erstan" its strengths an" !eaknesses #evel: Me"ium
,. %he performance measures on a !alanced scorecard tend to fall into four groups- financial measures) customer measures) internal !usiness process measures) and e.ternal !usiness process measures. F"#$E
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Com*rehension #earning $%&ective: ''()3 4n"erstan" ho! to construct an" use a %alance" scorecar" #evel: Me"ium
11-32
/. ( !alanced scorecard should contain e er$ performance measure that can !e e.pected to influence a compan$0s profits. F"#$E
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Com*rehension #earning $%&ective: ''()3 4n"erstan" ho! to construct an" use a %alance" scorecar" #evel: Me"ium
1. %he performance measures on an indi idual0s scorecard should not !e o erl$ influenced !$ actions ta"en !$ others in the compan$ or !$ e ents that are outside of the indi idual0s control. T !E
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: no!le"ge #earning $%&ective: ''()3 4n"erstan" ho! to construct an" use a %alance" scorecar" #evel: 0as1
12. Managers of cost centers are e aluated according to the profits #hich their departments are a!le to generate. F"#$E
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: no!le"ge #earning $%&ective: $ther to*ics #evel: 0as1
11. 3f e.penses e.ceed re enues in a department) then it #ould !e considered a cost center. F"#$E
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Com*rehension #earning $%&ective: $ther to*ics #evel: Me"ium
11-33
Multiple Choice Questions
12. Residual income is a !etter measure for performance e aluation of an in estment center manager than return on in estment !ecause(. the pro!lems associated #ith measuring the asset !ase are eliminated. %& desira!le in estment decisions #ill not !e re5ected !$ di isions that alread$ ha e a high RO3. C. onl$ the gross !oo" alue of assets needs to !e calculated. D. returns do not increase as assets are depreciated.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Com*rehension #earning $%&ective: ''()' Com*ute return on investment +R$I, an" sho! ho! changes in sales- e.*enses- an" assets affect R$I #earning $%&ective: ''()/ Com*ute resi"ual income an" un"erstan" its strengths an" !eaknesses #evel: Me"ium Source: CMA5 a"a*te"
13. %urno er is computed !$ di iding a erage operating assets into(. in ested capital. 4. total assets. C. net operating income. D& sales.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: no!le"ge #earning $%&ective: ''()' Com*ute return on investment +R$I, an" sho! ho! changes in sales- e.*enses- an" assets affect R$I #evel: 0as1
11-34
14. 6hich of the follo#ing statements pro ide7s8 an argument in fa or of including onl$ a plant0s net !oo" alue rather than gross !oo" alue as part of operating assets in the RO3 computation9 3. :et !oo" alue is consistent #ith ho# plant and e'uipment items are reported on a !alance sheet. 33. :et !oo" alue is consistent #ith the computation of net operating income) #hich includes depreciation as an operating e.pense. 333. :et !oo" alue allo#s RO3 to decrease o er time as assets get older. (. Onl$ 3. 4. Onl$ 333. C& Onl$ 3 and 33. D. Onl$ 3 and 333.
1*. 3n computing the margin in a RO3 anal$sis) #hich of the follo#ing is used9 "& ;ales in the denominator 4. :et operating income in the denominator C. ( erage operating assets in the denominator D. Residual income in the denominator
11-3*
1+. 6hich of the follo#ing is not an operating asset9 (. Cash 4. 3n entor$ C. Plant e'uipment D& Common stoc"
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: no!le"ge #earning $%&ective: ''()' Com*ute return on investment +R$I, an" sho! ho! changes in sales- e.*enses- an" assets affect R$I #evel: 0as1
1,. 3n determining the dollar amount to use for operating assets in the return on in estment 7RO38 calculation) companies #ill generall$ use either net !oo" alue or gross cost of the assets. 6hich of the follo#ing is an argument for the use of net !oo" alue rather than gross cost9 (. 3t is consistent #ith ho# assets are reported on the !alance sheet. 4. 3t eliminates the depreciation method as a factor in RO3 calculations. C. 3t encourages the replacement of old) #orn-out e'uipment. D& (ll of the a!o e.
1/. 6hich of the follo#ing #ill not result in an increase in the residual income) assuming other factors remain constant9 (. (n increase in sales. %& (n increase in the minimum re'uired rate of return. C. ( decrease in e.penses. D. ( decrease in operating assets.
11-3+
11. (ll other things the same) #hich of the follo#ing #ould increase residual income9 (. 3ncrease in a erage operating assets. %& Decrease in a erage operating assets. C. 3ncrease in minimum re'uired return. D. Decrease in net operating income.
22. 6hich of the follo#ing three statements are correct9 3. ( profit center has control o er !oth cost and re enue. 33. (n in estment center has control o er in ested funds) !ut not o er costs and re enue. 333. ( cost center has no control o er sales. (. Onl$ 3 4. Onl$ 33 C& Onl$ 3 and 333 D. Onl$ 3 and 33
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Com*rehension #earning $%&ective: $ther to*ics #evel: Me"ium
21. %he purpose of the Data Processing Department of &alena Corporation is to assist the arious departments of the corporation #ith their information needs free of charge. %he Data Processing Department #ould !est !e e aluated as a"& cost center. 4. re enue center. C. profit center. D. in estment center.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: no!le"ge #earning $%&ective: $ther to*ics #evel: 0as1
11-3,
22. ( erage operating assets are <112)222 and net operating income is <23)122. %he compan$ in ests <2*)222 in ne# assets for a pro5ect that #ill increase net operating income !$ <4),*2. 6hat is the return on in estment 7RO38 of the ne# pro5ect9 (. 21= %& 11= C. 1/.*= D. 22= RO3 I :et operating income ( erage operating assets I <4),*2 <2*)222 I 11=
AACSB: Anal1tic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: A**lication #earning $%&ective: ''()' Com*ute return on investment +R$I, an" sho! ho! changes in sales- e.*enses- an" assets affect R$I #evel: Me"ium
23. >ast $ear a compan$ had stoc"holder0s e'uit$ of <1+2)222) net operating income of <1+)222 and sales of <122)222. %he turno er #as 2.*. %he return on in estment 7RO38 #as(. 12= 4. 1= C& /= D. ,= Margin I :et operating income ;ales I <1+)222 <122)222 I 1+= RO3 I Margin %urno er I 1+= 2.* I /=
11-3/
24. ;ales and a erage operating assets for Compan$ P and Compan$ ? are gi en !elo#-
6hat is the margin that each compan$ #ill ha e to earn in order to generate a return on in estment of 22=9 (. 12= and 1+= 4. *2= and 122= C& /= and 4= D. 2.*= and *=
Compan$ P%urno er I ;ales ( erage operating assets I <22)222 </)222 I 2.* RO3 %urno er I Margin I 22= 2.* I /= Compan$ ?%urno er I ;ales ( erage operating assets I <*2)222 <12)222 I * RO3 %urno er I Margin I 22= * I 4=
AACSB: Anal1tic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: A**lication #earning $%&ective: ''()' Com*ute return on investment +R$I, an" sho! ho! changes in sales- e.*enses- an" assets affect R$I #evel: 2ar"
11-31
2*. Reed Compan$0s sales last $ear totaled <1*2)222 and its return on in estment 7RO38 #as 12=. 3f the compan$0s turno er #as 3) then its net operating income for the $ear must ha e !een"& <+)222 4. <2)222 C. <1/)222 D. it is impossi!le to determine from the data gi en. RO3 I Margin %urno er Margin I RO3 %urno er I 12= 3 I 4= Margin I :et operating income ;ales :et operating income I Margin ;ales I 4= <1*2)222 I <+)222
2+. ( compan$0s current net operating income is <1+)/22 and its a erage operating assets are </2)222. %he compan$0s re'uired rate of return is 1/=. ( ne# pro5ect !eing considered #ould re'uire an in estment of <1*)222 and #ould generate annual net operating income of <3)222. 6hat is the residual income of the ne# pro5ect9 (. 22./= 4. 22= C. 7<1*28 D& <322
AACSB: Anal1tic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: A**lication #earning $%&ective: ''()/ Com*ute resi"ual income an" un"erstan" its strengths an" !eaknesses #evel: 0as1
11-42
2,. ;oder'uist Corporation uses residual income to e aluate the performance of its di isions. %he compan$0s minimum re'uired rate of return is 11=. 3n (pril) the Commercial Products Di ision had a erage operating assets of <122)222 and net operating income of <1)422. 6hat #as the Commercial Products Di ision0s residual income in (pril9 "& -<1)+22 4. <1)+22 C. <1)234 D. -<1)234
2/. 3n (ugust) the @ni ersal ;olutions Di ision of Augan Corporation had a erage operating assets of <+,2)222 and net operating income of <,,)*22. %he compan$ uses residual income) #ith a minimum re'uired rate of return of 12=) to e aluate the performance of its di isions. 6hat #as the @ni ersal ;olutions Di ision0s residual income in (ugust9 (. <2)122 %& -<2)122 C. -<1)322 D. <1)322
11-41
21. Di ision 4 had an RO3 last $ear of 1*=. %he di ision0s minimum re'uired rate of return is 12=. 3f the di ision0s a erage operating assets last $ear #ere <4*2)222) then the di ision0s residual income for last $ear #as(. <+,)*22 %& <22)*22 C. <3,)*22 D. <4*)222 RO3 I :et operating income ( erage operating assets :et operating income I RO3 ( erage operating assets I 1*= <4*2)222 I <+,)*22
AACSB: Anal1tic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: A**lication #earning $%&ective: ''()' Com*ute return on investment +R$I, an" sho! ho! changes in sales- e.*enses- an" assets affect R$I #earning $%&ective: ''()/ Com*ute resi"ual income an" un"erstan" its strengths an" !eaknesses #evel: 2ar"
11-42
32. Barnic" Corporation "eeps careful trac" of the time re'uired to fill orders. %he times recorded for a particular order appear !elo#-
%he deli er$ c$cle time #as(. 3.* hours 4. /., hours C. 34.1 hours D& 3+.1 hours
%hroughput time I Process time J 3nspection time J Mo e time J ?ueue time I 2.1 hours J 2.3 hours J 3.* hours J *.2 hours I 1.1 hours Deli er$ c$cle time I 6ait time J %hroughput time I 2+.2 hours J 1.1 hours I 3+.1 hours
AACSB: Anal1tic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: A**lication #earning $%&ective: ''()6 Com*ute "eliver1 c1cle time- through*ut time- an" manufacturing c1cle efficienc1 +MC0, #evel: 0as1
11-43
31. Balanis Corporation "eeps careful trac" of the time re'uired to fill orders. Data concerning a particular order appear !elo#-
%he throughput time #as(. 3/./ hours 4. 33.4 hours C& 14.1 hours D. *.4 hours
%hroughput time I Process time J 3nspection time J Mo e time J ?ueue time I 1.4 hours J 2.4 hours J 3.+ hours J /., hours I 14.1 hours
11-44
32. Coster Corporation "eeps careful trac" of the time re'uired to fill orders. %he times recorded for a particular order appear !elo#-
%he throughput time #as"& /.1 hours 4. 1/ hours C. 4.* hours D. 22.* hours
%hroughput time I Process time J 3nspection time J Mo e time J ?ueue time I 1.2 hours J 2.4 hours J 2.1 hours J 4.4 hours I /.1 hours
11-4*
33. 4otelho Corporation "eeps careful trac" of the time re'uired to fill orders. Data concerning a particular order appear !elo#-
%he deli er$ c$cle time #as"& 33.1 hours 4. 3., hours C. 12.+ hours D. 32.1 hours
%hroughput time I Process time J 3nspection time J Mo e time J ?ueue time I 1.1 hours J 2.3 hours J 3., hours J /.1 hours I 14./ hours Deli er$ c$cle time I 6ait time J %hroughput time I 1/.3 hours J 14./ hours I 33.1 hours
11-4+
34. :iemiec Corporation "eeps careful trac" of the time re'uired to fill orders. %he times recorded for a particular order appear !elo#-
%he manufacturing c$cle efficienc$ 7MCD8 #as closest to(. 2.22 4. 2.2+ C& 2.12 D. 2.1+
%hroughput time I Process time J 3nspection time J Mo e time J ?ueue time I 1.* hours J 2.2 hours J 2.+ hours J /.* hours I 12./ hours MCD I Kalue-added time 7Process time8 %hroughput 7manufacturing c$cle8 time I 1.* hours 12./ hours I 2.12
11-4,
3*. Mordue Corporation "eeps careful trac" of the time re'uired to fill orders. Data concerning a particular order appear !elo#-
%he manufacturing c$cle efficienc$ 7MCD8 #as closest to(. 2.1* 4. 2.*3 C. 2.2* D& 2.1+
%hroughput time I Process time J 3nspection time J Mo e time J ?ueue time I 1., hours J 2.1 hours J 2.4 hours J +., hours I 12.1 hours MCD I Kalue-added time 7Process time8 %hroughput 7manufacturing c$cle8 time I 1., hours 12.1 hours I 2.1+
(ide 3ndustries is a di ision of a ma5or corporation. Data concerning the most recent $ear appears !elo#-
11-4/
3+. %he di ision0s margin is closest to(. 21./= %& *.2= C. 23.2= D. 2/.2= Margin I :et operating income ;ales I </,2)222 <1,)422)222 I *.2=
AACSB: Anal1tic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: A**lication #earning $%&ective: ''()' Com*ute return on investment +R$I, an" sho! ho! changes in sales- e.*enses- an" assets affect R$I #evel: 0as1
3,. %he di ision0s turno er is closest to(. 22.22 %& 4.3* C. 2.22 D. 3.*, %urno er I ;ales ( erage operating assets I <1,)422)222 <4)222)222 I 4.3*
11-41
3/. %he di ision0s return on in estment 7RO38 is closest to(. 4.1= %& 21.,*= C. 1,.1= D. 1.1= RO3 I :et operating income ( erage operating assets I </,2)222 <4)222)222 I 21.,*=
%he Reed Di ision reports the follo#ing operating data for the past t#o $ears-
%he return on in estment at Reed #as e.actl$ the same in Eear 1 and Eear 2.
11-*2
31. %he margin in Eear 2 #as(. 4/= 4. 32= C& 22= D. 12=
RO3 in Eear 1RO3 I Margin %urno er I 1+= 2.* I 42= 4$ assumption) the RO3 is the same in Eear 2 as in Eear 1. %herefore) in Eear 2RO3 I Margin %urno er 42= I Margin 2 Margin I 42= 2 I 22=
42. ;ales in Eear 2 amounted to(. <2*2)222 %& <322)222 C. <32*)222 D. <3*2)222
RO3 in Eear 1RO3 I Margin %urno er I 1+= 2.* I 42= 4$ assumption) the RO3 is the same in Eear 2 as in Eear 1. %herefore) in Eear 2:et operating income I RO3 ( erage operating assets I 42= <1*2)222 I <+2)222 Margin I :et operating income ;ales ;ales I :et operating income Margin I <+2)222 22= I <322)222
11-*1
41. ( erage operating assets in Eear 1 #ere(. <1+2)222 4. <1*2)222 C. <12*)222 D& <122)222 Margin I :et operating income ;ales ;ales I :et operating income Margin I <42)222 1+= I <2*2)222 %urno er I ;ales ( erage operating assets ( erage operating assets I ;ales %urno er I <2*2)222 2.* I <122)222
42. :et operating income in Eear 2 amounted to"& <+2)222 4. <*2)222 C. <42)222 D. <3*)222
RO3 in Eear 1RO3 I Margin %urno er I 1+= 2.* I 42= 4$ assumption) the RO3 is the same in Eear 2 as in Eear 1. %herefore) in Eear 2:et operating income I RO3 ( erage operating assets I 42= <1*2)222 I <+2)222
4eall 3ndustries is a di ision of a ma5or corporation. >ast $ear the di ision had total sales of <22)1+2)222) net operating income of <1)*12)+42) and a erage operating assets of </)222)222.
11-*2
43. %he di ision0s margin is closest to(. 31.,= 4. 4,.+= C& ,.1= D. 11.1= Margin I :et operating income ;ales I <1)*12)+42 <22)1+2)222 I ,.1=
44. %he di ision0s turno er is closest to"& 2.*2 4. 2.12 C. 2.22 D. 12.++ %urno er I ;ales ( erage operating assets I <22)1+2)222 </)222)222 I 2.*2
11-*3
4*. %he di ision0s return on in estment 7RO38 is closest to"& 11.1= 4. 1+.+= C. 1.+= D. *.,= RO3 I :et operating income ( erage operating assets I <1)*12)+42 </)222)222 I 11.1=
%he 6est Di ision of ;he"archi Corporation had a erage operating assets of <+22)222 and net operating income of </2)122 in March. %he minimum re'uired rate of return for performance e aluation purposes is 14=.
4+. 6hat #as the 6est Di ision0s minimum re'uired return in March9 (. </2)122 %& </+)/22 C. <11)214 D. <1/)214 Minimum re'uired return I ( erage operating assets Minimum re'uired rate of return I <+22)222 14= I </+)/22
11-*4
4,. 6hat #as the 6est Di ision0s residual income in March9 "& -<+),22 4. <+),22 C. -<11)214 D. <11)214
%he Consumer Products Di ision of 6eiter Corporation had a erage operating assets of <*,2)222 and net operating income of <+*)122 in March. %he minimum re'uired rate of return for performance e aluation purposes is 12=.
4/. 6hat #as the Consumer Products Di ision0s minimum re'uired return in March9 (. <,)/12 4. <,+)212 C& <+/)422 D. <+*)122 Minimum re'uired return I ( erage operating assets Minimum re'uired rate of return I <*,2)222 12= I <+/)422
11-**
41. 6hat #as the Consumer Products Di ision0s residual income in March9 "& -<3)322 4. <3)322 C. -<,)/12 D. <,)/12
Dstes Compan$ has assem!led the follo#ing data for its di isions for the past $ear-
11-*+
*2. Di ision (0s sales are(. <422)222 %& <+2*)222 C. <12*)222 D. <222)222 %urno er I ;ales ( erage operating assets ;ales I ( erage operating assets %urno er I <*22)222 1.2* I <+2*)222
*1. Di ision (0s residual income is(. <22)222 %& <32)222 C. <3*)222 D. <4*)222
AACSB: Anal1tic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: A**lication #earning $%&ective: ''()/ Com*ute resi"ual income an" un"erstan" its strengths an" !eaknesses #evel: Me"ium
11-*,
*2. Di ision 40s a erage operating assets is(. </1)222 4. <2)2/2)222 C. <1)333)333 D& <132)222 %urno er I ;ales ( erage operating assets ( erage operating assets I ;ales %urno er I <*22)222 4 I <132)222
AACSB: Anal1tic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: A**lication #earning $%&ective: ''()' Com*ute return on investment +R$I, an" sho! ho! changes in sales- e.*enses- an" assets affect R$I #earning $%&ective: ''()/ Com*ute resi"ual income an" un"erstan" its strengths an" !eaknesses #evel: Me"ium
Operating data from %indall Compan$ for last $ear follo#s-
11-*/
*3. %he a erage operating assets amounted to"& <+22)222 4. <422)222 C. <*22)222 D. </22)222 %urno er I ;ales ( erage operating assets ( erage operating assets I ;ales %urno er I <122)222 1.* I <+22)222
*4. %he residual income #as(. <1/)222 4. <12)222 C& <12)222 D. <1+)222 %urno er I ;ales ( erage operating assets ( erage operating assets I ;ales %urno er I <122)222 1.* I <+22)222 RO3 I :et operating income ( erage operating assets :et operating income I RO3 ( erage operating assets I 12= <+22)222 I <,2)222
AACSB: Anal1tic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: A**lication #earning $%&ective: ''()/ Com*ute resi"ual income an" un"erstan" its strengths an" !eaknesses #evel: 2ar"
11-*1
**. %he margin used in RO3 calculations #as closest to(. 1/.22= %& /.22= C. +.+,= D. 1*.22= RO3 I Margin %urno er Margin I RO3 %urno er I 12= 1.* I /=
%he 4ail$ Di ision recorded operating data as follo#s for the past t#o $ears-
4ail$ Di ision0s turno er #as e.actl$ the same in !oth Eear 1 and Eear 2.
11-+2
*+. ;ales in Eear 1 amounted to(. <422)222 %& <122)222 C. <,*2)222 D. <1)222)222 %urno er I RO3 Margin I 22.*= 1*= I 1.* %urno er I ;ales ( erage operating assets ;ales I ( erage operating assets %urno er I <+22)222 1.* I <122)222
*,. %he net operating income in Eear 1 #as(. <12)222 %& <13*)222 C. <142)222 D. <1*2)222 %urno er I RO3 Margin I 22.*= 1*= I 1.* %urno er I ;ales ( erage operating assets ;ales I ( erage operating assets %urno er I <+22)222 1.* I <122)222 Margin I :et operating income ;ales :et operating income I ;ales Margin I <122)222 1*= I <13*)222
11-+1
*/. %he margin in Eear 2 #as(. 1/.,*= 4. 2,.22= C. 22.*2= D& 12.22= %urno er in Eear 1 I RO3 in Eear 1 Margin in Eear 1 I 22.*= 1*= I 1.* RO3 I Margin %urno er Margin in Eear 2 I RO3 in Eear 2 %urno er in Eear 2 I RO3 in Eear 2 %urno er in Eear 1 I 1/= 1.* I 12=
*1. %he a erage operating assets in Eear 2 #ere(. <,22)222 4. <,*2)222 C& </22)222 D. <122)222 %urno er in Eear1 I RO3 in Eear 1 Margin in Eear 1 I 22.*= 1*= I 1.* %urno er in Eear 2 I ;ales in Eear 2 ( erage operating assets in Eear 2 ( erage operating assets in Eear 2 I ;ales in Eear 2 %urno er in Eear 2 I ;ales in Eear 2 %urno er in Eear 1 I <1)222)222 1.* I </22)222
11-+2
%he follo#ing data are a aila!le for the ;outh Di ision of Redride Products) 3nc. and the single product it ma"es-
+2. Co# man$ units must ;outh sell each $ear to ha e an RO3 of 1+=9 (. 242)222 4. 1)322)222 C. *2)222 D& +*)222 RO3 I :et operating income ( erage operating assets :et operating income I RO3 ( erage operating assets I 1+= <1)*22)222 I <242)222 @nit sales to attain a target profit I 7%arget profit J &i.ed e.penses8 @nit CM I 7<242)222 J <2/2)2228 7<22 per unit - <12 per unit8 I <*22)222 </ per unit I +*)222 units
11-+3
+1. 3f ;outh #ants a residual income of <*2)222 and the minimum re'uired rate of return is 12=) the annual turno er #ill ha e to !e(. 2.32 %& 2./2 C. 1.2* D. 1.*2 %urno er I ;ales ( erage operating assets 6e need to determine the ;ales that #ould generate a residual income of <*2)222. Residual income I :et operating income - ( erage operating assets Minimum re'uired rate of return <*2)222 I :et operating income - 7<1)*22)222 12=8 :et operating income I <*2)222 J 7<1)*22)222 12=8 I <222)222 Dollar sales to attain a target profit I 7%arget profit J &i.ed e.penses8 CM ratio I 7<222)222 J <2/2)2228 L7<22 per unit - <12 per unit8M<22 per unitN I <4/2)222 7</ per unitM<22 per unit8 I <4/2)222 2.42 I <1)222)222 %urno er I ;ales ( erage operating assets I <1)222)222 <1)*22)222 I 2./
AACSB: Anal1tic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: A**lication #earning $%&ective: ''()/ Com*ute resi"ual income an" un"erstan" its strengths an" !eaknesses #evel: 2ar"
%he follo#ing data pertain to the 6halen Di ision of :orthern 3ndustries.
%he margin at 6halen #as e.actl$ the same in Eear 2 as it #as in Eear 1.
11-+4
+2. %he a erage operating assets for Eear 2 amounted to(. <422)222 4. </22)222 C. <+22)222 D& <*22)222 %urno er I ;ales ( erage operating assets ( erage operating assets I ;ales %urno er I <+22)222 1.2 I <*22)222
+3. %he return on in estment in Eear 1 #as"& 4/.22= 4. 32.*2= C. ,.*/= D. 1.12= RO3 I Margin %urno er Margin in Eear 2 I RO3 in Eear 2 %urno er in Eear 2 I 1.+= 1.2 I /= RO3 in Eear 1 I Margin in Eear 1 %urno er in Eear 1 RO3 in Eear 1 I Margin in Eear 2 %urno er in Eear 1 I /= + I 4/=
11-+*
+4. %he minimum re'uired rate of return in Eear 1 #as(. 1/= 4. 1,= C& 1+= D. 1*= Margin I :et operating income ;ales :et operating income I ;ales Margin I <322)222 /= I <24)222 RO3 I Margin %urno er Margin in Eear 2 I RO3 in Eear 2 %urno er in Eear 2 I 1.+= 1.2 I /= RO3 in Eear 1 I Margin in Eear 1 %urno er in Eear 1 RO3 in Eear 1 I Margin in Eear 2 %urno er in Eear 1 I /= + I 4/= RO3 I :et operating income ( erage operating assets 4/= I <24)222 ( erage operating assets ( erage operating assets I <24)222 4/= I <*2)222 Residual income I :et operating income - ( erage operating assets Minimum re'uired rate of return <1+)222 I <24)222 - <*2)222 Minimum re'uired rate of return <*2)222 Minimum re'uired rate of return I <24)222 - <1+)222 Minimum re'uired rate of return I </)222 <*2)222 I 1+=
Dic"onson Products is a di ision of a ma5or corporation. %he follo#ing data are for the last $ear of operations-
11-++
+*. %he di ision0s margin is closest to(. 2+.4= 4. 12.2= C& 2.4= D. 24.2= Margin I :et operating income ;ales I <311)3+2 <1+)+42)222 I 2.4=
++. %he di ision0s turno er is closest to(. 3.,/ 4. 41.+, C& 4.1+ D. 2.12 %urno er I ;ales ( erage operating assets I <1+)+42)222 <4)222)222 I 4.1+
11-+,
+,. %he di ision0s return on in estment 7RO38 is closest to(. 2.2= 4. 41.+= C& 12.2= D. 1.1= RO3 I :et operating income ( erage operating assets I <311)3+2 <4)222)222 I 1.1/4=
+/. %he di ision0s residual income is closest to"& <7322)+428 4. <1)111)3+2 C. <311)3+2 D. <72)*1*)/428
Chace Products is a di ision of a ma5or corporation. >ast $ear the di ision had total sales of <21)322)222) net operating income of <*,*)122) and a erage operating assets of <*)222)222. %he compan$0s minimum re'uired rate of return is 12=.
11-+/
+1. %he di ision0s margin is closest to(. 2+.2= 4. 23.*= C& 2.,= D. 11.*= Margin I :et operating income ;ales I <*,*)122 <21)322)222 I 2.,=
,2. %he di ision0s turno er is closest to(. 3./2 %& 4.2+ C. 2.12 D. 3,.24 %urno er I ;ales ( erage operating assets I <21)322)222 <*)222)222 I 4.2+
11-+1
,1. %he di ision0s return on in estment 7RO38 is closest to(. 41.2= %& 11.*= C. 2.3= D. 2.2= RO3 I :et operating income ( erage operating assets I <*,*)122 <*)222)222 I 11.*22=
,2. %he di ision0s residual income is closest to(. <*,*)122 4. <1)1,*)122 C. <71)1/2)1228 D& <724)1228
Diorio Corporation "eeps careful trac" of the time re'uired to fill orders. %he times recorded for a particular order appear !elo#-
11-,2
,3. %he deli er$ c$cle time #as(. 21.1 hours %& 32.+ hours C. / hours D. 2., hours
%hroughput time I Process time J 3nspection time J Mo e time J ?ueue time I 1.4 hours J 2.1 hours J 2., hours J *.3 hours I 1.* hours Deli er$ c$cle time I 6ait time J %hroughput time I 21.1 hours J 1.* hours I 32.+ hours
,4. %he throughput time #as(. 4.2 hours %& 1.* hours C. 32.+ hours D. 2+.4 hours
%hroughput time I Process time J 3nspection time J Mo e time J ?ueue time I 1.4 hours J 2.1 hours J 2., hours J *.3 hours I 1.* hours
11-,1
,*. %he manufacturing c$cle efficienc$ 7MCD8 #as closest to"& 2.1* 4. 2.2* C. 2.4* D. 2.1/
%hroughput time I Process time J 3nspection time J Mo e time J ?ueue time I 1.4 hours J 2.1 hours J 2., hours J *.3 hours I 1.* hours MCD I Kalue-added time 7Process time8 %hroughput 7manufacturing c$cle8 time I 1.4 hours 1.* hours I 2.1*
Cart Manufacturing operates an automated steel fa!rication process. &or one operation) Cart has found that 4*= of the total throughput 7manufacturing c$cle8 time is spent on non- alueadded acti ities. Deli er$ c$cle time is 12 hours) #aiting time during the production process is 3 hours) 'ueue time prior to starting the production process is 2 hours) and inspection time is 1.2 hours.
,+. %he manufacturing c$cle efficienc$ 7MCD8 for this operation is"& **= 4. 4*= C. +.+ hours D. *.4 hours
Percentage of time spent on non- alue-added acti ities I 122= - MCD 4*= I 122= - MCD MCD I 122= - 4*= I **=
AACSB: Anal1tic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: A**lication #earning $%&ective: ''()6 Com*ute "eliver1 c1cle time- through*ut time- an" manufacturing c1cle efficienc1 +MC0, #evel: Me"ium
11-,2
,,. 6hat is the mo e time recorded for the operation9 (. 1.* hours 4. +.* hours C. *./ hours D& 2./* hours
Deli er$ c$cle time I 6ait time J %hroughput time 12 hours I 3 hours J %hroughput time %hroughput time I 12 hours - 3 hours I 1 hours Percentage of time spent on non- alue-added acti ities I 122= - MCD 4*= I 122= - MCD MCD I 122= - 4*= I **= MCD I Kalue-added time 7Process time8 %hroughput 7manufacturing c$cle8 time **= I Process time 1 hours Process time I 1 hours **= I 4.1* hours %hroughput time I Process time J 3nspection time J Mo e time J ?ueue time 1.22 hours I 4.1* hours J 1.22 hours J Mo e time J 2.22 hours Mo e time I 1.22 hours - 74.1* hours J 1.22 hours J 2.22 hours8 I 1.22 hours - /.1* hours I 2./* hours
AACSB: Anal1tic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: A**lication #earning $%&ective: ''()6 Com*ute "eliver1 c1cle time- through*ut time- an" manufacturing c1cle efficienc1 +MC0, #evel: 2ar"
,/. 6hat is the throughput 7manufacturing c$cle8 time for the operation9 (. 12.2 hours %& 1.2 hours C. 12.2 hours D. *./ hours
Deli er$ c$cle time I 6ait time J %hroughput time 12 hours I 3 hours J %hroughput time %hroughput time I 12 hours - 3 hours I 1 hours
11-,3
;affer Corporation "eeps careful trac" of the time re'uired to fill orders. Data concerning a particular order appear !elo#-
,1. %he throughput time #as"& 1.3 hours 4. 4.1 hours C. 32.1 hours D. 2+ hours
%hroughput time I Process time J 3nspection time J Mo e time J ?ueue time I 1.+ hours J 2.2 hours J 3.1 hours J 4.4 hours I 1.3 hours
/2. %he manufacturing c$cle efficienc$ 7MCD8 #as closest to"& 2.1, 4. 2.2* C. 2.43 D. 2.11 MCD I Kalue-added time 7Process time8 %hroughput 7manufacturing c$cle8 time I 1.+ hours 1.3 hours I 2.1,
11-,4
/1. %he deli er$ c$cle time #as(. ,.* hours 4. 21.1 hours C& 32.1 hours D. 3.1 hours
Deli er$ c$cle time I 6ait time J %hroughput time I 21.+ hours J 1.3 hours I 32.1 hours
Essay Questions
/2. Cea e$ &a!rication is a di ision of a ma5or corporation. >ast $ear the di ision had total sales of <21)122)222) net operating income of <2)22+)422) and a erage operating assets of <+)222)222. %he compan$0s minimum re'uired rate of return is 12=. Re'uired6hat is the di ision0s return on in estment 7RO389 RO3 I :et operating income ( erage operating assets I <2)22+)422 <+)222)222 I 33.4=
11-,*
/3. Bilde 3ndustries is a di ision of a ma5or corporation. >ast $ear the di ision had total sales of <23)3/2)222) net operating income of <2)/2/)1/2) and a erage operating assets of <,)222)222. %he compan$0s minimum re'uired rate of return is 12=. Re'uireda. 6hat is the di ision0s margin9 !. 6hat is the di ision0s turno er9 c. 6hat is the di ision0s return on in estment 7RO389 a. Margin I :et operating income ;ales I <2)/2/)1/2 <23)3/2)222 I 12.1= !. %urno er I ;ales ( erage operating assets I <23)3/2)222 <,)222)222 I 3.3 c. RO3 I :et operating income ( erage operating assets I <2)/2/)1/2 <,)222)222 I 42.4=
/4. &erris 6ares is a di ision of a ma5or corporation. %he follo#ing data are for the latest $ear of operations-
Re'uireda. 6hat is the di ision0s return on in estment 7RO389 !. 6hat is the di ision0s residual income9 a. RO3 I :et operating income ( erage operating assets I <1)2*4)122 <*)222)222 I 21.1= !. Residual income I :et operating income - ( erage operating assets Minimum re'uired rate of return I <1)2*4)122 - <*)222)222 1+= I <1)2*4)122 - </22)222 I <2*4)122
AACSB: Anal1tic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: A**lication #earning $%&ective: ''()' Com*ute return on investment +R$I, an" sho! ho! changes in sales- e.*enses- an" assets affect R$I #earning $%&ective: ''()/ Com*ute resi"ual income an" un"erstan" its strengths an" !eaknesses #evel: 0as1
11-,+
/*. &inancial data for 6indsor) 3nc. for last $ear appear !elo#-
%he compan$ paid di idends of <124)222 last $ear. %he F3n estment in Pine Compan$F on the statement of financial position represents an in estment in the stoc" of another compan$. Re'uireda. Compute the compan$0s margin) turno er) and return on in estment for last $ear. !. %he 4oard of Directors of 6indsor) 3nc. has set a minimum re'uired return of 2*=. 6hat #as the compan$0s residual income last $ear9
11-,,
a. Operating assets do not include in estments in other companies or in unde eloped land.
( erage operating assets I 7<1)222)222 J <1/2)2228 2 I <1)222)222 Margin I :et operating income ;ales I <2/2)222 <1),*2)222 I 1+= %urno er I ;ales ( erage operating assets I <1),*2)222 <1)222)222 I 1.,* RO3 I Margin %urno er I 1+= 1.,* I 2/= !. Residual income I :et operating income - ( erage operating assets Minimum re'uired rate of return I <2/2)222 - 7<1)222)222 2*=8 I <2/2)222 - <2*2)222 I <32)222
AACSB: Anal1tic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: A**lication #earning $%&ective: ''()' Com*ute return on investment +R$I, an" sho! ho! changes in sales- e.*enses- an" assets affect R$I #earning $%&ective: ''()/ Com*ute resi"ual income an" un"erstan" its strengths an" !eaknesses #evel: Me"ium
11-,/
/+. Dc"els 6ares is a di ision of a ma5or corporation. %he follo#ing data are for the latest $ear of operations-
Re'uireda. 6hat is the di !. 6hat is the di c. 6hat is the di d. 6hat is the di
ision0s margin9 ision0s turno er9 ision0s return on in estment 7RO389 ision0s residual income9
a. Margin I :et operating income ;ales I <1)311),22 <24)122)222 I *.3= !. %urno er I ;ales ( erage operating assets I <24)122)222 <+)222)222 I 4.2 c. RO3 I :et operating income ( erage operating assets I <1)311),22 <+)222)222 I 22.2= d. Residual income I :et operating income - ( erage operating assets Minimum re'uired rate of return I <1)311),22 - <+)222)222 12= I <1)311),22 - <,22)222 I <*11),22
AACSB: Anal1tic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: A**lication #earning $%&ective: ''()' Com*ute return on investment +R$I, an" sho! ho! changes in sales- e.*enses- an" assets affect R$I #earning $%&ective: ''()/ Com*ute resi"ual income an" un"erstan" its strengths an" !eaknesses #evel: 0as1
11-,1
/,. 3les 3ndustries is a di ision of a ma5or corporation. %he follo#ing data are for the latest $ear of operations-
Re'uired6hat is the di ision0s residual income9 Residual income I :et operating income - ( erage operating assets Minimum re'uired rate of return I <2)**3)4/2 - <+)222)222 1+= I <2)**3)4/2 - <1+2)222 I <1)*13)4/2
//. %he Cas"et Di ision of Rosencranz Corporation had a erage operating assets of <1*2)222 and net operating income of <2,)/22 in March. %he compan$ uses residual income to e aluate the performance of its di isions) #ith a minimum re'uired rate of return of 1,=. Re'uired6hat #as the Cas"et Di ision0s residual income in March9
11-/2
/1. Madrazo Corporation uses residual income to e aluate the performance of its di isions. %he minimum re'uired rate of return for performance e aluation purposes is 11=. %he Bames Di ision had a erage operating assets of <412)222 and net operating income of </+)222 in Aune. Re'uired6hat #as the Bames Di ision0s residual income in Aune9
11-/1
12. Aaster Corporation0s management "eeps trac" of the time it ta"es to process orders. During the most recent month) the follo#ing a erage times #ere recorded per order-
Re'uireda. Compute the throughput time. !. Compute the manufacturing c$cle efficienc$ 7MCD8. c. 6hat percentage of the production time is spent in non- alue-added acti ities9 d. Compute the deli er$ c$cle time. a. %hroughput time I Process time J 3nspection time J Mo e time J ?ueue time I 2.+ da$s J 2.2 da$s J 2.+ da$s J 3.2 da$s I +.+ da$s !. MCD I Kalue-added time 7Process time8 %hroughput time I 2.+ da$s +.+ da$s I 2.31 c. Percentage of time spent on non- alue-added acti ities I 122= - MCD= I 122= - 31= I +1= d. Deli er$ c$cle time I 6ait time J %hroughput time I 12.+ da$s J +.+ da$s I 1,.2 da$s
11-/2
11. During the most recent month at Coggan Corporation) 'ueue time #as *.3 da$s) inspection time #as 2.* da$) process time #as 1.1 da$s) #ait time #as 4.* da$s) and mo e time #as 2.* da$. Re'uireda. Compute the throughput time. !. Compute the manufacturing c$cle efficienc$ 7MCD8. c. 6hat percentage of the production time is spent in non- alue-added acti ities9 d. Compute the deli er$ c$cle time. a. %hroughput time I Process time J 3nspection time J Mo e time J ?ueue time I 1.1 da$s J 2.* da$s J 2.* da$s J *.3 da$s I /.2 da$s !. MCD I Kalue-added time 7Process time8 %hroughput time I 1.1 da$s /.2 da$s I 2.23 c. Percentage of time spent on non- alue-added acti ities I 122= - MCD= I 122= - 23= I ,,= d. Deli er$ c$cle time I 6ait time J %hroughput time I 4.* da$s J /.2 da$s I 12., da$s
AACSB: Anal1tic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: A**lication #earning $%&ective: ''()6 Com*ute "eliver1 c1cle time- through*ut time- an" manufacturing c1cle efficienc1 +MC0, #evel: Me"ium
11-/3
12. Dur"ee Corporation "eeps careful trac" of the time re'uired to fill orders. %he times re'uired for a particular order appear !elo#-
Re'uireda. Determine the throughput time. ;ho# $our #or"G !. Determine the manufacturing c$cle efficienc$ 7MCD8. ;ho# $our #or"G c. Determine the deli er$ c$cle time. ;ho# $our #or"G a. %hroughput time I Process time J 3nspection time J Mo e time J ?ueue time I 2.1 hours J 2.4 hours J 2.3 hours J 4.* hours I /.1 hours !. MCD I Kalue-added timeM%hroughput time I 2.1 hours /.1 hours I 2.11 c. Deli er$ c$cle time I 6ait time J %hroughput time I 12., hours J /.1 hours I 1/./ hours
11-/4
13. 6altner Corporation0s management reports that its a erage deli er$ c$cle time is 22.2 da$s) its a erage throughput time is ,.* da$s) its manufacturing c$cle efficienc$ 7MCD8 is 2.32) its a erage mo e time is 2.2 da$) and its a erage 'ueue time is 4.2 da$s. Re'uireda. 6hat is the #ait time9 !. 6hat is the process time9 c. 6hat is the inspection time9 a. Deli er$ c$cle time I 6ait time J %hroughput time 22.2 da$s I 6ait time J ,.* da$s 6ait time I 22.2 da$s - ,.* da$s I 12.* da$s !. MCD I Process time %hroughput time 2.32 I Process time ,.* da$s Process time I 2.32 ,.* da$s I 2.4 da$s c. %hroughput time I Process time J 3nspection time J Mo e time J ?ueue time ,.* da$s I 2.4 da$s J 3nspection time J 2.2 da$s J 4.2 da$s 3nspection time I ,.* da$s - 2.4 da$s - 2.2 da$s - 4.2 da$s I 2.1 da$s
11-/*

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Chapter 11 - Performance Measurement in Decentralized Organizations

LO3: Operating performance measures

!rofessional "#am $dapted

LO4: Balanced scorecard

LO2: Residual income

17 18 19 2) 21 22 23 24 25 26 27 28 29 3) 31 32 33 34 11( 1 11( 2 11( 35 3638 3942 43-

Chapter 11 - Performance Measurement in Decentralized Organizations 9/15/2))4 5ro6.e7 34 EN 4/21/2))3 54

Chapter 11 - Performance Measurement in Decentralized Organizations

Chapter 11 Performance Measurement in Decentralized Organizations

Chapter 11 - Performance Measurement in Decentralized Organizations

Multiple Choice Questions

Chapter 11 - Performance Measurement in Decentralized Organizations

Chapter 11 - Performance Measurement in Decentralized Organizations

Chapter 11 - Performance Measurement in Decentralized Organizations

Chapter 11 - Performance Measurement in Decentralized Organizations

Chapter 11 - Performance Measurement in Decentralized Organizations

Chapter 11 - Performance Measurement in Decentralized Organizations

Chapter 11 - Performance Measurement in Decentralized Organizations

Chapter 11 - Performance Measurement in Decentralized Organizations

31. %he margin in Eear 2 #as(. 4/= 4. 32= C. 22= D. 12=

Chapter 11 - Performance Measurement in Decentralized Organizations

42. ;ales in Eear 2 amounted to(. <2*2)222 4. <322)222 C. <32*)222 D. <3*2)222

Chapter 11 - Performance Measurement in Decentralized Organizations

Chapter 11 - Performance Measurement in Decentralized Organizations

*2. Di ision (0s sales are(. <422)222 4. <+2*)222 C. <12*)222 D. <222)222

Chapter 11 - Performance Measurement in Decentralized Organizations

Operating data from %indall Compan$ for last $ear follo#s-

*4. %he residual income #as(. <1/)222 4. <12)222 C. <12)222 D. <1+)222

Chapter 11 - Performance Measurement in Decentralized Organizations

*+. ;ales in Eear 1 amounted to(. <422)222 4. <122)222 C. <,*2)222 D. <1)222)222

*/. %he margin in Eear 2 #as(. 1/.,*= 4. 2,.22= C. 22.*2= D. 12.22=

Chapter 11 - Performance Measurement in Decentralized Organizations

%he follo#ing data pertain to the 6halen Di ision of :orthern 3ndustries.

Chapter 11 - Performance Measurement in Decentralized Organizations

Chapter 11 - Performance Measurement in Decentralized Organizations

Chapter 11 - Performance Measurement in Decentralized Organizations

Chapter 11 - Performance Measurement in Decentralized Organizations

Chapter 11 - Performance Measurement in Decentralized Organizations

Chapter 11 - Performance Measurement in Decentralized Organizations

Chapter 11 - Performance Measurement in Decentralized Organizations

Chapter 11 - Performance Measurement in Decentralized Organizations

Re'uireda. 6hat is the di !. 6hat is the di c. 6hat is the di d. 6hat is the di

Re'uired6hat is the di ision0s residual income9

Chapter 11 - Performance Measurement in Decentralized Organizations

Chapter 11 - Performance Measurement in Decentralized Organizations

Chapter 11 - Performance Measurement in Decentralized Organizations

Chapter 11 - Performance Measurement in Decentralized Organizations

Chapter 11 Performance Measurement in Decentralized Organizations (ns#er He$

True / False Questions

Chapter 11 - Performance Measurement in Decentralized Organizations

+. Residual income should not !e used to e aluate a cost center. T !E

Chapter 11 - Performance Measurement in Decentralized Organizations

Chapter 11 - Performance Measurement in Decentralized Organizations

Multiple Choice Questions

Chapter 11 - Performance Measurement in Decentralized Organizations

Chapter 11 - Performance Measurement in Decentralized Organizations

Chapter 11 - Performance Measurement in Decentralized Organizations

Chapter 11 - Performance Measurement in Decentralized Organizations

Chapter 11 - Performance Measurement in Decentralized Organizations

Chapter 11 - Performance Measurement in Decentralized Organizations

Chapter 11 - Performance Measurement in Decentralized Organizations

Chapter 11 - Performance Measurement in Decentralized Organizations

Chapter 11 - Performance Measurement in Decentralized Organizations

42. ;ales in Eear 2 amounted to(. <22)222 4. <322)222 C. <32)222 D. <3*2)222

2. Di ision (0s sales are(. <422)222 4. <+2)222 C. <12*)222 D. <222)222

+. ;ales in Eear 1 amounted to(. <422)222 4. <122)222 C. <,2)222 D. <1)222)222

/. %he margin in Eear 2 #as(. 1/.,= 4. 2,.22= C. 22.*2= D. 12.22=