21
45) The following information pertains to Artemis Co. for the year ended December 31: (CPA
adapted)
Sales $ 600,000
Income $ 100,000
Capital investment $ 400,000
Which of the following equations should be used to compute Artemis’ return on investment
(ROI)?
A) (4/6) × (6/1) = ROI
B) (1/6) × (6/4) = ROI
C) (4/6) × (1/6) = ROI
D) (6/4) × (6/1) = ROI
46) The following information pertains to Zootime Co.’s Shelter Division for the current year:
(CPA adapted)
Sales $ 311,000
Variable cost $ 250,000
Traceable fixed costs $ 50,000
Average invested capital $ 40,000
Imputed interest rate 10 %
Zootime’s return on investment was:
A) 10.00%.
B) 13.33%.
C) 27.50%.
D) 30.00%.
47) A division earning a profit will increase its return on investment (ROI) if it increases
operating expenses and:
A) sales by the same dollar amount.
B) sales by the same percentage.
C) investment by the same dollar amount.
D) investment by the same percentage.
48) In computing the margin in a ROI analysis, which of the following is used?
A) Sales in the denominator.
B) Net operating income in the denominator.
C) Average operating assets in the denominator.
D) Residual income in the denominator.
49) In determining the dollar amount to use for operating assets in the return on investment
(ROI) calculation, companies will generally use either net book value or gross cost of the assets.
Which of the following is not an argument for the use of net book value rather than gross cost?
A) It is consistent with how assets are reported on the balance sheet.
B) It eliminates the depreciation method as a factor in ROI calculations.
C) It encourages the replacement of old, worn-out equipment.
D) It will result in a decrease of ROI each year.
50) Average operating assets are $110,000 and net operating income is $23,100. The company
invests $25,000 in new assets for a project that will increase net operating income by $4,750.
What is the return on investment (ROI) of the new project?
A) 21%.
B) 19%.
C) 18.5%.
D) 20%.
51) Last year, a company had stockholders’ equity of $160,000, net operating income of $16,000,
and sales of $100,000. The asset turnover was 0.5 and the return on investment (ROI) was:
A) 10%.
B) 9%.
C) 8%.
D) 7%.
52) Sales and average operating assets for Wyeth Company and Genesis Company are given
below:
Sales Average
Operating
Assets
Wyeth Company $ 20,000 $ 8,000
Genesis Company $ 50,000 $ 10,000
What is the margin that each company will have to earn in order to generate a return on
investment of 20%?
A) 12% and 16%.
B) 50% and 100%.
C) 8% and 4%.
D) 2.5% and 5%.
53) Rex Company’s sales last year totaled $150,000 and its return on investment (ROI) was 12%.
If the company’s turnover was 3, then its net operating income for the year must have been:
A) $6,000.
B) $2,000.
C) $18,000.
D) it is impossible to determine from the data given.
54) The Dry Wall Division reports the following operating data for the past two years:
Year 1 Year 2
Margin 16 % ?
Turnover 2.5 2.0
Average operating assets ? $ 150,000
Net operating income $ 40,000 ?
Stockholders’ equity $ 80,000 $ 125,000
Sales ? ?
The return on investment at the Dry Wall Division was exactly the same in Year 1 and Year 2.
The margin in Year 2 was:
A) 48%.
B) 32%.
C) 20%.
D) 10%.
55) The Dry Wall Division reports the following operating data for the past two years:
Year 1 Year 2
Margin 16 % ?
Turnover 2.5 2.0
Average operating assets ? $ 150,000
Net operating income $ 40,000 ?
Stockholders’ equity $ 80,000 $ 125,000
Sales ? ?
The return on investment at the Dry Wall Division was exactly the same in Year 1 and Year 2.
Sales in Year 2 amounted to:
A) $250,000.
B) $300,000.
C) $325,000.
D) $350,000.
56) The Dry Wall Division reports the following operating data for the past two years:
Year 1 Year 2
Margin 16 % ?
Turnover 2.5 2.0
Average operating assets ? $ 150,000
Net operating income $ 40,000 ?
Stockholders’ equity $ 80,000 $ 125,000
Sales ? ?
The return on investment at the Dry Wall Division was exactly the same in Year 1 and Year 2.
Average operating assets in Year 1 were:
A) $160,000.
B) $150,000.
C) $125,000.
D) $100,000.
57) The Dry Wall Division reports the following operating data for the past two years:
Year 1 Year 2
Margin 16 % ?
Turnover 2.5 2
Average operating assets ? $ 150,000
Net operating income $ 40,000 ?
Stockholders’ equity $ 80,000 $ 125,000
Sales ? ?
The return on investment at the Dry Wall Division was exactly the same in Year 1 and Year 2.
Net operating income in Year 2 amounted to:
A) $60,000.
B) $50,000.
C) $40,000.
D) $35,000.
58) The following data are available for the South Division of Manhattan Products, Inc. and the
single product it makes:
Unit selling price $ 20
Variable cost per unit $ 12
Annual fixed costs $ 280,000
Average operating assets $ 1,500,000
How many units must South sell each year to have an ROI of 16%?
A) 240,000.
B) 1,300,000.
C) 52,000.
D) 65,000.
59) The Country Garden Company’s current net operating income is $16,800 and its average
operating assets are $80,000. The Country Garden’s required rate of return is 18%. A new project
being considered would require an investment of $15,000 and would generate annual net
operating income of $3,000. What is the residual income of the new project?
A) 20.8%.
B) 20%.
C) $(150).
D) $300.
60) Imagination Corporation uses residual income to evaluate the performance of its divisions.
Imagination’s minimum required rate of return is 11%. In April, the Commercial Products
Division had average operating assets of $100,000 and net operating income of $9,400. What
was the Commercial Products Division’s residual income in April?
A) $(1,600).
B) $1,600.
C) $1,034.
D) $(1,034).
61) Division B had an ROI last year of 15%. The division’s minimum required rate of return is
10%. If the division’s average operating assets last year were $450,000, then the division’s
residual income for last year was:
A) $67,500.
B) $22,500.
C) $37,500.
D) $45,000.
62) Which of the following will not result in an increase in the residual income, assuming other
factors remain constant?
A) An increase in sales.
B) An increase in the minimum required rate of return.
C) A decrease in expenses.
D) A decrease in operating assets.
63) All other things constant, which of the following would increase residual income?
A) Increase in average operating assets.
B) Decrease in average operating assets.
C) Increase in minimum required rate of return.
D) Decrease in net operating income.
64) Which of the following statement(s) is/are true?
(A) If a division’s return on investment (ROI) exceeds its cost of capital, then its residual income
is positive.
(B) If a division’s cost of capital equals its return on investment (ROI), then its residual income is
zero.
A) Only (A) is true.
B) Only (B) is true.
C) Both of these are true.
D) Neither of these is true.
65) Residual income is similar to the ________ notion of profit as being the amount left over
after all costs, including the cost of the capital employed in the division, are subtracted.
A) accountant’s
B) manager’s
C) shareholder’s
D) economist’s
66) Which of the following statement(s) is/are false?
(A) Residual income can be used to compare divisions of different sizes.
(B) Residual income can be used to compare divisions that are profit centers.
A) Only (A) is false.
B) Only (B) is false.
C) Both of these are false.
D) Neither of these is false.
67) Managerial performance can be measured in many different ways including return on
investment (ROI) and residual income. A good reason for using residual income instead of ROI
is that:
A) residual income can be computed without regard to identifying an investment base.
B) appropriate goal congruence behavior is more likely to occur when using residual income.
C) residual income is well accepted in many organizations and often used in the financial press.
D) ROI does not take into consideration both the investment turnover ratio and return-on-sales
percentage.
68) How will decreases in the following items affect residual income?
Decrease in Expenses Decrease in Inventory
A. Decrease RI Decrease RI
B. Decrease RI Increase RI
C. Increase RI Decrease RI
D. Increase RI Increase RI
A) Option A
B) Option B
C) Option C
D) Option D
69) Residual income is a performance evaluation that is used in conjunction with, or instead of,
return on investment (ROI). In many cases, residual income is preferred to ROI because: (CIA
adapted)
A) residual income is a measure over time, while ROI represents the results for one period.
B) residual income concentrates on maximizing absolute dollars of income rather than a
percentage return, as with ROI.
C) the imputed interest rate used in calculating residual income is more easily derived than the
target rate that is compared to the calculated ROI.
D) average investment is employed with residual income while year-end investment is employed
with ROI.
70) Residual income is a better measure for performance evaluation of an investment center
manager than return on investment because: (CMA adapted)
A) the problems associated with measuring the asset base are eliminated.
B) desirable investment decisions are less likely to be neglected by high-return divisions.
C) only the gross book value of assets needs to be calculated.
D) the arguments about the implicit cost of interest are eliminated.
71) Kevin Thomas is the general manager of the Modular Homes Division, and his performance
is measured using the residual income method. Thomas is reviewing the following forecasted
information for his division for next year: (CMA adapted)
Category Amount (thousands)
Working capital $ 1,800
Revenue 30,000
Plant and equipment 17,200
If the cost of capital is 15% and Thomas wants to achieve a residual income target of $2,000,000,
what will costs have to be in order to achieve the target?
A) $9,000,000.
B) $10,800,000.
C) $25,150,000.
D) $25,690,000.
72) Bella Vista Service Co. is a computer service center. For the month of May, Bella Vista
Service Co. had the following operating statistics: (CMA adapted)
Sales $ 450,000
Operating income 25,000
Net profit after taxes 8,000
Total assets 500,000
Stockholder’s equity 200,000
Cost of capital 6 %
Based on the above information, which one of the following statements is correct?
A) Bella Vista Service Co. has a return on investment of 4%.
B) Bella Vista Service Co. has a residual income of $(2,000).
C) Bella Vista Service Co. has a return on investment of 5.6%.
D) Bella Vista Service Co. has a residual income of $(22,000).
73) How will increases in the following items affect residual income?
Increase in Sales Increase in Equipment
A. Decrease RI Decrease RI
B. Decrease RI Increase RI
C. Increase RI Decrease RI
D. Increase RI Increase RI
A) Option A
B) Option B
C) Option C
D) Option D
74) Which of the following should not be used for the cost of capital to compute residual
income?
A) Historical weighted average cost of capital.
B) Marginal after-tax cost of new equity capital.
C) Cost of debt and equity used to finance a project.
D) Return on investment (ROI).
75) Which one of the following items would most likely not be incorporated into the calculation
of a division’s investment base when using the residual income approach for performance
measurement and evaluation?
A) Land being held by the division as a potential site for a new plant and parking lot.
B) Division inventories when division management exercises control over the inventory levels.
C) Division accounts payable when division management exercises control over the amount of
short-term credit utilized.
D) Division accounts receivable when division management exercises control over credit policy
and credit terms.
76) The Pathways Company has an asset turnover of 3.0 times, using assets of $45,000. The
company also has a return on investment (ROI) of 20%. If the residual income was $2,250, what
was the company’s cost of capital?
A) 6.0%.
B) 10.0%.
C) 15.0%.
D) 20.0%.
77) In 2020, Evans Corporation had an operating profit of $750,000 and a residual income of
$300,000. If Evans’ cost of capital is 15%, what is the amount of the invested capital?
A) $5,000,000.
B) $3,000,000.
C) $2,000,000.
D) $1,250,000.
78) The following information is available for Kiss Company:
Sales $ 100,000
Operating expenses $ 94,000
Operating assets $ 40,000
Stockholder’s equity $ 25,000
Cost of capital 10 %
What is Kiss Company’s residual income?
A) $2,000.
B) $2,500.
C) $3,500.
D) $4,000.
79) The following information has been gathered for the Door Division:
Return on investment (ROI) 15.0 %
Sales $ 120,000
Operating assets $ 60,000
Cost of Capital 12.0 %
Profit margin 7.5 %
What is the Door Division’s residual income?
A) $1,800.
B) $2,700.
C) $3,600.
D) $5,400.
80) The following information has been gathered for the Brake Division:
Sales $ 420,000
Operating income $ 75,000
Average current assets $ 260,000
Cost of capital 12 %
Return on investment 15 %
What is the Brake Division’s residual income?
A) $15,000.
B) $22,500.
C) $18,750.
D) $48,000.