82. 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)
83. Residual income is a better measure for performance evaluation of an investment center
manager than return on investment because: (CMA adapted)
84. James Webb is the general manager of the Industrial Product Division, and his
performance is measured using the residual income method. Webb is reviewing the following
forecasted information for his division for next year: (CMA adapted)
If the cost of capital is 15% and Webb wants to achieve a residual income target of $2,000,000,
what will costs have to be in order to achieve the target?
85. REB Service Co. is a computer service center. For the month of May, REB had the
following operating statistics: (CMA adapted)
Based on the above information, which one of the following statements is correct? REB has a:
86. Residual income is a better measure for performance evaluation of an investment center
manager than return on investment because: (CMA adapted)
87. In computing the margin in a ROI analysis, which of the following is used?
88. 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 an argument for the use of net book value rather than gross cost?
89. Which of the following will not result in an increase in the residual income, assuming other
factors remain constant?
14–67
90. All other things the same, which of the following would increase residual income?
91. 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?
92. Last year a company had stockholders’ equity of $160,000, net operating income of
$16,000, and sales of $100,000. The turnover was 0.5. The return on investment (ROI) was:
93. Sales and average operating assets for Company P and Company Q are given below:
What is the margin that each company will have to earn in order to generate a return on
investment of 20%?
94. Reed 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:
95. A company’s current net operating income is $16,800 and its average operating assets are
$80,000. The company’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?
96. Soderquist Corporation uses residual income to evaluate the performance of its divisions.
The company’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?
97. 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:
98. The Reed Division reports the following operating data for the past two years:
The return on investment at Reed was exactly the same in Year 1 and Year 2.
The margin in Year 2 was:
99. The Reed Division reports the following operating data for the past two years:
The return on investment at Reed was exactly the same in Year 1 and Year 2.
Sales in Year 2 amounted to:
100. The Reed Division reports the following operating data for the past two years:
The return on investment at Reed was exactly the same in Year 1 and Year 2.
Average operating assets in Year 1 were:
101. The Reed Division reports the following operating data for the past two years:
The return on investment at Reed was exactly the same in Year 1 and Year 2.
Net operating income in Year 2 amounted to:
102. The following data are available for the South Division of Redride Products, Inc. and the
single product it makes:
How many units must South sell each year to have an ROI of 16%?
103. The following information is available about the Winter Division of Washburn Company.
Washburn requires a return of 9% from all divisions.
Required: (use four decimal places in you calculation)
a. Compute the ROI for the Winter Division.
b. Compute the residual income for the Winter Division.