14–41
Sales
?
?
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.
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%?
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?
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?
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:
62.
Which of the following will not result in an increase in the residual income, assuming other
factors remain constant?
63.
All other things the same, which of the following would increase residual income?
64.
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.
66.
67.
68.
How will decreases in the following items affect residual income?
Expenses
Inventory
A.
Decrease
Decrease
B.
Decrease
Increase
C.
Increase
Decrease
D.
Increase
Increase
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)
70.
Residual income is a better measure for performance evaluation of an investment center
manager than return on investment because: (CMA adapted)
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
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%
73.
How will increases in the following items affect residual income?
Sales
Equipment
A.
Decrease
Decrease
B.
Decrease
Increase
C.
Increase
Decrease
D.
Increase
Increase
74.
Which of the following should not be used for the cost of capital to compute residual
income?
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?
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?
77.
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?