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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%
Compute the Door Division's residual income.
80.
Use the following information to compute residual income:
Sales
$320,000
Operating income
$60,000
Average current assets
$250,000
Cost of capital
12%
Return on investment
15%
81.
The Labrador Falls Company has three divisions: A Division, B Division, and C Division.
A
B
C
Sales
$320,000
$540,000
?
Net operating income
60,000
?
$24,000
Residual income
?
36,000
14,400
Average Division
Assets
250,000
320,000
80,000
Cost of Capital
12%
16%
Profit Margin
20%
5%
Asset Turnover
?
4.0
Return on investment
15%
What was A Division's residual income last year?
82.
The Labrador Falls Company has three divisions: A Division, B Division, and C Division.
A
B
C
Sales
$320,000
$540,000
?
Net operating
income
60,000
?
$24,000
Residual income
?
36,000
14,400
Average Division
Assets
250,000
320,000
80,000
Cost of Capital
12%
16%
Profit Margin
20%
5%
Asset Turnover
?
4.0
Return on
investment
15%
What was B Division's return on investment (ROI) last year?
83.
The Labrador Falls Company has three divisions: A Division, B Division, and C Division.
A
B
C
Sales
$320,000
$540,000
?
Net operating
income
60,000
?
$24,000
Residual income
?
36,000
14,400
Average Division
Assets
250,000
320,000
80,000
Cost of Capital
12%
16%
Profit Margin
20%
5%
Asset Turnover
?
4.0
Return on
investment
15%
What was C Division's cost of capital last year?
84.
Residual income is a better measure for performance evaluation of an investment center
manager than return on investment (ROI) because: (CMA adapted)
85.
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? (CMA adapted)
86.
Residual income is a better measure for performance evaluation of an investment center
manager than return on investment because: (CMA adapted)
87.
88.
89.
90.
91.
92.
Level return on investments (ROI) over the life of a long-term project is more likely when
ROI is computed using:
93.
Using ending balances for the investment base in computing return on investment (ROI)
might encourage managers to acquire assets:
94.
Using beginning balances for the investment base in computing return on investment
(ROI) might encourage managers to acquire assets:
14-75
95.
One division of the Marvin Educational Enterprises has depreciable assets costing
$4,000,000. The cash flows from these assets for the past three years have been:
Year
Cash flows
1
$1,200,000
2
$1,400,000
3
$1,620,000
The current (i.e., replacement) costs of these assets were expected to increase 25% each
year. Marvin used the straight-line depreciation method; the estimated useful life is 10-
years with no salvage value. For return on investment (ROI) calculations, Marvin uses
end-of-year balances.
What is the ROI using historical cost and gross book value?
Year 1
Year 2
Year 3
A.
20.0%
25.0%
30.5%
B.
25.0%
28.0%
32.0%
C.
18.0%
26.5%
28.0%
D.
30.0%
35.0%
40.5%
14-76
96.
One division of the Marvin Educational Enterprises has depreciable assets costing
$4,000,000. The cash flows from these assets for the past three years have been:
Year
Cash flows
1
$1,200,000
2
$1,400,000
3
$1,620,000
The current (i.e., replacement) costs of these assets were expected to increase 25% each
year. Marvin used the straight-line depreciation method; the estimated useful life is 10-
years with no salvage value. For return on investment (ROI) calculations, Marvin uses
end-of-year balances.
What is the ROI using historical cost and net book value?
Year 1
Year 2
Year 3
A.
21.5%
34.0%
42.0%
B.
22.2%
31.3%
43.6%
C.
23.0%
32.0%
47.0%
D.
24.8%
35.0%
49.5%
97.
One division of the Marvin Educational Enterprises has depreciable assets costing
$4,000,000. The cash flows from these assets for the past three years have been:
Year
Cash flows
1
$1,200,000
2
$1,400,000
3
$1,620,000
The current (i.e., replacement) costs of these assets were expected to increase 25% each
year. Marvin used the straight-line depreciation method; the estimated useful life is 10-
years with no salvage value. For return on investment (ROI) calculations, Marvin uses
end-of-year balances.
What is the ROI using current costs and gross book value?
Year 1
Year 2
Year 3
A.
14.0%
18.0%
22.4%
B.
13.0%
14.0%
14.0%
C.
12.0%
10.1%
9.5%
D.
14.0%
12.4%
10.7%
14-78
98.
One division of the Marvin Educational Enterprises has depreciable assets costing
$4,000,000. The cash flows from these assets for the past three years have been:
Year
Cash flows
1
$1,200,000
2
$1,400,000
3
$1,620,000
The current (i.e., replacement) costs of these assets were expected to increase 25% each
year. Marvin used the straight-line depreciation method; the estimated useful life is 10-
years with no salvage value. For return on investment (ROI) calculations, Marvin uses
end-of-year balances.
What is the ROI using current costs and net book value?
Year 1
Year 2
Year 3
A.
14.6%
15.9%
16.0%
B.
15.8%
15.9%
14.9%
C.
15.6%
15.5%
15.3%
D.
15.6%
15.8%
11.9%
14-79
99.
One division of the Marvin Educational Enterprises has depreciable assets costing
$4,000,000. The cash flows from these assets for the past three years have been:
Year
Cash flows
1
$1,200,000
2
$1,400,000
3
$1,620,000
The current (i.e., replacement) costs of these assets were expected to increase 25% each
year. Marvin used the straight-line depreciation method; the estimated useful life is 10-
years with no salvage value. For return on investment (ROI) calculations, Marvin uses
end-of-year balances.
What is the residual income for each year, assuming the cost of capital is 15% and Marvin
uses historical costs and gross book values to compute residual income?
Year 1
Year 2
Year 3
A.
$200,000
$400,000
$620,000
B.
$200,000
$200,000
$200,000
C.
$250,000
$200,000
$450,000
D.
$250,000
$400,000
$375,000
14-80
100.
One division of the Marvin Educational Enterprises has depreciable assets costing
$4,000,000. The cash flows from these assets for the past three years have been:
Year
Cash flows
1
$1,200,000
2
$1,400,000
3
$1,620,000
The current (i.e., replacement) costs of these assets were expected to increase 25% each
year. Marvin used the straight-line depreciation method; the estimated useful life is 10-
years with no salvage value. For return on investment (ROI) calculations, Marvin uses
end-of-year balances.
What is the residual income for each year, assuming the cost of capital is 15% and Marvin
uses historical costs and net book values to compute residual income?
Year 1
Year 2
Year 3
A.
$200,000
$435,000
$690,000
B.
$260,000
$520,000
$800,000
C.
$260,000
$420,000
$540,000
D.
$280,000
$400,000
$750,000
