Chapter 09 Performance Measurement in Decentralized
Organizations Answer Key
True / False Questions
1.
Land held for possible plant expansion would not be included as an operating asset when
computing return on investment (ROI).
2.
When used in return on investment (ROI) calculations, operating assets do not include
investments in land held for future use and investments in other companies.
3.
A disadvantage of using ROI to evaluate performance is that it encourages the manager to
reduce the investment in operating assets as well as increase net operating income.
4.
Operating assets include cash, accounts receivable, and inventory but not any depreciable
fixed assets.
5.
Return on investment (ROI) equals margin multiplied by turnover.
6.
All other things being the same, a decrease in average operating assets will decrease
return on investment (ROI).
7.
Margin equals net operating income divided by sales.
8.
Net operating income is income after interest and taxes.
Topic Area: Evaluating Investment Center Performance – Return on Investment
9.
Topic Area: Evaluating Investment Center Performance – Return on Investment
Average operating assets is used in the numerator to compute turnover in an ROI
analysis.
10.
Suppose a company evaluates divisional performance using both ROI and residual income.
The company’s minimum required rate of return for the purposes of residual income
calculations is 12%. If a division has a residual income of $6,000, then its ROI is greater
than 12%.
11.
Return on investment is superior to residual income as a means of measuring performance
because it encourages managers to make investment decisions that are more consistent
with the interests of the company as a whole.
12.
ROI and residual income are tools used to evaluate managerial performance in profit
centers.
13.
Residual income is the net operating income that an investment center earns above the
minimum required return on the investment in fixed assets.
14.
Residual income should not be used to evaluate a profit center.
15.
Process Time is the only non-value-added component of Throughput Time.
16.
Move time is considered value-added time.
17.
Queue time is considered value-added time.
18.
Wait time is considered non-value-added time.
19.
A manufacturing cycle efficiency (MCE) ratio close to 1.00 is desirable because this is the
ratio of value-added time to throughput time.
20.
Inspection Time is generally considered to be non-value-added time.
21.
Throughput time is the amount of time required to process raw materials into completed
products.
22.
Because continuous improvement is very difficult, the emphasis in the balanced scorecard
tends to be on meeting preset standards.
23.
A balanced scorecard should not contain any performance measures concerning customer
satisfaction since the extent to which customers are satisfied is beyond the control of any
manager in the company.
24.
All profit centers are responsibility centers, but not all responsibility centers are profit
centers.
25.
A profit center is responsible for generating revenue and for controlling costs.
26.
A cost center is not a responsibility center.
Multiple Choice Questions
27.
A company that is seeking to increase ROI should attempt to decrease:
28.
Consider the following three conditions:
I. An increase in sales
II. An increase in operating assets
III. A reduction in expenses
Which of the above conditions provide a way in which a manager can improve return on
investment?
29.
Net operating income is defined as:
30.
Which of the following would be an argument for the use of net book value in the
computation of operating assets in return on investment calculations?
31.
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:
32.
Which of the following performance measures will decrease if the minimum required rate
of return increases?
Return on Investment
Residual Income
A)
Yes
Yes
B)
No
Yes
C)
Yes
No
D)
No
No
33.
Residual income:
34.
All other things being the same, which of the following would increase the residual
income?
35.
Throughput Time consists of:
36.
Manufacturing Cycle Efficiency (MCE) is computed as:
37.
Contribution income statements are used to measure the performance of:
38.
Given the following data:
Average operating assets
$250,000
Total liabilities
$100,000
Sales
$600,000
Contribution margin
$150,000
Net operating income
$30,000
Return on investment (ROI) would be:
39.
CS Company has a profit margin of 11%. Sales are $320,000, net operating income is
$35,200, and average operating assets are $128,000. What is the company’s return on
investment (ROI)?