Chapter 11 Performance Measurement in Decentralized Organizations
Chapter 11 Performance Measurement in Decentralized Organizations Answer
Key
True / False Questions
1. Residual income is superior to return on investment 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.
2. Residual income equals average operating assets multiplied by the difference between the
return on investment and the minimum required rate of return.
3. Consider a company that has only variable costs. All other things the same, an increase in
unit sales will result in no change in the return on investment.
Chapter 11 Performance Measurement in Decentralized Organizations
4. The use of return on investment as a performance measure may lead managers to make
decisions that are not in the best interests of the company as a whole.
5. Residual income is the net operating income that an investment center earns above the
minimum required return on the investment in operating assets.
6. Residual income should not be used to evaluate a cost center.
7. The performance measures on a balanced scorecard tend to fall into four groups: financial
measures, customer measures, internal business process measures, and external business
process measures.
Chapter 11 Performance Measurement in Decentralized Organizations
8. A balanced scorecard should contain every performance measure that can be expected to
influence a company’s profits.
9. The performance measures on an individual’s scorecard should not be overly influenced by
actions taken by others in the company or by events that are outside of the individual’s
control.
10. Managers of cost centers are evaluated according to the profits which their departments
are able to generate.
11. If expenses exceed revenues in a department, then it would be considered a cost center.
Chapter 11 Performance Measurement in Decentralized Organizations
Multiple Choice Questions
12. Residual income is a better measure for performance evaluation of an investment center
manager than return on investment because:
13. Turnover is computed by dividing average operating assets into:
Chapter 11 Performance Measurement in Decentralized Organizations
14. Which of the following statements provide(s) an argument in favor of including only a
plant’s net book value rather than gross book value as part of operating assets in the ROI
computation?
I. Net book value is consistent with how plant and equipment items are reported on a balance
sheet.
II. Net book value is consistent with the computation of net operating income, which includes
depreciation as an operating expense.
III. Net book value allows ROI to decrease over time as assets get older.
15. In computing the margin in a ROI analysis, which of the following is used?
Chapter 11 Performance Measurement in Decentralized Organizations
16. Which of the following is not an operating asset?
17. 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 gross cost rather than net book
value?
18. Which of the following will not result in an increase in the residual income, assuming
other factors remain constant?
Chapter 11 Performance Measurement in Decentralized Organizations
19. All other things the same, which of the following would increase residual income?
20. Which of the following three statements are correct?
I. A profit center has control over both cost and revenue.
II. An investment center has control over invested funds, but not over costs and revenue.
III. A cost center has no control over sales.
21. The purpose of the Data Processing Department of Falena Corporation is to assist the
various departments of the corporation with their information needs free of charge. The Data
Processing Department would best be evaluated as a:
Chapter 11 Performance Measurement in Decentralized Organizations
22. 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?
23. Last year a company had stockholder’s 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:
Chapter 11 Performance Measurement in Decentralized Organizations
24. 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%?
Chapter 11 Performance Measurement in Decentralized Organizations
25. 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:
26. 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?
Chapter 11 Performance Measurement in Decentralized Organizations
27. 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?
28. In August, the Universal Solutions Division of Jugan Corporation had average operating
assets of $670,000 and net operating income of $77,500. The company uses residual income,
with a minimum required rate of return of 12%, to evaluate the performance of its divisions.
What was the Universal Solutions Division’s residual income in August?
29. 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:
Chapter 11 Performance Measurement in Decentralized Organizations
30. Garnick Corporation keeps careful track of the time required to fill orders. The times
recorded for a particular order appear below:
The delivery cycle time was:
Chapter 11 Performance Measurement in Decentralized Organizations
31. Galanis Corporation keeps careful track of the time required to fill orders. Data
concerning a particular order appear below:
The throughput time was:
Chapter 11 Performance Measurement in Decentralized Organizations
32. Hoster Corporation keeps careful track of the time required to fill orders. The times
recorded for a particular order appear below:
The throughput time was:
Chapter 11 Performance Measurement in Decentralized Organizations
33. Botelho Corporation keeps careful track of the time required to fill orders. Data
concerning a particular order appear below:
The delivery cycle time was:
Chapter 11 Performance Measurement in Decentralized Organizations
34. Niemiec Corporation keeps careful track of the time required to fill orders. The times
recorded for a particular order appear below:
The manufacturing cycle efficiency (MCE) was closest to:
Chapter 11 Performance Measurement in Decentralized Organizations
11–18
35. Mordue Corporation keeps careful track of the time required to fill orders. Data
concerning a particular order appear below:
The manufacturing cycle efficiency (MCE) was closest to:
Aide Industries is a division of a major corporation. Data concerning the most recent year
appears below:
Chapter 11 Performance Measurement in Decentralized Organizations
36. The division’s margin is closest to:
37. The division’s turnover is closest to:
Chapter 11 Performance Measurement in Decentralized Organizations
11–20
38. The division’s return on investment (ROI) is closest to:
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.