c.
$30
d.
$40
36. Chow Company has a number of investment centers to track on a day-to-day basis. The following
represent key figures related to one of Chow’s investment centers for May 20xx:
Operating income
$ 6,000,000
Sales
15,000,000
Asset turnover
55%
What is the investment center’s ROI for May 20xx (rounded to two decimal places)?
a.
27.5 percent
b.
33 percent
c.
55 percent
d.
22 percent
37. Which of the following represents the number of sales dollars generated by each dollar invested in
assets?
a.
Asset turnover
b.
Assets invested
c.
Profit margin
d.
Operating income
38. A manager can improve ROI by doing which of the following?
a.
Decreasing assets
b.
Increasing sales
c.
Decreasing costs
d.
All of these choices
39. Determine the October 20xx ROI (rounded to two decimal places) for an investment center with the
following information:
Assets at September 30, 20xx
$20,000,000
Assets at October 31, 20xx
22,000,000
Assets at October 15, 20xx
18,595,000
Operating income for the month ended October 31, 20xx
5,000,000.0
Operating income for the month ended October 31, 20xx 5,000,000.0
a.
25.8 percent
b.
21.8 percent
c.
23.8 percent
d.
27.8 percent
40. Determine the February 20xx residual income for an investment center with the following information:
$2,900,000
52%
38%
$18,200,000
a.
($4,016,000)
b.
($5,836,000)
c.
($6,564,000)
d.
($8,384,000)
41. Determine the April 20xx residual income for an investment center with the following information:
Operating income for the month ended April 30, 20xx
$14,900,000
Assets at March 31, 20xx
10,200,000
Assets at April 30, 20xx
13,150,000
Desired ROI
49%
Actual ROI
60%
a.
$8,456,500
b.
$8,780,000
c.
$9,179,250
d.
$8,945,750
42. For purposes of computing EVA, the minimum desired rate or return on an investment is known as
a.
ROI.
b.
cost of capital.
c.
residual income.
d.
profit margin.
43. Compute the May 20xx EVA for an investment center with the following information:
Pre-tax operating income for May 20xx
$18,000,500
Income tax expense for May 20xx
5,100,000
Assets at May 31, 20xx
13,200,500
Current liabilities at May 31, 20xx
10,000,000
Long-term liabilities at May 31, 20xx
3,500,000
Minimum desired rate of return
20%
Minimum desired rate of return 20%
a.
$12,260,400
b.
$12,700,500
c.
$11,880,500
d.
$12,200,500
44. An evaluation of EVA will prove more meaningful if it is compared to
a.
target EVAs.
b.
EVAs from other investment centers.
c.
EVAs from previous periods.
d.
all of these choices.
45. A manager can improve EVA by
a.
increasing assets and decreasing costs.
b.
increasing sales and assets.
c.
increasing cost of capital and assets.
d.
decreasing assets and lowering cost of capital.
46. Which of the following performance measures is most concerned with long-term financial
performance?
a.
Economic value added
b.
Residual income
c.
ROI
d.
None of these choices
47. Compute the June 20xx cost of capital (rounded to nearest percent) for an investment center with the
following information:
Pre-tax operating income for June 20xx
$17,500,000
Assets at June 30, 20xx
6,200,000
Current liabilities at June 30, 20xx
4,000,000
Long-term liabilities at June 30, 20xx
1,500,000
Income tax expense for June 30, 20xx
5,000,000
EVA
11,940,000
a.
10 percent
b.
25 percent
c.
13 percent
d.
17 percent
48. Compute the return on investment (rounded to nearest percent) for the Tim Tom investment center as
shown below.
Tim Tom Subsidiary
Total sales
$1,600
Operating income
$180
Average assets invested
$900
Profit margin
?
Asset turnover
?
ROI
?
a.
20%
b.
17%
c.
14%
d.
11%
49. Compute the profit margin (rounded to nearest percent) for the Tim Tom investment center as shown
below.
Tim Tom Subsidiary
Total sales
$1,600
Operating income
$140
Average assets invested
$900
Profit margin
?
Asset turnover
?
ROI
?
a.
7%
b.
9%
c.
12%
d.
18%
50. Compute the asset turnover (rounded to two decimal places) for the Tim Tom investment center as
shown below.
Tim Tom Subsidiary
Total sales
$1,600
Operating income
$100
Average assets invested
$900
Profit margin
?
Asset turnover
?
ROI
?
a.
1.78
b.
0.56
c.
0.11
d.
9.00
51. Compute the residual income for the Hi Ho investment center as shown below.
Hi Ho Subsidiary
Total sales
$20,000
Operating income
$4,300
Beginning assets invested
$14,000
Ending assets invested
$16,000
Average assets invested
$?
Desired ROI
25%
Residual income
$?
a.
$550
b.
$3,050
c.
$4,300
d.
$1,800
52. Compute the average assets invested for the Hi Ho investment center as shown below.
Hi Ho Subsidiary
Total sales
$20,000
Operating income
$5,000
Beginning assets invested
$14,000
Ending assets invested
$14,600
Average assets invested
$?
Desired ROI
25%
Residual income
$?
a.
$14,400
b.
$14,450
c.
$14,350
d.
$14,300
53. Compute the current liabilities for the Yi Yo investment center as shown below.
Yi Yo Subsidiary
Total sales
$18,000
After-tax operating income
$1,000
Total assets
$15,000
Current liabilities
$?
Total assets – current liabilities
$3,500
Cost of capital
15%
Economic value added
$?
a.
$475
b.
$525
c.
$1,000
d.
$11,500
54. The effectiveness of a performance management and evaluation system depends on how well it
coordinates the goals of
a.
the entire company.
b.
responsibility centers.
c.
managers.
d.
all of these choices.
55. Which of the following is a type of incentive compensation?
a.
Health insurance
b.
Profit-sharing plans
c.
Pension plans
d.
Flexible spending programs
56. Awards are often used to encourage
a.
intermediate performance.
b.
short-term performance.
c.
long-term performance.
d.
both short-term and long-term performance.
57. What type of incentive compensation is utilized to motivate employees to achieve financial targets that
increase the company’s stock price?
a.
Profit-sharing plans
b.
Awards
c.
Cash bonuses
d.
Stock option programs
58. Why might stock options not be the best way to promote coordination of goals?
a.
Stock prices can fluctuate quickly.
b.
Many of the variables that affect stock prices are beyond a manager’s control.
c.
Employees generally do not value stock options very highly.
d.
None of these choices
59. Incentive plans must be developed with input from which of the following groups?
a.
Supervisory employees
b.
Production line employees
c.
All employees
d.
Human resources employees
SHORT ANSWER
1. What is the business purpose of the balanced scorecard, and how does it benefit an organization?
2. Why are managers more likely to achieve their objectives in both the short term and the long term
when they utilize a tool such as the balanced scorecard?
ANS:
3. Provide three examples of something that an organization might want to measure and a performance
measurement that could be utilized in each example.
4. Identify and describe the five different responsibility centers, and provide one example of each.
5. Why is it important that a manager’s evaluation be based only on those revenues and costs that he or
she can control?
ANS:
6. Identify the following and show the formula for calculating each:
a. ROI
b. RI
c. EVA
7. What are some of the limitations of utilizing ROI, residual income, and EVA to measure the
performance of investment centers?
8. What are some items that can affect an investment center’s EVA calculation, and how can EVA be
improved?
9. The CEO of Buckstars is interested in reviewing the May 20xx performance report for Cost Center
7-11. Prepare a brief performance report for the CEO utilizing the following information for Cost
Center 7-11. Line items should be broken out between direct materials, direct labor, variable overhead,
and fixed overhead.
Actual Results
Flexible
Budget
Master Budget
Ground coffee
$1,350
$1,200
$1,270
Flavored syrups
2,300
2,320
3,000
Milk
850
800
950
Servers’ wages
3,500
3,800
3,600
Supervisor’s salary
5,000
5,000
5,000
Espresso machine repair
50
120
150
Direct materials
Fixed overhead
____ —
____ —
10. Using the following information, prepare a traditional income statement and a variable costing income
statement:
Sales
$4,000,000
Variable cost of goods sold
1,800,000
Variable selling expenses
900,000
Fixed selling expenses
100,000
Fixed manufacturing costs
600,000
ANS:
11. Using the following information, prepare a single report setting forth the variable costing income
statement as well as a performance report for Profit Center West.
Budgeted sales
$20,000
Budgeted sales variance
$5,000
(F)
Actual variable cost of goods sold
$8,000
Actual variable cost of goods sold variance
$10,000
(F)
Budgeted variable selling expenses
$5,000
Actual variable selling expenses
$3,000
Budgeted fixed manufacturing costs
$1,000
Budgeted fixed manufacturing costs variance
$50
(F)
Budgeted fixed selling expenses
$2,000
Budgeted fixed selling expenses variance
$100
(F)
Actual number of orders processed
100
Actual number of orders processed variance
10
(U)
Budgeted average daily sales
$500
Budgeted average daily sales variance
$200
(F)
Actual number of units sold
450
Actual number of units sold variance
25
(F)
Variable cost of goods sold
Contribution margin
$14,000
Sales
Cost of goods sold
Variable selling expenses
Fixed selling expenses
Operating income
Sales
Variable cost of goods sold
Variable selling expenses
Contribution margin
Fixed manufacturing costs
Fixed selling expenses
Operating income
12. As the staff accountant for Investment Center 713, calculate the October 20xx ROI, using the
following information:
October 20xx profit margin
38%
October 20xx sales
$2,000,000
Assets at September 30, 20xx
1,850,000
Assets at October 31, 20xx
1,855,000
13. As the staff accountant for Investment Centers Beta and Gamma, compute the residual income for
each investment center, using the following information:
Beta
Gamma
Operating income
$850,000
$1,000,000
Actual ROI
28%
49%
Desired ROI
32%
35%
Assets invested
$585,000
$750,000
14. Kristen Roper oversees her company’s largest and most profitable investment center. She has asked
you, as her staff accountant, to compute the center’s ROI, residual income, and EVA for the month of
August 20xx, using the following information (rounded to two decimal places):
August 20xx operating income
$300,000
August 20xx sales
450,000
Assets at July 31, 20xx
500,000
Assets at August 31, 20xx
510,000
August 20×6 income taxes
90,000
Current liabilities at August 31, 20xx
250,000
Cost of capital
19%
Desired ROI
52%
Daily sales
15. Complete the following calculations for the three investment centers shown (round to two decimal
places):
Investment Center 1
Operating income
$3,000,000
Assets invested
a
Performance indicator
25%
Investment Center 2
Operating income
$3,500,000
Desired ROI
b
Assets invested
4,000,000
Performance indicator
20,000
Investment Center 3
After-tax operating income
c
Cost of capital
38%
Total assets
$500,000
Current liabilities
150,000
Performance indicator
15,000
2) For each Investment Center, identify which performance indicator is used.
ANS:
16. Calculate ROI, residual income, and EVA for each of the investment centers listed. (Round to two
decimal places.)
Investment Center 1
Investment Center 2
Operating income
$ 50,000
$ 70,000
Assets invested
125,000
180,000
Income taxes
15,000
21,000
Cost of capital in dollars
13,000
25,000
Desired ROI
56%
48%
17. As the staff accountant for NYC Investment Center #1, compute the center’s EVA, using the following
information:
Pretax Operating income
$ 900,000
Income taxes
270,000
Total assets
1,500,000
Total liabilities
1,000,000
Long-term liabilities
100,000
Cost of capital
55%
= $50,000 ÷ $125,000 = 40%
Residual Income
= $50,000 – (56% × $125,000) = ($20,000)
EVA
= $50,000 – $15,000 – $13,000 = $22,000
= $70,000 ÷ $180,000 = 39%
Residual Income
= $70,000 – (48% × $180,000) = ($16,400)
EVA
= $70,000 – $21,000 – $25,000 = $24,000