Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
Chapter 24 Multinational Performance Measurement and Compensation
24.1 Analyze and evaluate alternative measures of financial performance.
1) Many common performance measures rely on internal financial and accounting information.
2) Some companies present financial and non-financial performance measures for various organization
units in a single report called the financial performance scorecard.
3) In establishing performance measures and compensation policy, the issues are interdependent and the
decision maker may proceed through a series of decisions several times before selecting the performance
measure(s).
4) ROI, residual income, and economic value-added, can be used as performance measures.
5) There are three basic ingredients in profitability: investment, revenues, and debts.
6) Return on investment highlights the benefits that managers can obtain by reducing their investments in
current or fixed assets.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
7) Imputed costs are costs recognized in particular situations that are not regularly recognized by accrual
accounting procedures.
8) The imputed cost of an investment is the required rate of return times the investment.
9) Residual income is income plus an imputed interest charge for the investment.
10) Economic value-added is after-tax operating income minus (required rate of return times total assets).
11) The first step in designing accounting based performance measures is to choose performance
measures that align with top management’s financial goals.
12) Return on investment is also called the accrual accounting rate of return.
13) Investment turnover is calculated by dividing investments by revenues.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
14) Return on sales is calculated by dividing net income by revenues.
15) The three alternatives for increasing return on investment include increasing assets such as
receivables, increasing revenues, and decreasing costs. (In all cases assume that all other items stay the
same.)
16) A report that measures financial and nonfinancial performance measures for various organization
units in a single report is called a (n)
A) balanced scorecard.
B) financial report scorecard.
C) imbalanced scorecard.
D) unbalanced scorecard.
E) non-financial scorecard.
17) Which of the following is the least typical balanced scorecard measure?
A) customer satisfaction measures.
B) direct materials measures.
C) innovation measures.
D) time measures.
E) profitability measures.
18) What the first step in selecting appropriate performance measures?
A) Decide on the level of relevance and urgency of feedback.
B) Decide on measurement alternatives for each performance measure.
C) Decide on components n each performance measure.
D) Decide on criteria targets against which to measure performance.
E) Identify and align accounting performance measures with financial goals.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
19) Deciding if all subunits should have the same required rate of return is an example of
A) deciding on the level of relevance and urgency of feedback.
B) deciding on measurement alternatives for each performance measure.
C) deciding on components n each performance measure.
D) deciding on criteria targets against which to measure performance.
E) identifying and aligning accounting performance measures with financial goals.
20) Which of the following approaches include investment in a performance measure?
A) ROI and RI
B) ROI and ROS
C) ROS and RI
D) EVA and ROI
E) ROI, EVA, and RI
21) Which of the following incorporates the amount of investment into a performance measure?
A) dividend income
B) residual income
C) return on investment
D) both residual income and return on investment
E) both dividend income and residual
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
Use the information below to answer the following question(s).
Berger Publishing has two divisions which operate autonomously. Their results for the past year were as
follows:
Toronto
Vancouver
Sales
$5,000,000
$6,000,000
Contribution margin
2,500,000
3,000,000
Operating income
2,000,000
3,500,000
Investment base (total assets)
6,500,000
7,500,000
The company’s desired rate of return is 15%.
22) What are the respective return–on-investment ratios for the Toronto and Vancouver divisions?
A) 0.04; 0.58
B) 0.31; 0.47
C) 0.38; 0.40
D) 0.77; 1.25
E) 0.38; 0.45
23) What are the respective residual incomes for the Toronto and Vancouver divisions?
A) $975,000; $1,125,000
B) $1,025,000; $1,125,000
C) $1,025,000; $2,375,000
D) $2,375,000; $1,025,000
E) $1,075,000; $1,125,000
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
24) Which of the following is true concerning the ROI performance measure?
A) ROI is based on cash flow.
B) Is also called the accounting rate of return.
C) Some companies use net assets (assets minus liabilities) as the numerator.
D) The usual formulation is [total assets/ income ].
E) Net assets are sometimes used as the denominator, and net assets are sometimes used as the
numerator.
25) During the past year Badger Company had a net income of $175,000. What is the ROI if the
investment is $25,000?
A) 0.142
B) 2.500
C) 5.140
D) 7.000
E) 5.450
26) The most popular approach to incorporating the investment base into a performance measure is
A) income on return.
B) opportunity cost.
C) return on investment.
D) residual income.
E) economic value added.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
27) Paymaster Company provided the following information for the year just ended.
Revenue
$200,000
Operating assets
70,000
Net operating income
110,000
Total assets
104,500
What is the return on investment?
A) 2.25
B) 1.57
C) 1.05
D) 0.59
E) 0.55
Use the information below to answer the following question(s).
Thacker Company has two regional offices. The information for each is as follows:
Edmonton
Sarnia
Revenues
$290,000
$298,000
Total assets
$2,900,000
$4,500,000
Net operating income
$600,000
$1,200,000
28) What is the Edmonton Division’s return on investment?
A) 0.21
B) 0.27
C) 0.48
D) 2.06
E) 0.25
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
29) What is the return on investment for the Sarnia division?
A) 0.21
B) 0.27
C) 0.48
D) 2.06
E) 0.25
30) Keeping all other factors constant, which of the following would not cause an increase in the return
on investment?
A) actions that increase revenues
B) actions that increase liabilities
C) actions that decrease investments
D) actions that decrease expense
E) actions that increase sales
31) An automotive dealership, with a book value of $3,000,000, and total assets of $5,000,000, has a long
history of earning 18%. Last year, the company earned $900,000. The owner is considering acquiring
another dealership in a nearby town. If the expansion increases income by 50%, what is the maximum
amount of investment the owner can make in the new dealership in order to maintain his desired 18%
return?
A) $1,350,000
B) $9,000,000
C) $5,000,000
D) $3,000,000
E) $2,500,000
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
32) The Dupont method of profitability analysis is
A) TA – CL / operating income
B) ROI × WACC
C) [revenue / investment] × [income / revenue]
D) ROI / WACC
E) ROI × RI
Use the information below to answer the following question(s).
The top management at Munchie Company, a manufacturer of computer games, is attempting to recover
from a flood, which destroyed some of its accounting records. The main computer system was also
severely damaged. The following information was salvaged:
Alpha Division
Beta Division
Sales
$2,500,000
(a)
Net operating income
$1,500,000
$650,000
Total assets
(b)
(c)
Return on investment
0.25
0.15
Return on sales
(e)
0.10
33) What is the value of the total assets belonging to the Alpha Division?
A) $4,333,333
B) $6,000,000
C) $6,500,000
D) $7,151,800
E) $6,434,434
34) What is the value of the total assets belonging to the Beta Division?
A) $4,333,333
B) $5,952,380
C) $6,500,000
D) $7,151,800
E) $4,654,252
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
35) What is the Alpha Division’s return on sales?
A) 0.25
B) 0.42
C) 0.60
D) 0.75
E) 0.80
36) What were the sales for Beta Division?
A) $4,333,333
B) $5,952,380
C) $6,500,000
D) $7,151,800
E) $6,326,787
37) What is the Gamma Division’s return on investment?
A) 0.25
B) 0.42
C) 0.60
D) 0.75
E) 0.80
38) Costs recognized in particular situations that are not recognized by accrual accounting procedures are
A) opportunity costs.
B) imputed costs.
C) cash accounting costs.
D) incremental costs.
E) capital costs.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
39) A corporation has a required rate of return of 13% for all subsidiaries. The Calgary subsidiary earned
residual income of $200,000 in year 1, and $300,000 in year 2 on an investment base of $4,500,000. What
rate of return did the Calgary subsidiary earn in years 1 and 2 respectively?
A) 17.4% and 19.7%
B) 4.4% and 6.7%
C) 13.0% and 13.0%
D) 7.9% and 10.9%
E) 10.00% and 13.00%
40) What disadvantage is there in using ROI and/or RI as performance measures?
A) A manager’s bonus will decrease when ROI decreases.
B) ROI may decrease when business expands if income does not increase in line with the new investment.
C) RI and ROI are both single-period measures.
D) RI is measured in absolute dollars but ROI is in percentages.
E) Imputed costs that are deducted in the RI calculation, are not recognized in accrual accounting, and are
therefore not included in the operating figure used in calculating ROI.
41) A company has total assets of $500,000, a required rate of return of 10%, and operating income for the
year was $200,000. What is the residual income?
A) $150,000
B) $200,000
C) $250,000
D) $480,000
E) $175,000
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
42) Which of the following performance measures is more likely to promote goal congruence?
A) inventory turnover
B) marginal income
C) residual income
D) return on investment
E) contribution margin
43) The Auto Division of Fran Corporation has $2.5 million in total assets and $200,000 in liabilities, while
the Transportation Division has $5 million in total assets and $3 million in liabilities. What are the
imputed costs of the Auto division and of the Transportation division, respectively, if the corporation has
a required rate of return of 11%?
A) $275,000 and $550,000
B) $253,000 and $330,000
C) $297,000 and $880,000
D) $275,000 and $330,000
E) $200,000 and $3,000,000
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
44) Miller Medical Services provided the following information for its operations in the Hospital Bed
Division.
Revenues
$2,000,000
Accounts receivable
500,000
Required rate of return
11%
Operating assets
1,500,000
Net operating income
800,000
Taxable income
520,000
Total assets
$6,500,000
What is the Hospital Bed’s residual income?
A) $30,000
B) $85,000
C) <$195,000>
D) $1,285,000
E) <$250,000>
45) Which of the following is not a reason for evaluating subunits over a multi-year time horizon?
A) Benefits of actions taken in the current period may not show up in a short-term performance measure.
B) Managers may curtail R & D or plant maintenance in order to increase short-term results.
C) Investments may actually decrease ROI and or RI in the short-term.
D) The NPV of the cash flows over the life of an investment equals [total assets ÷ ROI].
E) Investments may actually decrease ROI and or RI in the short-term, and benefits of actions taken in the
current period may not show up in a short-term performance measure.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
Use the information below to answer the following question(s).
Brandorf Company has two sources of funds: long term debt with a market and book value of $9 million
issued at an interest rate of 10 percent; and, equity capital that has a market value of $6 million (book
value of $2 million). The cost of equity capital is 5 percent, while the tax rate is 30 percent. Brandorf
Company has profit centres in the following locations with the following data:
Total
Operating
Income
Total
Assets
Current
Liabilities
Ottawa
$480,000
$2,000,000
$100,000
St. Johns
$600,000
$4,000,000
$300,000
Regina
$1,020,000
$6,000,000
$600,000
46) What is EVA for Ottawa?
A) $218,200
B) $42,600
C) $163,200
D) $480,000
E) $140,000
47) What is EVA for St. Johns?
A) $142,200
B) $190,600
C) $163,200
D) $200,000
E) $145,000
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
48) What is EVA for Regina?
A) $685,200
B) $342,000
C) $379,200
D) $648,000
E) $218,200
49) A company’s weighted-average cost of capital [WACC] was 9.6% last year. The company has
$6,000,000 of bonds payable (its only debt) with a 9.25% coupon, and has $9,000,000 in equity capital. The
tax rate is 35%.
What is the company’s cost of debt funding? (two decimal places only)
A) 6.01%
B) 6.25%
C) 6.50%
D) 9.25%
E) 12.00%
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
50) A company’s weighted-average cost of capital [WACC] was 9.6% last year. The company has
$6,000,000 of bonds payable (its only debt) with a 9.25% coupon, and has $9,000,000 in equity capital. The
tax rate is 35%.
What is the company’s cost of equity capital? (two decimal places only)
A) 6.00%
B) 6.25%
C) 6.50%
D) 9.25%
E) 12.00%
Answer the following question(s) using the information below:
Springfield Corporation, whose tax rate is 40%, has two sources of funds: long-term debt with a market
value of $8,000,000 and an interest rate of 8%, and equity capital with a market value of $12,000,000 and a
cost of equity of 12%. Springfield has two operating divisions, the Blue division and the Gold division,
with the following financial measures for the current year:
Total Assets
Current Liabilities
Operating Income
Blue Div.
$9,500,000
$2,800,000
$1,055,000
Gold Div.
$11,000,000
$2,200,000
$1,200,000
51) What is Economic Value Added (EVA) for the Blue Division?
A) -$233,400
B) $21,960
C) $188,600
D) $433,960
E) -$63,800
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
52) What is Economic Value Added (EVA) for the Gold Division?
A) -$283,200
B) -$82,560
C) $196,800
D) $397,440
E) -$195,200
Answer the following question(s) using the information below:
Coldbrook Company has two sources of funds: long-term debt with a market and book value of $15
million issued at an interest rate of 10%, and equity capital that has a market value of $9 million (book
value of $5 million). Coldbrook Company has profit centres in the following locations with the following
operating incomes, total assets, and current liabilities. The cost of equity capital is 15%, while the tax rate
is 30%.
Operating Income
Assets
Current Liabilities
Bish Bash Falls
$815,000
$3,750,000
$800,000
Brooksville
$1,100,000
$5,000,000
$1,200,000
Stonybrook
$2,450,000
$9,250,000
$3,180,000
53) What is the EVA for Bish Bash Falls?
A) $338,563
B) $305,000
C) $275,500
D) $255,500
E) $220,188
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
54) What is the EVA for Brooksville?
A) $476,250
B) $428,000
C) $415,525
D) $390,000
E) $318,750
55) What is the EVA for Stonybrook?
A) $1,108,000
B) $1,168,700
C) $1,315,063
D) $1,403,063
E) $994,188
56) Novella Ltd. reported a return on investment of 16%, an asset turnover of 6, and income of $190,000.
On the basis of this information, the company’s invested capital was:
A) $1,187,500
B) $7,125,000
C) $1,140,000
D) $197,917
E) $182,400
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
57) For the period just ended, Trident Ltd. reported profit of $22.6 million and invested capital of $250
million. Assuming an imputed interest rate of 8%, which of the following choices correctly denotes
Trident’s return on investment (ROI) and residual income respectively?
A) 8.32%; $20.792 million
B) 9.04%; $20,792 million
C) 9.76%; $4.408 million
D) 9.04%; $2.6 million
E) 9.76%; $2.6 million
58) Which two ratios are used in the DuPont system to create return on assets?
A) Profit margin and asset turnover
B) Asset turnover and return on investment
C) Profit margin and operating leverage
D) Profit margin and return on sales
E) Return on sales and return on assets
59) Miller Medical Services provided the following information for it past year’s operations in its Hospital
Bed Division.
Revenues
$2,000,000
Accounts receivable
500,000
Total assets
1,500,000
Operating income
800,000
Taxable income
520,000
What is the Hospital Bed Division’s return on sales if income is defined as operating income ?
A) 0.40
B) 0.53
C) 0.92
D) 1.33
E) 2.50
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
60) Miller Medical Services provided the following information for its last year’s operations in the
Hospital Bed Division.
Revenues
$2,000,000
Accounts receivable
500,000
Total assets
1,500,000
Net operating income
800,000
Taxable income
520,000
What is the Hospital Bed Division’s asset turnover?
A) 0.00
B) 0.53
C) 0.92
D) 1.33
E) 2.50
61) Outline and discuss the steps involved in making decisions on performance measures.