Chapter 14 – Business Unit Performance Measurement
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_____ 11.
Sales
income Operating
.
Answers
Chapter 14 – Business Unit Performance Measurement
14–18
Multiple Choice
1. Which of the following is correct?
a. Gross margin ratio =
Sales
margin Gross
.
b. Operating margin ratio =
Sales
income Operating
.
c. Profit margin ratio =
After-tax income
Sales
.
d. All of the above.
2. Which of the following statements is incorrect?
a. No performance measurement system perfectly aligns the manager’s and organization’s
interests.
b. Divisional income serves as a useful summary measure of performance.
c. Divisional income statements are subject to compliance with generally accepted
accounting principles (GAAP).
d. When the divisions are different in sizes, the use of financial ratios may improve
comparison.
3. Which of the following statements regarding ROI is incorrect?
a. Return on investment is the ratio of profits to investment in the asset that generates those
profits.
b. Return on investment is an effective performance measure for managers with
responsibility for asset acquisition, usage, and disposal.
c. ROI can be decomposed into operating margin ratio and asset turnover ratio.
d. Relating profits to investment provides a scale for measuring performance.
The following information is for questions 4 and 5.
Hospitability Inc. has two hotels, Sleep Well and Sleep Tight. The following information is
available.
Division
Divisional assets
Sales
After-tax income
Sleep Well
$1,200,000
$2,000,000
$200,000
Sleep Tight
2,100,000
3,000,000
270,000
4. What is Sleep Tight’s ROI?
a. 9.84%.
b. 10.65%.
c. 11.72%.
d. 12.86%.
Chapter 14 – Business Unit Performance Measurement
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5. What is Sleep Well’s asset turnover ratio?
a. 167%.
b. 154%.
c. 143%.
d. 137%.
6. Which of the following formulas represents the residual income?
a. Residual income = Adjusted divisional income – Adjusted investment base.
b. Residual income = Divisional income.
c. Residual income = After-tax income – Cost of capital.
d. Residual income = After-tax income – Cost of invested capital.
7. A division reports the residual income in the amount of $95,000, after-tax income in the
amount of $410,000, and the investment base in the amount of $2,100,000. What is the cost
of capital used in the calculation?
a. 14%.
b. 15%.
c. 16%.
d. 17%
8. Which of the following statements regarding EVA is incorrect?
a. EVA is a concept closely related to residual income.
b. EVA is a ratio.
c. EVA corrects for many of the accounting distortions that make the other measures
myopic.
d. It is difficult to implement EVA.
9. Which of the following statements is incorrect?
a. Using the beginning balance of the investment base could encourage asset acquisitions at
the end of the year.
b. Measuring the manager only on the division’s results risks suboptimal decision making.
c. In general, how a performance measure is used is more important than how it is
calculated.
d. As long as the measurement method is understood, it can enhance performance
evaluation.
10. Which of the following statements regarding the measurement of the investment base is
correct?
a. Current cost is the original cost to purchase or build an asset.
Chapter 14 – Business Unit Performance Measurement
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b. When ROI is used in conjunction with the net book value method, the ROI increases each
year even though no operating changes take place.
c. ROI decreases each year under the historical cost method even though no operating
changes take place.
d. It is easier and less expensive to deal with current costs than to deal with historical costs.
11. Which of the following approaches will improve ROI?
a. Increase sales.
b. Reduce costs effectively.
c. Reduce the assets used to generate income.
d. All of the above.
12. Which of the following statements regarding suboptimization is incorrect?
a. The use of ROI can give incentives to managers that lead to lower organizational
performance.
b. The use of residual income reduces the suboptimization problem.
c. EVA® solves the suboptimization problem.
d. Suboptimization is due to the misalignment of interests between the managers and the
organization.
Answers
Chapter 14 – Business Unit Performance Measurement
14–21