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The basic objective of the residual income (RI) approach to performance measurement is to have a division of a company maximize its:


A) Return on investment.
B) Imputed interest rate charge.
C) Cash flows.
D) Cash flows in excess of a desired minimum amount.
E) Operating income in excess of a desired minimum return.

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As a general rule,leased assets should be included as part of the calculation of "investment" since they represent assets used:


A) As collateral to borrow funds.
B) To generate operating income.
C) To offset current operating expenses.
D) To reduce taxes.
E) To estimate earnings per share for a given period.

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Selected data from Division A of Green Company are as follows: Selected data from Division A of Green Company are as follows: Division A's residual income (RI) is: A) $15,000. B) $24,000. C) $30,000. D) $36,000. E) $54,000. Division A's residual income (RI) is:


A) $15,000.
B) $24,000.
C) $30,000.
D) $36,000.
E) $54,000.

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Determination of the useful life of an asset and choice of a depreciation method will affect all of the following except:


A) The amount of income earned for any given period.
B) The investment base for purposes of calculating ROI.
C) Amount of depreciation expense for any given period.
D) Net book value (NBV) of an asset as of any point in time.
E) The opportunity cost of lost sales on alternative projects.

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The most likely result of using a negotiated transfer price is that:


A) The resulting decision reflects purely economic considerations.
B) More than the optimum number of units will be transferred between divisions.
C) Fewer than the optimum number of units will be transferred between divisions.
D) It takes away from the buying and selling units the ultimate responsibility for determining the transfer price.
E) The end result might reflect the relative bargaining skills of the negotiating managers.

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Consider the following data for three divisions of a company,X,Y,and Z: Consider the following data for three divisions of a company,X,Y,and Z: The asset turnover (AT) for Division X is (rounded) : A) 1.43. B) 1.60. C) 1.67. D) 2.86. E) 3.33. The asset turnover (AT) for Division X is (rounded) :


A) 1.43.
B) 1.60.
C) 1.67.
D) 2.86.
E) 3.33.

Correct Answer

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The use of replacement cost of assets for purposes of calculating ROI has the advantage(s) of:


A) Historical accuracy.
B) Being a sound measure of the level of investment in a continuing business.
C) Objectivity.
D) Consistency with generally accepted accounting principles (GAAP) .
E) Avoiding the need for developing estimates of current cost.

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The choice of valuation method for inventories would normally not affect which item(s) used in calculating ROI?


A) The valuation of fixed assets (e.g. ,Plant,Property,and Equipment) .
B) The amount of operating income earned in a period.
C) Both the investment base and the level of operating income.
D) The estimated value of current assets of the business entity.
E) The return on sales (ROS) for the period.

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Consider the following data for three divisions of a company,X,Y,and Z: Consider the following data for three divisions of a company,X,Y,and Z: The asset turnover (AT) for Division Z is: A) 1.43. B) 1.60. C) 1.67. D) 2.86. E) 3.33. The asset turnover (AT) for Division Z is:


A) 1.43.
B) 1.60.
C) 1.67.
D) 2.86.
E) 3.33.

Correct Answer

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A measure of the manager's ability to produce increased sales from a given level of investment is:


A) Residual income (RI) divided by level of invested capital.
B) Return on equity (ROE) .
C) Return on investment (ROI) .
D) Return on sales (ROS) .
E) Asset turnover (AT) .

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In a decentralized organization,the best option for measuring the performance of subunits is through the use of:


A) Profit centers.
B) Revenue centers.
C) Product centers.
D) Cost centers.
E) Investment centers.

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A segment of an organization is referred to as an investment center if it has:


A) Authority to make decisions affecting the major determinants of profit,including the power to choose its markets and sources of supply.
B) Authority to make decisions affecting the major determinants of profit,including the power to choose its markets and sources of supply and significant control over the amount of invested capital.
C) Authority to make decisions over the most significant costs of operations,including the power to choose sources of supply.
D) Authority to provide specialized support to other units within the organization.
E) Responsibility for developing markets for and selling the output of the organization.

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Under the notion of controllability,it is appropriate for top management to evaluate the profitability of investment center in terms of:


A) Profits in relation to the amount of capital invested in the unit.
B) Returns expressed as a percentage.
C) Profits expressed in absolute terms.
D) Operating profit generated.
E) Returns expressed in actual dollar amounts.

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A company has two divisions,X and Y,each operated as an investment center.X charges Y $55 per unit for each unit transferred to Y.Other data are: A company has two divisions,X and Y,each operated as an investment center.X charges Y $55 per unit for each unit transferred to Y.Other data are: X is planning to raise its transfer price to $65 per unit.Division Y can purchase units at $50 each from outsiders,but doing so would idle X's facilities now committed to producing units for Y.Division X cannot increase its sales to outsiders.From the perspective of the short-term profit position of the company as a whole,from whom should Division Y acquire the units? A) Outside vendors. B) Division X,but only at the variable cost per unit. C) Division X,but only until fixed costs are covered,then should purchase from outside vendors. D) Division X,in spite of the increased transfer price. E) It is not possible to tell without additional information. X is planning to raise its transfer price to $65 per unit.Division Y can purchase units at $50 each from outsiders,but doing so would idle X's facilities now committed to producing units for Y.Division X cannot increase its sales to outsiders.From the perspective of the short-term profit position of the company as a whole,from whom should Division Y acquire the units?


A) Outside vendors.
B) Division X,but only at the variable cost per unit.
C) Division X,but only until fixed costs are covered,then should purchase from outside vendors.
D) Division X,in spite of the increased transfer price.
E) It is not possible to tell without additional information.

Correct Answer

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Brown's Mill has two operating units,each of which is considered an investment center for evaluation purposes.The Cutting Division of the mill prepares timber at its sawmills.Afterwards,the Assembly Division prepares the cut lumber into finished wood,to be sold to furniture manufacturers.During the most recent year,the Cutting Division produced 120,000 cords of wood,at a total cost of $1,320,000.The entire output was transferred to the Assembly Division,where additional costs of $6 per cord were incurred.The 1,200,000 board-feet of finished wood were then sold in the open market for $5,000,000. Required: 1.Determine the operating income for each division if the transfer price from the Cutting Division to the Assembly Division is set at cost,$11 per cord. 2.Determine the operating income for each division if the transfer price is set at $9 per cord. 3.Since the Cutting Division sells all of its output internally,does the manager care about what price is charged? Why? Should the Cutting Division in this case be considered a cost center or a profit/investment center?

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Feedback: 1.Transfer price set at $11 p...

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Consider the following data for three divisions of a company,X,Y,and Z: Consider the following data for three divisions of a company,X,Y,and Z: The return on investment (ROI) for Division Y is: A) 8.0%. B) 12.0%. C) 20.0%. D) 25.0%. E) 40.0%. The return on investment (ROI) for Division Y is:


A) 8.0%.
B) 12.0%.
C) 20.0%.
D) 25.0%.
E) 40.0%.

Correct Answer

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Return on investment (ROI) encourages business units to invest only in projects that earn:


A) A rate of return greater than borrowing costs.
B) An amount greater than the amount of EVA →\rarr currently being generated.
C) A rate of return greater than the amount of residual income currently being earned.
D) A rate of return less than the unit's current ROI.
E) A rate of return higher than the unit's current ROI.

Correct Answer

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The following results pertain to an investment center. The following results pertain to an investment center. How much is the residual income (RI) for this investment center? A) $100,000. B) $500,000. C) $600,000. D) $700,000. E) $800,000. How much is the residual income (RI) for this investment center?


A) $100,000.
B) $500,000.
C) $600,000.
D) $700,000.
E) $800,000.

Correct Answer

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The use of gross book value (GBV) for measuring the level of investment in depreciable assets is preferred by those who value the objectivity of:


A) An historical cost number.
B) The depreciation process.
C) Price-level adjusted data.
D) A declining book value.
E) Current-cost information.

Correct Answer

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The estimated cost to replace assets at the current level of service and functionality is defined as:


A) Gross book value.
B) Historical cost,plus accumulated depreciation to date.
C) Liquidation value.
D) Replacement cost.
E) Price-level adjusted original cost.

Correct Answer

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