Performance & Comp – Ch24 | Test Bank – 17th Ed

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Horngren's Cost Accounting: A Managerial Emphasis, 17e, Global Edition by Datar/Rajan

Chapter 24 Performance Measurement, Compensation, and Multinational Considerations

Objective 24.1

1) 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) goal-congruence report

D) investment success report

Diff: 1

Objective: 1

AACSB: Analytical thinking

2) Customer-satisfaction measures are an example of the:

A) goal-congruence approach

B) balanced scorecard approach

C) financial report scorecard approach

D) investment success approach

Diff: 1

Objective: 1

AACSB: Analytical thinking

3) An example of a performance measure with a long-time horizon is:

A) direct materials efficiency variances

B) overhead spending variances

C) number of new patents developed

D) quality of room service

Diff: 2

Objective: 1

AACSB: Application of knowledge

4) Average number of repeat visits in a spa unit is a ________ measure on a balanced scorecard.

A) customer perspective

B) financial perspective

C) learning-and-growth perspective

D) internal-business-process perspective

Diff: 2

Objective: 1

AACSB: Application of knowledge

5) Which of the following steps in designing an accounting-based performance measure includes decisions such as defining assets as total assets or net assets in the calculation of return on assets?

A) choosing performance measures that align with top management's financial goals

B) choosing the time horizon of each performance measure

C) choosing the details for each performance measure

D) choosing a target level of performance

Diff: 2

Objective: 1

AACSB: Analytical thinking

6) Which of the following steps in designing an accounting-based performance measure includes decisions of selecting net income as a measure of financial performance?

A) choosing performance measures that align with the firm's financial goals

B) choosing the time horizon of each performance measure

C) choosing the details for each performance measure

D) choosing a target level of performance

Diff: 2

Objective: 1

AACSB: Analytical thinking

7) Which of the following is true about designing an accounting-based performance measure?

A) The decisions made in steps are followed in a hierarchical order.

B) The issues considered in each step are independent.

C) Management's beliefs are not required during the analyses.

D) Behavioral criteria are important when evaluating the steps.

Diff: 2

Objective: 1

AACSB: Analytical thinking

8) Which of the following activities would relate most closely to how often to report balance scorecard results to top management?

A) developing the details of each performance measure

B) developing a feedback mechanism

C) aligning performance measures with financial goals

D) discovering appropriate internal business process perspectives

Diff: 2

Objective: 1

AACSB: Analytical thinking

9) Many common performance measures, such as customer satisfaction, rely on internal financial accounting information.

Diff: 1

Objective: 1

AACSB: Analytical thinking

10) Some companies present financial and nonfinancial performance measures for various organization units in a single report called the balanced scorecard.

Diff: 1

Objective: 1

AACSB: Analytical thinking

11) The balanced scorecard in most organizations is broken down into the following categories: commercial perspective, supplier perspective, external business-process perspective, and productivity perspective.

Diff: 1

Objective: 1

AACSB: Analytical thinking

12) The first step in designing accounting based performance measures is to choose a target level of performance and feedback mechanism.

Diff: 1

Objective: 1

AACSB: Analytical thinking

13) Assume you are evaluating a manufacturing company. Match the various organizational activities and concepts with the performance measures listed. Some items may have more than one match.

Activities:

1. Change in revenues

2. Cycle time

3. Economic order quantity

4. Manufacturing defects

5. Market share

6. New products

7. On-time delivery

8. Operating income

9. Product reliability

10. Time-to-market

Performance measure:

________ a. Profitability

________ b. Customer satisfaction

________ c. Innovation

________ d. Efficiency, quality, and time

1, 8 a. Profitability

5, 7, 9 b. Customer satisfaction

6, 10 c. Innovation

2, 3, 4, 7, 9, 10 d. Efficiency, quality, and time

Diff: 2

Objective: 1

AACSB: Application of knowledge

14) Make a list of steps of designing an accounting based performance measure. Give an example of decisions taken under each step.

1. Choose performance measures that align with top management's goals.

Does operating income, return on assets, or revenues best measure a subunit's financial goals?

2. Choose the Details of Each Performance Measure.

Once a firm has chosen a specific performance measure, it must make a variety of decisions about the precise way in which various components of the measure are to be calculated. For example, if the chosen performance measure is return on assets, should it be calculated for one year or for a multiyear period? Should assets be defined as total assets or net assets (total assets

minus total liabilities)? Should assets be measured at historical cost or current cost?

3. Choose a Target Level of Performance and Feedback Mechanism for Each Performance Measure

For example, should all subunits have identical targets, such as the same required rate of return on assets? Should performance reports be sent to top managers daily, weekly, or monthly?

Diff: 2

Objective: 1

AACSB: Analytical thinking

15) Companies are increasingly using nonfinancial measures to evaluate performance. Why? Since these numbers do not come from the company's financial records, why are they used?

The idea is that these nonfinancial measures concentrate on areas and questions that indicate the quality of a particular corporation's products. While some of these items do not come from a companies' financial records, such as defect rates, they are quantifiable and can be verified.

Diff: 3

Objective: 1

AACSB: Application of knowledge

Objective 24.2

1) All of the following are ways to calculate different versions of ROI except:

A) Revenues/Total Assets

B) Return on sales × investment turnover

C) Income/Investments

D) Operating Income/Revenues × Revenues/Total Assets

Diff: 2

Objective: 2

AACSB: Analytical thinking

2) The return on investment is usually considered the most popular approach to measure performance because:

A) it blends all the ingredients of profitability into a single percentage

B) once determined, there is no need to use it with other measures of performance

C) it throws light on the company's working capital

D) it measures the cash balance of the company in the most efficient manner

Diff: 2

Objective: 2

AACSB: Analytical thinking

3) Return on investment can be increased by:

A) increasing current assets

B) increasing return on sales

C) decreasing revenues

D) increasing the debt portion of the capital

Diff: 2

Objective: 2

AACSB: Analytical thinking

4) The ________ method of profitability analysis recognizes the two basic ingredients in profit-making: increasing income per dollar of revenues and using assets to generate more revenues.

A) Balanced Scorecard

B) Residual-Income

C) DuPont

D) Economic Value Added

Diff: 2

Objective: 2

AACSB: Analytical thinking

5) Aaron Corp's net income is $30,000. What is the amount of the investment if the return on investment is 30%?

A) $60,000

B) $70,000

C) $100,000

D) $130,000

Diff: 2

Objective: 2

AACSB: Application of knowledge

6) Zenith Corporation's net income is $82,000. What is the return on investment if the amount of the investment is $510,000?

A) 19.16%

B) 13.85%

C) 16.08%

D) 27.70%

Diff: 1

Objective: 2

AACSB: Application of knowledge

7) Bouvous Corporation had the following information for 2020:

Revenue $420,000

Operating expenses 340,000

Total assets 500,000

What is the return on investment?

A) 16.0%

B) 84.0%

C) 13.8%

D) 19.0%

Diff: 2

Objective: 2

AACSB: Application of knowledge

8) Aeralia Inc., has two regional offices. The data for each are as follows:

What is the Maryland Division's return on investment?

A) 35.7%

B) 10.4%

C) 27.7%

D) 29.1%

Diff: 2

Objective: 2

AACSB: Application of knowledge

9) Bouvous Corp has two regional offices. The data for each are as follows:

What is the return on investment for the New Jersey Division?

A) 6.4%

B) 31.9%

C) 37.0%

D) 25.5%

Diff: 2

Objective: 2

AACSB: Application of knowledge

10) The Cybertronics Corporation reported the following information for its Cyclotron Division:

Income is defined as operating income.

What is the Cyclotron Division's investment turnover ratio?

A) 1.92

B) 2.08

C) 1.08

D) 0.92

Diff: 2

Objective: 2

AACSB: Application of knowledge

11) The Cybertronics Corporation reported the following information for its Cyclotron Division:

Income is defined as operating income.

What is the Cyclotron Division's return on sales?

A) 76.9%

B) 40.0%

C) 52.0%

D) 80.0%

Diff: 2

Objective: 2

AACSB: Application of knowledge

12) The Cybertronics Corporation reported the following information for its Cyclotron Division:

Income is defined as operating income.

What is the Cyclotron Division's return on investment?

A) 69.2%

B) 84.6%

C) 40.9%

D) 81.8%

Diff: 2

Objective: 2

AACSB: Application of knowledge

13) The top management at Amore Corp, a manufacturer of computer games, is attempting to recover from a flood that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:

What were the sales for the Beta Division (a)?

A) $8,750,000

B) $168,000

C) $11,666,667

D) $224,000

Diff: 2

Objective: 2

AACSB: Application of knowledge

14) The top management at Amore Corp, a manufacturer of computer games, is attempting to recover from a flood that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:

What is the value of the operating assets belonging to the Alpha Division (b)?

A) $12,500,000

B) $20,000,000

C) $30,000,000

D) $1,875,000

Diff: 2

Objective: 2

AACSB: Application of knowledge

15) The top management at Amore Corp, a manufacturer of computer games, is attempting to recover from a flood that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:

What is the value of the operating assets belonging to the Beta Division (c)?

A) $7,500,000

B) $12,000,000

C) $192,000

D) $120,000

Diff: 2

Objective: 2

AACSB: Application of knowledge

16) The top management at Amore Corp, a manufacturer of computer games, is attempting to recover from a flood that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:

What is the Gamma Division's return on investment (d)?

A) 0.67

B) 2.14

C) 0.47

D) 0.70

Diff: 2

Objective: 2

AACSB: Application of knowledge

17) The top management at Amore Corp, a manufacturer of computer games, is attempting to recover from a flood that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:

What is the Alpha Division's return on sales (e)?

A) 39.6%

B) 152.6%

C) 65.5%

D) 34.5%

Diff: 2

Objective: 2

AACSB: Application of knowledge

18) The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:

What were the sales for the Tiller Division? (Round the final answer to the nearest whole dollar.)

A) $13,846,154

B) $20,000,000

C) $2,600,000

D) $1,246,154

Diff: 2

Objective: 2

AACSB: Application of knowledge

19) The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:

What is the value of the operating assets belonging to the Tractor Division?

A) $11,000,000

B) $1,578,947

C) $9,800,000

D) $5,000,000

Diff: 2

Objective: 2

AACSB: Application of knowledge

20) The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:

What is the value of the operating assets belonging to the Tiller Division?

A) $7,500,000

B) $10,714,286

C) $15,000,000

D) $210,000

Diff: 2

Objective: 2

AACSB: Application of knowledge

21) The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:

What is the Digger Division's return on investment?

A) 0.23

B) 0.29

C) 0.31

D) 0.41

Diff: 2

Objective: 2

AACSB: Application of knowledge

22) The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:

What is the Tractor Division's return on sales?

A) 0.08

B) 2.80

C) 0.29

D) 0.21

Diff: 2

Objective: 2

AACSB: Application of knowledge

23) The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:

What is the Tractor Division's investment turnover?

A) 4.0

B) 12.7

C) 3.2

D) 1.0

Diff: 2

Objective: 2

AACSB: Application of knowledge

24) The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:

What is the Tiller Division's investment turnover?

A) 1.18

B) 0.85

C) 0.01

D) 0.24

Diff: 2

Objective: 2

AACSB: Application of knowledge

25) The weighted-average cost of capital (WACC) equals:

A) the after-tax average cost of all the long-term and short-term sources of funds

B) the after-tax average cost of all the long-term source of funds

C) the pre-tax average cost of all the short-term sources of funds

D) the pre-tax average cost of all the long-term and short-term sources of funds

Diff: 2

Objective: 2

AACSB: Analytical thinking

26) The required rate of return multiplied by the investment is the:

A) sunk cost of the investment

B) historical cost of the investment

C) imputed cost of the investment

D) return on sales

Diff: 2

Objective: 2

AACSB: Application of knowledge

27) The required rate of return used in the residual income calculation to evaluate a potential investment in a subunit, should be the:

A) weighted cost of capital for the firm's competition

B) maximum return target for the firm's investments

C) minimum acceptable return the company seeks on its investment in the subunit

D) accounting (under GAAP) cost of capital related to the project as recorded in the general ledger

Diff: 2

Objective: 2

AACSB: Application of knowledge

28) A company which favors the residual income approach to financial performance evaluation wants managers to:

A) concentrate on maximizing an absolute amount of dollars of residual income as opposed to a percentage yield as is the case with ROI

B) concentrate on maximizing a percentage return in excess of the cost of capital

C) maximize the investment turnover ratio

D) maximize return on sales

Diff: 2

Objective: 2

AACSB: Analytical thinking

29) Using residual income as a measure of performance rather than return on investment promotes goal congruence because residual income:

A) places importance on the reduction of underperforming assets

B) calculates a percentage return rather than an absolute return

C) concentrates on maximizing an absolute amount of dollars

D) concentrates on maximizing the return on sales

Diff: 2

Objective: 2

AACSB: Analytical thinking

30) Which of the following is a performance measure?

A) retained earnings

B) market value

C) present value of cash flows

D) economic value added

Diff: 1

Objective: 2

AACSB: Analytical thinking

31) Which of the following is the required rate of return used in the economic value added (EVA) calculation?

A) the ROI of the division or company being evaluated

B) after-tax weighted-average cost of capital

C) the residual income/total assets

D) the after-tax operating income/(Total assets - current liabilities)

Diff: 1

Objective: 2

AACSB: Analytical thinking

32) Care Inc., has two divisions that operate independently of one another. The financial data for the year 2020 reported the following results:

The company's desired rate of return is 10%. Income is defined as operating income.

What are the respective return-on-investment ratios for the North and South Divisions?

A) 10.00% and 8.33%

B) 10.00% and 5.00%

C) 8.33% and 10.00%

D) 5.00% and 10.00%

Diff: 2

Objective: 2

AACSB: Application of knowledge

33) Care Inc., has two divisions that operate independently of one another. The financial data for the year 2020 reported the following results:

The company's desired rate of return is 10%. Income is defined as operating income.

What are the respective residual incomes for the North and South Divisions?

A) $60,000 and $100,000

B) $300,000 and $60,000

C) $300,000 and $100,000

D) $300,000 and $100,000

Diff: 2

Objective: 2

AACSB: Application of knowledge

34) Care Inc., has two divisions that operate independently of one another. The financial data for the year 2020 reported the following results:

The company's desired rate of return is 10%. Income is defined as operating income.

Which division has the best return on investment and which division has the best residual income figure, respectively?

A) North, North

B) South, South

C) North, South

D) South, North

Diff: 2

Objective: 2

AACSB: Application of knowledge

35) Economic value added is equal to:

A) After-tax operating income - [Weighted-average cost of capital + (Total assets - Current liabilities)]

B) Pre-tax operating income - [Weighted-average cost of capital + (Total assets - Current liabilities)]

C) After-tax operating income - [Weighted-average cost of capital × (Total assets - Current liabilities)]

D) Pre-tax operating income - [Weighted-average cost of capital × (Total assets - Current liabilities)]

Diff: 1

Objective: 2

AACSB: Analytical thinking

36) A company has operating income of $300,000, revenues of $1,500,000, total assets of $2,000,000 and an ROI of 15%. To improve the ROI, to increase ROI to 20%, which of the following investment turnovers would need to be achieved?

A) .75

B) 1.5

C) 1

D) 2

Diff: 1

Objective: 2

AACSB: Analytical thinking

37) Which of the following is the expression of the DuPont method of profitability analysis?

A) Income / Investment = Income / Total costs + Revenues / Equity

B) Income / Investment = Income / Revenues + Revenues / Investment

C) Income / Investment = Income / Revenues × Revenues / Investment

D) Income / Investment = Income / Total costs × Revenues / Equity

Diff: 2

Objective: 2

AACSB: Analytical thinking

38) Springfield Corporation, whose tax rate is 34%, has two sources of funds: long-term debt with a market value of $6,000,000 and an interest rate of 8%, and equity capital with a market value of $15,000,000 and a cost of equity of 12%. What is Springfield's weighted average cost of capital (WACC)?

A) 12.00%

B) 8.64%

C) 10.08%

D) 10.86%

Diff: 2

Objective: 2

AACSB: Application of knowledge

39) Springfield Corporation, whose tax rate is 35%, has two sources of funds: long-term debt with a market value of $8,100,000 and an interest rate of 9%, and equity capital with a market value of $14,000,000 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:

What is Economic Value Added (EVA®) for the Blue Division? (Round intermediary calculations to four decimal places.)

A) ($34,450)

B) $34,450

C) $404,750

D) ($258,050)

Diff: 3

Objective: 2

AACSB: Application of knowledge

40) Times Corporation, whose tax rate is 35%, has two sources of funds: long-term debt with a market value of $6,400,000 and an interest rate of 9%, and equity capital with a market value of $18,000,000 and a cost of equity of 11%. Times Corporation's after-tax cost of debt is:

A) 9.65%

B) 5.85%

C) 9.00%

D) 11.00%

Diff: 2

Objective: 2

AACSB: Application of knowledge

41) Stonex Corp, whose tax rate is 38%, has two sources of funds: long-term debt with a market value of $6,500,000 and an interest rate of 8%, and equity capital with a market value of $14,000,000 and a cost of equity of 12%. Stonex has two operating divisions, the Blue division and the Gold division, with the following financial measures for the current year:

Calculate EVA for the Gold Division. (Round intermediary calculations to four decimal places.)

A) ($164,560)

B) $164,560

C) $868,000

D) $703,440

Diff: 3

Objective: 2

AACSB: Application of knowledge

42) Waldorf Company has two sources of funds: long-term debt with a market and book value of $5,300,000 issued at an interest rate of 12%, and equity capital that has a market value of $4,000,000 (book value of $2,200,000). Waldorf Company has profit centers in the following locations with the following operating incomes, total assets, and current liabilities. The cost of equity capital is 12%, while the tax rate is 35%.

What is the EVA® for St. Louis? (Round intermediary calculations to four decimal places.)

A) $134,109

B) $122,683

C) $312,000

D) $189,317

Diff: 3

Objective: 2

AACSB: Application of knowledge

43) Waldorf Company has two sources of funds: long-term debt with a market and book value of $5,300,000 issued at an interest rate of 12%, and equity capital that has a market value of $4,100,000 (book value of $2,100,000). Waldorf Company has profit centers in the following locations with the following operating incomes, total assets, and current liabilities. The cost of equity capital is 12%, while the tax rate is 35%.

What is the EVA® for Cedar Rapids? (Round intermediary calculations to four decimal places.)

A) $243,142

B) $403,000

C) $460,142

D) $210,400

Diff: 3

Objective: 2

AACSB: Application of knowledge

44) Waldorf Company has two sources of funds: long-term debt with a market and book value of $5,300,000 issued at an interest rate of 12%, and equity capital that has a market value of $4,400,000 (book value of $2,000,000). Waldorf Company has profit centers in the following locations with the following operating incomes, total assets, and current liabilities. The cost of equity capital is 12%, while the tax rate is 35%.

What is the EVA® for Wichita? (Round intermediary calculations to four decimal places.)

A) $910,000

B) $875,660

C) $385,660

D) $298,270

Diff: 3

Objective: 2

AACSB: Application of knowledge

45) Coldbrook Company has two sources of funds: long-term debt with a market and book value of $16,000,000 issued at an interest rate of 11%, and equity capital that has a market value of $5,000,000 (book value of $4,000,000). Coldbrook Company has profit centers in the following locations with the following operating incomes, total assets, and current liabilities. The cost of equity capital is 17%, while the tax rate is 35%.

What is the EVA® for Bish Bash Falls? (Round intermediary calculations to four decimal places.)

A) $529,750

B) $278,350

C) $251,400

D) $138,800

Diff: 3

Objective: 2

AACSB: Application of knowledge

46) Coldbrook Company has two sources of funds: long-term debt with a market and book value of $16,000,000 issued at an interest rate of 10%, and equity capital that has a market value of $9,000,000 (book value of $6,000,000). Coldbrook Company has profit centers in the following locations with the following operating incomes, total assets, and current liabilities. The cost of equity capital is 16%, while the tax rate is 35%.

What is the EVA® for Brooksville? (Round intermediary calculations to four decimal places.)

A) $780,000

B) $367,040

C) $206,546

D) $412,960

Diff: 3

Objective: 2

AACSB: Application of knowledge

47) Coldbrook Company has two sources of funds: long-term debt with a market and book value of $19,000,000 issued at an interest rate of 11%, and equity capital that has a market value of $9,000,000 (book value of $6,500,000). Coldbrook Company has profit centers in the following locations with the following operating incomes, total assets, and current liabilities. The cost of equity capital is 17%, while the tax rate is 35%.

What is the EVA® for Stonybrook? (Round intermediary calculations to four decimal places.)

A) $966,076

B) $1,592,500

C) $626,424

D) $475,298

Diff: 3

Objective: 2

AACSB: Application of knowledge

48) A major weakness of comparing two companies using only operating incomes as the basis of comparison is that it ignores the differences in the size of the investment and therefore any concept of yield or return on investment.

Diff: 2

Objective: 2

AACSB: Application of knowledge

49) Reducing the investment base to improve ROI involves decreasing idle cash, paying down debt, determining proper inventory levels, and spending carefully on long-term assets.

Diff: 2

Objective: 2

AACSB: Application of knowledge

50) Return on sales can provide how effectively costs are managed and is part of the DuPont method of profitability analysis.

Diff: 1

Objective: 2

AACSB: Analytical thinking

51) Return on investment can be calculated by multiplying return on assets by investment turnover.

Diff: 1

Objective: 2

AACSB: Analytical thinking

52) All other things held constant, increase in assets such as receivables or decrease in operating income results in an increase in return on investment.

Diff: 2

Objective: 2

AACSB: Analytical thinking

53) The DuPont method recognizes the two basic ingredients in profit making: increasing the income per dollar of revenues and using assets to generate more revenues.

Diff: 1

Objective: 2

AACSB: Analytical thinking

54) To evaluate overall performance, return on investment and residual income measures are more appropriate than return on sales.

Diff: 2

Objective: 2

AACSB: Analytical thinking

55) Required rate of return multiplied by the investment is the weighted average cost of the investment.

Diff: 1

Objective: 2

AACSB: Application of knowledge

56) Historical costs are costs recognized in particular situations that are not usually recognized by accrual accounting procedures.

Diff: 2

Objective: 2

AACSB: Analytical thinking

57) The objective of maximizing return on investment may induce managers of highly profitable divisions to reject projects that from the viewpoint of the overall organization should be accepted.

Diff: 2

Objective: 2

AACSB: Analytical thinking

58) Return on investment, Residual income, or Economic value added (EVA) measures are more appropriate than return on sales because they consider only the investment to measure the performance.

Diff: 2

Objective: 2

AACSB: Analytical thinking

59) Residual income is income less interest expense.

Diff: 2

Objective: 2

AACSB: Analytical thinking

60) Economic value added, unlike residual income, charges managers for the costs of their investments in long-term assets and working capital.

Diff: 2

Objective: 2

AACSB: Analytical thinking

61) Companies that adopt the EVA concept define investment as total assets employed minus current liabilities.

Diff: 2

Objective: 2

AACSB: Analytical thinking

62) In an EVA calculation, the corporate charge for a division's investment is based on a weighted average of the after-tax interest rate on the firm's debt and the cost of the firm's equity.

Diff: 2

Objective: 2

AACSB: Analytical thinking

63) In an EVA calculation, the measure of the invested capital for a division would be that division's assets minus that division's long-term liabilities.

Diff: 2

Objective: 2

AACSB: Analytical thinking

64) In an EVA calculation, the appropriate measure of a division's profit would be that division's pre-tax operating income.

Diff: 2

Objective: 2

AACSB: Analytical thinking

65) Antique Corp uses the investment center concept for the museums that it manages. Selected operating data for three of its museums for 2020 are as follows:

Required:

a. Compute the return on investment for each division.

b. Which museum manager is doing best based only on ROI? Why?

c. What other factors should be included when evaluating the managers?

a. Ohio = $105,000 / $700,000 = 0.15

Dallas = $115,000 / $500,000 = 0.23

Texas = $120,000 / $600,000 = 0.20

b. Dallas is doing the best because the ROI is the highest, and compared to Texas, is doing better with lesser assets.

c. At a minimum, the company should consider examining the DuPont method, residual income, and the age of operating assets.

Diff: 3

Objective: 2

AACSB: Application of knowledge

66) Gas Supply Corporation uses the investment center concept for the gasoline stations that it manages in the city. Consolidated has a 15% required rate of return on investment in order for a branch station to be viable. Select operating data for three of its stations for 2020 are as follows:

Required:

a. Compute the return on investment for each station.

b. Which station manager is doing best based only on ROI? Why?

c. Are any of the stations in danger of being closed due to lack of performance?

d. What other factors should be included when evaluating the managers?

a. Maple = $900,000 / $7,000,000 = 12.86%

Oak = $1,200,000 / $7,000,000 = 17.14%

High = $980,000 / $6,000,000 = 16.33%

b. Oak Street is doing the best because the ROI is the highest.

c. Maple Street is in danger of being shut down because it is only making a return on its investment base of 12.86%. This is less than the required rate of return of 15%.

d. At a minimum, the company should consider examining the DuPont method, residual income, and the age of operating assets.

Diff: 3

Objective: 2

AACSB: Application of knowledge

67) Moto Corp allows its divisions to operate as autonomous units. The operating data for 2020 follow:

Required:

a. Compute the investment turnover for each division.

b. Compute the return on sales for each division.

c. Compute the return on investment for each division.

d. Which division manager is doing best? Why?

e. What other factors should be included when evaluating the managers?

For parts (b) and (c) income is defined as operating income.

a. Investment turnover:

Plows = $2,250,000/$1,000,000 = 2.25

Tractors = $500,000/$400,000 = 1.25

Combines = $4,800,000/$1,750,000 = 2.74

b. Return on Sales:

Plows = $220,000/$2,250,000 = 0.10

Tractors = $60,000/$500,000 = 0.12

Combines = $480,000/$4,800,000 = 0.10

c. ROI:

Plows = 2.25 × 0.10 = 0.225

Tractors = 1.25 × 0.12 = 0.150

Combines = 2.74 × 0.10 = 0.274

d. Combines' manager had the best performance because he had the highest investment turnover, which offset his second-best return on sales.

e. Residual income should be considered and noncontrollable factors such as the age of the assets.

Diff: 3

Objective: 2

AACSB: Application of knowledge

68) Provide the missing data for the following situations:

Red Division:

ROI = ROS × IT

0.16 = 0.04 × IT

IT = 4.0

ROS = Income/Sales

0.04 = $200,000/Sales

Sales = $5,000,000

IT = Sales/OA

4 = $5,000,000/OA

OA = $1,250,000

White Division:

ROS = $400,000/$10,000,000 = 0.04

IT = ROI/ROS = 0.10/0.04 = 2.5

OA = S/IT = $10,000,000/2.5 = $4,000,000

Blue Division:

Sales = IT × OA = 1.5 × $1,600,000 = $2,400,000

ROI = 0.12 × 1.5 = 0.18

Diff: 3

Objective: 2

AACSB: Application of knowledge

69) Craylon Corp has three divisions, which operate autonomously. Their results for 2020 were as follows:

The company's desired rate of return is 15%.

Required:

a. Compute each division's ROI. Round to three decimal places.

b. Compute each division's residual income.

a. East ROI = $4,500,000 / $30,000,000 = 15.000%

West ROI = $5,000,000 / $32,000,000 = 15.625%

International = $5,500,000 / $34,000,000 = 16.176%

b.

Diff: 2

Objective: 2

AACSB: Application of knowledge

70) Batman Abstract Company has three divisions that operate autonomously. Their results for 2020 are as follows:

The company's desired rate of return is 20%.

Required:

a. Compute each division's ROI.

b. Compute each division's residual income.

c. Rank each division by both ROI and residual income.

d. Which division had the best performance in 2020? Why?

a. Riddler ROI = $1,000,000/$9,000,000 = 0.111

Joker ROI = $1,750,000/$10,000,000 = 0.175

Penguin ROI = $2,520,000/$14,000,000 = 0.180

b.

c. ROI Rank:

Penguin # 1

Joker # 2

Riddler # 3

RI Rank:

Joker #1

Penguin #2

Riddler #3

d. As to which division was the best, it is difficult to determine without knowing what the results are being used to evaluate. If management is measuring only the return of capital, the Penguin Division has the highest ranking, although not much ahead of Joker. However, Penguin does have a substantially higher income level. As to meeting management's expectations of residual income, all divisions fall short of the goal with Joker being slightly ahead of Penguin.

Diff: 3

Objective: 2

AACSB: Application of knowledge

71) Coptermagic Company supplies helicopters to corporate clients. Coptermagic has two sources of funds: long term debt with a market and book value of $32 million issued at an interest rate of 10%, and equity capital that has a market value of $18 million (book value of $8 million). The cost of equity capital for Coptermagic is 15%, and its tax rate is 30%. Coptermagic has profit centers in four divisions that operate autonomously. The company's results for 2020 are as follows:

Required:

a. Compute Coptermagic's weighted average cost of capital.

b. Compute each division's Economic Value Added.

c. Rank the divisions by EVA.

a. WACC = [(.10 × (1 - .30) × $32,000,000) + (.15 × $18,000,000)] / $50,000,000

= 9.88 %

b. New York (EVA) = [($1,750,000 × (1 - .30)] - [0.0988 × ($11,500,000 - $2,500,000)]

= $1,225,000 - $889,200 = $335,800

Chicago (EVA) = [($2,400,000 × (1 - .30)] - [0.0988 × ($9,000,000 - $3,500,000)]

= $1,680,000 - $543,400 = $1,136,600

Dallas (EVA) = [($4,675,000 × (1 - .30)] - [0.0988 × ($27,500,000 - $9,500,000)]

= $3,272,500 - $1,788,400 = $1,494,100

Los Angeles (EVA) = [($4,2000,000 × (1 - .30)] - [0.0988 × ($25,000,000 - $8,000,000)]

= $2,940,00 - $1,679,600 = $1,260,400

c. Rank:

Dallas # 1

Los Angeles # 2

Chicago # 3

New York #4

Diff: 3

Objective: 2

AACSB: Application of knowledge

72) Bob's Cellular Phone Company uses ROI to measure divisional performance. Annual ROI calculations for each division have traditionally employed the ending amount of invested capital along with annual operating income and net revenue. The Dupont method is generally used. The company's Phone Accessories Division had the following results for the last two years:

2019 ROI = ($2,000,000/$20,000,000) × ($20,000,000/$10,000,000) = 0.20

2020 ROI = ($2,400,000/$25,000,000) × ($25,000,000/$15,000,000) = 0.16

Corporate management was disappointed in the performance of the division for 2020, since it had made an additional investment in the division that was budgeted for a 23% ROI.

Required:

a. Discuss some factors that may have contributed to the decrease in ROI for 2020.

b. Would there have been any substantial difference if average capital had been used?

a. While sales increased by 25%, net income only increased by 20%. This may indicate that expenses increased more than they should have. Apparently, the expected marginal net income from the new investment was $1,150,000 ($5,000,000 × 0.23), and either sales were too low or expenses too high for the new products. But this calculation is somewhat hypothetical since we do not know expected sales. Start-up costs may have also contributed to the increased expenses of the first year's operations. An increase in investment also contributed to the decline in return on investment.

b. Using average capital: = ($10,000,000 + $15,000,000) / 2 = $12,500,000

ROI = $2,400,000 / $12,500,000 = 0.192

Using average capital would have improved the ROI from 16% to over 19%. This would still have been a disappointment to management because the total ROI fell below expectations. Perhaps it is unreasonable to expect a new investment to achieve its target ROI in the first year of operations.

Diff: 3

Objective: 2

AACSB: Application of knowledge

73) ROI, RI, or EVA measures are more appropriate than ROS to measure the performance of a company. Why?

Diff: 2

Objective: 2

AACSB: Application of knowledge

74) Explain how the calculation of residual income is different from the EVA calculation by contrasting the elements of income and cost in the formulas and briefly explain how EVA might be more effective as a measure.

weighted-average cost of capital multiplied by total assets minus current liabilities. Therefore, EVA takes into account the long-term cost of capital (which includes debt and equity) and gives you a residual income amount after covering a yield on assets. Therefore EVA can make managers focus on ways to improve EVA by earning more after-tax income on the same amount of capital or the same amount of after-tax income while using less capital or to seek out and invest in only those projects expected to earn a high return on capital.

Diff: 2

Objective: 2

AACSB: Application of knowledge

Objective 24.3

1) Home Decor Inc., manufactures home cleaning products. The company has two divisions, Bleach and Cleanser. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 2020:

ASSETS INCOME

The company is currently using a 15% required rate of return.

What are Bleach's and Cleanser's return on investment based on book values, respectively?

A) 30%; 42 %

B) 49%; 34 %

C) 34%; 49%

D) 42%; 30%

Diff: 2

Objective: 3

AACSB: Application of knowledge

2) Home Decor Inc., manufactures home cleaning products. The company has two divisions, Bleach and Cleanser. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 2020:

ASSETS INCOME

The company is currently using a 15% required rate of return.

What are Bleach's and Cleanser's return on investment based on current values, respectively?

A) 43%; 24%

B) 24%; 43%

C) 54%; 32%

D) 32%; 54%

Diff: 2

Objective: 3

AACSB: Application of knowledge

3) Home Decor Inc., manufactures home cleaning products. The company has two divisions, Bleach and Cleanser. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 2020:

ASSETS INCOME

The company is currently using a 14% required rate of return.

What are Bleach's and Cleanser's residual incomes based on book values, respectively?

A) $88,000; $51,900

B) $115,200; $78,900

C) $51,900; $88,000

D) $78,900; $115,200

Diff: 2

Objective: 3

AACSB: Application of knowledge

4) Carriage Incorporated manufactures horse carriages. The company has two divisions, Wheels and Assembly. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 2020:

ASSETS INCOME

The company is currently using a 13% required rate of return.

What are Wheels' and Assembly's return on investment based on book values, respectively?

A) 27%; 12%

B) 24%; 21%

C) 12%; 27%

D) 21%; 24%

Diff: 2

Objective: 3

AACSB: Application of knowledge

5) Carriage Incorporated manufactures horse carriages. The company has two divisions, Wheels and Assembly. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 2020:

ASSETS INCOME

The company is currently using a 14% required rate of return.

What are Wheels' and Assembly's return on investment based on current values, respectively?

A) 15%; 26%

B) 30%; 21%

C) 21%; 30%

D) 26%; 15%

Diff: 2

Objective: 3

AACSB: Application of knowledge

6) Carriage Incorporated manufactures horse carriages. The company has two divisions, Wheels and Assembly. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 2020:

ASSETS INCOME

The company is currently using a 12% required rate of return.

What are Wheels' and Assembly's residual incomes based on book values, respectively?

A) $67,600; $60,000

B) $60,000; $67,600

C) $82,800; $4,000

D) $4,000; $82,800

Diff: 2

Objective: 3

AACSB: Application of knowledge

7) Which of the following is the formula for investment assuming that total assets employed is the measure?

A) total assets available minus the sum of idle assets

B) total assets available minus the sum of idle assets and assets purchased for future expansion

C) total assets available minus assets purchased for future expansion

D) total assets minus current liabilities

Diff: 2

Objective: 3

AACSB: Analytical thinking

8) A caution for managers when choosing time horizons for performance measures is:

A) ROI, RI, and EVA calculations and interpretations of such need to focus on 1-year time horizons

B) causes of short-run increases in key measures may be in conflict with the long-run interest of the firm

C) R&D and plant maintenance should be the immediate focus when improving performance measures to maximize profits

D) evaluation of performance via measures such as ROI, RI, EVA, and ROS should impact behaviors during short-run as well as long-run time horizons

Diff: 2

Objective: 3

AACSB: Analytical thinking

9) For ROI or RI, companies frequently choose to define investment as total assets available. EVA® users would normally use total assets employed minus:

A) long-term debt

B) current liabilities

C) stockholders' equity

D) retained earnings

Diff: 2

Objective: 3

AACSB: Analytical thinking

10) Consider the following historical costs for long-term assets of Adapter Inc. , a company with operations in three regions of the U.S.

At the end of 2020, what is the gross book value of the assets in Southeast region based on current costs based on the following construction cost index by year?

A) $2,937,500

B) $3,877,500

C) $3,102,000

D) $2,585,000

Diff: 2

Objective: 3

AACSB: Analytical thinking

11) The proponents of using net book value as an investment base maintain that it is less confusing because it is consistent with the amount of total assets shown in the conventional balance sheet.

Diff: 2

Objective: 3

AACSB: Analytical thinking

12) When current cost is used to evaluate the performance of an asset, "current cost" is synonymous with historical cost.

Diff: 2

Objective: 3

AACSB: Analytical thinking

13) Current cost return on investment is a better measure of the current economic returns from an investment than historical cost return on investment.

Diff: 2

Objective: 3

AACSB: Analytical thinking

14) The net present value of all cash flows over the life of an investment equals the net present value of the operating incomes.

Diff: 2

Objective: 3

AACSB: Application of knowledge

15) Total assets employed includes all assets, regardless of their intended purpose.

Diff: 1

Objective: 3

AACSB: Analytical thinking

16) Using net book value as an investment base will result in a lower ROI than using gross book value as an investment base.

Diff: 2

Objective: 3

AACSB: Application of knowledge

17) An important element in designing accounting-based performance measures is choosing the time horizon of the performance measures. Discuss.

Diff: 3

Objective: 3

AACSB: Application of knowledge

Objective 24.4

1) When managers set and measure target levels of performance and feedback:

A) the historical-cost-based accounting measures are usually adequate for evaluating economic returns on new investments

B) the historical-cost ROIs cannot be used to evaluate current performance

C) the timing of feedback is not dependent on the sophistication of the organization's information technology

D) how critical the information is for success of the organization and the management level receiving the feedback

Diff: 2

Objective: 4

AACSB: Analytical thinking

2) Historical-cost-based accounting measures are usually inadequate for evaluating economic returns on new investments and, in some cases, create disincentives for expansion.

Diff: 1

Objective: 4

AACSB: Analytical thinking

3) Managers must negotiate and tailor a budget to the particular subunit, accounting system, and performance measures to obtain useful results.

Diff: 1

Objective: 4

AACSB: Analytical thinking

4) Evaluating performance on the basis of continuous improvements in EVA makes the initial method of calculating the measure critically important.

Diff: 3

Objective: 4

AACSB: Analytical thinking

5) What are the factors involved in choosing the timing of the feedback in designing accounting-based performance measures?

Diff: 2

Objective: 4

AACSB: Analytical thinking

6) What targets should companies use, and when should they give feedback to managers regarding their performance relative to the targets?

Timely feedback enables managers to implement actions that correct deviations from the target performance.

Diff: 2

Objective: 4

AACSB: Analytical thinking

Objective 24.5

1) Inflation clouds the real economic returns on an asset and:

A) makes variable-cost-based ROI higher

B) makes historical-cost-based ROI lower.

C) makes historical-cost-based ROI higher

D) makes variable-cost-based ROI lower

Diff: 2

Objective: 5

AACSB: Analytical thinking

2) Which of the following statements is true?

A) The economic, legal, political, social, and cultural environments differ across countries.

B) The import quotas and tariffs remain the same across all countries according to the standards set by United Nations.

C) The advances in telecommunications and transportation, the availability of materials and skilled labor does not differ significantly across countries.

D) The fixed rate policy is followed across all countries to avoid price fluctuations and inflation.

Diff: 2

Objective: 5

AACSB: Analytical thinking

3) ________ would be an uncontrollable factor that a firm would need to consider when evaluating the return on investment of an international division.

A) Manager's experience

B) Manager's compensation

C) Pricing decisions

D) Custom duties

Diff: 2

Objective: 5

AACSB: Application of knowledge

4) In performance evaluations:

A) managers should use the swap exchange rate prevailing at the end of a financial period

B) managers should use the average exchange rate prevailing at the end of a financial period

C) managers should use the exchange rate prevailing on the date the assets were acquired

D) managers should use the exchange rate prevailing at the end of a financial period

Diff: 2

Objective: 5

AACSB: Analytical thinking

5) Ventaz Corp. purchased assets for its overseas branch for $16,000. The rate of conversion at the time of purchase of asset was $1.400 / Euro. If the company evaluates a project's ROI based on its initial costs and its operating income and does that in the foreign currency, what value of assets in Euros to be used to calculate the ROI if the rate current conversion rate is $1.513 / Euro and the average rate being $1.409 / Euro?

A) 11,429 Euros

B) 10,575 Euros

C) 11,356 Euros

D) 22,400 Euros

Diff: 2

Objective: 5

AACSB: Application of knowledge

6) Megatron Corp. earned net income of 16,000 Euros in its overseas branch at France. Its headquarters is located in the U.S. The rate of conversion during set up was $1.307 / Euro. What is the value of its income in its home currency if the rate is $1.508 / Euro at the end of a financial year and the average rate being $1.408 / Euro?

A) $12,242

B) $22,528

C) $24,128

D) $20,912

Diff: 2

Objective: 5

AACSB: Application of knowledge

7) Inflation and fluctuations in foreign-currency exchange rates affect performance measurement.

Diff: 1

Objective: 5

AACSB: Analytical thinking

8) Higher inflation will lead to higher prices for goods or services, which will increase a company's operating income and lead to a higher ROI.

Diff: 2

Objective: 5

AACSB: Application of knowledge

9) When one currency declines against the dollar, it may correspond to lower inflation in the foreign country and as a result, historical operating income and ROI's will be higher.

Diff: 2

Objective: 5

AACSB: Analytical thinking

10) To convert the operating income for an overseas branch into US dollars, the historical rate of exchange is used for its conversion into US dollars.

Diff: 2

Objective: 5

AACSB: Analytical thinking

11) To calculate the value of fixed assets for an overseas branch, the historical rate of exchange is used for its conversion.

Diff: 2

Objective: 5

AACSB: Analytical thinking

12) Discuss the issues and complications that may arise when multinational corporations conduct performance measurement and comparisons among divisions located in different countries.

There are wide differences in legal, political, social, and cultural environments among countries.

Import quotas and tariffs range widely from country to country, and it's not unusual for countries to impose tariffs and custom duties to restrict the imports of certain goods.

Availability of materials and skilled labor as well as power, transportation, and communication grids are likely to create significant issues.

Divisions operating in different countries account for their performance in different currencies. The exchange rates will fluctuate and there will be differences and effects as a result of levels of inflation, which will need to be reconciled with adjustments to the measurement criteria established.

Diff: 3

Objective: 5

AACSB: Analytical thinking

Objective 24.6

1) Which of the following is true of rewarding managers on the basis of residual income?

A) Managers are paid a fixed amount for his services regardless of the risk involved.

B) Managers' efforts are easily measured.

C) Managers taking less risk should be rewarded more since more risk can lead to huge losses.

D) Managers' rewards are dependent on their own efforts and other local economic factors.

Diff: 2

Objective: 6

AACSB: Analytical thinking

2) Which of the following describes a situation in which an employee prefers to exert less effort than the effort the owner desires because the employee's effort cannot be accurately monitored and enforced?

A) goal incongruence

B) moral hazard

C) performance report variance

D) incentive report variance

Diff: 1

Objective: 6

AACSB: Analytical thinking

3) An important reality to be aware of when designing performance measurement and award systems is that:

A) managers can influence performance that is impacted by economic factors

B) there are tradeoffs between creating incentives and imposing risk on a manager

C) managers can exert significant influence over matters related to regulatory restrictions and limitations

D) there is really no distinction between a subunit's performance and the performance of that subunit's manager

Diff: 2

Objective: 6

AACSB: Analytical thinking

4) Sensitive performance measures:

A) the salary component of the managers

B) are not affected by managers' performance and fail to induce them to improve

C) motivate the manager as well as limit the manager's exposure to risk, reducing the cost of providing incentives.

D) increases the exposure of credit

Diff: 1

Objective: 6

AACSB: Analytical thinking

5) Which of the following is true of performance measurement?

A) Preferred performance measures do not change much with changes in factors that are beyond manager's control.

B) Sensitive performance measures increases the cost of providing incentives.

C) Less-sensitive performance measures induce managers to improve.

D) Managers' performances should be evaluated based on the financial measures such as residual income and economic value added.

Diff: 2

Objective: 6

AACSB: Analytical thinking

6) Relative performance evaluation:

A) determines the effective intensity of incentives placed on each measure of performance

B) filters out the effect of common uncontrollable factors

C) results in managers helping each other who run similar operations

D) leads to goal congruence

Diff: 2

Objective: 6

AACSB: Analytical thinking

7) Team incentives encourage cooperation by:

A) identifying an efficient and a nonefficient employee

B) enhancing the incentives of individual employees leading to overall positive performance

C) letting individuals help one another as they strive toward a common goal

D) rewarding all teams by the same margin

Diff: 2

Objective: 6

AACSB: Analytical thinking

8) Many manufacturing, marketing, and design problems require employees with multiple skills; therefore, teams are used, and the members have the added encouragement of:

A) individual incentives

B) management incentives

C) morale incentives

D) team incentives

Diff: 1

Objective: 6

AACSB: Analytical thinking

9) Which of the following is true of an executive compensation plan?

A) The compensation paid to the executives should be linked only to the financial performance of the company.

B) Most compensation plans are two parts: salary and health plan.

C) It does not help balancing risk with short-run and long-run incentives.

D) It includes salary, annual incentive compensation, and benefits such as medical benefits, pension plans, and life insurance.

Diff: 2

Objective: 6

AACSB: Application of knowledge

10) Which of the following is true of benchmarking two managers against each other if they carry out similar operations?

A) It would lead to better cooperation among the managers.

B) It would reduce the managers' incentives to help one another.

C) It would enhance the accomplishment of organization goals.

D) It would help reduce costs common to both the departments.

Diff: 2

Objective: 6

AACSB: Application of knowledge

11) An important consideration in designing compensation arrangements is the tradeoff between creating incentives and imposing risks.

Diff: 1

Objective: 6

AACSB: Analytical thinking

12) There should be strict congruence between the performance evaluation of a subunit and the performance evaluation of that subunit's manager.

Diff: 2

Objective: 6

AACSB: Analytical thinking

13) A manager's job entails gathering information, interpreting that information and making judgments on that information and thus is less susceptible to moral hazards than jobs that require repetitive tasks and less subjective decision making.

Diff: 1

Objective: 6

AACSB: Analytical thinking

14) The more owners have access to sensitive performance measures, the more they can rely on incentive compensation for their managers.

Diff: 2

Objective: 6

AACSB: Analytical thinking

15) The credit rating agencies require detailed disclosures of the compensation arrangements of top-level executives.

Diff: 2

Objective: 6

AACSB: Analytical thinking

16) The salary component of compensation dominates when performance measures that are sensitive to managers' actions are not available.

Diff: 2

Objective: 6

AACSB: Analytical thinking

17) An additional criticism of team-based compensation is that there can be problems managing team members who are not productive contributors to a team's success but who, nevertheless, share in the team's rewards.

Diff: 2

Objective: 6

AACSB: Analytical thinking

18) Stock options give executives the right to buy company stock at a specified price, called the exercise price, within a specified period.

Diff: 2

Objective: 6

AACSB: Analytical thinking

19) Craylon Corp. is planning the 2020 operating budget. Average operating assets of $1,800,000 will be used during the year and unit selling prices are expected to average $100 each. Variable costs of the division are budgeted at $500,000, while fixed costs are set at $300,000. The company's required rate of return is 18%.

Required:

a. Compute the sales volume necessary to achieve a 20% ROI.

b. The division manager receives a bonus of 50% of residual income. What is his anticipated bonus for 2020, assuming he achieves the 20% ROI from part (a)?

a. Target operating income = 0.20 × $1,800,000 = $360,000

Sales volume = $1,160,000 / $100 = 11,600 units

b.

Bonus = $36,000 × 0.50 = $18,000

Diff: 3

Objective: 6

AACSB: Application of knowledge

20) LaserLife Printer Cartridge Company is a decentralized organization with several autonomous divisions. The division managers are evaluated, in part, on the basis of the change in their return on invested assets. Operating results for the Packer Division for 2020 are budgeted as follows:

Operating assets for the division are currently $3,600,000. For 2020, the division can add a new product line for an investment of $600,000. The new product line will generate sales of $1,600,000 and will incur fixed expenses of $600,000 annually. Variable costs of the new product will average 60% of the selling price.

Required:

a. What is the effect on ROI of accepting the new product line?

b. If the company's required rate of return is 6% and residual income is used to evaluate managers, would this encourage the division to accept the new product line? Explain and show computations.

a.

Current ROI = $700,000/$3,600,000 = 0.194

New investment ROI = $40,000/$600,000 = 0.067

Combined ROI = $740,000/$4,200,000 = 0.176

Accepting the new product line will reduce the division's ROI. This would make the manager reluctant to make the investment.

b.

The manager would accept the investment because income is increased by $4,000.

Diff: 2

Objective: 6

AACSB: Application of knowledge

21) Capital Investments has three divisions. Each division's required rate of return is 15%. Planned operating results for 2020 are as follows:

The company is planning an expansion, which will require each division to increase its investments by $25,000,000 and its income by $4,500,000.

Required:

a. Compute the current ROI for each division.

b. Compute the current residual income for each division.

c. Rank the divisions according to their current ROIs and residual incomes.

d. Determine the effects after adding the new project to each division's ROI and residual income.

e. Assuming the managers are evaluated on either ROI or residual income, which divisions are pleased with the expansion and which ones are unhappy?

a. A ROI = $15,000,000 / $100,000,000 = 0.15 = 15%

B ROI = $25,000,000 / $125,000,000 = 0.20 = 20%

C ROI = $11,000,000 / $50,000,000 = 0.22 = 22%

b. A RI = $15,000,000 - ($100,000,000 × 0.15) = $ 0

B RI = $25,000,000 - ($125,000,000 × 0.15) = $6,250,000

C RI = $11,000,000 - ($50,000,000 × 0.15) = $3,500,000

c. ROI Rank: 1. C RI Rank: 1. B

2. B 2. C

3. A 3. A

d. A ROI = $19,500,000 / $125,000,000 = 0.156 = 15.6%

B ROI = $29,500,000 / $150,000,000 = 0.197 = 19.7%

C ROI = $15,500,000 / $75,000,000 = 0.207 = 20.7%

A RI = $19,500,000 - ($125,000,000 × 0.15) = $ 750,000

B RI = $29,500,000 - ($150,000,000 × 0.15) = $7,000,000

C RI = $15,500,000 - ($75,000,000 × 0.15) = $4,250,000

e. Everyone would be pleased if residual income was used because residual incomes increase with the expansion. However, it would be difficult to evaluate each division on a comparative basis because each division's investment base is different.

Only the manager of Division A is pleased with the new investment if ROI is used because that is the only division with an increased ROI. In the case of additional investments that are required by corporate management, residual income may be the best to use for evaluating each manager individually, but not collectively.

Diff: 3

Objective: 6

AACSB: Application of knowledge

22) Vega Corp's corporate income has declined to unacceptable levels. To change the direction of the company, the board of directors hired a new chief executive officer. She is currently considering three alternative ways to reward division managers for performance. They are:

1. Give each manager a competitive salary with no bonus for performance.

2. Give each manager a base salary with the largest portion being a bonus based on performance, ROI being the yardstick.

3. Give each manager a base salary with a bonus based on comparative performance with the other divisions.

Required:

Evaluate each of the ideas, giving strengths and weaknesses.

1. Opportunities for salary increases might be decided via other means such as improvements in employee motivation, cost savings ideas, or improved management skills. This method will fit some types of situations better than the bonus methods, but should not be used in situations where a high degree of motivation is desired. This method might not be the ideal one as the manager would expect an additional incentive to improve the company's financial status.

2. The second idea is good for motivating a manager to improve the performance of each given division. A weakness in this method occurs when managers make decisions that maximize return on investment in the short run because they have no intent to stay with the company over a long period of time.

3. The third method is great for motivating managers to compete with each other. However, some reward should be available for the lowest rated manager if that manager's performance is, in fact, above the company's standard for performance. Suboptimization is a potential problem with this approach if the winning manager's bonus is substantially above everyone else's bonus.

Diff: 3

Objective: 6

AACSB: Application of knowledge

23) Executive compensation plans are based on both financial and nonfinancial performance measures. Discuss

Well-designed plans use a compensation mix that balances risk (the effect of uncontrollable factors on the performance measure and hence compensation) with short-run and long-run incentives.

Diff: 2

Objective: 6

AACSB: Analytical thinking

24) The Wooden Box Company rewards managers who are part of a team based on the performance of the team. Briefly explain the problem that such an incentive plan can create.

Diff: 2

Objective: 6

AACSB: Analytical thinking

Objective 24.7

1) Which of the following is a difference between a diagnostic control system and an interactive control system?

A) A diagnostic control system focuses on meeting expectations, while an interactive control system focuses on standards of ethical behavior.

B) A diagnostic control system focuses on standards of ethical behavior while an interactive control system focuses on meeting expectations.

C) A diagnostic control system focuses on meeting expectations, while an interactive control system focuses on organizational attention and learning on key strategic issues.

D) A diagnostic control system focuses on organizational attention and learning on key strategic issues, while an interactive control system focuses on meeting expectations.

Diff: 2

Objective: 7

AACSB: Application of knowledge

2) Which of the following describes boundary control systems?

A) set limits by instituting and communicating standards of behavior and codes of conduct expected of all employees

B) articulate the mission, purpose, and core values of a company

C) are formal information systems managers use to focus the company's attention and learning on key strategic issues

D) describe the geographic limits of a company and help organize its layout

Diff: 2

Objective: 7

AACSB: Analytical thinking

3) Which of the following best describes interactive control systems?

A) it articulates the mission, purpose, and core values of a company

B) it articulates standards of behavior and codes of conduct expected of all employees and help in achieving the maximum benefit

C) they are formal information systems managers use to focus the company's attention and learning on key strategic issues

D) it describes the geographic limits of a company and help organize its layout

Diff: 2

Objective: 7

AACSB: Analytical thinking

4) Which of the following best describes a belief control system?

A) it describes standards of behavior and codes of conduct expected of all executives and board of directors

B) it articulates the mission, purpose, and core values of a company

C) they are formal information systems managers use to focus the company's attention and learning on key strategic issues

D) it describes standards of behavior and codes of conduct expected of all employees

Diff: 2

Objective: 7

AACSB: Analytical thinking

5) Which of the following best describes an interactive control system?

A) ensures adherence to legal or ethical accounting policies and procedures

B) ensures prompt and severe reprimand of unethical conduct, regardless of the benefits that might accrue to the company from unethical action

C) ensures that employees' intrinsic motivation, the desire to achieve self-satisfaction for performing well regardless of external rewards such as bonuses or promotion

D) ensures frequent face-to-face communications among managers and employees regarding the critical uncertainties

Diff: 2

Objective: 7

AACSB: Application of knowledge

6) Managers use ________ to ensure employees' intrinsic motivation, the desire to achieve self-satisfaction for performing well regardless of external rewards such as bonuses or promotion.

A) diagnostic control systems

B) boundary systems

C) belief systems

D) interactive control systems

Diff: 2

Objective: 7

AACSB: Analytical thinking

7) "Levers of control," in addition to a diagnostic control system, are needed in an organization because:

A) diagnostic controls have been found to lead to poor financial performance

B) diagnostic controls have no place in a balanced scorecard system

C) pressure to perform on diagnostic controls may lead to unethical behavior

D) they are mandated by the Financial Accounting Standards Board

Diff: 3

Objective: 7

AACSB: Application of knowledge

8) "Cooking the books" means reporting of understated assets and overstated liabilities.

Diff: 1

Objective: 7

AACSB: Application of knowledge

9) Intrinsic motivation comes from being given greater responsibility, doing interesting and creative work, and having pride in doing that work.

Diff: 2

Objective: 7

AACSB: Analytical thinking

10) An excessive focus on diagnostic control systems and critical performance variables can cause an organization to ignore emerging threats and opportunities.

Diff: 2

Objective: 7

AACSB: Analytical thinking

11) Some companies make environmental performance a line item on every employee's salary appraisal report.

Diff: 2

Objective: 7

AACSB: Analytical thinking

12) Interactive control systems are informal information systems managers use to focus the company's attention and learning on key strategic issues.

Diff: 2

Objective: 7

AACSB: Analytical thinking

13) Measures which monitor critical performance variables that help managers track progress toward achieving a company's strategic goals are collectively called diagnostic control systems.

Diff: 2

Objective: 7

AACSB: Analytical thinking

14) Briefly explain each of the four levels of control. Why does a company need to implement more than a diagnostic control system?

The "levers of control," in addition to diagnostic control systems, are needed since the pressure to perform on diagnostic goals can be so strong that management might take steps to cut corners and make their performance look better than it really is. In addition, diagnostic systems might focus management too much on meeting short term goals that organization learning and attention to key strategic issues might be inadequate for the future.

Diff: 2

Objective: 7

AACSB: Analytical thinking

15) Explain how the Institute of Management Accounting's Standards of Ethical Practice is a type of boundary system and how specifically the standard of Credibility addresses the danger of "cooking the books".

Diff: 2

Objective: 7

AACSB: Analytical thinking