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Exam 11: Performance Measurement in Decentralized Organizations

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Question 81

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The following data are for the Akron Division of Consolidated Rubber, Inc.: $\begin{array}{lrr}\text { Sales } & \$ & 750,000 \\\text { Net operating income } & \$ & 45,000 \\\text { Average operating assets } & \$ & 250,000 \\\text { Stockholder's' equity } & \$ & 75,000 \\\text { Residual income } & \$ & 15,000\end{array}$ For the past year, the turnover used in ROI calculations was:

A) 1.4
B) 3.3
C) 10.0
D) 3.0

E) None of the above
F) B) and C)

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Question 82

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Mike Corporation uses residual income to evaluate the performance of its divisions. The company's minimum required rate of return is 14%. In January, the Commercial Products Division had average operating assets of $970,000 and net operating income of $143,700. What was the Commercial Products Division's residual income in January?

A) $7,900
B) ($20,118)
C) $20,118
D) ($7,900)

E) A) and C)
F) B) and C)

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Question 83

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Fabbri Wares is a division of a major corporation. The following data are for the latest year of operations: Required: a. What is the division's return on investment (ROI)? b. What is the division's residual income?

Lumsden Inc. has a $1,200,000 investment opportunity with the following characteristics: The company's minimum required rate of return is 7%. The residual income for this year's investment opportunity is closest to:

Cabell Products is a division of a major corporation. Last year the division had total sales of $25,320,000, net operating income of $1,924,320, and average operating assets of $6,000,000. The company's minimum required rate of return is 10%. The division's residual income is closest to:

Boespflug Inc. has a $1,000,000 investment opportunity that involves sales of $900,000, fixed expenses of $225,000, and a contribution margin ratio of 30% of sales. The margin for this investment opportunity is closest to:

Minar Inc. reported the following results from last year's operations: $\begin{array}{lrr}\text { Sales } & \$ 5,700,000 \\\text { Variable expenses } & 3,510,000 \\\text { Contribution margin } & 2,190,000 \\\text { Fixed expenses } & 1,734,000 \\\text { Net operating income } & \$ 456,000 \\\text { Average operating assets } & \$ \quad 3,000,000\end{array}$ At the beginning of this year, the company has a $900,000 investment opportunity with the following characteristics: $\begin{array}{lc}\text { Sales } & \$ 1,530,000 \\\text { Contribution margin ratio } & 60 \% \text { of sales } \\\text { Fixed expenses } & \$ 810,900\end{array}$ If the company pursues the investment opportunity and otherwise performs the same as last year, the combined turnover for the entire company will be closest to:

If the balanced scorecard is correctly constructed, the performance measures should be independent of each other so that bad performance on one measure will not result in bad performance on another performance measure.

Which of the following segment performance measures will decrease if there is an increase in the interest expense for that segment? $\begin{array} { l l l } & \text { Return on Investment}& \text {Residual Income }\\\text { A) } & \text { Yes } & \text { Yes } \\ \text { B) } & \text { No } & \text { Yes } \\ \text { C) } & \text { Yes } & \text { No } \\ \text { D) } & \text { No } & \text { No } \end{array}$

In essence, a balanced scorecard lays out a theory of how the company can take concrete actions to attain its desired outcomes. The strategy should seem plausible, but it should be regarded as only a theory.

Shrewsbury Inc. reported the following results from last year's operations: At the beginning of this year, the company has a $800,000 investment opportunity with the following characteristics: The company's minimum required rate of return is 14%. If the company pursues the investment opportunity, this year's combined residual income for the entire company will be closest to:

Serie Inc. reported the following results from last year's operations: At the beginning of this year, the company has a $2,100,000 investment opportunity with the following characteristics: Last year's margin was closest to:

Which of the following measures of performance encourages continued expansion by an investment center so long as it is able to earn a return in excess of the minimum required return on average operating assets?

Gauntlett Inc. reported the following results from last year's operations: $\begin{array}{lr}\text { Sales } & \$ 12,000,000 \\\text { Variable expenses } & 9,580,000 \\\text { Contribution margin } & 2,420,000 \\\text { Fixed expenses } & 1,460,000\\\text { Net operating income }&\$960,000\\\text { Average operating assets }&\$5,000,000\end{array}$ At the beginning of this year, the company has a $1,300,000 investment opportunity with the following characteristics: $\begin{array}{lc}\text { Sales } & \$ 4,680,000 \\\text { Contribution margin ratio } & 50 \% \text { of sales } \\\text { Fixed expenses } & \$ 2,059,200\end{array}$ The turnover for this year's investment opportunity considered alone is closest to:

Hunt Company has the following production data: $\begin{array}{lr}\text {Throughput time }&\text { 4 hours}\\\text {Delivery cycle time }&\text { 6 hours}\\\text {Process time }&\text {1 hour }\\\text { Wait time before production}&\text {2 hours }\\\end{array}$ The manufacturing cycle efficiency (MCE) for Hunt Company is:

Condren Inc. reported the following results from last year's operations: $\begin{array}{lr}\text { Sales } & \$ 12,000,000 \\\text { Variable expenses } & 7,680,000 \\\text { Contribution margin } & 4,320,000 \\\text { Fixed expenses } & 3,720,000 \\\text { Net operating income } & \$ 600,000 \\\text { Average operating assets } & \$ 6,000,000 \\\end{array}$ At the beginning of this year, the company has a $1,000,000 investment opportunity with the following characteristics: $\begin{array}{lc}\text { Sales } & \$ 1,100,000 \\\text { Contribution margin ratio } & 40 \% \text { of sales } \\\text { Fixed expenses } & \$ 363,000\end{array}$ If the company pursues the investment opportunity and otherwise performs the same as last year, the combined ROI for the entire company will be closest to:

Bonilla Inc. has a $700,000 investment opportunity with the following characteristics: $\begin{array}{lc}\text { Sales } & \$ 2,240,000 \\\text { Contribution margin ratio } & 40 \% \text { of sales } \\\text { Fixed expenses } & \$ 739,200\end{array}$ The turnover for the investment opportunity is closest to:

Edith Carolina is president of the Deed Corporation. The company is decentralized, and leaves investment decisions up to the discretion of the division managers. Michael Sanders, manager of the Cosmetics Division, has had a return on investment of 14% for his division for the past three years and expects the division to have the same return in the coming year. Sanders has the opportunity to invest in a new line of cosmetics which is expected to have a return on investment of 12%. The company's minimum required rate of return is 8%. If the Deed Corporation evaluates managerial performance using residual income based on the corporate minimum required rate of return of 8%, what decision would be preferred by Edith Carolina and Michael Sanders? $\begin{array}{lll} & \text { Carolina } & \text { Sanders } \\\text { A) } & \text { accept } & \text { reject } \\\text { B) } & \text { reject } & \text { accept } \\\text { C) } & \text { accept } & \text { accept } \\\text { D) } & \text { reject } & \text { reject }\end{array}$

Given the following data: $\begin{array}{lc}\text { Average operating assets } & \$125,000 \\\text { Total liabilities } & \$ 50,000\\\text { Sales } & \$300,000 \\\text { Contribution margin } & \$75,000 \\\text { Net operating income } & \$15,000\end{array}$ Return on investment (ROI) is:

Shrewsbury Inc. reported the following results from last year's operations: At the beginning of this year, the company has a $800,000 investment opportunity with the following characteristics: $\begin{array}{lc}\text { Sales } & \$ 2,480,000 \\\text { Contribution margin ratio } & 40 \% \text { of sales } \\\text { Fixed expenses } & \$ 868,000\end{array}$ The company's minimum required rate of return is 14%. The residual income for this year's investment opportunity when considered alone is closest to: