Saint Columban College

College of Business Education

ACCTG 202 – Strategic Cost Management
RESPONSIBILITY ACCOUNTING
MULTIPLE CHOICE PROBLEMS

RETURN ON INVESTMENT
Based on Operating Income
1. The following selected data pertain to the belt division of Allen Corp. for last year:
Sales $500,000
Average operating assets $200,000
Net operating income $80,000
Turnover 2.5
Minimum required return 20%
How much is the return on investment? (M)
a. 40% c. 20%
b. 16% d. 15% AICPA, Adapted

2. Harstin Corporation has provided the following data:

Sales $625,000
Gross margin 70,000
Net operating income 50,000
Stockholders' equity 90,000
Average operating assets 250,000
Residual income 20,000
The return on investment for the past year was: (M)
a. 28%. c. 36%.
b. 20%. d. 8%. G & N 9e

Investment
3. Apple Division of the American Fruit Co. had the following statistics for 2002:
Assets available for use $1,000,000
Residual income 100,000
Return on investment 15%
If the manager of Apple Division is evaluated based on return on investment, how much would she be willing to pay for an
investment that promises to increase net segment income by $50,000? (M)
a. $50,000 c. $1,000,000
b. $333,333 d. $500,000 Barfield

Required Peso Sales

4. The manager of the Strong Division of Powers Company expects the following results in 2003 (pesos in millions);
Sales P49.60
Variable costs (60%) 29.76
Contribution margin P19.84
Fixed costs 12.00
Profit P 7.84
Investment
Plant equipment P19.51
Working capital 14.88 P34.39
ROI (P7.84/P34.39) 22.80%
The division has a target ROI of 30%, and the manager has asked you to determine how much sales volume the division would
need to reach. He states that the sales mix is relatively constant so variable costs should be close to 60% of sales, fixed cost
and plant and equipment should remain constant, and working capital (cash, receivables and inventories) should vary closely
with sales in the percentage reflected above.
The peso sales that the division needs in order to reach the 30% ROI target is (D)
A. P19,829,032. C. P44,373,871
B. P57,590,322 D. P59,510,000 Pol Bobadilla

Dupont Model
5. If the operating income margin of 0.3 stayed the same and the operating asset turnover of 5.0 increased by 10 percent, the
ROI (M)
a. increase by 10 percent c. remain the same
b. decrease by 10 percent d. increase to 1.5.

6. If the investment turnover increased by 20% and ROS decreased by 30%, the ROI would (M)
a. Increase by 20%. c. Increase by 4%.
b. Decrease by 16%. d. None of the above. D, L & H 9e

7. If the investment turnover decreased by 20% and ROS decreased by 30%, the ROI would (M)
a. Increase by 30%. c. Decrease by 44%.
b. Decrease by 20%. d. None of the above. D, L & H 9e

8. Company L had its operating asset turnover increased by 50% and the operating income margin increased by 50%. Company
U had its operating asset turnover increased by 30% and the operating income margin decreased by 30%. What changes are
expected for ROI of Company L and Company U, respectively? (M)
Pol Bobadilla A. B. C. D.
Company L 50% increase 125% increase 225% increase 125% increase
Company U 9% decrease 9% decrease No change No change

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RESIDUAL INCOME
Residual Income Computation
9. REB Service Co. is a computer service center. For the month of May 1995, REB had the following statistics:
Sales $450,000
Operating income 25,000
Net profit after taxes 8,000
Total assets 500,000
Shareholders’ equity 200,000
Cost of capital 6%
Based on the above information, which one of the following statements is correct? REB has a (M)
a. ROI of 4% c. ROI of 1.6% CMA 0695 3-20
b. Residual income of $(5,000) d. Residual income of $(22,000)

Target Cost
10. James Webb is the general manager of the Industrial Park Division, and his performance is measured using the residual income
method. Webb is reviewing the following forecasted information for the division for next year.
Category Amount (thousands)
Working capital $ 1,800
Revenue 30,000
Plant and equipment 17,200
To establish a standard of performance for the division’s manager using the residual income approach, four scenarios are being
considered. Scenario 1 assumes an imputed interest charge of 15% and a target residual income of $2,000,000. Scenario 2
assumes an imputed interest charge of 12% and a target residual income of $1,500,000. Scenario 3 assumes an imputed
interest charge of 18% and a target residual income of $1,250,000. Scenario 4 assumes an imputed interest charge of 10%
and a target residual income of $2,500,000. Which of the scenarios assumes the lowest maximum cost? (M)
a. Scenario 1. c. Scenario 3.
b. Scenario 2. d. Scenario 4. Gleim

RETURN ON INVESMENT, MINIMUM REQUIRED RATE OF RETURN & RESIDUAL INCOME

Minimum Required Rate of Return & Residual Income
Return on Investment
11. Fortree products have a residual net income of P1.8 million. If the imputed interest rate is 16%, compute the ROI (M)
a. 5% c. 15%
b. 10% d. not listed RPCPA 1091

12. Z Division of XYZ Corp. has the following information for 2002:
Assets available for $1,800,000
Target rate of return 10%
Residual income $270,000
What was Z Division's return on investment for 2002? (M)
a. 15% c. 25%
b. 10% d. 20% Barfield

13. Pasta Division of We Make Italian, is evaluated based on residual income generated. For 2002, the Division generated a
residual income of $2,000,000 and net income of $5,000,000. The target rate of return for all divisions of We Make Italian is 20
percent. For 2002, what was the return on investment for Pasta Division? (M)
a. 40% c. 20%
b. 13% d. 33% Barfield

Return on Investment, Minimum Required Rate of Return & Residual Income

Investment Cost
14. In the X Division of S Co., 2002 segment income exceeded 2002 residual income by $15,000. Also for 2002, return on
investment exceeded the target rate of return by 10 percent. What was the level of investment in the X Division for 2002? (M)
a. $15,000 c. $150,000
b. $100,000 d. An answer can't be determined

Return on Investment & Residual Income & Units Sold

Questions 15 thru 17 are based on the following information. G & N 9e
The Axle Division of LaBate Company makes and sells only one product. Annual data on the Axle Division's single product follow:
Unit selling price $50
Unit variable cost $30
Total fixed costs $200,000
Average operating assets $750,000
Minimum required rate of return 12%
15. If Axle sells 16,000 units per year, the return on investment should be: (M)
a. 12%. c. 16%.
b. 15%. d. 18%.

16. If Axle sells 15,000 units per year, the residual income should be: (M)
a. $30,000. c. $50,000.
b. $100,000. d. $10,000. G & N 9e

17. Suppose the manager of Axle desires an annual residual income of $45,000. In order to achieve this, Axle should sell how
many units per year? (M)
a. 14,500. c. 18,250.
b. 16,750. d. 19,500. G & N 9e

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ECONOMIC VALUE-ADDED
EVA Based on Operating Income
18. Division A had the following information:
Asset base in Division A $800,000
Net income in Division A $100,000
Operating income margin for Division A 20%
Target ROI 15%
Weighted-average cost of capital 12%
What is EVA for Division A?
a. $120,000 c. $4,000
b. $96,000 d. $(20,000)

19. Watne Company has two divisions, M and N. Information for each division is as follows:
Net earnings for division $65,000
Asset base for division $300,000
Target rate of return 18%
Operating income margin 20%
Weighted average cost of capital 12%
What is EVA for N?
a. $36,000 c. $54,000
b. $29,000 d. $11,000 H & M

20. Family Company has two divisions, Ma and Pa. Information for each division is as follows:
Ma Pa
Net earnings for division P20,000 P65,000
Asset base for division P50,000 P300,000
Target rate of return 15% 18%
Operating income margin 10% 20%
Weighted-average cost of capital 12% 12%
What is the Economic Value Added for Ma and Pa, respectively?
A. P20,000, P36,000 C. P12,500; P11,000
B. P14,000; P29,000 D. P20,000; P29,000 Pol Bobadilla

EVA Based on Operating Income after Tax

EVA - Given Operating Income Before Tax
21. McKenzie Oil had $440,000 in operating income before interest and taxes in the last year. McKenzie is in the 40% tax
bracket. If capital employed by McKenzie was equal to $300,000, and the company's weighted-average after-tax cost of
capital is 15%, what is McKenzie's Economic Value Added?
A. $131,000 C. $198,000
B. $140,000 D. $219,000 Gleim

22. Valecon Co. reported the following information for the year just ended:
Segment A Segment B Segment C
Pre-tax operating income $ 4,000,000 $ 2,000,000 $3,000,000
Current assets 4,000,000 3,000,000 4,000,000
Long-term assets 16,000,000 13,000,000 8,000,000
Current liabilities 2,000,000 1,000,000 1,500,000
If the applicable income tax rate and after-tax weighted-average cost of capital for each segment are 30% and 10%,
respectively, the segment with the highest economic value added (EVA) is (M)
A. Segment A. C. Segment C. Gleim
B. Segment B. D. Not determinable from this information.

23. Assume Avionics Industries reported at year-end that operating income before taxes for the year equaled $2,400,000.
Long-term debt issued by Avionics has a coupon rate equal to 6%, and its cost of equity is 8%. The book value of the debt
currently equals its fair value, and the book value of the equity capital for Avionics is $900,000 less than its fair value. Current
assets are listed at $2,000,000 and long-term assets equal $9,600,000. The claims against those assets are in the form of
$1,500,000 in current liabilities and $2,200,000 in long-term liabilities. The income tax rate for Avionics is 30%. What is the
economic value added (EVA)? (D)
a. $731,240 c. $1,668,760
b. $948,760 d. $1,680,000 Gleim

Questions 24 thru 26 are based on the following information. Horngren

Waldorf Company has two sources of funds: long-term debt with a market and book value of $10 million issued at an interest rate
of 12%, and equity capital that has a market value of $8 million (book value of $4 million). Waldorf Company has profit centers
in the following locations with the following operating incomes, total assets, and total liabi lities. The cost of equity
capital is 12%, while the tax rate is 25%.
Operating Income Assets Current Liabilities
St. Louis $ 960,000 $ 4,000,000 $ 200,000
Cedar Rapids $1,200,000 $ 8,000,000 $ 600,000
Wichita $2,040,000 $12,000,000 $1,200,000
24. What is the EVA for St. Louis? (M)
a. $255,740 c. $392,540
b. $327,460 d. $720,000

25. What is the EVA for Cedar Rapids? (M)

a. $135,580 c. $234,000

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 b. $220,000 d. $305,000
26. What is the EVA for Wichita? (M)
a. $450,000 c. $414,360
b. $1,530,000 d. $1,115,640

EVA Computation – Given Operating Income after Tax

27. Samovar Company has operating income after taxes of $50,000. It has $200,000 of equity capital, which has an after-tax
weighted-average cost of 12%. Samovar also has $10,000 of current liabilities (noninterest-bearing) and no long-term
liabilities. What is the company's economic value added (EVA) for the period?
A. $(24,000) C. $24,000
B. $(26,000) D. $26,000 Gleim

28. Ralph, an investor, is interested in loaning money to a secure corporation. He always bases his decision on the company with
the largest economic value added (EVA). Ralph has narrowed his choices down to four, and has collected the following
information:
Operating
Income after Tax Equity Capital WACC Current Liabilities
Company A $50,000 $200,000 12% $10,000
Company B 60,000 150,000 20% 18,000
Company C 45,000 220,000 10% 30,000
Company D 55,000 250,000 15% 5,000
Based on largest EVA and assuming that none of the companies have any long-term liabilities, which company should Ralph invest in?
A. Company A. C. Company C.
B. Company B. D. Company D. Gleim

SENSITIVITY ANALYSIS
29. Apple Division of the American Fruit Co. had the following statistics for 2002:
Assets available for use $1,000,000
Residual income 100,000
Return on investment 15%
If expenses increased by $20,000 in Apple Division, (E)
a. return on investment would decrease. c. the target rate of return would decrease.
b. residual income would increase. d. asset turnover would decrease. Barfield

30. Division A had the following information:

Asset base in Division A $800,000
Net income in Division A $100,000
Operating income margin for Division A 20%
Target ROI 15%
Weighted-average cost of capital 12%
If the asset base is decreased by $200,000, with no other changes, the return on investment of Division A will be
a. 100.0% c. 62.5%
b. 16.7% d. 20.0%

Comprehensive
Questions 34 through 38 are based on the following information. AICPA 1186 II-22 to 26
Oslo Co.’s industrial photo-finishing division, Rho, incurred the following costs and expenses in 1992:
Variable Fixed
Direct materials $200,000
Direct labor 150,000
Factory overhead 70,000 $42,000
General, selling and administrative 30,000 48,000
Totals $450,000 $90,000
During 1992, Rho produced 300,000 units of industrial photo-prints, which were sold for $2.00 each. Oslo’s investment in Rho was
$500,000 and $700,000 at January 1, 1992 and December 31, 1992, respectively. Oslo normally imputes interest on investments
at 15% of average invested capital.

31. For the year-ended December 31, 1992, Rho’s return on average investment was
a. 15.0% c. 8.6%
b. 10.0% d. (5.0%)

32. Assume that net operating income was $60,000 and that average invested capital was $600,000. For the year ended
December 31, 1992, Rho’s residual income (loss) was
a. $150,000 c. $(45,000)
b. $60,000 d. $(30,000)

33. How many industrial photo-print units did Rho have to sell in 1992 to break-even?
a. 180,000 c. 90,000
b. 120,000 d. 60,000

34. For the year ended December 31, 1992, Rho’s contribution margin was
a. $250,000 c. $150,000
b. $180,000 d. $60,000

35. Assume the variable cost per unit was $1.50. Based on Rho’s 1992 financial data, and an estimated 1993 production of
350,000 units of industrial photo-prints, Rho’s estimated 1993 total costs and expenses will be
a. $525,000 c. $615,000
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 b. $540,000 d. $630,000
Questions 39 through 51 are based on the following information. Gleim
Segment A Segment B Segment C Segment D
Net income $ 5,000 - - $ 90,000
Sales 60,000 $750,000 $135,000 1,800,000
Investment 24,000 500,000 45,000 -
Net income as % of sales - - - -
Turnover of investment - - - -
ROI - - 20% 7.5%
Minimum ROI-dollars - - - $120,000
Minimum ROI - % 20% 6% - -
Residual income - -0- $2,250 -

36. For Segment B, net income as a percentage of sales is

a. 8% c. 4%
b. 6.67% d. 10%

37. For Segment C, net income as a percentage of sales is

a. 5% c. 4%
b. 6.67% d. 20%

38. For Segment C, the turnover of investment is

a. 3 c. 2.5
b. 1.5 d. 4

39. For Segment D, the turnover of investment is

a. 3 c. 2.5
b. 1.5 d. 4

40. For segment A, ROI is

a. 6% c. 20.8%
b. 20% d. 7.5%

41. For segment B, ROI is

a. 6% c. 20%
b. 20.8% d. 7.5%

42. For segment A, the minimum dollar ROI is

a. $30,000 c. $4,800
b. $6,750 d. $120,000

43. For Segment B, the minimum dollar ROI is

a. $30,000 c. $4,800
b. $6,750 d. $120,000

44. For Segment C, the minimum dollar ROI is

a. $30,000 c. $4,800
b. $6,750 d. $120,000

45. Assume that the minimum dollar ROI is $6,750 for Segment C. The minimum percentage of ROI is
a. 20% c. 15%
b. 6% d. 10%

46. In Segment D, the minimum percentage of ROI is

a. 20% c. 15%
b. 6% d. 10%

47. In Segment A, the residual income is

a. $200 c. $(30,000)
b. $12,000 d. $4,800

48. In Segment D, the residual income is

a. $12,000 c. $(60,000)
b. $(30,000) d. $9,000

49. What is the segment margin for Division Y? (E)

a. $310,000 c. $40,000
b. $210,000 d. $16,000

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