Since the sales figure is neutral in the return on investment (ROI) formula ROI = Margin X Turnover, a change in total

sales will not affect ROI. {F}

Allocations of corporate headquarters expenses to divisions used in return on investment calculations should be limited to
the cost of those actual services provided by central headquarters which the divisions otherwise would have to provide for
themselves. {T}

The use of return on investment as a performance measure may lead managers to make decisions that are not in the best
interests of the company as a whole. {T}

Residual income is the net operating income that an investment center earns above the minimum required return on the
investment in operating assets. {T}

In responsibility accounting, each segment in an organization should be charged with the costs for which it is responsible
and over which it has control plus its share of common organizational costs. {F}

A good example of a common cost which normally could not be assigned to products on a segmented income statement
except on an arbitrary basis would be:
{~product advertising outlays.
=salary of a corporation president.
~direct materials.
~the product manager's salary.}

All other things being equal, if a division's traceable fixed expenses increase:
{~ the division's contribution margin ratio will decrease.
~ the division's segment margin ratio will remain the same.
= the division's segment margin will decrease.
~ the overall company profit will remain the same.
}

Turnover is computed by dividing average operating assets into:

{~ invested capital.
~ total assets.
~ net operating income.
= sales.
}

In computing the margin in a ROI analysis, which of the following is used?

= Sales in the denominator
~ Net operating income in the denominator
~ Average operating assets in the denominator
~ Residual income in the denominator
}

Assuming that sales and net income remain the same, a company's return on investment will:
{~ increase if operating assets increase.
~ decrease if operating assets decrease.
= decrease if turnover decreases.
~ decrease if turnover increases.
}

All other things equal, a company's return on investment (ROI) would generally increase when:
{~ average operating assets increase.
~ sales decrease.
= operating expenses decrease.
~ operating expenses increase.
}

Delmar Corporation is considering the use of residual income as a measure of the performance of its divisions. What major
disadvantage of this method should the company consider before deciding to institute it?
= this method does not make allowance for difference in the size of compared divisions.
~ opportunities may be undertaken which will decrease the overall return on investment.
~ the minimum required rate of return may eliminate desirable opportunities from consideration.
~ residual income does not measure how effectively the division manager controls costs.
}

The performance of the manager of Division A is measured by residual income. Which of the following would increase the
manager's performance measure?
{~ Increase in average operating assets.
= Decrease in average operating assets.
~ Increase in minimum required return.
~ Decrease in net operating income.
}

A segment of a business responsible for both revenues and expenses would be called:
{~ a cost center.
~ an investment center.
= a profit center.
~ residual income.
}

Which of the following are benefits of decentralization?

I. Giving a manager of a division greater decision-making control over his/her division provides vital training for a manager
who is on the rise in the company.
II. Managers at corporate headquarters have greater control in seeing that the goals of the company are realized.
III. Added decision-making authority and responsibility often leads to increased job satisfaction and often persuades a manager
to put forth his/her best efforts.
{~ Only I and II.
~ Only II and III.
= Only I and III.
~ Only I.
}
Reardon Retail Company consists of two stores, A and ~ Store A had sales of P80,000 during March, a contribution margin
ratio of 30%, and a segment margin of P11,000. The company as a whole had sales of P200,000, a contribution margin ratio of
36%, and segment margins for the two stores totaling P31,000. If net income for the company was P15,000 for the month, the
traceable fixed expenses in Store B must have been:
{~ P16,000.
~ P20,000.
~ P31,000.
= P28,000.
}

Leis Retail Company has two Stores, M and N. Store N had sales of P180,000 during March, a segment margin of 30%, and
traceable fixed expenses of P26,000. The company as a whole had a contribution margin ratio of 25% and P120,000 in total
contribution margin. Based on this information, total variable expenses in Store M for the month must have been:
{~ P140,000.
= P260,000.
~ P300,000.
~ P360,000.
}

Hatch Company has two divisions, O and E. During the year just ended, Division O had a segment margin of P9,000 and
variable costs equal to 70% of sales. Traceable fixed costs for Division E were P19,000. Hatch Company as a whole had a
contribution margin of 40%, a segment margin of P25,000, and sales of P200,000. Given this data, the sales for Division E for
last year were:
= P50,000.
~ P150,000.
~ P87,500.
~ P116,667.
}

Division B had an ROI last year of 15%. The division's minimum required rate of return is 10%. If the division's average
operating assets last year were P450,000, then the division's residual income for last year was:
{~ P67,500.
= P22,500.
~ P37,500.
~ P45,000.
}

Reed Company's sales last year totaled P150,000 and its return on investment (ROI) was 12%. If the company's turnover was
3, then its net income for the year must have been:
= P6,000.
~ P2,000.
~ P18,000.
~ it is impossible to determine from the data given.
}

Last year a company had stockholder's equity of P160,000, net operating income of P16,000 and sales of P100,000. The
turnover was 0.5. The return on investment (ROI) was:
{~ 10%.
~ 9%.
= 8%.
~ 7%.
}

Howe Company increased its ROI from 20% to 25%. Net operating income and sales remained at their previous levels of
P40,000 and P1,000,000 respectively. The increase in ROI was attributed to a reduction in operating assets brought about by
the sale of obsolete inventory at cost (the proceeds from the sale were used to reduce bank loans). By how much was
inventory reduced?
{~ P8,000.
= P40,000.
~ P10,000.
~ it is impossible to determine from the data given.
}

Largo Company recorded for the past year sales of P750,000 and average operating assets of P375,000. What is the margin
that Largo Company needed to earn in order to achieve an ROI of 15%?
{~ 2.00%
~ 15.00%
~ 9.99%
= 7.50%
}

Monrovia Division has net income of P240,000 on sales of P3,200,000. If the investment is P1,600,000 what is
ROS?
{~ 15.0%
= 7.5%
~ 10.0
~ 2.0
}

Cascade Company had the following results in June.

Planned Actual
Sales P 80,000 P78,900
Variable costs 50,000 48,500
Contribution margin P30,000 P30,400

Planned sales were 10,000 units; actual sales were 9,700 units. The sales price variance is
{~ P1,100 U.
= P1,000 F.
~ P900 U.
~ P400 F.
}

Sales and average operating assets for Company P and Company Q are given below:
Sales Average
Operating
Assets
Company P P20,000 P 8,000
Company Q P 50,000 P 10,00

What is the margin that each company will have to earn in order to generate a return on investment of 20%?
{~ 12% and 16%.
~ 50% and 100%.
= 8% and 4%.
~ 2.5% and 5%.
}
Estes Company has assembled the following data for its divisions for the past year:
Division A Division B
Ave. Operating assets P 500,000 ?
Sales ? P 520,000
Net Operating Income P 100,000 P 20,300
Turnover 1.25 4
Margin ? 3.9%
Min. required rate of return 14% ?
Residual income ? P 6,000

Division A's sales are:

{~ P400,000.
= P625,000.
~ P125,000.
~ P200,000.
}

Division A's residual income is:

{~ P20,000.
= P30,000.
~ P35,000.
~ P45,000.
}

Division B's average operating assets is:

{~ P81,200.
~ P2,080,000.
~ P1,333,333.
= P130,000.
}

The Holmes Division recorded operating data as follows for the past year:

Sales .......................... P200,000

Net operating income ........... 25,000
Average operating assets ....... 100,000
Stockholders' equity ........... 80,000
Residual income ................ 13,000

Questions:
For the past year, the return on investment was: {1:SA:=25%}

For the past year, the margin was: {1:SA:=12.50%}

For the past year, the turnover was: {1:SA:=2}

For the past year, the minimum required rate of return was: {1:SA:=12%}

The following selected data pertain to Beck Co.'s Beam Division for last year:

Sales ............................. P400,000

Variable expenses ................. P100,000
Traceable fixed expenses .......... P250,000
Average operating assets .......... P200,000
Minimum required rate of return ... 20%
Questions:

How much is the residual income? {1:SA:=10,000}

How much is the return on the investment? {1:SA=25%}