TRUE/FALSE

Statement T/F
The practice of delegating decision-making authority to lower levels of management in a
company is called centralization.
Turnover is the most common measure of performance for an investment center
Return on investment (ROI) can be calculated by multiplying margin times turnover.
Residual income is sometimes used to overcome the tendency of ROI to discourage
investments that are profitable for the company, but that lower the division's ROI.

Residual income is the difference between operating income and the product of the hurdle
rate and the company's average operating assets.

Return on investment (ROI) can be calculated by multiplying margin times turnover.

The net income reduced by the total annual cost of capital is equal to the economic value
added.

Basically, EVA is residual income with the cost of capital equal to the actual cost of capital
for the firm (as opposed to some minimum rate of return desired by the company for other
reasons).

JetSky Airways has three divisions, the Western Division, the Eastern Division, and the Northern
Division. The manager of the Western Division had wanted to purchase replacement airplanes for the
division. However, he decided against it because, although revenues would increase and the new planes
would be less expensive to operate, the initial cost of the planes was quite large. The Western Division is
most probably accounted for as a(n)

a. cost center.
b. investment
center.
c. profit center.
d. revenue center.
e. None of these.

A positive result that stems from the use of return on investment (ROI) is that it encourages managers to
focus on
a. the relationship among sales, expenses, and investment.
b. cost efficiency.
c. operating asset efficiency.
d. the efficient use of resources in generating income.
e. All of these.
Division A had ROI of 15% last year. The manager of Division A is considering an additional investment
for the coming year. What step will the manager likely choose to take?
a. Accept the investment as long as it provides positive operating
income.
b. Accept the investment as long as its ROI is positive.
c. Reject the investment if it returns more than 15% ROI.
d. Reject the investment if it returns less than 15% ROI.
e. Reject the investment if it returns an ROI equal to 15%.

Castor Company had income of $10,000, average assets of $100,000 and sales of $40,000. What is
Castor's ROI?
a. 10%
b. 20%
c. 25%
d. 0.4%
e. 40%

Shandling Company had operating income of $70,000, sales of $218,750, and turnover of 0.5. What is
Shandling's ROI?
a. 32%
b. 50%
c. 16%
d. 64%
e. Cannot be determined from this information.

Beta Division had the following information:

Asset base in Beta Division $400,000
Operating income in Beta Division $50,000
Cost of capital 12%
Target ROI 15%
Margin for Beta Division 20%
If the asset base is decreased by $100,000, with no other changes, the return on investment of Beta
Division will be
a. 100.0%.
b. 16.7%.
c. 600.0%.
d. 62.5%.

If the National Division of American Products Company had a turnover ratio of 4.2 and a margin of 0.10,
the return on investment would be
a. 23.8%.
b. 420.0%.
 c. 42.0%.
d. 238.0%.

Figure ABC
The following information pertains to the three divisions of Yang Company:

Division A Division B Division C

Sales
? ? $1,345,000
Net operating income
$48,000 $18,000 $82,000
Average operating assets
$420,000 ? ?
Return on investment
? 15% 20%
Margin
0.2 0.015 ?
Turnover
2.1 ? ?
Target ROI
17% 14% 8%

Refer to Figure ABC. What are the average operating assets for Division C?
a. $95,000
b. $410,000
c. $82,000
d. $420,000

Refer to Figure ABC. What is the turnover for Division C?

a. 3.28
b. 0.20
c. 6.670
d. 1.500

Refer to Figure ABC. What are the sales for Division B?

a. $18,000
b. $1,250,000
c. $1,200,000
d. $208,333
Refer to Figure 12-5. What are the average operating assets for Division B?
a. $125,000
b. $120,000
c. $18,000
d. $420,000

Residual income is calculated as

a. operating income − (ROI × average operating assets).
b. operating income / (ROI × average operating assets).
c. operating income / (minimum rate of return × average operating assets).
d. operating income − (minimum rate of return × average operating
assets).
e. (minimum rate of return × average operating assets) / operating income.

The manager of Stock Division projects the following for next year:
Sales
$185,000
Operating income
$60,000
Operating assets
$375,000
The manager can invest in an additional project that would require $40,000 investment in additional
assets and would generate $6,000 of additional income. The company's minimum rate of return is 14%.
What is the residual income for Stock Division without the additional investment?
a. $40,000
b. $6,000
c. $6,600
d. $6,200
e. $7,500

The performance measure that uses after-tax operating income and the actual cost of capital employed is
a. return on investment (ROI).
b. residual income.
c. economic value added (EVA).
 d. margin.
e. turnover.

Which of the following is an absolute dollar measure rather than a percentage?

a. average operating assets.
b. operating income.
c. residual income.
d. economic value added (EVA).
e. All of these.

The calculation of Economic Value Added is

a. margin minus total annual cost of capital.
b. operating income minus average cost of capital.
c. operating income minus total annual cost of capital.
d. operating income minus taxes and the total annual cost of capital.

Using Economic Value Added (EVA) to calculate residual income, the cost of capital employed is
a. the standard percentage cost of capital multiplied by the average capital
employed.
b. the actual percentage cost of capital multiplied by the average capital employed.
c. the standard percentage cost of capital multiplied by the total capital employed.
d. the actual percentage cost of capital multiplied by the total capital employed.