Management Science

Name: Reign Juliana G. Mallare

Divisional Performance

1.) The following are selected data for the division for the consumer products of ABC Corp for 2019:
Sales 50,000,000
Average invested capital (assets) 20,000,000
Net income 2,000,000
Cost of capital 8%
What is the return on sales for the division?
a. 4%
b. 8%
c. 10%
d. 20%

Solution:
Return on Sales = Net Income/Sales
= 2,000,000/50,000,000
= 0.04 or 4%

2.) The following are selected data for the division for the consumer products of ABC Corp for 2019:
Sales 50,000,000
Average invested capital (assets) 20,000,000
Net income 2,000,000
Cost of capital 8%
What is the asset turn-over ratio for the division?
a. .25
b. 2.5
c. 8
d. 10%

Solution:
Turnover = Sales/Average Operating Assets
= 50,000,000/20,000,000
= 2.5

3.) The following are selected data for the division for the consumer products of ABC Corp for 2019:
Sales 50,000,000
Average invested capital (assets) 20,000,000
Net income 2,000,000
Cost of capital 8%
What is the return on investment for the division?
a. 2%
b. 4%
c. 8%
d. 10%

Solution:
ROI = Net Operating Income/Average Operating Assets
= 2,000,000/20,000,000
= 0.1 or 10%
4.) The following are selected data for the division for the consumer products of ABC Corp for 2019:
Sales 50,000,000
Average invested capital (assets) 20,000,000
Net income 2,000,000
Cost of capital 8%
What is the amount of residual income for the division?
a. P 400,000
b. P 1,000,000
c. P 1,600,000
d. P 2,000,000

Solution:
Residual income = Net operating income - (Average operating assets x minimum rate of return
= 2,000,000 - (20,000,000 x 8%)
= 400,000

5.) The following are selected data for the division for the consumer products of ABC Corp for 2019:
Sales 50,000,000
Average invested capital (assets) 20,000,000
Net income 2,000,000
Cost of capital 8%
What is the interest rate spread for the division? (Hint: the spread is equal to the ROI less the
cost of capital.)
a. 2%
b. 8%
c. 10%
d. 20%

Solution:
Interest Rate Spread = ROI - cost of capital
= 10% - 8%
= 2%

6.) The following is available for Golden Corporation for 2019:

Sales 2,000,000
Average invested capital (assets) 500,000
Net income 300,000
Cost of capital 18%
What is the return on investment for Golden Corp.?
a. 15%
b. 18%
c. 33%
d. 60%

Solution:
ROI = Net Operating Income/Average Operating Assets
= 300,000/500,000
= 0.6 or 60%

7.) The following is available for Golden Corporation for 2019:

Sales 2,000,000
Average invested capital (assets) 500,000
Net income 300,000
Cost of capital 18%
What is the residual income for Golden Corp.?
 a. P–0-
b. P 200,000
c. P 210,000
d. P 246,000

Residual income = Net operating income - (Average operating assets x minimum rate of return
= 300,000 - (500,000 x 18%)
= 210,000

8.) A company’s rate of return on investment (ROI) is equal to the

a. Percentage of profit on sales, divided by the average invested capital turn-over rate
b. Percentage of profit on sales, multiplied by the average invested capital turnover rate
c. Average invested capital, divided by average invested capital turn-over rate
d. Average invested capital, multiplied by average invested capital turn-over rate

9.) Return on investment can be increased by

a. Increasing operating assets or invested capital
b. Decreasing operating assets or invested capital
c. Decreasing revenues
d. Both (b) and (c)

10.)The residual income (RI) is often preferred over return on investment (ROI) as a performance
evaluation because
a. Residual income is a measure over time while return on investment represents the
results for a single time period.
b. Residual income concentrates on maximizing absolute amount of income rather than a
percentage return as with return of investment.
c. The imputed interest rate used in calculating residual income is more easily derived than
the target rate that is compared to the calculated ROI.
d. Average investment is employed with residual income while year-end investment is
employed with ROI.