ch23 - Cost Accounting, 13e (Horngren et al.) Chapter 23 1...

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Unformatted text preview: Cost Accounting, 13e (Horngren et al.) Chapter 23 1 Performance Measuremen t, Compensati on, and Multination al Consideratio 1) n s Many common performance measures, such as customer satisfaction, rely on internal financial accounting information. Answer: FALSE Explanation: Customer satisfaction would be obtained by surveys that are not in the financial accounting records. Diff: 1 Terms: Balanced Scorecard Objective: 1 AACSB: Analytical skills 2) Some s present financial and nonfinancial performance measures for various organization units in a single report called the companie "balanced scorecard." Answer: TRUE Diff: 1 Terms: Balanced Scorecard Objective: 1 AACSB: Analytical skills 3) The scorecard" in most organizations is broken down into the following categories: financial perspective, customer perspective, "balanced internal business-process perspecitve, and productivity perspective. Answer: FALSE Explanation: The "balanced scorecard" in most organizations is broken down into the following categories: financial perspective, customer perspective, internal business-process perspecitve, and learning-and-growth perspective. Diff: 1 Terms: Balanced Scorecard Objective: 1 AACSB: Reflective thinking 4) The first designing accounting based performance measures is to choose performance measures that align with top management's step in financial goals. Answer: TRUE Diff: 1 Terms: performance measure Objective: 2 AACSB: Reflective thinking 5) A major of comparing two companies using only operating incomes as the basis of comparison is this method ignores differences in weakness the size of the investment required to earn the operating income. Answer: TRUE Diff: 1 Terms: return on investment (ROI), investment Objective: 3 AACSB: Analytical skills 6) Return on investment is also called the accrual accounting rate of return. Answer: TRUE Diff: 1 Terms: return on investment (ROI) Objective: 3 AACSB: Reflective thinking 7) Investmen t turnover is calculated by dividing investments by revenues. Answer: FALSE Explanation: Investment turnover is calculated by dividing revenues by investments. Diff: 1 Terms: return on investment (ROI) Objective: 3 AACSB: Reflective thinking 8) Return on sales is calculated by dividing net income by revenues. Answer: TRUE Diff: 1 Terms: return on investment (ROI) Objective: 3 AACSB: Reflective thinking 9) The three es for increasing return on investment include increasing assets such as receivables, increasing revenues, and decreasing alternativ costs. (In all cases assume that all other items stay the same.) Answer: FALSE Explanation: Increasing receivables does not increase return on investment. Diff: 2 Terms: return on investment (ROI) Objective: 3 AACSB: Reflective thinking 10) Return on investment is the most popular performance measure when measuring performance in an investment center. Answer: TRUE Diff: 1 Terms: return on investment (ROI) Objective: 3 AACSB: Analytical skills 11) To overall aggregate performance, return on investment and residual income measures are more appropriate than return on evaluate sales. Answer: TRUE Diff: 2 Terms: return on investment (ROI), residual income residual income (RI) Objective: 3,4 AACSB: Analytical skills 12) Return on investment is also called the imputed cost of the investment. Answer: FALSE Explanation: Required rate of return multiplied by the investment is the imputed cost of the investment. Diff: 1 Terms: imputed cost Objective: 4 AACSB: Reflective thinking 13) Imputed costs are costs recognized in particular situations that are not usually recognized by accrual accounting procedures. Answer: TRUE Diff: 2 Terms: imputed cost Objective: 4 AACSB: Reflective thinking 14) The of maximizing return on investment may induce managers of highly profitable divisions to reject projects that from the objective viewpoint of the overall organization should be accepted. Answer: TRUE Diff: 2 Terms: return on investment (ROI) Objective: 4 AACSB: Analytical skills 15) Goal e is more likely to be promoted by using return on investment rather than residual income as a measure of a subunit's congruenc managerial performance. Answer: FALSE Explanation: Goal congruence is more likely to be promoted by using residual income rather than return on investment. Diff: 2 Terms: return on investment (ROI), residual income residual income (RI) Objective: 4 AACSB: Analytical skills 16) Residual calculations are similar to EVA® calculations because in each calculation there is a charge for the division's invested income capital which is deducted from a measure of that division's profit. Answer: TRUE Diff: 2 Terms: residual income, economic value added (EVA®) Objective: 4,5 AACSB: Analytical skills 17) Economic added, unlike residual income, charges managers for the costs of their investments in long-term assets and working capital. value Answer: FALSE Explanation: Both economic value added and residual income charge managers for the costs of their investments in long-term capital. Diff: 2 Terms: economic value added (EVA®), residual income (RI) Objective: 5 AACSB: Reflective thinking 18) Companie s that adopt the Economic Value Added concept define investment as total assets employed minus current liabilities. Answer: TRUE Diff: 2 Terms: economic value added (EVA®) Objective: 5 AACSB: Reflective thinking 19) In an Added Value calculation, the corporate charge for a division's investment is based entirely on the after-tax interest rate on Economic the firm's debt. Answer: FALSE Explanation: In an Economic Added Value calculation, the corporate charge for a division's investment is based on a weighted average of the after-tax interest rate on the firm's debt and the cost of the firm's equity. Diff: 2 Terms: economic value added (EVA®) Objective: 5 AACSB: Reflective thinking 20) In an Value Added calculation, the measure of the invested capital for a division would be that division's assets minus that Economic division's liabilities. Answer: FALSE Explanation: In an Economic Value Added calculation, the measure of the invested capital for a division would be that division's assets minus that division's current liabilities. Diff: 2 Terms: economic value added (EVA®) Objective: 5 AACSB: Reflective thinking 21) In an Value Added calculation, the appropriate measure of a division's profit would be that division's after tax operating income. Economic Answer: TRUE Diff: 2 Terms: economic value added (EVA®) Objective: 5 AACSB: Reflective thinking 22) Current cost return on investment is a better measure of the current economic returns from an investment than historical cost return on investment. Answer: TRUE Diff: 2 Terms: current cost, return on investment (ROI) Objective: 6 AACSB: Reflective thinking 23) A firm difference in the return on investment amount depending if they use historical cost or current cost valuation methods for will see a the assets. Answer: TRUE Diff: 2 Terms: return on investment Objective: 6 AACSB: Analytical skills 24) Using gross book value as an investment base is consistent with the amount of total assets shown in the conventional balance sheet. Answer: FALSE Explanation: Using net book value as an investment base is consistent with the amount of total assets shown in the conventional balance sheet. Diff: 2 Terms: return on investment Objective: 6 AACSB: Analytical skills 25) Using gross book value as an investment base will result in a lower ROI than using net book value as an investment base. Answer: TRUE Diff: 2 Terms: return on investment Objective: 6 AACSB: Reflective thinking 26) Comparin performance of divisions of a multinational company operating in different countries is difficult due to the differences in g the economic, legal, political, social, and cultural environments. Answer: TRUE Diff: 1 Terms: Balanced Scorecard Objective: 7 AACSB: Multiculturalism and diversity 27) One way greater comparability of historical cost-based ROIs for a company's foreign division is to restate performance in dollars. to achieve Answer: TRUE Diff: 2 Terms: return on investment (ROI) Objective: 7 AACSB: Multiculturalism and diversity 28) An consideration in designing compensation arrangements is the tradeoff between creating incentives and imposing risks. important Answer: TRUE Diff: 1 Terms: moral hazard Objective: 8 AACSB: Analytical skills 29) Moral hazard describes contexts in which an employee prefers to exert less effort than the effort that the owner wants because the employee's effort cannot be accurately monitored and enforced. Answer: TRUE Diff: 1 Terms: moral hazard Objective: 8 AACSB: Ethical reasoning 30) Another term for benchmarking is a relative performance evaluation. Answer: TRUE Diff: 1 Terms: benchmarking Objective: 8 AACSB: Reflective thinking 31) Evaluatin g an executive's performance using the annual return on investment would sharpen an executive's long-run focus. Answer: FALSE Explanation: Using return on investment is a short-run tool. Diff: 2 Terms: return on investment (ROI) Objective: 8 AACSB: Analytical skills 32) Managers only employ one task as a part of their job, and thus evaluation of how well they do is simple to accomplish. Answer: FALSE Explanation: Managers employ many tasks as a part of their job, and thus evaluation of how well they do is difficult to accomplish. Diff: 2 Terms: Balanced Scorecard Objective: 8 AACSB: Analytical skills 33) The only of team-based compensation is that the incentives for individual employees to excel are diminished, harming overall criticism performance. Answer: FALSE Explanation: An additional critcism is that there can be problems managing team members who are not productive contributors to the team's success but who, nevertheless, share in the team's rewards. Diff: 2 Terms: Balanced Scorecard Objective: 8 AACSB: Analytical skills 34) Examples of "cooking the books" are understated assets and overstated liabilities. Answer: FALSE Explanation: Cooking the books is overstating assets and understating liabilities. Diff: 1 Terms: moral hazard Objective: 9 AACSB: Reflective thinking 35) Residual a better evaluation method than return on investment because it has a lower required rate of return for the company income is projects than return on investment does. Answer: FALSE Explanation: A company can make a decision using the same required rate of return with either return on investment or residual income. Diff: 1 Terms: residual income, return on investment (ROI) Objective: 9 AACSB: Reflective thinking 36) An e control system is a formal information system that managers use to focus organization attention and learning on key interactiv strategic issues. Answer: TRUE Diff: 2 Terms: interactive control system Objective: 9 AACSB: Communication 37) Boundary describe standards of behavior and codes of conduct expected of all employees, especially actions that are off-limits. systems Answer: TRUE Diff: 2 Terms: boundary systems Objective: 9 AACSB: Ethical reasoning 38) The "four levers" of control are operating profit before taxes, return on investment, residual income, and economic value added. Answer: FALSE Explanation: The "four levers" of control are diagnostic control systems, boundary systems, belief systems, and interactive control systems. Diff: 2 Terms: levers of control Objective: 9 AACSB: Reflective thinking 39) Measures monitor critical performance variables that help managers track progress toward achieving a company's strategic goals are which collectively called diagnostic control systems. Answer: TRUE Diff: 2 Terms: diagnostic control systems Objective: 9 AACSB: Reflective thinking 40) A report measures financial and nonfinancial performance measures for various organization units in a single report is called a(n): that A) balanced B) scorecard financial report scorecard C) imbalanced D) scorecard unbalanced scorecard Answer: A Diff: 1 Terms: Balanced Scorecard Objective: 1 AACSB: Reflective thinking 41) Customer -satisfaction measures are an example of the: A) goalB) congruence approach balanced C) scorecard approach financial report scorecard approach D) investment success approach Answer: B Diff: 1 Terms: Balanced Scorecard Objective: 1 AACSB: Reflective thinking 42) An example of a performance measure with a long-run time horizon is: A) direct materials efficiency variances B) overhead C) spending variances number of new patents developed D) All of these answers are correct. Answer: C Diff: 2 Terms: Balanced Scorecard Objective: 1 AACSB: Reflective thinking 43) Does income best measure a subunit's financial performance? This question is considered part of which step in designing an operating accounting-based performance measure? A) Choose B) performance measures that align with top management's financial goals. Choose the time horizon of each performance measure. C) Choose a D) definition for each performance measure. Choose a measurement alternative for each performance measure. Answer: A Diff: 2 Terms: Balanced Scorecard Objective: 2 AACSB: Reflective thinking 44) Should defined as total assets or net assets? This question is considered part of which step in designing an accounting-based assets be performance measure? A) Choose B) performance measures that align with top management's financial goals. Choose the time horizon of each performance measure. C) Choose a D) definition for each performance measure. Choose a measurement alternative for each performance measure. Answer: C Diff: 2 Terms: return on investment (ROI) Objective: 2 AACSB: Reflective thinking 45) Should measured at historical cost or current cost? This question is considered part of which step in designing an accounting-based assets be performance measure? A) Choose B) performance measures that align with top management's financial goals. Choose the time horizon of each performance measure. C) Choose a D) definition for each performance measure. Choose a measurement alternative for each performance measure. Answer: D Diff: 2 Terms: current cost, return on investment (ROI) Objective: 2 AACSB: Reflective thinking 46) Which of the following statements about designing an accounting-based performance measure is FALSE? A) The steps may be followed in a random order. B) The issues C) considered in each step are independent. Management's beliefs are present during the analyses. D) Behavioral criteria are important when evaluating the steps. Answer: B Diff: 2 Terms: Balanced Scorecard Objective: 2 AACSB: Reflective thinking 47) Managers usually use the term return on investment to evaluate: A) the performance of a subdivision B) a potential C) project the performance of a subunit D) Both A and C are correct. Answer: D Diff: 2 Terms: return on investment (ROI) Objective: 3 AACSB: Reflective thinking 48) The investment is usually considered the most popular approach to incorporating the investment base into a performance return on measure because: A) it blends all the ingredients of profitability into a single percentage B) once C) determined, there is no need to use it with other measures of performance it is similar to price earnings ratio because a corporation's return on investment appears every day in The Wall Street Journal the company's D) Both A and C are correct. Answer: A Diff: 2 Terms: return on investment (ROI) Objective: 3 AACSB: Reflective thinking 49) Return on investment can be increased by: A) increasing B) operating assets decreasing C) operating assets decreasing D) revenues Both B and C are correct. Answer: B Diff: 2 Terms: return on investment (ROI) Objective: 3 AACSB: Reflective thinking 50) The method of profitability analysis recognizes the two basic ingredients in profit-making: increasing income per dollar of ________ revenues and using assets to generate more revenues. A) Balanced B) Scorecard ResidualC) Income Dupont D) Economic Value Added Answer: C Diff: 2 Terms: return on investment (ROI) Objective: 3 AACSB: Reflective thinking 51) During the past twelve months, the Aaron Corporation had a net income of $50,000. What is the amount of the investment if the return on investment is 20%? A) $100,000 B) $200,000 C) $250,000 D) $500,000 Answer: C Explanation: C) 0 Diff: 2 T 3 AACSB: Analytical skills 52) During the past twelve months, the Zenith Corporation had a net income of $39,200. What is the return on investment if the amount of the investment is $280,000? A) 10% B) 12% C) 14% D) 16% Answer: C Explanation: C) $ Diff: 1 T 3 AACSB: Analytical skills 53) The information for 20X5: Alpha Revenue $ 900,000 Beta Operating expenses 670,000 Corporati Total assets 1,150,000 on had the following What is the return on investment? A) 10% B) 20% C) 25% D) 78.2% Answer: B Explanation: B) ( Diff: 2 T 3 AACSB: Analytical skills 54) Wacker are as follows: Company Maryland New York has two Revenues $ 580,000 $ 596,000 regional Operating assets 4,800,000 9,000,000 offices. Net operating income 2,016,000 2,400,000 The data for each What is the Maryland Division's return on investment? A) 0.42 B) 0.54 C) 0.96 D) 4.12 Answer: A Explanation: A) $ Diff: 1 T 3 AACSB: Analytical skills 55) Thacker are as follows: Company Maryland New York has two Revenues $ 580,000 $ 596,000 regional Operating assets 4,800,000 9,000,000 offices. Net operating income 2,016,000 4,860,000 The data for each What is the return on investment for the New York Division? A) 0.42 B) 0.54 C) 0.96 D) 4.12 Answer: B Explanation: B) $ Diff: 1 T 3 AACSB: Analytical skills Answer the following questions using the information below: The Cybertronics Corporation reported the following information for its Cyclotron Division: Revenues Operating costs Taxable income Operating assets Income is defined as operating income. 56) $1,000,000 600,000 200,000 500,000 What is the Cyclotron Division's investment turnover ratio? A) 2.00 B) 3.33 C) 2.50 D) 0.80 Answer: A Explanation: A) $ Diff: 2 T 3 AACSB: Analytical skills 57) What is the Cyclotron Division's return on sales? A) 0.20 B) 0.40 C) 0.50 D) 0.60 Answer: B Explanation: B) $ Diff: 2 T 3 AACSB: Analytical skills 58) What is the Cyclotron Division's return on investment? A) 0.2 B) 0.4 C) 0.5 D) 0.8 Answer: D Explanation: D) $ Diff: 2 T 3 AACSB: Analytical skills Answer the following questions using the information below: The top management at Munchie Company, a manufacturer of computer games, is attempting to recover from a flood that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged: Alpha Division $2,500,000 $1,500,000 (b) 0.25 (e) (f) Beta Division (a) $650,000 (c) 0.15 0.10 (g) Gamma Division $1,150,000 $ 575,000 $ 766,667 (d) 0.5 1.5 Sales Net operating income Operating assets Return on investment Return on sales Investment turnover 59) What were the sales for the Beta Division? A) $4,333,333 B) $5,952,380 C) $6,500,000 D) $7,151,800 Answer: C Explanation: C) 0 Diff: 2 T 3 AACSB: Analytical skills 60) What is the value of the operating assets belonging to the Alpha Division? A) $4,333,333 B) $6,000,000 C) $6,500,000 D) $7,151,800 Answer: B Explanation: B) $ Diff: 2 T 3 AACSB: Analytical skills 61) What is the value of the operating assets belonging to the Beta Division? A) $4,333,333 B) $5,952,380 C) $6,500,000 D) $7,151,800 Answer: A Explanation: A) . Diff: 2 T 3 AACSB: Analytical skills 62) What is the Gamma Division's return on investment? A) 0.25 B) 0.42 C) 0.60 D) 0.75 Answer: D Explanation: D) 0 Diff: 2 T 3 AACSB: Analytical skills 63) What is the Alpha Division's return on sales? A) 0.25 B) 0.42 C) 0.60 D) 0.75 Answer: C Explanation: C) $ Diff: 2 T 3 AACSB: Analytical skills Answer the following questions using the information below: The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged: Tractor Division $5,000,000 $ 500,000 (b) 0.20 (e) (f) Tiller Division (a) $720,000 (c) 0.10 0.12 (g) Digger Division $1,200,000 $ 300,000 $ 1,000,000 (d) 0.25 1.2 Sales Net operating income Operating assets Return on investment Return on sales Investment turnover 64) What were the sales for the Tiller Division? A) $4,800,000 B) $6,000,000 C) $7,500,000 D) $7,750,000 Answer: B Explanation: B) R Diff: 2 T S 3 AACSB: Analytical skills 65) What is the value of the operating assets belonging to the Tractor Division? A) $ 1,750,000 B) $2,000,000 C) $ 2,250,000 D) $2,500,000 Answer: D Explanation: D) R Diff: 2 T A 3 AACSB: Analytical skills 66) What is the value of the operating assets belonging to the Tiller Division? A) $5,000,000 B) $ 6,000,000 C) $ 7,200,000 D) $ 7,500,000 Answer: C Explanation: A) . s $720, 0.10 = $7,200,000 000/ Diff: 2 T r O Analytical skills 67) What is the Digger Division's return on investment? A) .25 B) .30 C) .45 D) .60 Answer: B Explanation: B) R C = return on investment (ROI) Objective: 3 AACSB: Analytical skills 68) What is the Tractor Division's return on sales? A) 0.10 B) 0.12 C) 0.15 D) 0.20 Answer: A Explanation: A) $ Diff: 2 T 3 AACSB: Analytical skills 69) What is the Tractor Division's investment turnover? A) .50 B) 1.0 C) 2.0 D) 2.5 Answer: C Explanation: C) I s Diff: 2 T A T 3 AACSB: Analytical skills 70) What is the Tiller Division's investment turnover? A) .50 B) .833 C) 1.2 D) 1.5 Answer: B Explanation: B) R Diff: 2 T = 3 AACSB: Analytical skills 71) Costs recognized in particular situations that are not recognized by accrual accounting procedures are: A) opportunity B) costs imputed costs C) cash accounting costs D) None of these answers is correct. Answer: B Diff: 1 Terms: imputed cost Objective: 4 AACSB: Reflective thinking 72) A problem with using residual income is that a corporation with a: A) high investment turnover ratio always has a higher residual income than a corporation with a smaller investment turnover ratio B) high return on sales always has a higher residual income than a corporation with a smaller return on sales C) larger dollar D) amount of assets is likely to have a higher residual income than a corporation with a smaller dollar amount of assets None of these answers is correct. Answer: C Diff: 2 Terms: residual income residual income (RI) Objective: 4 AACSB: Reflective thinking 73) A company which favors the residual income approach wants managers to: A) concentrate on maximizing an absolute amount of dollars B) concentrate on maximizing a percentage return C) maximize the investment turnover ratio D) maximize return on sales Answer: A Diff: 2 Terms: residual income residual income (RI) Objective: 4 AACSB: Reflective thinking 74) Using residual income as a measure of performance rather than return on investment promotes goal congruence because residual income: A) places B) importance on the reduction of underperforming assets calculates a C) percentage return rather than an absolute return concentrates on maximizing an absolute amount of dollars D) concentrates on maximizing the return on sales Answer: C Diff: 2 Terms: residual income residual income (RI) Objective: 4 AACSB: Reflective thinking Answer the following questions using the information below: The Bandage Medical Supply Company has two divisions that operate independently of one another. The financial data for the year 20X5 reported the following results: North $3,000,000 750,000 650,000 6,000,000 South $2,500,000 550,000 375,000 5,000,000 Sales Operating income Taxable income Investment The company's desired rate of return is 10%. Income is defined as operating income. 75) What are the respective return-on-investment ratios for the North and South Divisions? A) 0.110 and 0.125 B) 0.108 and 0.075 C) 0.125 and 0.110 D) 0.050 and 0.150 Answer: C Explanation: C) N Diff: 2 T 3 AACSB: Analytical skills 76) Which of the following is the correct formula for return on sales? A) Income / B) Investment Investment / C) Income Income / D) Revenue Revenue / Investment Answer: C Diff: 1 Terms: return on investment Objective: 3 AACSB: Reflective thinking 77) Another name for return on investment is the: A) net present B) value accounting rate of return C) residual income D) internal rate of return Answer: B Diff: 1 Terms: return on investment Objective: 3 AACSB: Reflective thinking 78) What are the respective residual incomes for the North and South Divisions? A) $30,000 and B) $50,000 $150,000 and $30,000 C) $150,000 and $50,000 D) $50,000 and a negative $150,000 Answer: C Explanation: C) N Diff: 2 T 4 AACSB: Analytical skills 79) Which division has the best return on investment and which division has the best residual income figure, respectively? A) North, North B) South, South C) North, South D) South, North Answer: A Explanation: A) N S N S return on investment (ROI), residual income residual income (RI) Objective: 4 AACSB: Analytical skills 80) After-tax income minus the after-tax weighted-average cost of capital multiplied by total assets minus current liabilities equals: operating A) return on B) investment residual income C) economic value added D) weighted- average cost of capital Answer: C Diff: 1 Terms: economic value added (EVA®) Objective: 5 AACSB: Reflective thinking 81) The after- tax average cost of all the long-term funds used by a corporation equals: A) economic value added B) return on C) investment return on equity D) weighted- average cost of capital Answer: D Diff: 1 Terms: economic value added (EVA®) Objective: 5 AACSB: Reflective thinking 82) A feature of defining investment by excluding the portion of total assets employed that are financed by short-term creditors is negative that: A) current B) liabilities are sometimes difficult to define short-term debt is always more expensive to finance than long-term debt C) this method D) encourages managers to use an excessive amount of short-term debt this method encourages managers to use an excessive amount of long-term debt Answer: C Diff: 2 Terms: economic value added (EVA®), investment Objective: 5 AACSB: Reflective thinking 83) Springfiel on, whose tax rate is 40%, has two sources of funds: long-term debt with a market value of $8,000,000 and an interest rate d of 8%, and equity capital with a market value of $12,000,000 and a cost of equity of 12%. What is Springfield's weighted Corporati average cost of capital (WACC)? A) .0480 B) .0800 C) .0912 D) .1000 Answer: C Explanation: C) [ Diff: 2 T 5 AACSB: Analytical skills 84) Springfiel long-term debt with a market value of $8,000,000 and an interest rate of 8%, and equity capital with a market value of d $12,000,000 and a cost of equity of 12%. Springfield has two operating divisions, the Blue division and the Gold division, Corporati with the following financial measures for the current year: on, whose tax rate is Total Assets Current Liabilities Operating Income 40%, has Blue Div. $9,500,000 $2,800,000 $1,055,000 two Gold Div. $11,000,000 $2,200,000 $1,200,000 sources of funds: What is Economic Value Added ( ) for the Blue Division? A) -$233,400 B) $21,960 C) $188,600 D) $433,960 Answer: B Explanation: B) W Diff: 3 T 5 AACSB: Analytical skills 85) Springfiel on, whose tax rate is 40%, has two sources of funds: long-term debt with a market value of $8,000,000 and an interest rate d of 8%, and equity capital with a market value of $12,000,000 and a cost of equity of 12%. Springfield's after-tax cost of Corporati debt is: A) .0320 B) .0480 C) .0800 D) .0912 Answer: B Explanation: B) . Diff: 2 T 5 AACSB: Analytical skills 86) Springfiel long-term debt with a market value of $8,000,000 and an interest rate of 8%, and equity capital with a market value of d $12,000,000 and a cost of equity of 12%. Springfield has two operating divisions, the Blue division and the Gold division, Corporati with the following financial measures for the current year: on, whose tax rate is Total Assets Current Liabilities Operating Income 40%, has Blue Div. $9,500,000 $2,800,000 $1,055,000 two Gold Div. $11,000,000 $2,200,000 $1,200,000 sources of funds: Calculate EVA® for the Gold Division. A) -$283,200 B) -$82,560 C) $196,800 D) $397,440 Answer: B Explanation: B) W Diff: 3 T 5 AACSB: Analytical skills Answer the following questions using the information below: 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 current liabilities. The cost of equity capital is 12%, while the tax rate is 25%. Operating Income $ 960,000 $1,200,000 $2,040,000 Assets $ 4,000,000 $ 8,000,000 $12,000,000 Current Liabilities $ 200,000 $ 600,000 $1,200,000 St. Louis Cedar Rapids Wichita 87) What is the EVA®for St. Louis? A) $255,740 B) $327,460 C) $392,540 D) $720,000 Answer: B Explanation: B) W Diff: 3 T 5 AACSB: Analytical skills 88) What is the EVA® for Cedar Rapids? A) $135,580 B) $220,000 C) $234,000 D) $305,000 Answer: A Explanation: A) C Diff: 3 T 5 AACSB: Analytical skills 89) What is the EVA® for Wichita? A) $450,000 B) $1,530,000 C) $414,360 D) $1,115,640 Answer: C Explanation: C) W Diff: 3 T 5 AACSB: Analytical skills Answer the following questions using the information below: Coldbrook Company has two sources of funds: long-term debt with a market and book value of $15 million issued at an interest rate of 10%, and equity capital that has a market value of $9 million (book value of $5 million). Coldbrook Company has profit centers in the following locations with the following operating incomes, total assets, and current liabilities. The cost of equity capital is 15%, while the tax rate is 30%. Operating Income $ 815,000 $1,100,000 $2,450,000 Assets $ 3,750,000 $ 5,000,000 $9,250,000 Current Liabilities $ 800,000 $ 1,200,000 $3,180,000 Bish Bash Falls Brooksville Stonybrook 90) What is the EVA®for Bish Bash Falls? A) $338,563 B) $305,000 C) $275,500 D) $255,500 Answer: C Explanation: C) W Diff: 3 T 5 AACSB: Analytical skills 91) What is the EVA®for Brooksville? A) $476,250 B) $428,000 C) $415,525 D) $390,000 Answer: D Explanation: D) W Diff: 3 T 0 5 AACSB: Analytical skills 92) What is the EVA®for Stonybrook? A) $1,108,000 B) $ 1,168,700 C) $ 1,315,063 D) $1,403,063 Answer: A Explanation: A) W Diff: 3 T 0 5 AACSB: Analytical skills Answer the following questions using the information below: Ruth Cleaning Products manufactures home cleaning products. The company has two divisions, Bleach and Cleanser. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 20X5: ASSETS Book value Current value $225,000 $300,000 $450,000 $250,000 INCOME Book value Current value $150,000 $155,000 $100,000 $105,000 Bleach Cleanser The company is currently using a 15% required rate of return. 93) What are Bleach's and Cleanser's return on investment based on book values, respectively? A) 0.22; 0.67 B) 0.42; 0.52 C) 0.52; 0.42 D) 0.67; 0.22 Answer: D Explanation: D) B Diff: 2 T 6 AACSB: Analytical skills 94) What are Bleach's and Cleanser's return on investment based on current values, respectively? A) 0.22; 0.67 B) 0.42; 0.52 C) 0.52; 0.42 D) 0.67; 0.22 Answer: C Explanation: C) C Diff: 2 T 6 AACSB: Analytical skills 95) What are Bleach's and Cleanser's residual incomes based on book values, respectively? A) $116,250; B) $32,500 $110,000; C) $67,500 $67,500; D) $110,000 $37,500; $116,250 Answer: A Explanation: A) B Diff: 2 T 6 AACSB: Analytical skills Answer the following questions using the information below: Carriage Incorporated manufactures horse carriages. The company has two divisions, Wheels and Assembly. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 2009: ASSETS Book value Current value $485,000 $550,000 $750,000 $1,200,000 INCOME Book value Current value $120,000 $140,000 $160,000 $172,500 Wheels Assembly The company is currently using a 12% required rate of return. 96) What are Wheels's and Assembly's return on investment based on book values, respectively? A) 0.21; 0.25 B) 0.25; 0.21 C) 0.14; 0.25 D) 0.25; 0.14 Answer: B Explanation: B) B Diff: 2 T 6 AACSB: Analytical skills 97) What are Wheels's and Assembly's return on investment based on current values, respectively? A) 0.21; 0.25 B) 0.25; 0.21 C) 0.14; 0.25 D) 0.25; 0.14 Answer: D Explanation: D) B Diff: 2 T 6 AACSB: Analytical skills 98) What are Wheels's and Assembly's residual incomes based on book values, respectively? A) $74,000; B) $28,500 $61,800; C) $70,000 $63,500; D) $59.500 $28,500; $74,000 Answer: B Explanation: B) B Diff: 2 T 6 AACSB: Analytical skills 99) The cost today of purchasing an asset identical to the one currently held is called a(n): A) actual cost B) current cost C) dual cost D) fixed cost Answer: B Diff: 2 Terms: current cost Objective: 6 AACSB: Reflective thinking 100) If a is a multinational company with operations in several different countries, one way to achieve comparability of historicalcompany cost based ROIs for facilities in different countries is to: A) restate the B) results of operations using the cash basis method of accounting use GAAP for all reporting and calculations C) restate the D) results of all operations in dollars All of these answers are correct. Answer: C Diff: 2 Terms: return on investment (ROI) Objective: 7 AACSB: Multiculturalism and diversity 101) Which of the following statements is true? A) The economic, legal, political, social, and cultural environments differ across countries. B) Governments in some countries may impose controls and limit selling prices of a company's products. C) Because of advances in D) telecommunications and transportation, the availability of materials and skilled labor does not differ significantly across countries. Both A and B are correct. Answer: D Diff: 2 Terms: Balanced Scorecard Objective: 7 AACSB: Multiculturalism and diversity 102) ________ ________ would be uncontrollable factors that a firm would need to consider when evaluating the return on investment of and an international division. A) Manager's B) experience; currency stability Manager's C) compensation; political climate Required rate of return; legal requirements D) Custom duties; cultural environment Answer: D Diff: 2 Terms: return on investment Objective: 7 AACSB: Multiculturalism and diversity 103) In performance evaluations: A) the performance of the division prior to the manager assuming control should be considered B) economic C) conditions for the specific industry should not be considered tohave an D) effective and fair evaluation, a manager should be evaluated over several time periods Both A and C are correct. Answer: D Diff: 2 Terms: Balanced Scorecard Objective: 8 AACSB: Reflective thinking 104) A problem with rewarding managers only on the basis of residual income is that: A) residual income is difficult to measure B) on occasion the items in the residual income calculation are not quantifiable C) residual income can depend on items over which the manager has little control D) All of these answers are correct. Answer: C Diff: 2 Terms: residual income residual income (RI) Objective: 8 AACSB: Reflective thinking 105) ________ contexts in which an employee prefers to exert less effort than the effort that the owner wants because the employee's describes effort cannot be accurately monitored and enforced. A) Goal B) congruence Moral hazard C) Management D) compensation Incentive compensation Answer: B Diff: 1 Terms: moral hazard Objective: 8 AACSB: Reflective thinking 106) Tying performance measures more closely to a manager's efforts: A) encourages the use of nonfinancial measures B) results in a C) strict use of financial ratios results in the D) salary component of compensation dominating the total compensation package Both A and C are correct. Answer: A Diff: 2 Terms: Balanced Scorecard Objective: 8 AACSB: Reflective thinking 107) Relative performance evaluation: A) is called B) benchmarking filters out the C) effect of common noncontrollable factors results in D) managers having no incentive to help one another All of these answers are correct. Answer: D Diff: 2 Terms: benchmarking Objective: 8 AACSB: Reflective thinking 108) Team incentives encourage cooperation by: A) forcing people to work together on difficult tasks B) improving C) morale letting D) individuals help one another as they strive toward a common goal rewarding all teams the same amount Answer: C Diff: 1 Terms: Balanced Scorecard Objective: 8 AACSB: Communication 109) Many uring, marketing, and design problems require employees with multiple skills; therefore, teams are used and the members manufact have the added encouragement of: A) individual B) incentives management C) incentives morale D) incentives team incentives Answer: D Diff: 1 Terms: Balanced Scorecard Objective: 8 AACSB: Reflective thinking 110) Designers of executive compensation plans emphasize which of the following factors? A) achievement of organizational goals B) administrative ease C) the probability that the executives affected by the plan will perceive the plan as fair D) All of these answers are correct. Answer: D Diff: 2 Terms: Balanced Scorecard Objective: 8 AACSB: Reflective thinking 111) The in which an employee prefers to exert less effort compared with the effort desired by the owner because the employee's situation effort cannot accurately be monitored and enforced is known as a(n): A) incentive B) moral hazard C) objective D) imputed cost Answer: B Diff: 1 Terms: moral hazard Objective: 8 AACSB: Reflective thinking 112) Which of the following is a difference between a diagnostic control system and an interactive control system? A) A diagnostic focuses on meeting expectations, while an interactive control system focuses on standards of ethical behavior. control system B) A diagnostic focuses on standards of ethical behavior while an interactive control system focus on meeting expectations. control system C) A diagnostic focuses on meeting expectations, while an interactive control system focuses on organizational attention and learning control system on key strategic issues. D) A diagnostic focuses on organizational attention and learning on key strategic issues, while an interactive control system focuses control system on meeting expectations. Answer: C Diff: 2 Terms: diagnostic control systems, interactive control systems Objective: 9 AACSB: Reflective thinking 113) A part of a control system that focuses on meeting expectations is known as a(n): A) diagnostic B) control system boundary C) system belief system D) interactive control system Answer: A Diff: 2 Terms: diagnostic control, boundary, belief, and interactive control systems Objective: 9 AACSB: Reflective thinking 114) A part of system that describes standards of behavior and codes of conduct expected of all employees, especially actions that are offa control limits, is known as a(n): A) diagnostic B) control system boundary C) system belief system D) interactive control system Answer: B Diff: 2 Terms: diagnostic control, boundary, belief, and interactive control systems Objective: 9 AACSB: Ethical reasoning 115) A part of a control system that articulates the mission, purpose, and core values of a company is known as a(n): A) diagnostic B) control system boundary C) system belief system D) interactive control system Answer: C Diff: 2 Terms: diagnostic control, boundary, belief, and interactive control systems Objective: 9 AACSB: Communication 116) A part of a control system that attempts to focus an organization's attention and learning on key strategic issues is known as a(n): A) diagnostic B) control system boundary C) system belief system D) interactive control system Answer: D Diff: 2 Terms: diagnostic control, boundary, belief, and interactive control systems Objective: 9 AACSB: Reflective thinking 117) Managers ________ to create an ongoing dialog around the organization's key strategic issues to personally involve themselves in use subordinates' decision-making activities. A) diagnostic B) control systems boundary C) systems belief systems D) interactive control systems Answer: D Diff: 2 Terms: diagnostic control, boundary, belief, and interactive control systems Objective: 9 AACSB: Communication 118) "Levers of control," in addition to a diagnostic control system, are needed in an organization because: A) diagnostic B) controls have been found to lead to poor financial performance diagnostic C) controls have no place in a Balanced Scorecard system pressure to D) perform on diagnostic controls may lead to unethical behavior they are mandated by the Financial Accounting Standards Board Answer: C Diff: 3 Terms: diagnostic control, boundary, belief, and interactive control systems Objective: 9 AACSB: Reflective thinking 119) Assume one match. you are evaluating Activities: a 1. Change in revenues manufact 2. Cycle time uring 3. Economic order quantity company. 4. Manufacturing defects Match the 5. Market share various 6. New products organizati 7. On-time delivery onal 8. Operating income activities 9. Product reliability and 10. Time-to-market concepts with the Performance measure: performan ce ________ a. Profitability measures listed. ________ b. Customer satisfaction Some items may ________ c. Innovation have more than ________ d. Efficiency, quality, and time Answer: 1, 8 Profitability 5, 7, 9 Customer satisfaction 6, 10 Innovation 2, 3, 4, 7, 9, 10 a. b. c. d. Efficiency, quality, and time Diff: 2 Terms: Balanced Scorecard Objective: 1 AACSB: Analytical skills 120) Designing accounting based performance measure requires six steps. List each step. For three of the steps, describe a question that an must be resolved as part of the implementation process. Answer: 1. Choose performance measures that align with top management's goals. Does operating income, return on assets, or revenues best measure a subunit's financial goals? 2. Choose the time horizon of each performance measure. Should the performance measures be calculated for one year or a multiyear time horizon? 3. Choose a definition for each performance measure. Should assets be defined as total assets or net assets? 4. Choose a measurement alternative for each performance measure. Should assets be measured at historical cost or current cost? 5. Choose a target level of performance. Should all subunits have the same targets such as the same required rate of return on assets? 6. Choose the timing of the feedback. How often should performance reports be sent to management? Diff: 2 Terms: Balanced Scorecard Objective: 2 AACSB: Reflective thinking 121) Museum Corporati on uses the investmen t center concept for the museums that it manages. Select operating data for three of its museums for 20X5 are as follows: St. Louis Dallas Miami Revenue $600,000 $750,000 $900,000 Operating assets 300,000 250,000 350,000 Net operating income 51,000 56,000 59,000 Required: a. Compute the return on investment for each division. b. Which museum manager is doing best based only on ROI? Why? c. What other factors should be included when evaluating the managers? Answer: a. St. Louis = $51,000/$300,000 = 0.170 Dallas = $56,000/$250,000 = 0.224 Miami = $59,000/$350,000 = 0.169 b. Dallas was doing the best because the ROI was the highest, and compared to Miami, was doing better with fewer assets. c. At a minimum, the company should consider examining the DuPont method, residual income, and the age of operating assets. Diff: 2 Terms: return on investment (ROI), residual income residual income (RI) Objective: 3 AACSB: Analytical skills 122) Consolida ted Gas Supply Corporati on uses the investmen t center concept for the gasoline stations that it manages in the city. Consolidated has a 15% required rate of return on investment in order for a branch station to be viable. Select operating data for three of its stations for 2008 are as follows: Maple Street Oak Street Hickory Street Revenue $8,500,000 $6,750,000 $7,500,000 Operating assets 3,500,000 3,500,000 2,500,000 Net operating income 480,000 575,000 455,000 Required: a. Compute the return on investment for each station. b. Which station manager is doing best based only on ROI? Why? c. Are any of the stations in danger of being closed due to lack of performance? d. What other factors should be included when evaluating the managers? Answer: a. Maple = $480,000/$3,500,000 = 0.137 Oak = $575,000/$3,500,000 = 0.164 Hickory = $455,000/$2,500,000 = 0.182 b. Hickory Street was doing the best because the ROI was the highest. c. Maple Street is in danger of being shut down because it is only making a return on its investment base of 13.7%. This is less than the required rate of return of 15%. d. At a minimum, the company should consider examining the DuPont method, residual income, and the age of operating assets. Diff: 2 Terms: return on investment (ROI), residual income residual income (RI) Objective: 3 AACSB: Analytical skills 123) Kase Plows Tractors Combines Tractor Revenues $2,250,000 $500,000 $4,800,000 Company Accounts receivable 800,000 152,500 1,435,000 allows its Operating assets 1,000,000 400,000 1,750,000 divisions Net operating income 220,000 60,000 480,000 to operate Taxable income 165,000 90,000 385,000 as autonomo Required: us units. a. Compute the investment turnover for each division. The b. Compute the return on sales for each division. operating c. Compute the return on investment for each division. data for d. Which division manager is doing best? Why? 20X5 e. What other factors should be included when evaluating the managers? follow: For parts (b) and (c) income is defined as operating income. Answer: a. Investment turnover: Plows = $2,250,000/$1,000,0 00 = 2.25 Tractors = $500,000/$400,000 = 1.25 Combines = $4,800,000/$1,750,0 00 = 2.74 Return on Sales: Plows = $220,000/$2,250,000 = 0.10 Tractors = $60,000/$500,000 = 0.12 Combines = $480,000/$4,800,000 = 0.10 b. ROI: Plows 2.25 × 0.10 0.225 Tractors 1.25 × 0.12 0.150 Combines 2.74 × 0.10 0.274 c. = = = = = = d. Combines' manager had the best performance because he had the highest investment turnover, which offset his second-best return on sales. e. Residual income should be considered and noncontrollable factors such as the age of the assets. Diff: 2 Terms: return on investment (ROI) Objective: 3 AACSB: Analytical skills 124) Provide the missing data for the following situations: Sales Net operating income Operating assets Return on investment Return on sales Investment turnover Red Division: ROI = ROS × IT 0.16 = 0.04 × IT IT = 4.0 ROS = Income/Sales 0.04 = $200,000/Sales Sales = $5,000,000 IT OA 4 = $5,000,000/OA OA = $1,250,000 White Division: ROS = $400,000/$10,000,00 0 = 0.04 IT = ROI/ROS = 0.10/0.04 = 2.5 OA = S/IT = $10,000,000/2.5 = $4,000,000 Blue Division: Sales = IT × OA = 1.5 × $1,600,000 = $2,400,000 ROI = 0.12 × 1.5 = 0.18 = Sales/ Diff: 3 Terms: return on investment (ROI) Objective: 3 AACSB: Analytical skills 125) Hargrave Products East West International has three Sales $30,000,000 $40,000,000 $50,000,000 divisions, Cost of goods sold 15,000,000 25,000,000 37,000,000 which Operating income 4,500,000 4,750,000 5,000,000 operate Investment base 30,000,000 30,500,000 31,000,000 autonomo usly. The company's desired rate of return is 15%. Their results for Required: 20X5 a. Compute each division's ROI. Round to three decimal places. were as b. Compute each division's residual income. follows: Answer: a. East ROI = $4,500,000/$30,000, 000 = 0.150 West ROI = $4,750,000/$30,500, 000 = 0.156 International = $5,000,000/$31,000, Diff: 2 Terms: Investme Minimum Minimum Operating Minimum Residual return on investment (ROI), residual income residual income (RI) Objective: 3, 4 AACSB: Analytical skills 126) Batman Abstract Riddler Joker Company Sales $5,000,000 $7,000,000 has three Contribution margin 1,440,000 1,700,000 divisions Operating income 1,000,000 1,750,000 that Investment base 9,000,000 10,000,000 operate autonomo The company's desired rate of return is 20%. usly. Their Required: results for a. Compute each division's ROI. 20X5 are b. Compute each division's residual income. as c. Rank each division by both ROI and residual income. follows: d. Which division had the best performance in 20X5? Why? Answer: Penguin $10,000,000 3,500,000 2,520,000 14,000,000 a. Riddler ROI = $1,000,000/$9,000,0 00 = 0.111 Joker ROI = $1,750,000/$10,000, 000 = 0.175 Penguin ROI = $2,520,000/$14,000, 000 = 0.180 b. Investment base Minimum rate Minimum return Income Minimum return Residual income c. ROI Rank : Penguin # 1 Joker # 2 Riddler # 3 RI Rank : Joker #1 Penguin #2 Riddler #3 d. As to which division was the best, it is difficult to determine without knowing what the results are being used to evaluate. If management is measuring only the return of capital, the Penguin Division has the highest ranking, although not much ahead of Joker. However, Penguin does have a substantially higher income level. As to meeting management's Riddler $9,000,000 × 0.20 $1,800,000 $1,000,000 1,800,000 $(800,000) Joker $10,000,000 × 0.20 $2,000,000 $1,750,000 2,000,000 $(250,000) Penguin $14,000,000 × 0.20 $2,800,000 $2,520,000 2,800,000 $(280,000) residual income, all divisions fall short of the goal with Joker being slightly ahead of Penguin. Diff: 3 Terms: return on investment (ROI), residual income residual income (RI) Objective: 3, 4 AACSB: Analytical skills 127) The operating budget. Average operating assets of $1,500,000 will be used during the year and unit selling prices are expected Coffee to average $100 each. Variable costs of the division are budgeted at $400,000, while fixed costs are set at $250,000. The Division company's required rate of return is 18%. of American Required: Products a. Compute the sales volume necessary to achieve a 20% ROI. is planning b. The division manager receives a bonus of 50% of residual income. What is his anticipated bonus for 20X5, assuming the 20X5 he achieves the 20% ROI from part (a)? Answer: a. Target operating income = 0.20 × $1,500,000 = $300,000 Operating income Variable costs Fixed costs Target revenues Sales volume = $950,000/$100 = 9,500 units b. Asset base Minimum rate Required return Target operating income Required return Residual income Bonus = $30,000 × 0.50 = $15,000 $300,000 400,000 250,000 $950,000 $1,500,000 × 0.18 $ 270,000 $ 300,000 270,000 $ 30,000 Diff: 3 Terms: return on investment (ROI), residual income residual income (RI) Objective: 3, 8 AACSB: Analytical skills 128) LaserLife Printer Cartridge Company is a decentrali zed organizati on with several autonomo us divisions. The division managers are evaluated, in part, on the basis of the change in their return on invested assets. Operating results for the Packer Division for 20X5 are budgeted as follows: Sales $5,000,000 Less variable costs 2,500,000 Contribution margin 2,500,000 Less fixed expenses 1,800,000 Net operating income $ 700,000 Operating assets for the division are currently $3,600,000. For 20X5, the division can add a new product line for an investment of $600,000. The new product line will generate sales of $1,600,000 and will incur fixed expenses of $600,000 annually. Variable costs of the new product will average 60% of the selling price. Required: a. What is the effect on ROI of accepting the new product line? b. If the company's required rate of return is 6% and residual income is used to evaluate managers, would this encourage the division to accept the new product line? Explain and show computations. Answer: a. New investment: Sales Variable costs Fixed costs Operating income Current ROI = $700,000/$3,600,000 = 0.194 New investment ROI = $40,000/$600,000 = 0.067 Combined ROI = $740,000/$4,200,000 = 0.176 Accepting the new product line will reduce the division's ROI. This would make the manager reluctant to make the investment. b. Investment Minimum return Required amount Income Required amount Residual income The manager would accept the investment because income is increased by $4,000. $1,600,000 $960,000 600,000 1,560,000 $ 40,000 $600,000 × 0.06 $ 36,000 $ 40,000 36,000 $ 4,000 Diff: 2 Terms: return on investment (ROI), residual income residual income (RI) Objective: 3, 4, 8 AACSB: Analytical skills 129) Capital A $15,000,000 $100,000,000 Investmen B $25,000,000 $125,000,000 ts has C $11,000,000 $ 50,000,000 three divisions. The company is planning an expansion, which will require each division to increase its investments by $25,000,000 and its Each income by $4,500,000. division's required Required: rate of a. Compute the current ROI for each division. return is 15%. b. Compute the current residual income for each division. Planned operating c. Rank the divisions according to their current ROIs and residual incomes. results for 20X5 are d. Determine the effects after adding the new project to each division's ROI and residual income. as follows: e. Assuming the managers are evaluated on either ROI or residual income, which divisions are pleased with the expansion and which ones are unhappy? Division Answer: a. A ROI = $15,000,000/$100,00 0,000 = 0.15 B ROI = $25,000,000/$125,00 0,000 = 0.20 C ROI = $11,000,000/$50,000 ,000 = 0.22 b. A RI = $15,000,000 ($100,000,000 × 0.15) = $ 0 B RI = $25,000,000 ($125,000,000 × 0.15) = $6,250,000 C RI = $11,000,000 ($50,000,000 × 0.15) = $3,500,000 c. C B B C A A ROI Rank: RI Rank: 1. 1. 2. 2. 3. 3. d. A ROI = $19,500,000/$125,00 0,000 = 0.156 B ROI = $29,500,000/$150,00 0,000 = 0.197 C ROI = $15,500,000/$75,000 ,000 = 0.207 A RI = $19,500,000 ($125,000,000 x 0.15) = $ B RI = $29,500,000 ($150,000,000 x 0.15) = $7,000,000 C RI = $15,500,000 ($75,000,000 x 0.15) = $4,250,000 e. Everyone would be pleased if residual income was used because residual incomes increase with the expansion. However, it would be difficult to evaluate each division on a comparative basis because each division's investment base is different. Only the manager of Division A is pleased with the new investment if ROI is used because that is the only division with an increased ROI. In the case of additional investments that are required by corporate management, residual income may be the best to use for evaluating each manager individually, but not collectively. Diff: 3 Terms: return on investment (ROI), residual income residual income (RI) Objective: 3, 4, 8 AACSB: Analytical skills 130) Copterma a market and book value of $32 million issued at an interest rate of 10%, and equity capital that has a market value of $18 gic million (book value of $8 million). The cost of equity capital for Coptermagic is 15%, and its tax rate is 30%. Coptermagic Company has profit centers in four divisions that operate autonomously. The company's results for 2008 are as follows: supplies helicopter Operating Current s to Income Assets Liabilities corporate New York $1,750,000 $11,500,000 $2,500,000 clients. Chicago 2,400,000 9,000,000 3,500,000 Copterma Dalllas 4,675,000 27,500,000 9,500,000 gic has Los Angeles 4,200,000 25,000,000 8,000,000 two sources of Required: funds: a. Compute Coptermagic's weighted average cost of capital. long term b. Compute each division's Economic Value Added. debt with c. Rank the divisions by EVA. Answer: a. WACC = [(.10 x (1 - .30) x $32,000,000) + (.15 x $18,000,000)] / $50,000,000 = 9.88 % b. New York (EVA) = [($1,750,000 x (1 - .30)] - [0.0988 x ($11,500,000 $2,500,000)] = $1,225,000 $889,200 = $335,800 Chicago (EVA) = [($2,400,000 x (1 - .30)] - [0.0988 x ($9,000,000 $3,500,000)] = $1,680,000 $543,400 = $1,136,600 Dallas (EVA) = [($4,675,000 x (1 - .30)] - [0.0988 x ($27,500,000 $9,500,000)] = $3,272,500 $1,788,400 = $1,494,100 Los Angeles (EVA) = [($4,2000,000 x (1 - .30)] - [0.0988 x ($25,000,000 $8,000,000)] = $2,940,00 $1,679,600 = c. Rank : Diff: 3 Terms: economic value added (EVA®) Objective: 5 AACSB: Analytical skills 131) The establish an accounting-based performance measurement system for the company's new plant. The company has an executive accounting information system sufficient to support a fairly sophisticated performance measurement system. The new plant vice is going to be considered an investment center since its products will be markedly different from others the company president currently sells. The new plant will have no internal dealings with other plants within the company. of Wicker Pen Required: Company What are some of the key steps that should be undertaken in the establishment of an accounting-based performance wants to measurement system? Answer: Key steps include: 1. Choose performance measures that align with top management's financial goals for the plant. They would include those that relate to the plant as an investment center. 2. Choose the time horizon of each performance measure in step 1. 3. Choose a definition of the components in each performance measure in step 1. For example, how should investment be defined? 4. Choose a measurement alternative for each performance measure in step 1. For example, should historical cost or current cost be used to measure investment? 5. Choose a target level of performance. 6. Choose the timing of feedback. Diff: 2 Terms: Balanced Scorecard Objective: 2 AACSB: Reflective thinking 132) Companie increasingly using nonfinancial measures to evaluate performance. Why? Since these numbers do not come from the s are company's financial records, why are they used? Answer: The correct answer will revolve around the objective of providing quality goods to the corporation's customers. Quality goods bring repeat business and satisfied customers are a business' best advertisement. The idea is that these nonfinancial measures concentrate on areas and questions that indicate the quality of a particular corporation's products. While some of these items do not come from a companies' financial records, such as defect rates, they are quantifiable and can be verified. Diff: 3 Terms: Balanced Scorecard Objective: 1 AACSB: Reflective thinking 133) Bob's Cellular Phone Company uses ROI to measure divisional performan ce. Annual ROI calculatio ns for each division have traditionally employed the ending amount of invested capital along with annual operating income and net revenue. The Dupont method is generally used. The company's Phone Accessories Division had the following results for the last two years: 20X5 ROI = ($2,000,000/$20,000,000) × ($20,000,000/$10,000,000) = 0.20 20X6 ROI = ($2,400,000/$25,000,000) × ($25,000,000/$15,000,000) = 0.16 Corporate management was disappointed in the performance of the division for 20X6, since it had made an additional investment in the division that was budgeted for a 23% ROI. Required: a. Discuss some factors that may have contributed to the decrease in ROI for 20X6. b. Would there have been any substantial difference if average capital had been used? Answer: a. While sales increased by 25%, net income only increased by 20%. This may indicate that expenses increased more than they should have. Apparently, the expected marginal net income from the new investment was $1,150,000 ($5,000,000 × 0.23), and either sales were too low or expenses too high for the new products. But this calculation is somewhat hypothetical since we do not know expected sales. Startup costs may have also contributed to the increased expenses of the first year's operations. An increase in investment also contributed to the decline in return on investment. b. Using average capital: = ($10,000,000 + $15,000,000)/2 = $12,500,000 ROI = $2,400,000/$12,500, 000 = 0.192 Using average capital would have improved the ROI from 16% to over 19%. This would still have been a disappointment to the total ROI fell below expectations. Perhaps it is unreasonable to expect a new investment to achieve its target ROI in the first year of operations. Diff: 3 Terms: return on investment (ROI) Objective: 3 AACSB: Analytical skills 134) The value added concept has attracted considerable attention in recent years. Explain the attractiveness of this number as a economic measure of performance. Answer: The attractiveness of economic value added at the divisional level is primarily the fact that it allows managers to incorporate the cost of capital in decisions at the divisional level. Diff: 3 Terms: economic value added (EVA®) Objective: 5 AACSB: Reflective thinking 135) When historical cost of assets for calculation of return on investment, is it better to use the gross book value of the assets or the using the net book value of the assets ? Discuss. Answer: Although the most frequently used measure of assets by companies is the net book value, there are advantages and disadvantages of each option. Those who use the net book value will note that it is consistent with the assets shown in the conventional balance sheet, and that it is consistent with the income computations that include deductions for depreciation expense. Those who favor using the gross book value calculation will note that it is more likely to be able to compare ROI across the subunits. Diff: 3 Terms: return on investment (ROI) Objective: 6 AACSB: Reflective thinking 136) Discuss and complications that may arise when multinational corporations conduct performance measurement and comparisons the issues among divisions located in different countries. Answer: There are wide differences in legal, political, social, and cultural environments among countries. Many governments impose price and import/export controls on various products. Availablilty of materials and skilled labor as well as power, transportation, and communication grids are likely to create significant issues. Divisions operating in different countries account for their performance in different currencies. The exchange rates will fluctuate and there will be differences and effects as a result of levels of inflation, which will need to be reconciled with adjustments to the measurement criteria established. Diff: 3 Terms: performance measure Objective: 7 AACSB: Multiculturalism and diversity 137) R&D has declined to unacceptable levels. To change the direction of the company, the board of directors hired a new chief Storage is executive officer. She is currently considering three alternative ways to reward division managers for performance. They a small, are: but diversifie 1. Give each manager a competitive salary with no bonus for performance. d, moving and 2. Give each manager a base salary with the largest portion being a bonus based on performance, ROI being the storage yardstick. company. In recent 3. Give each manager a base salary with a bonus based on comparative performance with the other divisions. years, its corporate Required: income Evaluate each of the ideas, giving strengths and weaknesses. Answer: 1. Opportunities for salary increases might be decided via other means such as improvements in employee motivation, cost savings ideas, or improved management skills. This method will fit some types of situations and managers better than the bonus methods, but should not be used in situations where a high degree of motivation is desired. 2. The second idea is good for motivating a manager to improve the performance of each given division. A weakness in this method occurs when managers make decisions that maximize return on investment in the short run because they have no intent to stay with the company over a long period of time. 3. The third method is great for motivating managers to compete with each other. However, some reward should be available for the lowest rated manager if that manager's performance is, in fact, above the for performance. Suboptimization is a potential problem with this approach if the winning manager's bonus is substantially above everyone else's bonus. Diff: 2 Terms: return on investment (ROI), balanced scorecard Objective: 8 AACSB: Analytical skills 138) Briefly explain each of the four levels of control. Why does a company need to implement more than a diagnostic control system? Answer: The four levers of control are diagnostic control systems, boundary systems, belief systems, and interactive control systems. Companies must strive for performance, behave ethically, inspire employees, and respond to strategic threats and opportunities in the environment. Diagnostic control systems involve measures that help a company to diagnose whether or not a company is performing according to expectations. Boundary systems describe standards of behavior and codes of conduct expected of all employees, especially actions that are off-limits. Belief systems articulate the mission, purpose, and core values of a company. Interactive control systems are formal information systems that managers use to focus organization attention and learning on key strategic issues. The "levers of control," in addition to diagnostic control systems, are needed since the pressure to diagnostic goals can be so strong that management might take steps to cut corners and make their performance look better than it really is. In addition, diagnostic systems might focus management too much on meeting short term goals that organization learning and attention to key strategic issues might be inadequate for the future. Diff: 2 Terms: diagnostic control, boundary, belief, and interactive control systems Objective: 9 AACSB: Reflective thinking ...
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