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Exam 11: Performance Measurement in Decentralized Organizations

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Question 91

True/False

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The basic objective of responsibility accounting is to charge each manager with those costs and/or revenues over which he has control.

A) True
B) False

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Question 92

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In November, the Universal Solutions Division of Keaffaber Corporation had average operating assets of $480,000 and net operating income of $46,200. The company uses residual income, with a minimum required rate of return of 11%, to evaluate the performance of its divisions. What was the Universal Solutions Division's residual income in November?

A) ($6,600)
B) $5,082
C) $6,600
D) ($5,082)

E) None of the above
F) B) and D)

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Question 93

Multiple Choice

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Which of the following will increase a company's manufacturing cycle efficiency (MCE) ? $\begin{array} { l l l } &\text { Decrease in Inspection Time } & \text { Decrease in Queue Time }\\\text { A) } & \text { Yes } & \text { Yes } \\ \text { B) } & \text { Yes } & \text { No } \\ \text { C) } & \text { No } & \text { Yes } \\ \text { D) } & \text { No } & \text { No } \end{array}$

Financial measures such as ROI are generally better than nonfinancial measures of key success drivers such as customer satisfaction as leading indicators of future financial performance.

Residual income is the difference between net operating income and the product of average operating assets and the minimum rate of return.

Cirone Inc. reported the following results from last year's operations: $\begin{array}{lrr}\text { Sales } & \$ 9,600,000 \\\text { Variable expenses } & 6,810,000 \\\text { Contribution margin } & 2,790,000 \\\text { Fixed expenses } & 1,926,000 \\\text { Net operating income } & \$ 864,000 \\\text { Average operating assets } & \$ 4,000,000\end{array}$ At the beginning of this year, the company has a $1,200,000 investment opportunity with the following characteristics: $\begin{array}{lc}\text { Sales } & \$4,200,000 \\\text { Contribution margin ratio } & 30 \% \text { of sales } \\\text { Fixed expenses } & \$ 966,000\end{array}$ If the company pursues the investment opportunity and otherwise performs the same as last year, the combined margin for the entire company will be closest to:

Residual income should be used to evaluate an investment center rather than a cost or profit center.

Chiodini Inc. has a $900,000 investment opportunity that involves sales of $2,430,000, fixed expenses of $1,044,900, and a contribution margin ratio of 50% of sales. The ROI for this year's investment opportunity considered alone is closest to:

Parsa Inc. reported the following results from last year's operations: At the beginning of this year, the company has a $1,100,000 investment opportunity with the following characteristics: The ROI for this year's investment opportunity considered alone is closest to:

The management of International Cookwares believes that delivery performance measures must be improved if the company is to maintain its competitive edge. The following data are considered to be typical of the time to complete orders. $\bullet$ Process time: 4 days $\bullet$ Wait time to the start of production: 15 days $\bullet$ Move time: 3 days $\bullet$ Inspection time: 2 days $\bullet$ Queue time during the production process: 8 days What is the manufacturing cycle efficiency?

Weafer Inc. reported the following results from last year's operations: Last year's return on investment (ROI) was closest to:

If a company contains a number of investment centers of differing sizes, return on investment (ROI) should be used rather than residual income to rank the financial performance of the divisions.

If net operating income is $70,000, average operating assets are $250,000, and the minimum required rate of return is 16%, what is the residual income?

Worsell Inc. reported the following results from last year's operations: The company's minimum required rate of return is 10%. Last year's residual income was closest to:

Bonilla Inc. has a $700,000 investment opportunity with the following characteristics: $\begin{array}{lc}\text { Sales } & \$ 2,240,000 \\\text { Contribution margin ratio } & 40 \% \text { of sales } \\\text { Fixed expenses } & \$ 739,200\end{array}$ The ROI for the investment opportunity is closest to:

Kingcade Corporation keeps careful track of the time required to fill orders. Data concerning a particular order appear below: The throughput time was:

Beery Inc. reported the following results from last year's operations: At the beginning of this year, the company has a $900,000 investment opportunity with the following characteristics: The company's minimum required rate of return is 12%. If the company pursues the investment opportunity, this year's combined residual income for the entire company will be closest to:

ROI and residual income are tools used to evaluate managerial performance in investment centers.

Which of the following would not be included in operating assets in return on investment calculations?

Rotan Corporation keeps careful track of the time required to fill orders. The times recorded for a particular order appear below: The delivery cycle time was: