Connect 1-Semester Access Card for Managerial Accounting
3rd Edition
ISBN: 9781259738548
Author: Stacey M Whitecotton Associate Professor, Robert Libby, Fred Phillips Associate Professor
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Videos
Question
Chapter 10, Problem 7MC
To determine
Concept introduction:
Return on investment (ROI):
Return on investment is a profitability ratio that represents the percentage return on the investment made. It is calculated by dividing the Net Income by the Average total assets. The formulas to calculate the ROI are as follows:
To choose:
The option (s) which will result in improvement of investment center’s performance.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
John Ltd is an organization with two divisions: A and B, each with its own cost and revenue streams. Each of the two divisions is classified as Investment center. The company’s cost of capital is 9%. Historically, investment decisions have been made by calculating the return on investment (ROI). A new manager who has recently been appointed in division A has argued that using residual income (RI) to make investment decisions would result in ‘better goal congruence’ throughout the company.
The data below shows the current position of the division as at the end of 31 December, 2019:
Details of Projects Project A Project B
Capital required GH¢ 82.8 million GH¢ 40.6 million
Sales generated GH¢44.6 million GH¢ 21.8 million
Net Profit margin 18% 25%
The company is seeking to maximize shareholders wealth. Assuming that, Division A acquires a more efficient asset at GH¢17 million and Division B sold one of its assets with written down value of GH¢21 million, and profits are expected to…
Which of the following statements is NOT a benefit of return on investment (ROI) as a measure of the financial performance of divisions?
a. It is a relative measure and allows divisions of different sizes to be compared
b. The percentage calculated can be compared with the return required by investors.
c. The performance of a division can be tracked over time (since a percentage is calculated).
d. It can provide a disincentive to invest, or force the sale of assets, in order to better the return.
If Yin-Yang Corporation evaluates its managers on the basis of return on investment, how would the Division A manager and the Yin-Yang Corporation president react to a new investment that has an estimated return on investment of 23% (Division A - Manager and YingYang Corp - President, respectively)?
Chapter 10 Solutions
Connect 1-Semester Access Card for Managerial Accounting
Ch. 10 - Explain how centralized and decentralized...Ch. 10 - Why does decentralization create the need for...Ch. 10 - What is the controllability principle and why is...Ch. 10 - Prob. 4QCh. 10 - Prob. 5QCh. 10 - Prob. 6QCh. 10 - Prob. 7QCh. 10 - Prob. 8QCh. 10 - Return on investment may be separated into two...Ch. 10 - Prob. 10Q
Ch. 10 - Prob. 11QCh. 10 - Prob. 12QCh. 10 - Prob. 13QCh. 10 - Prob. 14QCh. 10 - Prob. 15QCh. 10 - Prob. 16QCh. 10 - Prob. 17QCh. 10 - Why must a company consider its incentive and...Ch. 10 - Prob. 19QCh. 10 - Prob. 20QCh. 10 - Prob. 21QCh. 10 - Prob. 22QCh. 10 - Prob. 23QCh. 10 - Prob. 24QCh. 10 - Prob. 25QCh. 10 - What are negotiated transfer prices? Explain two...Ch. 10 - Sally Thorne is a profit center manager for ABC...Ch. 10 - Prob. 2MCCh. 10 - Which of the following statements is true? a. A...Ch. 10 - Prob. 4MCCh. 10 - Prob. 5MCCh. 10 - Prob. 6MCCh. 10 - Prob. 7MCCh. 10 - Prob. 8MCCh. 10 - Which of the following is not a component of the...Ch. 10 - Prob. 10MCCh. 10 - Using Terms to Complete Sentences about...Ch. 10 - Prob. 2MECh. 10 - Prob. 3MECh. 10 - Applying Balanced Scorecard to Real World Company...Ch. 10 - Applying Balanced Scorecard to Online Company...Ch. 10 - Prob. 6MECh. 10 - Prob. 7MECh. 10 - Prob. 8MECh. 10 - Prob. 9MECh. 10 - Prob. 10MECh. 10 - Prob. 11MECh. 10 - Prob. 12MECh. 10 - Prob. 13MECh. 10 - Prob. 2ECh. 10 - Prob. 3ECh. 10 - Prob. 4ECh. 10 - Calculating Return on Investment, Residual Income,...Ch. 10 - Prob. 6ECh. 10 - Evaluating Managerial Performance Using Return on...Ch. 10 - Evaluating Managerial Performance Using Return on...Ch. 10 - Prob. 9ECh. 10 - Determining the Impact of Various Transactions on...Ch. 10 - Determining Different Types of Responsibility...Ch. 10 - Prob. 14ECh. 10 - Prob. 15ECh. 10 - Prob. 16ECh. 10 - Matching Measures of Performance with the Correct...Ch. 10 - Determining Minimum, Maximum, Negotiated Transfer...Ch. 10 - Prob. 19ECh. 10 - Prob. 20ECh. 10 - Calculating Return on Investment, Residual Income,...Ch. 10 - Prob. 1.2GAPCh. 10 - Calculating Unknowns, Predicting Relationship...Ch. 10 - Calculating Unknowns, Predicting Relationship...Ch. 10 - Prob. 2.3GAPCh. 10 - Prob. 2.4GAPCh. 10 - Prob. 2.5GAPCh. 10 - Prob. 2.6GAPCh. 10 - Prob. 3.1GAPCh. 10 - Prob. 3.2GAPCh. 10 - Prob. 3.3GAPCh. 10 - Prob. 3.4GAPCh. 10 - Prob. 3.5GAPCh. 10 - Prob. 3.6GAPCh. 10 - Prob. 4.1GAPCh. 10 - Prob. 4.2GAPCh. 10 - Prob. 4.3GAPCh. 10 - Prob. 4.4GAPCh. 10 - Prob. 4.5GAPCh. 10 - Prob. 5.1GAPCh. 10 - Prob. 5.2GAPCh. 10 - Prob. 5.3GAPCh. 10 - Prob. 5.4GAPCh. 10 - Prob. 6GAPCh. 10 - Prob. 1.1GBPCh. 10 - Prob. 1.2GBPCh. 10 - Prob. 2.1GBPCh. 10 - Prob. 2.2GBPCh. 10 - Prob. 2.3GBPCh. 10 - Prob. 2.4GBPCh. 10 - Prob. 2.5GBPCh. 10 - Prob. 2.6GBPCh. 10 - Prob. 3.1GBPCh. 10 - Prob. 3.2GBPCh. 10 - Prob. 3.3GBPCh. 10 - Prob. 3.4GBPCh. 10 - Prob. 3.5GBPCh. 10 - Prob. 3.6GBPCh. 10 - Prob. 4.1GBPCh. 10 - Prob. 4.2GBPCh. 10 - Prob. 4.3GBPCh. 10 - Prob. 4.4GBPCh. 10 - Prob. 4.5GBPCh. 10 - Prob. 5.1GBPCh. 10 - Prob. 5.2GBPCh. 10 - Prob. 5.3GBPCh. 10 - Prob. 5.4GBPCh. 10 - Prob. 6GBP
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- (a) Explain how return on investment might lead a divisional manager to reject new investments that could be profitable for the company as a whole. (b) How can this disadvantage be overcome?arrow_forwardBlue is the controller at the Acme Shoe Company, a large manufacturing companylocated in Franklin, Pennsylvania. Acme has many divisions, and the performance ofeach division has typically been evaluated using a retum on investment (ROI)formula. The return on investment is caleulated by dividing profit by the book value of total assets.In a meeting yesterday with Bob Burn, the compuny president, Blue warned that thisreturn on investment measure might not be accurately rellecting how well thedivisions are doing. Blue is concerned that by using profits and the book value ofussets, division managers might be engaging in some short-term finagling to show the highest possible return. Bob concurred and asked what other numbers they could use to evaluate division performance.Blue said,T'm not sure, Bob. Net income isn't a good number for evaluationpurposes. Becuse we allocate a lot of overhead costs to the divisions on what somemanagers consider an arbitrary basis, net income won't work as a…arrow_forwardBlue is the controller at the Acme Shoe Company, a large manufacturing company located in Franklin, Pennsylvania. Acme has many divisions, and the performance of each division has typically been evaluated using a return on investment (ROI) formula. The return on investment is calculated by dividing profit by the book value of total assets.In a meeting yesterday with Bob Burn, the company president, Blue warned that this return on investment measure might not be accurately reflecting how well the divisions are doing. Blue is concerned that by using profits and the book value of assets, division managers might be engaging in some short-term finagling to show the highest possible return. Bob concurred and asked what other numbers they could use to evaluate division performance.Blue said, ‘‘I’m not sure, Bob. Net income is not a good number for evaluation purposes. Because we allocate a lot of overhead costs to the divisions on what some managers consider an arbitrary basis, net…arrow_forward
- 1. Which of the following is an example of qualitative factors that can effect investment decisions? Select one: a. All of the choices b. Over time, how will the quality of goods produced impact the company financially? c. How will any changes affect worker productivity? Will they have any impact on employee morale? d. How will the proposed acquisition or upgrade affect the company’s flexibility?arrow_forwardAssume that the manager of the club is able to reduce expenses by $2,880 without any change in sales or average operating assets. What would be the club's return on investment (ROI)? Assume that the manager of the club is able to reduce expenses by $2,880 without any change in sales or average operating assets. What would be the club's return on investment (ROI)?arrow_forwardAs indicated in the chapter, return on investment (ROI) is well entrenched in business practice. However, its use can have negative incentive effects on managerial behavior. For example, assume you are the manager of an investment center and that your annual bonus is a function of achieved ROI for your division. You have the opportunity to invest in a project that would cost $420,000 and that would increase annual operating income of your division by $30,000. (This level of return is considered acceptable from top management’s standpoint.) Currently, your division generates annual operating profits of approximately $705,000, on an asset base (i.e., level of investment) of $4,500,000. Required: 1. What is the current return on investment (ROI) being realized by your division (i.e., before considering the new investment)? 2. What would happen to the near-term ROI of your division after adding the effect of the new investment? 3. As manager of this division, given your incentive…arrow_forward
- Instructions: Designate the best answer for each of the following questions. 1.Which of the following is a responsibility center that incurs expenses, generates revenues, and is responsible for generating a return on assets? a. Cost center b. Revenue center c. Profit center d. Investment center 2.Which one of the following is the most useful measure for evaluating a manager's performance in controlling revenues and costs in a profit center? a. Contribution margin b. Contribution net income c. Contribution gross profit d. Controllable margin 3.Hanover Corporation desires to earn target net income of $42,000. The selling price per unit is $18, unit variable cost is $5.60, and total fixed costs are $123,912. How many units must the company sell to earn its target net income? a. 13,380 b. 9,993 c. 3,387 d. 9,217 4.Remark…arrow_forwardWhich of the following situations is most likely to pose a problem for companies that use return on investment as a measure of a manager’s performance? a. Managers may be encouraged to purchase more operating assets than they otherwise should. b. Managers may be discouraged from purchasing operating assets that could improve overall profitability. c. Managers may be discouraged from reducing their division’s costs. d. Managers may be discouraged from paying off debt in order to reduce costsarrow_forwardWhich of the following statements about responsible return on investment is not true? Responsible return on investment is a tool for the main goal of calculating how much money a company makes from responsible business activities. includes components related to sustainability, responsibility, and ethics into its calculation. may be split up into the triple bottom line return on investment, stakeholder value return on investment, and the ethical return on investment. Question 26 Which of the following exemplary activities is part of the financing phase of responsible financial management? Deciding which community project to implement, based on the social impact of each project. Using the social return on investment to understand how much value your different responsible management activities create. Creating revenues through a social marketing campaign which are then used to fund the position of a responsibility officer. Establishing a governance system. Question 27 A protester at…arrow_forward
- The senior management of ABC Corp. has proposed the following three performance measures for the company: 1. Net income as a percent of stockholders' equity 2. Revenue growth 3. Employee satisfaction Management believes these three measures combine both financial and nonfinancial measures and, as such, are superior to using just financial measures. What advice would you give ABC Corp. for improving its performance measurement system?arrow_forwardCompute the current Return on Investment of the Carbon Division and the division's ROI if the investment opportunity is pursued. What is the likely reaction of divisional management toward the acquisition? Why? What is the likely reaction of Jasper's corporate management toward the investment? Why? Assume that Jasper uses residual income to evaluate perfomance and desires an 11% minimum return on invested capital.Compute the current residual income of the Carbon Division and the division's residual income if the investment is made. Will divisional management likely change its attitude toward the acquisition? Why?arrow_forwardHarry Haney, manager of the Eastern Division of MertockCo., made the following comment to the manager of theCentral Division: It’s all well and good for you to say that I should dis-regard sunk costs when I consider whether to replace the old, inefficient equipment with new, more efficientequipment. But my performance evaluation is based onnet operating profits divided by total assets. The newequipment will increase my total asset base and lowerthe ratio of profits to assets, hurting my performance.Thus, I will not sell the old equipment.Do you agree with Haney’s statement? Why or why not?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub
Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
Managerial Accounting
Accounting
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:South-Western College Pub
Principles of Accounting Volume 2
Accounting
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax College
Elements of cost | Direct and Indirect: Material, Labor, & Expenses; Author: Educationleaves;https://www.youtube.com/watch?v=UFBaj6AHjHQ;License: Standard youtube license