COST ACCT
FD Edition
ISBN: 9781323843284
Author: Horngren
Publisher: PEARSON
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Textbook Question
Chapter 23, Problem 23.18MCQ
If ROI Is used to evaluate a manager’s performance for a relatively new division, which of the following measures for assets (or investment) will increase ROI?
- a. Gross book value used instead of net book value.
- b. Net book value using accelerated rather than straight-line
depreciation. - c. Gross book value used instead of replacement cost, if gross book value is higher.
- d. Replacement cost used instead of liquidation value, if replacement cost is higher.
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If ROI is used to evaluate a manager’s performance for a relatively new division, which of the following measures for assets (or investment) will increase ROI?
a. Gross book value used instead of net book value.
b. Net book value using accelerated rather than straight-line depreciation.
c. Gross book value used instead of replacement cost, if gross book value is higher.
d. Replacement cost used instead of liquidation value, if replacement cost is higher.
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.
Which of the following statements is true?
Return on investment (ROI) equals margin multiplied by sales.
When used in return on investment (ROI) calculations, turnover equals sales divided by average operating assets.
An advantage of using ROI to evaluate performance is that it encourages the manager to reduce the investment in operating assets as well as increase net operating income.
Chapter 23 Solutions
COST ACCT
Ch. 23 - Prob. 23.1QCh. 23 - Prob. 23.2QCh. 23 - What factors affecting ROI does the DuPont method...Ch. 23 - RI is not identical to ROI, although both measures...Ch. 23 - Describe EVA.Ch. 23 - Give three definitions of investment used in...Ch. 23 - Distinguish between measuring assets based on...Ch. 23 - Prob. 23.8QCh. 23 - Why is it important to distinguish between the...Ch. 23 - Prob. 23.10Q
Ch. 23 - Managers should be rewarded only on the basis of...Ch. 23 - Explain the role of benchmarking in evaluating...Ch. 23 - Explain the incentive problems that can arise when...Ch. 23 - Prob. 23.14QCh. 23 - Prob. 23.15QCh. 23 - During the current year, a strategic business unit...Ch. 23 - Assuming an increase in price levels over time,...Ch. 23 - If ROI Is used to evaluate a managers performance...Ch. 23 - The Long Haul Trucking Company is developing...Ch. 23 - ABC Inc. desires to maintain a capital structure...Ch. 23 - ROI, comparisons of three companies. (CMA,...Ch. 23 - Prob. 23.22ECh. 23 - ROI and RI. (D. Kleespie, adapted) The Sports...Ch. 23 - ROI and RI with manufacturing costs. Excellent...Ch. 23 - ROI, RI, EVA. Hamilton Corp. is a reinsurance and...Ch. 23 - Goal incongruence and ROI. Comfy Corporation...Ch. 23 - ROI, RI, EVA. Performance Auto Company operates a...Ch. 23 - Capital budgeting, RI. Ryan Alcoa, a new associate...Ch. 23 - Prob. 23.29ECh. 23 - ROI, RI, EVA, and performance evaluation. Cora...Ch. 23 - Prob. 23.31ECh. 23 - Prob. 23.32ECh. 23 - ROI performance measures based on historical cost...Ch. 23 - ROI, measurement alternatives for performance...Ch. 23 - Multinational firms, differing risk, comparison of...Ch. 23 - ROI, Rl, DuPont method, investment decisions,...Ch. 23 - Division managers compensation, levers of control...Ch. 23 - Executive compensation, balanced scorecard. Acme...Ch. 23 - Financial and nonfinancial performance measures,...Ch. 23 - Prob. 23.40PCh. 23 - Prob. 23.41PCh. 23 - RI, EVA, measurement alternatives, goal...
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- (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_forwardWhich of the following measures the profitability of a division relative to the size of its investment in capital assets? A. residual Income (RI) B. sales margin C. return on investment (ROI) D. economic value added (EVA)arrow_forwardDifferentiate between a cost center, profit center, and investment center. What is the major shortcoming of using operating income as a performance measure for investment centers? Why should the factors under the control of the investment center manager (revenues, expenses, and invested assets) be considered in computing the return on investment? In a decentralized company in which the divisions are organized as investment centers, how could a division be considered the least profitable, even though it earned the largest amount of operating income? Does the concept of decentralization--top managers allowing middle and lower-level managers to make decisions--have application to God's plan for us? In other words, does God make decisions for us or does he allow us to make decisions in our own lives? Is this good or bad? How does using the return on investment facilitate comparability between divisions of decentralized companies?arrow_forward
- The performance of the manager of Division A is measured by residual income. Which of the following would increase the manager's performance measure? a. Increase in average operating assets. b. Decrease in average operating assets. c. Increase in minimum required return. d. Decrease in net operating income.arrow_forwardWhich of the following statement(s) is/are not true? i. Return On Investment (ROI) as a performance measure may discourage managers of divisions with high ROIs to invest in projects with lower ROIs that are acceptable to the organization as a whole. ii. ROI incorporates the firm’s opportunity cost of acquiring investment capital. iii. Under Residual Income (RI), rates of return can be adjusted to take into account differences in risks for different investment assets. iv. Both ROI and RI use a percentage measure. v. ROIs cannot be used to compare divisions of differing sizes. Multiple Choice ii, iv and v ii, iii and iv i, ii and iii i and ii i onlyarrow_forwardWhich of the following statement(s) is/are not true? i. Return On Investment (ROI) as a performance measure may discourage managers of divisions with high ROIs to invest in projects with lower ROIs that are acceptable to the organization as a whole. ii. ROI incorporates the firm’s opportunity cost of acquiring investment capital. iii. Under Residual Income (RI), rates of return can be adjusted to take into account differences in risks for different investment assets. iv. Both ROI and RI use a percentage measure. v. ROIs cannot be used to compare divisions of differing sizes. Multiple Choice a)i, ii and iii b)ii, iv and v c)i only d)i and ii e)ii, iii and ivarrow_forward
- Which 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 is not an objective or potential advantage of transfer pricing? A) A realistic measurement of performance of each division B) A reduction in goal congruence between divisions and overall company C) More autonomy and motivation for divisional managers D) The maximisation of company profitsarrow_forwardWhich of the following items would most likely not be incorporated into calculation of a division’s investment base when using the residual income approach for performance measurement and evaluation? Division accounts payable when division management exercises control over the amount of short term credit used Division inventories when division management exercises control over the inventory levels Fixed assets employed in divisions operations Land being held by the division as a site for a new plantarrow_forward
- Compute 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_forwardWhich of the following is not a measure that management can use in evaluating and controlling investment center performance? a.residual income b.negotiated price c.income from operations d.rate of return on investmentarrow_forwardDiscuss how the behavior of division managers is likely to be affected by the use of: a. Return on Investment as a Performance Measure b. Residual Income as a performance measure (CMA Adapted)arrow_forward
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