INCORREC

T How is a company's return on investment computed?

A)
Margin divided by turnover
B)
Turnover divided by average operating assets
C)
Margin times turnover
D)
Margin times average operating assets
Feedback: A company's return on investment is computed by multiplying its
margin by its turnover.

2 CORRECT
Which of the following is not considered an operating asset for purposes of
calculating return on investment?
A)
Cash
B)
Investment in common stock
C)
Inventory
D)
Plant equipment
Feedback: Operating assets include cash, accounts receivable, inventory,
plant and equipment, and all other assets held for productive use in an
organization. Assets that are not held for operating purposes include land
held for future use, investment in another company, and a building rented to
someone else.

3 CORRECT
Assuming that sales and net income remain the same, a company's return on
investment will:
A)
increase if its operating assets increase.
B)
decrease if its operating assets decrease.
C)
decrease if its turnover decreases.
D)
decrease if its turnover increases.
Feedback: Return on investment is computed by multiplying its margin by its
turnover. Margin is computed by dividing net operating income by sales.
Turnover is computed by dividing sales by average operating assets. If
operating assets increase, turnover decreases, and return on investment
decreases (so Answer A is incorrect). If operating assets decrease, turnover
increases, and return on investment increases (so Answer B is incorrect). If
turnover decreases, return on investment also decreases (so Answer C is
correct and Answer D is then incorrect).

4
INCORRECT The Central Division of Burlington Company reported the following operating
data for the past year:
 What was the division's margin?
A)
12.50%
B)
13.00%
C)
14.75%
D)
15.00%
Feedback:
The division's margin for the past year is determined as follows.
Margin = Net operating income ÷ Sales
Margin = $75,000 ÷ $600,000 = 12.5%

5
INCORRECT The Central Division of Burlington Company reported the following operating
data for the past year:

(Note that this is the same data that was provided for the previous question.)
What was the division's turnover?
A)
2
B)
4
C)
10
D)
25
Feedback:
The division's turnover for the past year is determined as follows.
Turnover = Sales ÷ Average operating assets
Turnover = $600,000 ÷ $300,000 = 2.0

6 CORRECT
The following data are available for the Appliance Division of Homeware
Company and the single product it sells:
 How many units must the division sell each year to achieve an ROI of 16%?
A)
52,000
B)
65,000
C)
240,000
D)
1,300,000
Feedback:
First, calculate, the company's required operating income as follows.
ROI = Operating income ÷ Average operating assets or
Operating income = Average operating assets x ROI
Operating income = $4,500,000 x .16 = $720,000
Then, calculate the number of units (X) that must be sold to generate that
operating income as follows.
Operating income = Sales – Variable expenses – Fixed expenses
Operating income = $60X – $36X – $840,000 = $720,000; X = 65,000 units

7 CORRECT
The Great Lakes Company reported the following operating data for the past
year:

What was the company's minimum required rate of return?

A)
11%
B)
12%
C)
13%
D)
14%
Feedback:
First, calculate the minimum required return as follow.
Minimum required return = Net operating income – Residual income
Minimum required return = $50,000 – $26,000 = $24,000
Then, the minimum required rate of return is determined as follows.
Minimum required rate of return = Minimum required return ÷ Average
operating assets
Minimum required rate of return = $24,000 ÷ $200,000 = 12%

8
INCORRECT The D'Azure Company uses residual income to measure the performance of one
of its divisional managers. Which of the following would increase the division
manager's performance measure?
A)
A decrease in the division's average operating assets
B)A decrease in the division's net operating income
 C)
An increase in the division's average operating assets
D)
An increase in the minimum required return
Feedback: Residual income is the net operating income that an investment
center earns above the minimum required return on its operating assets. A
decrease in the division's net operating income would decrease its residual
income (thus answer B is incorrect). An increase in the minimum required
return would decrease residual income (thus Answer D is incorrect). The
minimum required rate of return is computed by multiplying the minimum
rate of return by the division's average operating assets. If the division's
average operating assets decrease, the minimum required return on its
operating assets would decrease and, as a result, its residual income would
increase (thus Answer A is correct and Answer C is incorrect).

9 CORRECT
Which of the following statements is not correct?
A)
Delivery cycle time is a key concern to many customers.
B)Manufacturing cycle time is made up of wait time, process time, inspection
time, move time, and queue time.
C)
Non-value-added activities include inspecting, moving, and queuing.
D)Manufacturing cycle efficiency is computed by dividing value-added time by
throughout time.
Feedback: Manufacturing cycle time is made up of process time, inspection
time, move time, and queue time. Delivery cycle time is made up of wait time
plus manufacturing cycle time.

10
INCORRECT Which of the following statements is not correct?
A)Financial measures such as ROI and residual income may be included in a
balanced scorecard.
B)Operating measures such as delivery cycle time may be included in a
balanced scorecard.
C)Top managers who translate strategy into performance measures that
employees understand and influence are following a balanced scorecard
approach.
D)Incentive compensation for employees, such as bonuses, should not be tied
to balanced scorecard performance measures.
Feedback: Incentive compensation for employees, such as bonuses, can, and
probably should, be tied to balanced scorecard performance measures.