1. Return on investment (ROI) is equal to the margin multiplied by: A) sales. B)
ID: 2435196 • Letter: 1
Question
1.Return on investment (ROI) is equal to the margin multiplied by:
A) sales.
B) turnover.
C) average operating assets.
D) residual income.
2.
Delmar Corporation is considering the use of residual income as a measure of the performance of its divisions. What major disadvantage of this method should the company consider before deciding to institute it?
A) This method does not take into account differences in the size of divisions.
B) Investments may be adopted that will decrease the overall return on investment.
C) The minimum required rate of return may eliminate desirable investments.
D) Residual income does not measure how effectively the division manager controls costs.
3.
A company had the following results last year: sales, $700,000; return on investment, 28%; and margin, 8%. The average operating assets last year were:
A) $200,000
B) $2,450,000
C) $540,000
D) $2,500,000
4.
The Northern Division of the Smith Company had average operating assets totaling $150,000 last year. If the minimum required rate of return is 12%, and if last year's net operating income at Northern was $20,000, then the residual income for Northern last year was:
A) $20,000
B) $l8,000
C) $5,000
D) $2,000
5.
Kulp Corporation has two major business segments-East and West. In July, the East business segment had sales revenues of $900,000, variable expenses of $441,000, and traceable fixed expenses of $171,000. During the same month, the West business segment had sales revenues of $450,000, variable expenses of $234,000, and traceable fixed expenses of $45,000. The common fixed expenses totaled $321,000 and were allocated as follows: $180,000 to the East business segment and $141,000 to the West business segment. The segment margin of the West business segment is:
A) $171,000
B) $675,000
C) $288,000
D) $216,000
6.
Ieso Company has two stores: J and K. During November, Ieso Company reported a net operating income of $30,000 and sales of $450,000. The contribution margin in Store J was $100,000, or 40% of sales from J. The segment margin in Store K was $30,000, or 15% of sales from K. Traceable fixed expenses are $60,000 in Store J, and $40,000 in Store K. Sales in Store J totaled:
A) $400,000
B) $250,000
C) $150,000
D) $100,000
Explanation / Answer
1) The Return on Investment is equal to margin multiplied by Asset turnover Profit margin and asset turnover explain changes in return on investment for a single investment center or differences in return among investment centers. The correct option is b) Turnover 2) The one major disadvantage of the residual income is it does not consider the size of the divisions. You would expect larger divisions to have more residual income than smaller divisions, not necessarily because they are better managed but simply because they are bigger. The correct option is a) This method does not take into account differences in the size of the divisions. 3) ROI = Profit margin * Asset turnover ROI = (Operating income / Sales) * (Sales / Assets invested) 0.28 = 0.08 * ($700,000 / Assets invested) 0.28 / 0.08 = $700,000 / Assets invested 3.5 = $700,000 / Assets invested Assets invested = $700,000 / 3.5 = $200,000 Therefore, the average operating assets last year are $200,000 The correct option is a) $200,000 4) The formula for calculating the residual income is Residual income = Operating income - (Desired ROI * Assets invested) = $20,000 - ( 0.12 * $150,000) = $20,000 - $18,000 = $2,000 Therefore, the residual income is $2,000 The correct option is d) $2,000 5) The segment margin of the West Business segment is calculated as: Sales $450,000 (-) Variable cost $234,000 ------------------------------------- Contribution margin $216,000 -------------------------------------- The correct option is d) $216,000 6) The contribution margin in store-J was $100,000 or 40% of sales of store-J If 40% of the sales is contribution margin($100,000 ) then the 100% is the sales amount of the Store-J. 40%--------------------- $100,000 100%---------------------? Sales of store-J = (100% * $100,000) / 40% = (100 * $100,000) / 40 = $10,000,000 / 40 = $250,000 Therefore, the correct option b) $250,000
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