Managerial Accounting 16th Edition By Ray Garrison – Test Bank

Chapter 11: Performance Measurement in Decentralized Organizations

1) Return on investment (ROI) equals margin multiplied by sales.

Answer: FALSE
Difficulty: 1 Easy
Topic: Return on Investment
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales, expenses, and assets affect ROI.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking

2) When used in return on investment (ROI) calculations, turnover equals sales divided by average operating assets.

Answer: TRUE
Difficulty: 1 Easy
Topic: Return on Investment
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales, expenses, and assets affect ROI.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking

3) Net operating income is income before interest and taxes.

4) 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.

5) All other things the same, an increase in unit sales will normally result in an increase in the return on investment.

Answer: TRUE
Difficulty: 2 Medium
Topic: Return on Investment
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales, expenses, and assets affect ROI.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking

6) The use of return on investment (ROI) as a performance measure may lead managers to reject a project that would be favorable for the company as a whole.

7) Land held for possible plant expansion would be included as an operating asset when computing return on investment (ROI).

Answer: FALSE
Difficulty: 2 Medium
Topic: Return on Investment
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales, expenses, and assets affect ROI.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking

8) A change in sales has no effect on margin and turnover.

9) Suppose a company evaluates divisional performance using both ROI and residual income. The company’s minimum required rate of return for the purposes of residual income calculations is 12%. If a division has a residual income of $6,000, then its ROI is less than 12%.

Answer: FALSE
Difficulty: 2 Medium
Topic: Return on Investment; Residual Income
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales, expenses, and assets affect ROI.; 11-02 Compute residual income and understand its strengths and weaknesses.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking

10) 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.

Answer: TRUE
Difficulty: 2 Medium
Topic: Return on Investment; Residual Income
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales, expenses, and assets affect ROI.; 11-02 Compute residual income and understand its strengths and weaknesses.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking