Chapter 11 - Performance Measurement in Decentralized Organizations

LO3: Operating performance measures

Professional Exam Adapted

LO4: Balanced scorecard
LO2: Residual income

Other topics
LO1: ROI
Difficulty

Question
Type ID Origin CMA/CPA origin
1 T/F E x x 3/e: 11-9 Authors
2 T/F H x x 5/e: 11-8 Authors
3 T/F M x 4/e: 11-658 Authors
4 T/F M x New, 1/31/95,E E.N.
5 T/F E x 4/e: 11-657 Authors
6 T/F M x 8/e:ATB12-23 David Keyes
7 T/F M x 11/26/97,E E.N.
8 T/F M x 11/26/97,L E.N.
9 T/F E x 11/26/97,M E.N.
10 T/F E x 1/e: 11-6 Authors
11 T/F M x 3/e: 11-2 Authors
Conceptual
12 M/C M x x 7/e: 12-65 CMA
Conceptual
13 M/C E x 3/e: 11-2 Authors
Conceptual
14 M/C M x 5/e: 11-23 Authors
Conceptual
15 M/C M x 5/e: 11-29 Authors
16 Conceptual E x 5/e: 11-53 Authors

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M/C
Conceptual
17 M/C M x 8/e:ATB12-33 David Keyes
Conceptual
18 M/C M x 4/e: 11-684 Authors
Conceptual Larry
19 M/C M x 9eLD:CH12,Q3 Deppe
Conceptual
20 M/C M x 5/e: 11-34 Authors
Conceptual
21 M/C E x 8/e:ATB12-28 David Keyes
22 M/C M x 11/e: ATB 12-41 Sandra Lang
23 M/C M x 5/e: 11-16 Authors
24 M/C H x 3/e: 11-6 Authors
25 M/C H x 2/e: 10-3 Authors
26 M/C E x 11/e: ATB 12-32 Sandra Lang
27 M/C E x 9/29/2004 Multi MC E4 E.N.
28 M/C E x 9/29/2004 Multi MC F4 E.N.
29 M/C H x x 4/e: 11-672 Authors
30 M/C E x 9/14/2004 Single MC AH4 E.N.
31 M/C E x 9/14/2004 Single MC AE4 E.N.
32 M/C E x 9/14/2004 Single MC AI4 E.N.
33 M/C E x 9/14/2004 Single MC AG4 E.N.
34 M/C E x 9/14/2004 Single MC AJ4 E.N.
35 M/C E x 9/14/2004 Single MC AF4 E.N.
11-
1 36-38 Multipart M/C E x New,4/27/02,A7 E.N.
11- M-
2 39-42 Multipart M/C H x 5/e: 11-44 to 47 Authors
11-
3 43-45 Multipart M/C E x New,4/27/02,B7 E.N.
11-
4 46-47 Multipart M/C E x 9/29/2004 Multi MC D4 E.N.
11-
5 48-49 Multipart M/C E x 9/29/2004 Multi MC E4 E.N.
11- M-
6 50-52 Multipart M/C H x x 4/e: 11-701 to 705 Authors

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11-
7 53-55 Multipart M/C H x x 6/e: 11-21 to 24 Authors
11-
8 56-59 Multipart M/C H x x 5/e: 11-30 to 33 Authors
11-
9 60-61 Multipart M/C H x x 4/e: 11-678 to 682 Authors
11-
10 62-64 Multipart M/C H x x 5/e: 11-36 to 40 Authors
11-
11 65-68 Multipart M/C E x x New,4/27/02,D7 E.N.
11-
12 69-72 Multipart M/C E x x New,4/27/02,C7 E.N.
11-
13 73-75 Multipart M/C E x 9/15/2005 Multi MC D4 E.N.
11-
14 76-78 Multipart M/C H x 6/e: 9-28 to 30 Authors
11-
15 79-81 Multipart M/C E x 9/15/2004 Multi MC C4 E.N.
82 Problem E x New,4/27/2002,H6 E.N.
83 Problem E x New,4/27/2002,G7 E.N.
84 Problem E x x New,4/27/2002,F6 E.N.
85 Problem M x x New,2/1/95,C E.N.
86 Problem E x x New,4/27/2002,E7 E.N.
87 Problem E x New,4/27/2002,I7 E.N.
88 Problem E x 9/29/2004 Problem E4 E.N.
89 Problem E x 9/29/2004 Problem D4 E.N.
90 Problem E x EN 4/21/2003 N4 E.N.
91 Problem M x EN 4/21/2003 O4 E.N.
92 Problem E x 9/15/2004 Problem G4 E.N.
93 Problem H x EN 4/21/2003 P4 E.N.

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Chapter 11
Performance Measurement in Decentralized Organizations
 

True / False Questions

 

1. Residual income is superior to return on investment as a means of measuring performance

because it encourages managers to make investment decisions that are more consistent with
the interests of the company as a whole. 
True    False

2. Residual income equals average operating assets multiplied by the difference between the
return on investment and the minimum required rate of return. 
True    False

3. Consider a company that has only variable costs. All other things the same, an increase in
unit sales will result in no change in the return on investment. 
True    False

4. The use of return on investment as a performance measure may lead managers to make
decisions that are not in the best interests of the company as a whole. 
True    False

5. Residual income is the net operating income that an investment center earns above the
minimum required return on the investment in operating assets. 
True    False

6. Residual income should not be used to evaluate a cost center. 

True    False

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7. The performance measures on a balanced scorecard tend to fall into four groups: financial
measures, customer measures, internal business process measures, and external business
process measures. 
True    False

8. A balanced scorecard should contain every performance measure that can be expected to
influence a company's profits. 
True    False

9. The performance measures on an individual's scorecard should not be overly influenced by

actions taken by others in the company or by events that are outside of the individual's
control. 
True    False

10. Managers of cost centers are evaluated according to the profits which their departments
are able to generate. 
True    False

11. If expenses exceed revenues in a department, then it would be considered a cost center. 
True    False

 
 

Multiple Choice Questions

 

12. Residual income is a better measure for performance evaluation of an investment center

manager than return on investment because: 
A. the problems associated with measuring the asset base are eliminated.
B. desirable investment decisions will not be rejected by divisions that already have a high
ROI.
C. only the gross book value of assets needs to be calculated.
D. returns do not increase as assets are depreciated.

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13. Turnover is computed by dividing average operating assets into: 

A. invested capital.
B. total assets.
C. net operating income.
D. sales.

14. Which of the following statements provide(s) an argument in favor of including only a

plant's net book value rather than gross book value as part of operating assets in the ROI
computation?
I. Net book value is consistent with how plant and equipment items are reported on a balance
sheet.
II. Net book value is consistent with the computation of net operating income, which includes
depreciation as an operating expense.
III. Net book value allows ROI to decrease over time as assets get older. 
A. Only I.
B. Only III.
C. Only I and II.
D. Only I and III.

15. In computing the margin in a ROI analysis, which of the following is used? 
A. Sales in the denominator
B. Net operating income in the denominator
C. Average operating assets in the denominator
D. Residual income in the denominator

16. Which of the following is not an operating asset? 

A. Cash
B. Inventory
C. Plant equipment
D. Common stock

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17. In determining the dollar amount to use for operating assets in the return on investment
(ROI) calculation, companies will generally use either net book value or gross cost of the
assets. Which of the following is an argument for the use of net book value rather than gross
cost? 
A. It is consistent with how assets are reported on the balance sheet.
B. It eliminates the depreciation method as a factor in ROI calculations.
C. It encourages the replacement of old, worn-out equipment.
D. All of the above.

18. Which of the following will not result in an increase in the residual income, assuming
other factors remain constant? 
A. An increase in sales.
B. An increase in the minimum required rate of return.
C. A decrease in expenses.
D. A decrease in operating assets.

19. All other things the same, which of the following would increase residual income? 
A. Increase in average operating assets.
B. Decrease in average operating assets.
C. Increase in minimum required return.
D. Decrease in net operating income.

20. Which of the following three statements are correct?

I. A profit center has control over both cost and revenue.
II. An investment center has control over invested funds, but not over costs and revenue.
III. A cost center has no control over sales. 
A. Only I
B. Only II
C. Only I and III
D. Only I and II

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21. The purpose of the Data Processing Department of Falena Corporation is to assist the
various departments of the corporation with their information needs free of charge. The Data
Processing Department would best be evaluated as a: 
A. cost center.
B. revenue center.
C. profit center.
D. investment center.

22. Average operating assets are $110,000 and net operating income is $23,100. The company
invests $25,000 in new assets for a project that will increase net operating income by $4,750.
What is the return on investment (ROI) of the new project? 
A. 21%
B. 19%
C. 18.5%
D. 20%

23. Last year a company had stockholder's equity of $160,000, net operating income of
$16,000 and sales of $100,000. The turnover was 0.5. The return on investment (ROI) was: 
A. 10%
B. 9%
C. 8%
D. 7%

24. Sales and average operating assets for Company P and Company Q are given below:

   
What is the margin that each company will have to earn in order to generate a return on
investment of 20%? 
A. 12% and 16%
B. 50% and 100%
C. 8% and 4%
D. 2.5% and 5%

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25. Reed Company's sales last year totaled $150,000 and its return on investment (ROI) was
12%. If the company's turnover was 3, then its net operating income for the year must have
been: 
A. $6,000
B. $2,000
C. $18,000
D. it is impossible to determine from the data given.

26. A company's current net operating income is $16,800 and its average operating assets are
$80,000. The company's required rate of return is 18%. A new project being considered
would require an investment of $15,000 and would generate annual net operating income of
$3,000. What is the residual income of the new project? 
A. 20.8%
B. 20%
C. ($150)
D. $300

27. Soderquist Corporation uses residual income to evaluate the performance of its divisions.
The company's minimum required rate of return is 11%. In April, the Commercial Products
Division had average operating assets of $100,000 and net operating income of $9,400. What
was the Commercial Products Division's residual income in April? 
A. -$1,600
B. $1,600
C. $1,034
D. -$1,034

28. In August, the Universal Solutions Division of Jugan Corporation had average operating
assets of $670,000 and net operating income of $77,500. The company uses residual income,
with a minimum required rate of return of 12%, to evaluate the performance of its divisions.
What was the Universal Solutions Division's residual income in August? 
A. $2,900
B. -$2,900
C. -$9,300
D. $9,300

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29. Division B had an ROI last year of 15%. The division's minimum required rate of return is
10%. If the division's average operating assets last year were $450,000, then the division's
residual income for last year was: 
A. $67,500
B. $22,500
C. $37,500
D. $45,000

30. Garnick Corporation keeps careful track of the time required to fill orders. The times
recorded for a particular order appear below:

   
The delivery cycle time was: 
A. 3.5 hours
B. 8.7 hours
C. 34.9 hours
D. 36.1 hours

31. Galanis Corporation keeps careful track of the time required to fill orders. Data
concerning a particular order appear below:

   
The throughput time was: 
A. 38.8 hours
B. 33.4 hours
C. 14.1 hours
D. 5.4 hours

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32. Hoster Corporation keeps careful track of the time required to fill orders. The times
recorded for a particular order appear below:

   
The throughput time was: 
A. 8.9 hours
B. 18 hours
C. 4.5 hours
D. 22.5 hours

33. Botelho Corporation keeps careful track of the time required to fill orders. Data
concerning a particular order appear below:

   
The delivery cycle time was: 
A. 33.1 hours
B. 3.7 hours
C. 12.6 hours
D. 30.9 hours

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34. Niemiec Corporation keeps careful track of the time required to fill orders. The times
recorded for a particular order appear below:

   
The manufacturing cycle efficiency (MCE) was closest to: 
A. 0.20
B. 0.06
C. 0.12
D. 0.96

35. Mordue Corporation keeps careful track of the time required to fill orders. Data
concerning a particular order appear below:

   
The manufacturing cycle efficiency (MCE) was closest to: 
A. 0.15
B. 0.53
C. 0.05
D. 0.16

 Aide Industries is a division of a major corporation. Data concerning the most recent year
appears below:

   

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36. The division's margin is closest to: 

A. 21.8%
B. 5.0%
C. 23.0%
D. 28.0%

37. The division's turnover is closest to: 

A. 20.00
B. 4.35
C. 0.22
D. 3.57

38. The division's return on investment (ROI) is closest to: 

A. 4.1%
B. 21.75%
C. 17.9%
D. 1.1%

 The Reed Division reports the following operating data for the past two years:

   
The return on investment at Reed was exactly the same in Year 1 and Year 2.

39. The margin in Year 2 was: 

A. 48%
B. 32%
C. 20%
D. 10%

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40. Sales in Year 2 amounted to: 

A. $250,000
B. $300,000
C. $325,000
D. $350,000

41. Average operating assets in Year 1 were: 

A. $160,000
B. $150,000
C. $125,000
D. $100,000

42. Net operating income in Year 2 amounted to: 

A. $60,000
B. $50,000
C. $40,000
D. $35,000

 Beall Industries is a division of a major corporation. Last year the division had total sales of
$20,160,000, net operating income of $1,592,640, and average operating assets of $8,000,000.

43. The division's margin is closest to: 

A. 39.7%
B. 47.6%
C. 7.9%
D. 19.9%

44. The division's turnover is closest to: 

A. 2.52
B. 2.10
C. 0.20
D. 12.66

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45. The division's return on investment (ROI) is closest to: 

A. 19.9%
B. 16.6%
C. 1.6%
D. 5.7%

 The West Division of Shekarchi Corporation had average operating assets of $620,000 and
net operating income of $80,100 in March. The minimum required rate of return for
performance evaluation purposes is 14%.

46. What was the West Division's minimum required return in March? 

A. $80,100
B. $86,800
C. $11,214
D. $98,014

47. What was the West Division's residual income in March? 

A. -$6,700
B. $6,700
C. -$11,214
D. $11,214

 The Consumer Products Division of Weiter Corporation had average operating assets of
$570,000 and net operating income of $65,100 in March. The minimum required rate of
return for performance evaluation purposes is 12%.

48. What was the Consumer Products Division's minimum required return in March? 
A. $7,812
B. $76,212
C. $68,400
D. $65,100

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49. What was the Consumer Products Division's residual income in March? 

A. -$3,300
B. $3,300
C. -$7,812
D. $7,812

 Estes Company has assembled the following data for its divisions for the past year:

   

50. Division A's sales are: 

A. $400,000
B. $625,000
C. $125,000
D. $200,000

51. Division A's residual income is: 

A. $20,000
B. $30,000
C. $35,000
D. $45,000

52. Division B's average operating assets is: 

A. $81,200
B. $2,080,000
C. $1,333,333
D. $130,000

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Chapter 11 - Performance Measurement in Decentralized Organizations

 Operating data from Tindall Company for last year follows:

   

53. The average operating assets amounted to: 

A. $600,000
B. $400,000
C. $500,000
D. $800,000

54. The residual income was: 

A. $18,000
B. $10,000
C. $12,000
D. $16,000

55. The margin used in ROI calculations was closest to: 

A. 18.00%
B. 8.00%
C. 6.67%
D. 15.00%

 The Baily Division recorded operating data as follows for the past two years:

   
Baily Division's turnover was exactly the same in both Year 1 and Year 2.

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56. Sales in Year 1 amounted to: 

A. $400,000
B. $900,000
C. $750,000
D. $1,200,000

57. The net operating income in Year 1 was: 

A. $90,000
B. $135,000
C. $140,000
D. $150,000

58. The margin in Year 2 was: 

A. 18.75%
B. 27.00%
C. 22.50%
D. 12.00%

59. The average operating assets in Year 2 were: 

A. $720,000
B. $750,000
C. $800,000
D. $900,000

 The following data are available for the South Division of Redride Products, Inc. and the
single product it makes:

   

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Chapter 11 - Performance Measurement in Decentralized Organizations

60. How many units must South sell each year to have an ROI of 16%? 
A. 240,000
B. 1,300,000
C. 52,000
D. 65,000

61. If South wants a residual income of $50,000 and the minimum required rate of return is
10%, the annual turnover will have to be: 
A. 0.32
B. 0.80
C. 1.25
D. 1.50

 The following data pertain to the Whalen Division of Northern Industries.

   
The margin at Whalen was exactly the same in Year 2 as it was in Year 1.

62. The average operating assets for Year 2 amounted to: 

A. $400,000
B. $800,000
C. $600,000
D. $500,000

63. The return on investment in Year 1 was: 

A. 48.00%
B. 32.50%
C. 7.58%
D. 1.92%

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Chapter 11 - Performance Measurement in Decentralized Organizations

64. The minimum required rate of return in Year 1 was: 

A. 18%
B. 17%
C. 16%
D. 15%

 Dickonson Products is a division of a major corporation. The following data are for the last
year of operations:

   

65. The division's margin is closest to: 

A. 26.4%
B. 10.0%
C. 2.4%
D. 24.0%

66. The division's turnover is closest to: 

A. 3.78
B. 41.67
C. 4.16
D. 0.10

67. The division's return on investment (ROI) is closest to: 

A. 0.2%
B. 41.6%
C. 10.0%
D. 1.9%

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68. The division's residual income is closest to: 

A. $(320,640)
B. $1,119,360
C. $399,360
D. $(2,595,840)

 Chace Products is a division of a major corporation. Last year the division had total sales of
$21,300,000, net operating income of $575,100, and average operating assets of $5,000,000.
The company's minimum required rate of return is 12%.

69. The division's margin is closest to: 

A. 26.2%
B. 23.5%
C. 2.7%
D. 11.5%

70. The division's turnover is closest to: 

A. 3.82
B. 4.26
C. 0.12
D. 37.04

71. The division's return on investment (ROI) is closest to: 

A. 49.0%
B. 11.5%
C. 0.3%
D. 2.2%

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72. The division's residual income is closest to: 

A. $575,100
B. $1,175,100
C. $(1,980,900)
D. $(24,900)

 Diorio Corporation keeps careful track of the time required to fill orders. The times recorded
for a particular order appear below:

   

73. The delivery cycle time was: 

A. 29.1 hours
B. 30.6 hours
C. 8 hours
D. 2.7 hours

74. The throughput time was: 

A. 4.2 hours
B. 9.5 hours
C. 30.6 hours
D. 26.4 hours

75. The manufacturing cycle efficiency (MCE) was closest to: 

A. 0.15
B. 0.05
C. 0.45
D. 0.18

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Chapter 11 - Performance Measurement in Decentralized Organizations

 Hart Manufacturing operates an automated steel fabrication process. For one operation, Hart
has found that 45% of the total throughput (manufacturing cycle) time is spent on non-value-
added activities. Delivery cycle time is 12 hours, waiting time during the production process
is 3 hours, queue time prior to starting the production process is 2 hours, and inspection time
is 1.2 hours.

76. The manufacturing cycle efficiency (MCE) for this operation is: 

A. 55%
B. 45%
C. 6.6 hours
D. 5.4 hours

77. What is the move time recorded for the operation? 

A. 1.5 hours
B. 6.5 hours
C. 5.8 hours
D. 0.85 hours

78. What is the throughput (manufacturing cycle) time for the operation? 

A. 12.0 hours
B. 9.0 hours
C. 10.0 hours
D. 5.8 hours

 Saffer Corporation keeps careful track of the time required to fill orders. Data concerning a
particular order appear below:

   

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79. The throughput time was: 

A. 9.3 hours
B. 4.9 hours
C. 30.9 hours
D. 26 hours

80. The manufacturing cycle efficiency (MCE) was closest to: 

A. 0.17
B. 0.05
C. 0.43
D. 0.19

81. The delivery cycle time was: 

A. 7.5 hours
B. 29.1 hours
C. 30.9 hours
D. 3.1 hours

 
 

Essay Questions
 

82. Heavey Fabrication is a division of a major corporation. Last year the division had total
sales of $21,120,000, net operating income of $2,006,400, and average operating assets of
$6,000,000. The company's minimum required rate of return is 12%.
Required:
What is the division's return on investment (ROI)? 

 
 

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83. Gilde Industries is a division of a major corporation. Last year the division had total sales
of $23,380,000, net operating income of $2,828,980, and average operating assets of
$7,000,000. The company's minimum required rate of return is 12%.
Required:
a. What is the division's margin?
b. What is the division's turnover?
c. What is the division's return on investment (ROI)? 

 
 

84. Ferris Wares is a division of a major corporation. The following data are for the latest year
of operations:

   
Required:
a. What is the division's return on investment (ROI)?
b. What is the division's residual income? 

 
 

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85. Financial data for Windsor, Inc. for last year appear below:

   

   
The company paid dividends of $104,000 last year. The "Investment in Pine Company" on the
statement of financial position represents an investment in the stock of another company.
Required:
a. Compute the company's margin, turnover, and return on investment for last year.
b. The Board of Directors of Windsor, Inc. has set a minimum required return of 25%. What
was the company's residual income last year? 

 
 

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86. Eckels Wares is a division of a major corporation. The following data are for the latest
year of operations:

   
Required:
a. What is the division's margin?
b. What is the division's turnover?
c. What is the division's return on investment (ROI)?
d. What is the division's residual income? 

 
 

87. Iles Industries is a division of a major corporation. The following data are for the latest
year of operations:

   
Required:
What is the division's residual income? 

 
 

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88. The Casket Division of Rosencranz Corporation had average operating assets of $150,000
and net operating income of $27,800 in March. The company uses residual income to evaluate
the performance of its divisions, with a minimum required rate of return of 17%.
Required:
What was the Casket Division's residual income in March? 

 
 

89. Madrazo Corporation uses residual income to evaluate the performance of its divisions.
The minimum required rate of return for performance evaluation purposes is 19%. The Games
Division had average operating assets of $410,000 and net operating income of $86,000 in
June.
Required:
What was the Games Division's residual income in June? 

 
 

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Chapter 11 - Performance Measurement in Decentralized Organizations

90. Jaster Corporation's management keeps track of the time it takes to process orders. During
the most recent month, the following average times were recorded per order:

   
Required:
a. Compute the throughput time.
b. Compute the manufacturing cycle efficiency (MCE).
c. What percentage of the production time is spent in non-value-added activities?
d. Compute the delivery cycle time. 

 
 

91. During the most recent month at Coggan Corporation, queue time was 5.3 days,
inspection time was 0.5 day, process time was 1.9 days, wait time was 4.5 days, and move
time was 0.5 day.
Required:
a. Compute the throughput time.
b. Compute the manufacturing cycle efficiency (MCE).
c. What percentage of the production time is spent in non-value-added activities?
d. Compute the delivery cycle time. 

 
 

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Chapter 11 - Performance Measurement in Decentralized Organizations

92. Durkee Corporation keeps careful track of the time required to fill orders. The times
required for a particular order appear below:

   
Required:
a. Determine the throughput time. Show your work!
b. Determine the manufacturing cycle efficiency (MCE). Show your work!
c. Determine the delivery cycle time. Show your work! 

 
 

93. Waltner Corporation's management reports that its average delivery cycle time is 20.0
days, its average throughput time is 7.5 days, its manufacturing cycle efficiency (MCE) is
0.32, its average move time is 0.2 day, and its average queue time is 4.0 days.
Required:
a. What is the wait time?
b. What is the process time?
c. What is the inspection time? 

 
 

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Chapter 11 - Performance Measurement in Decentralized Organizations

Chapter 11 Performance Measurement in Decentralized Organizations Answer

Key
 

True / False Questions

 

1. Residual income is superior to return on investment as a means of measuring performance

because it encourages managers to make investment decisions that are more consistent with
the interests of the company as a whole. 
TRUE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Knowledge
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Easy
 

2. Residual income equals average operating assets multiplied by the difference between the
return on investment and the minimum required rate of return. 
TRUE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Comprehension
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Hard
 

3. Consider a company that has only variable costs. All other things the same, an increase in
unit sales will result in no change in the return on investment. 
FALSE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Comprehension
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Medium
 

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Chapter 11 - Performance Measurement in Decentralized Organizations

4. The use of return on investment as a performance measure may lead managers to make
decisions that are not in the best interests of the company as a whole. 
TRUE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Comprehension
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Medium
 

5. Residual income is the net operating income that an investment center earns above the
minimum required return on the investment in operating assets. 
TRUE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Knowledge
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Easy
 

6. Residual income should not be used to evaluate a cost center. 

TRUE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Comprehension
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Medium
 

7. The performance measures on a balanced scorecard tend to fall into four groups: financial
measures, customer measures, internal business process measures, and external business
process measures. 
FALSE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Comprehension
Learning Objective: 11-04 Understand how to construct and use a balanced scorecard
Level: Medium
 

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Chapter 11 - Performance Measurement in Decentralized Organizations

8. A balanced scorecard should contain every performance measure that can be expected to
influence a company's profits. 
FALSE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Comprehension
Learning Objective: 11-04 Understand how to construct and use a balanced scorecard
Level: Medium
 

9. The performance measures on an individual's scorecard should not be overly influenced by

actions taken by others in the company or by events that are outside of the individual's
control. 
TRUE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Knowledge
Learning Objective: 11-04 Understand how to construct and use a balanced scorecard
Level: Easy
 

10. Managers of cost centers are evaluated according to the profits which their departments
are able to generate. 
FALSE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Knowledge
Learning Objective: Other topics
Level: Easy
 

11. If expenses exceed revenues in a department, then it would be considered a cost center. 
FALSE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Comprehension
Learning Objective: Other topics
Level: Medium
 

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Chapter 11 - Performance Measurement in Decentralized Organizations

Multiple Choice Questions

 

12. Residual income is a better measure for performance evaluation of an investment center

manager than return on investment because: 
A. the problems associated with measuring the asset base are eliminated.
B. desirable investment decisions will not be rejected by divisions that already have a high
ROI.
C. only the gross book value of assets needs to be calculated.
D. returns do not increase as assets are depreciated.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Comprehension
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Medium
Source: CMA, adapted
 

13. Turnover is computed by dividing average operating assets into: 

A. invested capital.
B. total assets.
C. net operating income.
D. sales.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Knowledge
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Easy
 

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Chapter 11 - Performance Measurement in Decentralized Organizations

14. Which of the following statements provide(s) an argument in favor of including only a

plant's net book value rather than gross book value as part of operating assets in the ROI
computation?
I. Net book value is consistent with how plant and equipment items are reported on a balance
sheet.
II. Net book value is consistent with the computation of net operating income, which includes
depreciation as an operating expense.
III. Net book value allows ROI to decrease over time as assets get older. 
A. Only I.
B. Only III.
C. Only I and II.
D. Only I and III.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Comprehension
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Medium
 

15. In computing the margin in a ROI analysis, which of the following is used? 
A. Sales in the denominator
B. Net operating income in the denominator
C. Average operating assets in the denominator
D. Residual income in the denominator

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Comprehension
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Medium
 

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Chapter 11 - Performance Measurement in Decentralized Organizations

16. Which of the following is not an operating asset? 

A. Cash
B. Inventory
C. Plant equipment
D. Common stock

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Knowledge
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Easy
 

17. In determining the dollar amount to use for operating assets in the return on investment
(ROI) calculation, companies will generally use either net book value or gross cost of the
assets. Which of the following is an argument for the use of net book value rather than gross
cost? 
A. It is consistent with how assets are reported on the balance sheet.
B. It eliminates the depreciation method as a factor in ROI calculations.
C. It encourages the replacement of old, worn-out equipment.
D. All of the above.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Comprehension
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Medium
 

18. Which of the following will not result in an increase in the residual income, assuming
other factors remain constant? 
A. An increase in sales.
B. An increase in the minimum required rate of return.
C. A decrease in expenses.
D. A decrease in operating assets.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Comprehension
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Medium
 

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Chapter 11 - Performance Measurement in Decentralized Organizations

19. All other things the same, which of the following would increase residual income? 
A. Increase in average operating assets.
B. Decrease in average operating assets.
C. Increase in minimum required return.
D. Decrease in net operating income.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Comprehension
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Medium
 

20. Which of the following three statements are correct?

I. A profit center has control over both cost and revenue.
II. An investment center has control over invested funds, but not over costs and revenue.
III. A cost center has no control over sales. 
A. Only I
B. Only II
C. Only I and III
D. Only I and II

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Comprehension
Learning Objective: Other topics
Level: Medium
 

21. The purpose of the Data Processing Department of Falena Corporation is to assist the
various departments of the corporation with their information needs free of charge. The Data
Processing Department would best be evaluated as a: 
A. cost center.
B. revenue center.
C. profit center.
D. investment center.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Knowledge
Learning Objective: Other topics
Level: Easy
 

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Chapter 11 - Performance Measurement in Decentralized Organizations

22. Average operating assets are $110,000 and net operating income is $23,100. The company
invests $25,000 in new assets for a project that will increase net operating income by $4,750.
What is the return on investment (ROI) of the new project? 
A. 21%
B. 19%
C. 18.5%
D. 20%

ROI = Net operating income  Average operating assets

= $4,750  $25,000 = 19%
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Medium
 

23. Last year a company had stockholder's equity of $160,000, net operating income of
$16,000 and sales of $100,000. The turnover was 0.5. The return on investment (ROI) was: 
A. 10%
B. 9%
C. 8%
D. 7%

Margin = Net operating income  Sales = $16,000  $100,000 = 16%

ROI = Margin  Turnover = 16%  0.5 = 8%
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Medium
 

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Chapter 11 - Performance Measurement in Decentralized Organizations

24. Sales and average operating assets for Company P and Company Q are given below:

   
What is the margin that each company will have to earn in order to generate a return on
investment of 20%? 
A. 12% and 16%
B. 50% and 100%
C. 8% and 4%
D. 2.5% and 5%

Company P:
Turnover = Sales  Average operating assets = $20,000  $8,000 = 2.5
ROI  Turnover = Margin = 20%  2.5 = 8%
Company Q:
Turnover = Sales  Average operating assets = $50,000  $10,000 = 5
ROI  Turnover = Margin = 20%  5 = 4%
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Hard
 

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Chapter 11 - Performance Measurement in Decentralized Organizations

25. Reed Company's sales last year totaled $150,000 and its return on investment (ROI) was
12%. If the company's turnover was 3, then its net operating income for the year must have
been: 
A. $6,000
B. $2,000
C. $18,000
D. it is impossible to determine from the data given.

ROI = Margin  Turnover

Margin = ROI  Turnover = 12%  3 = 4%
Margin = Net operating income  Sales
Net operating income = Margin  Sales = 4%  $150,000 = $6,000
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Hard
 

26. A company's current net operating income is $16,800 and its average operating assets are
$80,000. The company's required rate of return is 18%. A new project being considered
would require an investment of $15,000 and would generate annual net operating income of
$3,000. What is the residual income of the new project? 
A. 20.8%
B. 20%
C. ($150)
D. $300

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Easy
 

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Chapter 11 - Performance Measurement in Decentralized Organizations

27. Soderquist Corporation uses residual income to evaluate the performance of its divisions.
The company's minimum required rate of return is 11%. In April, the Commercial Products
Division had average operating assets of $100,000 and net operating income of $9,400. What
was the Commercial Products Division's residual income in April? 
A. -$1,600
B. $1,600
C. $1,034
D. -$1,034

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Easy
 

28. In August, the Universal Solutions Division of Jugan Corporation had average operating
assets of $670,000 and net operating income of $77,500. The company uses residual income,
with a minimum required rate of return of 12%, to evaluate the performance of its divisions.
What was the Universal Solutions Division's residual income in August? 
A. $2,900
B. -$2,900
C. -$9,300
D. $9,300

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Easy
 

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Chapter 11 - Performance Measurement in Decentralized Organizations

29. Division B had an ROI last year of 15%. The division's minimum required rate of return is
10%. If the division's average operating assets last year were $450,000, then the division's
residual income for last year was: 
A. $67,500
B. $22,500
C. $37,500
D. $45,000

ROI = Net operating income  Average operating assets

Net operating income = ROI  Average operating assets = 15%  $450,000 = $67,500

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Hard
 

11-42
Chapter 11 - Performance Measurement in Decentralized Organizations

30. Garnick Corporation keeps careful track of the time required to fill orders. The times
recorded for a particular order appear below:

   
The delivery cycle time was: 
A. 3.5 hours
B. 8.7 hours
C. 34.9 hours
D. 36.1 hours

Throughput time = Process time + Inspection time + Move time + Queue time
= 0.9 hours + 0.3 hours + 3.5 hours + 5.2 hours = 9.9 hours
Delivery cycle time = Wait time + Throughput time
= 26.2 hours + 9.9 hours = 36.1 hours
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-03 Compute delivery cycle time; throughput time; and manufacturing cycle efficiency (MCE)
Level: Easy
 

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Chapter 11 - Performance Measurement in Decentralized Organizations

31. Galanis Corporation keeps careful track of the time required to fill orders. Data
concerning a particular order appear below:

   
The throughput time was: 
A. 38.8 hours
B. 33.4 hours
C. 14.1 hours
D. 5.4 hours

Throughput time = Process time + Inspection time + Move time + Queue time
= 1.4 hours + 0.4 hours + 3.6 hours + 8.7 hours = 14.1 hours
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-03 Compute delivery cycle time; throughput time; and manufacturing cycle efficiency (MCE)
Level: Easy
 

11-44
Chapter 11 - Performance Measurement in Decentralized Organizations

32. Hoster Corporation keeps careful track of the time required to fill orders. The times
recorded for a particular order appear below:

   
The throughput time was: 
A. 8.9 hours
B. 18 hours
C. 4.5 hours
D. 22.5 hours

Throughput time = Process time + Inspection time + Move time + Queue time
= 1.2 hours + 0.4 hours + 2.9 hours + 4.4 hours = 8.9 hours
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-03 Compute delivery cycle time; throughput time; and manufacturing cycle efficiency (MCE)
Level: Easy
 

11-45
Chapter 11 - Performance Measurement in Decentralized Organizations

33. Botelho Corporation keeps careful track of the time required to fill orders. Data
concerning a particular order appear below:

   
The delivery cycle time was: 
A. 33.1 hours
B. 3.7 hours
C. 12.6 hours
D. 30.9 hours

Throughput time = Process time + Inspection time + Move time + Queue time
= 1.9 hours + 0.3 hours + 3.7 hours + 8.9 hours = 14.8 hours
Delivery cycle time = Wait time + Throughput time
= 18.3 hours + 14.8 hours = 33.1 hours
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-03 Compute delivery cycle time; throughput time; and manufacturing cycle efficiency (MCE)
Level: Easy
 

11-46
Chapter 11 - Performance Measurement in Decentralized Organizations

34. Niemiec Corporation keeps careful track of the time required to fill orders. The times
recorded for a particular order appear below:

   
The manufacturing cycle efficiency (MCE) was closest to: 
A. 0.20
B. 0.06
C. 0.12
D. 0.96

Throughput time = Process time + Inspection time + Move time + Queue time
= 1.5 hours + 0.2 hours + 2.6 hours + 8.5 hours = 12.8 hours
MCE = Value-added time (Process time)  Throughput (manufacturing cycle) time
= 1.5 hours  12.8 hours = 0.12
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-03 Compute delivery cycle time; throughput time; and manufacturing cycle efficiency (MCE)
Level: Easy
 

11-47
Chapter 11 - Performance Measurement in Decentralized Organizations

35. Mordue Corporation keeps careful track of the time required to fill orders. Data
concerning a particular order appear below:

   
The manufacturing cycle efficiency (MCE) was closest to: 
A. 0.15
B. 0.53
C. 0.05
D. 0.16

Throughput time = Process time + Inspection time + Move time + Queue time
= 1.7 hours + 0.1 hours + 2.4 hours + 6.7 hours = 10.9 hours
MCE = Value-added time (Process time)  Throughput (manufacturing cycle) time
= 1.7 hours  10.9 hours = 0.16
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-03 Compute delivery cycle time; throughput time; and manufacturing cycle efficiency (MCE)
Level: Easy
 

 Aide Industries is a division of a major corporation. Data concerning the most recent year
appears below:

   

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Chapter 11 - Performance Measurement in Decentralized Organizations

36. The division's margin is closest to: 

A. 21.8%
B. 5.0%
C. 23.0%
D. 28.0%

Margin = Net operating income  Sales = $870,000  $17,400,000 = 5.0%

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Easy
 

37. The division's turnover is closest to: 

A. 20.00
B. 4.35
C. 0.22
D. 3.57

Turnover = Sales  Average operating assets = $17,400,000  $4,000,000 = 4.35

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Easy
 

11-49
Chapter 11 - Performance Measurement in Decentralized Organizations

38. The division's return on investment (ROI) is closest to: 

A. 4.1%
B. 21.75%
C. 17.9%
D. 1.1%

ROI = Net operating income  Average operating assets = $870,000  $4,000,000 = 21.75%
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Easy
 

 The Reed Division reports the following operating data for the past two years:

   
The return on investment at Reed was exactly the same in Year 1 and Year 2.

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Chapter 11 - Performance Measurement in Decentralized Organizations

39. The margin in Year 2 was: 

A. 48%
B. 32%
C. 20%
D. 10%

ROI in Year 1:
ROI = Margin  Turnover = 16%  2.5 = 40%
By assumption, the ROI is the same in Year 2 as in Year 1. Therefore, in Year 2:
ROI = Margin  Turnover
40% = Margin  2
Margin = 40%  2 = 20%
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Hard
 

40. Sales in Year 2 amounted to: 

A. $250,000
B. $300,000
C. $325,000
D. $350,000

ROI in Year 1:
ROI = Margin  Turnover = 16%  2.5 = 40%
By assumption, the ROI is the same in Year 2 as in Year 1. Therefore, in Year 2:
Net operating income = ROI  Average operating assets = 40%  $150,000 = $60,000
Margin = Net operating income  Sales
Sales = Net operating income  Margin = $60,000  20% = $300,000
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Medium
 

11-51
Chapter 11 - Performance Measurement in Decentralized Organizations

41. Average operating assets in Year 1 were: 

A. $160,000
B. $150,000
C. $125,000
D. $100,000

Margin = Net operating income  Sales

Sales = Net operating income  Margin
= $40,000  16% = $250,000
Turnover = Sales  Average operating assets
Average operating assets = Sales  Turnover
= $250,000  2.5 = $100,000
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Hard
 

42. Net operating income in Year 2 amounted to: 

A. $60,000
B. $50,000
C. $40,000
D. $35,000

ROI in Year 1:
ROI = Margin  Turnover = 16%  2.5 = 40%
By assumption, the ROI is the same in Year 2 as in Year 1. Therefore, in Year 2:
Net operating income = ROI  Average operating assets = 40%  $150,000 = $60,000
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Hard
 

 Beall Industries is a division of a major corporation. Last year the division had total sales of
$20,160,000, net operating income of $1,592,640, and average operating assets of $8,000,000.

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Chapter 11 - Performance Measurement in Decentralized Organizations

43. The division's margin is closest to: 

A. 39.7%
B. 47.6%
C. 7.9%
D. 19.9%

Margin = Net operating income  Sales

= $1,592,640  $20,160,000 = 7.9%
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Easy
 

44. The division's turnover is closest to: 

A. 2.52
B. 2.10
C. 0.20
D. 12.66

Turnover = Sales  Average operating assets

= $20,160,000  $8,000,000 = 2.52
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Easy
 

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45. The division's return on investment (ROI) is closest to: 

A. 19.9%
B. 16.6%
C. 1.6%
D. 5.7%

ROI = Net operating income  Average operating assets

= $1,592,640  $8,000,000 = 19.9%
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Easy
 

 The West Division of Shekarchi Corporation had average operating assets of $620,000 and
net operating income of $80,100 in March. The minimum required rate of return for
performance evaluation purposes is 14%.

46. What was the West Division's minimum required return in March? 

A. $80,100
B. $86,800
C. $11,214
D. $98,014

Minimum required return = Average operating assets  Minimum required rate of return
= $620,000  14% = $86,800
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Easy
 

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47. What was the West Division's residual income in March? 

A. -$6,700
B. $6,700
C. -$11,214
D. $11,214

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Easy
 

 The Consumer Products Division of Weiter Corporation had average operating assets of
$570,000 and net operating income of $65,100 in March. The minimum required rate of
return for performance evaluation purposes is 12%.

48. What was the Consumer Products Division's minimum required return in March? 
A. $7,812
B. $76,212
C. $68,400
D. $65,100

Minimum required return = Average operating assets  Minimum required rate of return
= $570,000  12% = $68,400
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Easy
 

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Chapter 11 - Performance Measurement in Decentralized Organizations

49. What was the Consumer Products Division's residual income in March? 

A. -$3,300
B. $3,300
C. -$7,812
D. $7,812

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Easy
 

 Estes Company has assembled the following data for its divisions for the past year:

   

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50. Division A's sales are: 

A. $400,000
B. $625,000
C. $125,000
D. $200,000

Turnover = Sales  Average operating assets

Sales = Average operating assets  Turnover
= $500,000  1.25 = $625,000
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Hard
 

51. Division A's residual income is: 

A. $20,000
B. $30,000
C. $35,000
D. $45,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Medium
 

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52. Division B's average operating assets is: 

A. $81,200
B. $2,080,000
C. $1,333,333
D. $130,000

Turnover = Sales  Average operating assets

Average operating assets = Sales  Turnover
= $520,000  4 = $130,000
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Medium
 

 Operating data from Tindall Company for last year follows:

   

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53. The average operating assets amounted to: 

A. $600,000
B. $400,000
C. $500,000
D. $800,000

Turnover = Sales  Average operating assets

Average operating assets = Sales  Turnover
= $900,000  1.5 = $600,000
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Hard
 

54. The residual income was: 

A. $18,000
B. $10,000
C. $12,000
D. $16,000

Turnover = Sales  Average operating assets

Average operating assets = Sales  Turnover
= $900,000  1.5 = $600,000
ROI = Net operating income  Average operating assets
Net operating income = ROI  Average operating assets
= 12%  $600,000 = $72,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Hard
 

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Chapter 11 - Performance Measurement in Decentralized Organizations

55. The margin used in ROI calculations was closest to: 

A. 18.00%
B. 8.00%
C. 6.67%
D. 15.00%

ROI = Margin  Turnover

Margin = ROI  Turnover
= 12%  1.5 = 8%
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Hard
 

 The Baily Division recorded operating data as follows for the past two years:

   
Baily Division's turnover was exactly the same in both Year 1 and Year 2.

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Chapter 11 - Performance Measurement in Decentralized Organizations

56. Sales in Year 1 amounted to: 

A. $400,000
B. $900,000
C. $750,000
D. $1,200,000

Turnover = ROI  Margin = 22.5%  15% = 1.5

Turnover = Sales  Average operating assets
Sales = Average operating assets  Turnover = $600,000  1.5 = $900,000
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Hard
 

57. The net operating income in Year 1 was: 

A. $90,000
B. $135,000
C. $140,000
D. $150,000

Turnover = ROI  Margin = 22.5%  15% = 1.5

Turnover = Sales  Average operating assets
Sales = Average operating assets  Turnover = $600,000  1.5 = $900,000
Margin = Net operating income  Sales
Net operating income = Sales  Margin = $900,000  15% = $135,000
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Hard
 

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58. The margin in Year 2 was: 

A. 18.75%
B. 27.00%
C. 22.50%
D. 12.00%

Turnover in Year 1 = ROI in Year 1  Margin in Year 1 = 22.5%  15% = 1.5

ROI = Margin  Turnover
Margin in Year 2 = ROI in Year 2  Turnover in Year 2
= ROI in Year 2  Turnover in Year 1
= 18%  1.5 = 12%
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Hard
 

59. The average operating assets in Year 2 were: 

A. $720,000
B. $750,000
C. $800,000
D. $900,000

Turnover in Year1 = ROI in Year 1  Margin in Year 1 = 22.5%  15% = 1.5

Turnover in Year 2 = Sales in Year 2  Average operating assets in Year 2
Average operating assets in Year 2 = Sales in Year 2  Turnover in Year 2
= Sales in Year 2  Turnover in Year 1
= $1,200,000  1.5 = $800,000
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Hard
 

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Chapter 11 - Performance Measurement in Decentralized Organizations

 The following data are available for the South Division of Redride Products, Inc. and the
single product it makes:

   

60. How many units must South sell each year to have an ROI of 16%? 
A. 240,000
B. 1,300,000
C. 52,000
D. 65,000

ROI = Net operating income  Average operating assets

Net operating income = ROI  Average operating assets
= 16%  $1,500,000 = $240,000
Unit sales to attain a target profit = (Target profit + Fixed expenses)  Unit CM
= ($240,000 + $280,000)  ($20 per unit - $12 per unit)
= $520,000  $8 per unit
= 65,000 units
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Hard
 

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61. If South wants a residual income of $50,000 and the minimum required rate of return is
10%, the annual turnover will have to be: 
A. 0.32
B. 0.80
C. 1.25
D. 1.50

Turnover = Sales  Average operating assets

We need to determine the Sales that would generate a residual income of $50,000.
Residual income = Net operating income - Average operating assets  Minimum required rate
of return
$50,000 = Net operating income - ($1,500,000  10%)
Net operating income = $50,000 + ($1,500,000  10%) = $200,000
Dollar sales to attain a target profit = (Target profit + Fixed expenses)  CM ratio
= ($200,000 + $280,000)  [($20 per unit - $12 per unit)/$20 per unit]
= $480,000  ($8 per unit/$20 per unit)
= $480,000  0.40
= $1,200,000
Turnover = Sales  Average operating assets
= $1,200,000  $1,500,000 = 0.8
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Hard
 

 The following data pertain to the Whalen Division of Northern Industries.

   
The margin at Whalen was exactly the same in Year 2 as it was in Year 1.

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62. The average operating assets for Year 2 amounted to: 

A. $400,000
B. $800,000
C. $600,000
D. $500,000

Turnover = Sales  Average operating assets

Average operating assets = Sales  Turnover
= $600,000  1.2 = $500,000
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Hard
 

63. The return on investment in Year 1 was: 

A. 48.00%
B. 32.50%
C. 7.58%
D. 1.92%

ROI = Margin  Turnover

Margin in Year 2 = ROI in Year 2  Turnover in Year 2
= 9.6%  1.2 = 8%
ROI in Year 1 = Margin in Year 1  Turnover in Year 1
ROI in Year 1 = Margin in Year 2  Turnover in Year 1
= 8%  6 = 48%
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Hard
 

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Chapter 11 - Performance Measurement in Decentralized Organizations

64. The minimum required rate of return in Year 1 was: 

A. 18%
B. 17%
C. 16%
D. 15%

Margin = Net operating income  Sales

Net operating income = Sales  Margin
= $300,000  8% = $24,000
ROI = Margin  Turnover
Margin in Year 2 = ROI in Year 2  Turnover in Year 2
= 9.6%  1.2 = 8%
ROI in Year 1 = Margin in Year 1  Turnover in Year 1
ROI in Year 1 = Margin in Year 2  Turnover in Year 1
= 8%  6 = 48%
ROI = Net operating income  Average operating assets
48% = $24,000  Average operating assets
Average operating assets = $24,000  48% = $50,000
Residual income = Net operating income - Average operating assets  Minimum required rate
of return
$16,000 = $24,000 - $50,000  Minimum required rate of return
$50,000  Minimum required rate of return = $24,000 - $16,000
Minimum required rate of return = $8,000  $50,000 = 16%
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Hard
 

 Dickonson Products is a division of a major corporation. The following data are for the last
year of operations:

   

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65. The division's margin is closest to: 

A. 26.4%
B. 10.0%
C. 2.4%
D. 24.0%

Margin = Net operating income  Sales

= $399,360  $16,640,000 = 2.4%
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Easy
 

66. The division's turnover is closest to: 

A. 3.78
B. 41.67
C. 4.16
D. 0.10

Turnover = Sales  Average operating assets

= $16,640,000  $4,000,000 = 4.16
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Easy
 

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Chapter 11 - Performance Measurement in Decentralized Organizations

67. The division's return on investment (ROI) is closest to: 

A. 0.2%
B. 41.6%
C. 10.0%
D. 1.9%

ROI = Net operating income  Average operating assets

= $399,360  $4,000,000 = 9.984%
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Easy
 

68. The division's residual income is closest to: 

A. $(320,640)
B. $1,119,360
C. $399,360
D. $(2,595,840)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Easy
 

 Chace Products is a division of a major corporation. Last year the division had total sales of
$21,300,000, net operating income of $575,100, and average operating assets of $5,000,000.
The company's minimum required rate of return is 12%.

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69. The division's margin is closest to: 

A. 26.2%
B. 23.5%
C. 2.7%
D. 11.5%

Margin = Net operating income  Sales = $575,100  $21,300,000 = 2.7%

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Easy
 

70. The division's turnover is closest to: 

A. 3.82
B. 4.26
C. 0.12
D. 37.04

Turnover = Sales  Average operating assets = $21,300,000  $5,000,000 = 4.26

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Easy
 

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Chapter 11 - Performance Measurement in Decentralized Organizations

71. The division's return on investment (ROI) is closest to: 

A. 49.0%
B. 11.5%
C. 0.3%
D. 2.2%

ROI = Net operating income  Average operating assets

= $575,100  $5,000,000 = 11.502%
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Easy
 

72. The division's residual income is closest to: 

A. $575,100
B. $1,175,100
C. $(1,980,900)
D. $(24,900)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Easy
 

 Diorio Corporation keeps careful track of the time required to fill orders. The times recorded
for a particular order appear below:

   

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Chapter 11 - Performance Measurement in Decentralized Organizations

73. The delivery cycle time was: 

A. 29.1 hours
B. 30.6 hours
C. 8 hours
D. 2.7 hours

Throughput time = Process time + Inspection time + Move time + Queue time
= 1.4 hours + 0.1 hours + 2.7 hours + 5.3 hours = 9.5 hours
Delivery cycle time = Wait time + Throughput time
= 21.1 hours + 9.5 hours = 30.6 hours
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-03 Compute delivery cycle time; throughput time; and manufacturing cycle efficiency (MCE)
Level: Easy
 

74. The throughput time was: 

A. 4.2 hours
B. 9.5 hours
C. 30.6 hours
D. 26.4 hours

Throughput time = Process time + Inspection time + Move time + Queue time
= 1.4 hours + 0.1 hours + 2.7 hours + 5.3 hours = 9.5 hours
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-03 Compute delivery cycle time; throughput time; and manufacturing cycle efficiency (MCE)
Level: Easy
 

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75. The manufacturing cycle efficiency (MCE) was closest to: 

A. 0.15
B. 0.05
C. 0.45
D. 0.18

Throughput time = Process time + Inspection time + Move time + Queue time
= 1.4 hours + 0.1 hours + 2.7 hours + 5.3 hours = 9.5 hours
MCE = Value-added time (Process time)  Throughput (manufacturing cycle) time
= 1.4 hours  9.5 hours = 0.15
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-03 Compute delivery cycle time; throughput time; and manufacturing cycle efficiency (MCE)
Level: Easy
 

 Hart Manufacturing operates an automated steel fabrication process. For one operation, Hart
has found that 45% of the total throughput (manufacturing cycle) time is spent on non-value-
added activities. Delivery cycle time is 12 hours, waiting time during the production process
is 3 hours, queue time prior to starting the production process is 2 hours, and inspection time
is 1.2 hours.

76. The manufacturing cycle efficiency (MCE) for this operation is: 

A. 55%
B. 45%
C. 6.6 hours
D. 5.4 hours

Percentage of time spent on non-value-added activities = 100% - MCE

45% = 100% - MCE
MCE = 100% - 45% = 55%
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-03 Compute delivery cycle time; throughput time; and manufacturing cycle efficiency (MCE)
Level: Medium
 

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77. What is the move time recorded for the operation? 

A. 1.5 hours
B. 6.5 hours
C. 5.8 hours
D. 0.85 hours

Delivery cycle time = Wait time + Throughput time

12 hours = 3 hours + Throughput time
Throughput time = 12 hours - 3 hours = 9 hours
Percentage of time spent on non-value-added activities = 100% - MCE
45% = 100% - MCE
MCE = 100% - 45% = 55%
MCE = Value-added time (Process time)  Throughput (manufacturing cycle) time
55% = Process time  9 hours
Process time = 9 hours  55% = 4.95 hours
Throughput time = Process time + Inspection time + Move time + Queue time
9.00 hours = 4.95 hours + 1.20 hours + Move time + 2.00 hours
Move time = 9.00 hours - (4.95 hours + 1.20 hours + 2.00 hours)
= 9.00 hours - 8.15 hours = 0.85 hours
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-03 Compute delivery cycle time; throughput time; and manufacturing cycle efficiency (MCE)
Level: Hard
 

78. What is the throughput (manufacturing cycle) time for the operation? 

A. 12.0 hours
B. 9.0 hours
C. 10.0 hours
D. 5.8 hours

Delivery cycle time = Wait time + Throughput time

12 hours = 3 hours + Throughput time
Throughput time = 12 hours - 3 hours = 9 hours
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-03 Compute delivery cycle time; throughput time; and manufacturing cycle efficiency (MCE)
Level: Hard
 

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Chapter 11 - Performance Measurement in Decentralized Organizations

 Saffer Corporation keeps careful track of the time required to fill orders. Data concerning a
particular order appear below:

   

79. The throughput time was: 

A. 9.3 hours
B. 4.9 hours
C. 30.9 hours
D. 26 hours

Throughput time = Process time + Inspection time + Move time + Queue time
= 1.6 hours + 0.2 hours + 3.1 hours + 4.4 hours = 9.3 hours
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-03 Compute delivery cycle time; throughput time; and manufacturing cycle efficiency (MCE)
Level: Easy
 

80. The manufacturing cycle efficiency (MCE) was closest to: 

A. 0.17
B. 0.05
C. 0.43
D. 0.19

MCE = Value-added time (Process time)  Throughput (manufacturing cycle) time

= 1.6 hours  9.3 hours = 0.17
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-03 Compute delivery cycle time; throughput time; and manufacturing cycle efficiency (MCE)
Level: Easy
 

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81. The delivery cycle time was: 

A. 7.5 hours
B. 29.1 hours
C. 30.9 hours
D. 3.1 hours

Delivery cycle time = Wait time + Throughput time

= 21.6 hours + 9.3 hours = 30.9 hours
 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-03 Compute delivery cycle time; throughput time; and manufacturing cycle efficiency (MCE)
Level: Easy
 
 

Essay Questions
 

82. Heavey Fabrication is a division of a major corporation. Last year the division had total
sales of $21,120,000, net operating income of $2,006,400, and average operating assets of
$6,000,000. The company's minimum required rate of return is 12%.
Required:
What is the division's return on investment (ROI)? 

ROI = Net operating income  Average operating assets = $2,006,400  $6,000,000 = 33.4%

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Easy
 

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83. Gilde Industries is a division of a major corporation. Last year the division had total sales
of $23,380,000, net operating income of $2,828,980, and average operating assets of
$7,000,000. The company's minimum required rate of return is 12%.
Required:
a. What is the division's margin?
b. What is the division's turnover?
c. What is the division's return on investment (ROI)? 

a. Margin = Net operating income  Sales = $2,828,980  $23,380,000 = 12.1%

b. Turnover = Sales  Average operating assets = $23,380,000  $7,000,000 = 3.3
c. ROI = Net operating income  Average operating assets = $2,828,980  $7,000,000 =
40.4%

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Level: Easy
 

84. Ferris Wares is a division of a major corporation. The following data are for the latest year
of operations:

   
Required:
a. What is the division's return on investment (ROI)?
b. What is the division's residual income? 

a. ROI = Net operating income  Average operating assets = $1,054,100  $5,000,000 =

21.1%
b. Residual income = Net operating income - Average operating assets  Minimum required
rate of return = $1,054,100 - $5,000,000  16% = $1,054,100 - $800,000 = $254,100

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Easy
 

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85. Financial data for Windsor, Inc. for last year appear below:

   

   
The company paid dividends of $104,000 last year. The "Investment in Pine Company" on the
statement of financial position represents an investment in the stock of another company.
Required:
a. Compute the company's margin, turnover, and return on investment for last year.
b. The Board of Directors of Windsor, Inc. has set a minimum required return of 25%. What
was the company's residual income last year? 

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a. Operating assets do not include investments in other companies or in undeveloped land.

   
Average operating assets = ($1,020,000 + $980,000)  2 = $1,000,000
Margin = Net operating income  Sales = $280,000  $1,750,000 = 16%
Turnover = Sales  Average operating assets = $1,750,000  $1,000,000 = 1.75
ROI = Margin  Turnover = 16%  1.75 = 28%
b. Residual income = Net operating income - Average operating assets  Minimum required
rate of return = $280,000 - ($1,000,000  25%) = $280,000 - $250,000 = $30,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Medium
 

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86. Eckels Wares is a division of a major corporation. The following data are for the latest
year of operations:

   
Required:
a. What is the division's margin?
b. What is the division's turnover?
c. What is the division's return on investment (ROI)?
d. What is the division's residual income? 

a. Margin = Net operating income  Sales = $1,319,700  $24,900,000 = 5.3%

b. Turnover = Sales  Average operating assets = $24,900,000  $6,000,000 = 4.2
c. ROI = Net operating income  Average operating assets = $1,319,700  $6,000,000 =
22.0%
d. Residual income = Net operating income - Average operating assets  Minimum required
rate of return = $1,319,700 - $6,000,000  12% = $1,319,700 - $720,000 = $599,700

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Easy
 

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87. Iles Industries is a division of a major corporation. The following data are for the latest
year of operations:

   
Required:
What is the division's residual income? 

Residual income = Net operating income - Average operating assets  Minimum required rate
of return
= $2,553,480 - $6,000,000  16% = $2,553,480 - $960,000 = $1,593,480

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Easy
 

88. The Casket Division of Rosencranz Corporation had average operating assets of $150,000
and net operating income of $27,800 in March. The company uses residual income to evaluate
the performance of its divisions, with a minimum required rate of return of 17%.
Required:
What was the Casket Division's residual income in March? 

   

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Easy
 

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89. Madrazo Corporation uses residual income to evaluate the performance of its divisions.
The minimum required rate of return for performance evaluation purposes is 19%. The Games
Division had average operating assets of $410,000 and net operating income of $86,000 in
June.
Required:
What was the Games Division's residual income in June? 

   

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses
Level: Easy
 

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90. Jaster Corporation's management keeps track of the time it takes to process orders. During
the most recent month, the following average times were recorded per order:

   
Required:
a. Compute the throughput time.
b. Compute the manufacturing cycle efficiency (MCE).
c. What percentage of the production time is spent in non-value-added activities?
d. Compute the delivery cycle time. 

a. Throughput time
= Process time + Inspection time + Move time + Queue time
= 2.6 days + 0.2 days + 0.6 days + 3.2 days = 6.6 days
b. MCE = Value-added time (Process time)  Throughput time
= 2.6 days  6.6 days = 0.39
c. Percentage of time spent on non-value-added activities
= 100% - MCE% = 100% - 39% = 61%
d. Delivery cycle time = Wait time + Throughput time
= 10.6 days + 6.6 days = 17.2 days

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-03 Compute delivery cycle time; throughput time; and manufacturing cycle efficiency (MCE)
Level: Easy
 

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91. During the most recent month at Coggan Corporation, queue time was 5.3 days,
inspection time was 0.5 day, process time was 1.9 days, wait time was 4.5 days, and move
time was 0.5 day.
Required:
a. Compute the throughput time.
b. Compute the manufacturing cycle efficiency (MCE).
c. What percentage of the production time is spent in non-value-added activities?
d. Compute the delivery cycle time. 

a. Throughput time
= Process time + Inspection time + Move time + Queue time
= 1.9 days + 0.5 days + 0.5 days + 5.3 days = 8.2 days
b. MCE = Value-added time (Process time)  Throughput time
= 1.9 days  8.2 days = 0.23
c. Percentage of time spent on non-value-added activities
= 100% - MCE% = 100% - 23% = 77%
d. Delivery cycle time = Wait time + Throughput time
= 4.5 days + 8.2 days = 12.7 days

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-03 Compute delivery cycle time; throughput time; and manufacturing cycle efficiency (MCE)
Level: Medium
 

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92. Durkee Corporation keeps careful track of the time required to fill orders. The times
required for a particular order appear below:

   
Required:
a. Determine the throughput time. Show your work!
b. Determine the manufacturing cycle efficiency (MCE). Show your work!
c. Determine the delivery cycle time. Show your work! 

a. Throughput time
= Process time + Inspection time + Move time + Queue time
= 0.9 hours + 0.4 hours + 2.3 hours + 4.5 hours
= 8.1 hours
b. MCE = Value-added time/Throughput time
= 0.9 hours  8.1 hours = 0.11
c. Delivery cycle time = Wait time + Throughput time
= 10.7 hours + 8.1 hours = 18.8 hours

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-03 Compute delivery cycle time; throughput time; and manufacturing cycle efficiency (MCE)
Level: Easy
 

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93. Waltner Corporation's management reports that its average delivery cycle time is 20.0
days, its average throughput time is 7.5 days, its manufacturing cycle efficiency (MCE) is
0.32, its average move time is 0.2 day, and its average queue time is 4.0 days.
Required:
a. What is the wait time?
b. What is the process time?
c. What is the inspection time? 

a. Delivery cycle time = Wait time + Throughput time

20.0 days = Wait time + 7.5 days
Wait time = 20.0 days - 7.5 days = 12.5 days
b. MCE = Process time  Throughput time
0.32 = Process time  7.5 days
Process time = 0.32  7.5 days = 2.4 days
c. Throughput time = Process time + Inspection time + Move time + Queue time
7.5 days = 2.4 days + Inspection time + 0.2 days + 4.0 days
Inspection time = 7.5 days - 2.4 days - 0.2 days - 4.0 days = 0.9 days

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Application
Learning Objective: 11-03 Compute delivery cycle time; throughput time; and manufacturing cycle efficiency (MCE)
Level: Hard
 

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