Chapter 10

Decentralization

True/False

1. 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%.
Level: Medium LO: 1,2 Ans: F

2. Return on investment (ROI) encourages managers to accept all investment decisions that will benefit
the company as a whole when it is used as a measure of performance.
Level: Medium LO: 1 Ans: F

3. Just-in-time practices improve return on investment (ROI) by decreasing turnover.

Level: Hard LO: 1 Ans: F

4. Under a responsibility accounting system, fewer expenses are charged against managers the higher one
moves upward in an organization.
Level: Medium LO: 3 Ans: F

5. Responsibility accounting functions most effectively in decentralized organizations.

Level: Easy LO: 3 Ans: T

6. In a strongly centralized organization there is a large amount of freedom to make decisions at all levels
of management.
Level: Easy LO: 3 Ans: F

7. All profit centers are responsibility centers, but not all responsibility centers are profit centers.
Level: Medium LO: 3 Ans: T

Multiple Choice

8. Managerial performance can be measured in many different ways including return on investment (ROI)
and residual income. A good reason for using residual income instead of ROI is:
A) Residual income can be computed without having to measure operating assets.
B) Managers are more likely to accept projects that are beneficial to the company.
C) ROI does not take into account both turnover and margin.
D) A minimum rate of return does not have to be specified when the residual income approach is used.
Source: CMA, adapted Level: Medium LO: 1,2 Ans: B

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9. Which of the following performance measures will decrease if the minimum required rate of return
increases?

A) A Above
B) B Above
C) C Above
D) D Above
Level: Medium LO: 1,2 Ans: B

10. Which of the following performance measures will increase if inventory decreases and all else
remains the same?

A) A Above
B) B Above
C) C Above
D) D Above
Level: Medium LO: 1,2 Ans: A

11. Some investment opportunities which should be accepted from the viewpoint of the entire company
may be rejected by a manager who is evaluated on the basis of:
A) return on investment.
B) residual income.
C) contribution margin.
D) segment margin.
Level: Medium LO: 1 Ans: A

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12. Which of the following would be an argument for using the gross cost of plant and equipment as part
of operating assets in return on investment computations?
A) It is consistent with the computation of net operating income, which includes depreciation as an
operating expense.
B) It is consistent with the balance sheet presentation of plant and equipment.
C) It eliminates the age of equipment as a factor in ROI computations.
D) It discourages the replacement of old, worn-out equipment because of the dramatic, adverse effect on
ROI.
Level: Medium LO: 1 Ans: C

13. Which of the following would not be included in operating assets in return on investment
calculations?
A) Cash.
B) Accounts Receivable.
C) Equipment
D) Factory building rented to (and occupied by) another company.
Level: Easy LO: 1 Ans: D

14. Which of the following statements is correct concerning return on investment calculations?
A) Margin equals stockholders’ equity divided by sales.
B) Return on investment equals margin divided by turnover.
C) Turnover equals return on investment divided by margin.
D) Sales equals turnover divided by margin.
Level: Hard LO: 1 Ans: C

15. All other things equal, which of the following would increase a division’s residual income?
A) Increase in expenses.
B) Decrease in average operating assets.
C) Increase in minimum required return.
D) Decrease in net operating income.
Level: Medium LO: 2 Ans: B

16. The basic objective of the residual income approach to performance measurement and evaluation is to
have a division maximize its:
A) return on investment (ROI).
B) cash flows.
C) cash flows in excess of a desired minimum amount.
D) net operating income in excess of a minimum return.
Source: CMA, adapted
Level: Medium LO: 2 Ans: D

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17. Residual income:
A) is the return on investment (ROI) percentage multiplied by average operating assets.
B) is the net operating income earned above a certain minimum required return on sales.
C) is the net operating income earned above a certain minimum required return on average operating
assets.
D) will always be greater than zero.
Level: Medium LO: 2 Ans: C

18. Given the following data:

The residual income would be:

A) $2,800
B) $0
C) $6,000
D) $8,000
Level: Medium LO: 1,2 Ans: A

19. Given the following data:

Return on investment (ROI) would be:

A) 5%
B) 12%
C) 25%
D) 60%
Level: Medium LO: 1 Ans: B

20. Last year a company had sales of $400,000, a turnover of 2.4, and a return on investment of 36%. The
company’s net operating income for the year was:
A) $144,000
B) $120,000
C) $80,000
D) $60,000
Level: Medium LO: 1 Ans: D

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21. Cabot Company had the following results during June: net operating income, $2,500; turnover, 4; and
ROI, 20%. Cabot Company’s average operating assets were:
A) $50,000
B) $200,000
C) $12,500
D) $10,000
Level: Hard LO: 1 Ans: C

22. The following information pertains to Quest Company’s Gold Division for last year:

The Gold Division’s return on investment is:

A) 10.00%
B) 13.33%
C) 27.50%
D) 30.00%
Source: CPA, adapted
Level: Medium LO: 1 Ans: C

23. The following information relates to last year’s operations at the Paper Division of Germane
Corporation:

What was the Paper Division’s net operating income last year?
A) $24,300
B) $29,160
C) $145,800
D) $162,000
Level: Hard LO: 1 Ans: B

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24. The following information is available on Company X:

Company X’s residual income would be:

A) $1,100
B) $5,400
C) $360
D) $600
Level: Medium LO: 2 Ans: D

25. The following information relates to last year’s operations at the Bread Division of Rison Bakery,
Inc.:

What was the Bread Division’s minimum required rate of return last year?
A) 12%
B) 4%
C) 15%
D) 20%
Level: Hard LO: 2 Ans: A

26. Koogle Corporation uses residual income to evaluate the performance of its divisions. The company’s
minimum required rate of return is 13%. In August, the Commercial Products Division had average
operating assets of $530,000 and net operating income of $76,700. What was the Commercial Products
Division’s residual income in August?
A) -$9,971
B) -$7,800
C) $7,800
D) $9,971
Level: Easy LO: 2 Ans: C

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27. In September, the Universal Solutions Division of Mcallister Corporation had average operating
assets of $120,000 and net operating income of $12,800. 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 September?
A) -$1,600
B) $1,600
C) -$1,536
D) $1,536
Level: Easy LO: 2 Ans: A

Use the following information to answer 28-29

Brandon, Inc. has provided the following data for last year’s operations:

28. Brandon’s residual income is:

A) $2,000
B) $4,000
C) $3,500
D) $2,500
Level: Medium LO: 2 Ans: A

29. Brandon’s return on investment (ROI) is:

A) 6%
B) 10%
C) 15%
D) 24%
Level: Medium LO: 1 Ans: C

Use the following information to answer 30-31

The following selected data pertain to the belt division of Allen Corp. for last year:

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30. How much is the return on investment?
A) 25%
B) 10%
C) 20%
D) 15%
Source: CPA, adapted
Level: Medium LO: 1 Ans: A

31. How much is the residual income?

A) $100,000
B) $20,000
C) $80,000
D) $900,000
Source: CPA, adapted
Level: Medium LO: 2 Ans: B

Use the following information to answer 32-33

Yola Co.’s East Division had the following results last year:

32. The return on investment was:

A) 40.00%
B) 29.00%
C) 18.00%
D) 8.33%
Source: CPA, adapted
Level: Easy LO: 1 Ans: A

33. The residual income was:

A) $3,600
B) $9,000
C) $11,000
D) $20,000
Source: CPA, adapted
Level: Easy LO: 2 Ans: C

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Use the following information to answer 34-35
Data pertaining to Mar Co.’s Alo Division for last year follows:

34. Alo’s return on investment was:

A) 60%
B) 75%
C) 138%
D) 150%
Source: CPA, adapted
Level: Easy LO: 1 Ans: D

35. Alo’s residual income was:

A) $27,600
B) $30,000
C) $32,400
D) $40,000
Source: CPA, adapted
Level: Easy LO: 2 Ans: A

Use the following information to answer 36-37

The following selected data pertain to the Maple Division of Beyer Corp. for last year:

36. The return on investment was:

A) 6.67%
B) 8.00%
C) 20.00%
D) 33.33%
Source: CPA, adapted
Level: Easy LO: 1 Ans: C

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37. The residual income was:
A) $2,400
B) $5,600
C) $6,667
D) $8,000
Source: CPA, adapted
Level: Easy LO: 2 Ans: D

Use the following information to answer 38-39

The Northern Division of the Kimball Company reported the following data for last year:

38. The return on investment last year for the Northern Division was:
A) 50%
B) 80%
C) 27.5%
D) 44%
Level: Medium LO: 1 Ans: A

39. The residual income for the Northern Division last year was:
A) $112,000
B) $144,000
C) $110,000
D) $54,000
Level: Medium LO: 2 Ans: B

Use the following information to answer 40-43

The following data are for the Akron Division of Consolidated Rubber, Inc.:

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40. The margin used in calculating the return on investment for the past year was:
A) 6.00%
B) 8.67%
C) 10.00%
D) 8.00%
Level: Medium LO: 1 Ans: A

41. The return on investment for the past year was:

A) 6%
B) 30%
C) 18%
D) 26%
Level: Medium LO: 1 Ans: C

42. The turnover used in calculating the return on investment for the past year was:
A) 1.4
B) 3.3
C) 10.0
D) 3.0
Level: Medium LO: 1 Ans: D

43. The minimum required rate of return used in calculating the residual income for the past year was:
A) 30%
B) 12%
C) 15%
D) 6%
Level: Hard LO: 2 Ans: B

Use the following information to answer 44-47

Cebe Products is a division of a major corporation. Last year the division had total sales of $26,800,000,
net operating income of $1,768,800, and average operating assets of $8,000,000. The company’s
minimum required rate of return is 12%.

44. The division’s margin is closest to:

A) 22.1%
B) 6.6%
C) 29.9%
D) 36.5%
Level: Easy LO: 1 Ans: B

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45. The division’s turnover is closest to:
A) 0.22
B) 2.74
C) 15.15
D) 3.35
Level: Easy LO: 1 Ans: D

46. The division’s return on investment (ROI) is closest to:

A) 74.0%
B) 5.1%
C) 22.1%
D) 1.5%
Level: Easy LO: 1 Ans: C

47. The division’s residual income is closest to:

A) $808,800
B) $1,768,800
C) $(1,447,200)
D) $2,728,800
Level: Easy LO: 2 Ans: A

Use the following information to answer 48-51

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

48. The division’s margin is closest to:

A) 12.2%
B) 39.4%
C) 31.0%
D) 51.6%
Level: Easy LO: 1 Ans: A

49. The division’s turnover is closest to:

A) 0.31
B) 2.54
C) 8.20
D) 1.94
Level: Easy LO: 1 Ans: B

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50. The division’s return on investment (ROI) is closest to:
A) 31.0%
B) 3.8%
C) 78.7%
D) 8.8%
Level: Easy LO: 1 Ans: A

51. The division’s residual income is closest to:

A) $279,400
B) $1,549,400
C) $1,049,400
D) $2,049,400
Level: Easy LO: 2 Ans: C

Use the following information to answer 52-55

The Portland Division’s operating data for the past two years is as follows:

The Portland Division’s margin in Year 2 was 150% of the margin for Year 1.

52. The turnover for Year 1 was:

A) 10.00
B) 2.00
C) 1.50
D) 3.20
Level: Hard LO: 1 Ans: C

53. The net operating income for Year 1 was:

A) $192,000
B) $128,000
C) $266,667
D) $208,000
Level: Hard LO: 1 Ans: B

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54. The sales for Year 2 were:
A) $750,000
B) $2,000,000
C) $3,846,154
D) $2,400,000
Level: Hard LO: 1 Ans: D

55. The average operating assets for Year 2 were:

A) $750,000
B) $400,000
C) $1,200,000
D) $800,000
Level: Hard LO: 1 Ans: C

Use the following information to answer 56-57

Data from the Trendall Company for last year follow:

56. The average operating assets were:

A) $300,000
B) $400,000
C) $500,000
D) $600,000
Level: Medium LO: 1 Ans: C

57. The margin used in calculating return on investment was:

A) 6.67%
B) 16.67%
C) 20.00%
D) 8.00%
Level: Medium LO: 1 Ans: D

Use the following information to answer 58-60

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

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58. The division’s margin is closest to:
A) 41.8%
B) 7.2%
C) 20.8%
D) 34.6%
Level: Easy LO: 1 Ans: B

59. The division’s turnover is closest to:

A) 2.39
B) 13.89
C) 0.21
D) 2.89
Level: Easy LO: 1 Ans: D

60. The division’s return on investment (ROI) is closest to:

A) 1.5%
B) 20.8%
C) 5.3%
D) 17.2%
Level: Easy LO: 1 Ans: B

Use the following information to answer 61-63

Beach Industries is a division of a major corporation. Last year the division had total sales of
$11,360,000, net operating income of $624,800, and average operating assets of $4,000,000.

61. The division’s margin is closest to:

A) 15.6%
B) 35.2%
C) 5.5%
D) 40.7%
Level: Easy LO: 1 Ans: C

62. The division’s turnover is closest to:

A) 2.84
B) 18.18
C) 2.46
D) 0.16
Level: Easy LO: 1 Ans: A

63. The division’s return on investment (ROI) is closest to:

A) 0.9%
B) 15.6%
C) 4.1%
D) 13.5%
Level: Easy LO: 1 Ans: B

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Use the following information to answer 64-65
The West Division of Frede Corporation had average operating assets of $700,000 and net operating
income of $120,800 in December. The minimum required rate of return for performance evaluation
purposes is 16%.

64. What was the West Division’s minimum required return in December?
A) $112,000
B) $120,800
C) $131,328
D) $19,328
Level: Easy LO: 2 Ans: A

65. What was the West Division’s residual income in December?

A) $8,800
B) -$19,328
C) -$8,800
D) $19,328
Level: Easy LO: 2 Ans: A

Use the following information to answer 66-67

The Consumer Products Division of Mickolick Corporation had average operating assets of $450,000 and
net operating income of $38,700 in August. The minimum required rate of return for performance
evaluation purposes is 10%.

66. What was the Consumer Products Division’s minimum required return in August?
A) $3,870
B) $38,700
C) $48,870
D) $45,000
Level: Easy LO: 2 Ans: D

67. What was the Consumer Products Division’s residual income in August?
A) $3,870
B) $6,300
C) -$3,870
D) -$6,300
Level: Easy LO: 2 Ans: D

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Essay

68. Financial data for Redstone Company for last year appear below:

The company paid dividends of $32,200 last year. The “Investment in Balsam 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 Redstone has set a minimum required return of 25%. What was the
company’s residual income last year?
Level: Medium LO: 1,2

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Ans:
(a.) Operating assets do not include investments in other companies or in undeveloped land.

Average operating assets = ($460,000 + $480,000) ÷ 2

= $470,000
Margin = Net operating income ÷ Sales
= $122,200 ÷ $1,222,000 = 10%
Turnover = Sales ÷ Average operating assets
= $1,222,000 ÷ $470,000 = 2.6
ROI = Margin × Turnover
= 10% × 2.6 = 26%

69. Eban 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?
Level: Easy LO: 1,2
Ans:
(a.) Margin = Net operating income ÷ Sales = $609,840 ÷ $10,890,000 = 5.6%
(b.) Turnover = Sales ÷ Average operating assets = $10,890,000 ÷ $3,000,000 = 3.6
(c.) ROI = Net operating income ÷ Average operating assets = $609,840 ÷ $3,000,000 = 20.3%
(d.) Residual income = Net operating income - Minimum required rate of return × Average operating
assets = $609,840 - 16% × $3,000,000 = $129,840

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70. Ferrel 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?
Level: Easy LO: 1,2
Ans:
(a.) ROI = Net operating income ÷ Average operating assets = $1,149,750 ÷ $7,000,000 = 16.4%
(b.) Residual income = Net operating income - Minimum required rate of return × Average operating
assets = $1,149,750 - 14% × $7,000,000 = $169,750

71. Geary Industries is a division of a major corporation. Last year the division had total sales of
$7,920,000, net operating income of $190,080, and average operating assets of $3,000,000. The
company’s minimum required rate of return is 16%.
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)?
Level: Easy LO: 1
Ans:
(a.) Margin = Net operating income ÷ Sales = $190,080 ÷ $7,920,000 = 2.4%
(b.) Turnover = Sales ÷ Average operating assets = $7,920,000 ÷ $3,000,000 = 2.6
(c.) ROI = Net operating income ÷ Average operating assets = $190,080 ÷ $3,000,000 = 6.3%

72. Heady Fabrication is a division of a major corporation. Last year the division had total sales of
$6,480,000, net operating income of $667,440, and average operating assets of $2,000,000. The
company’s minimum required rate of return is 10%.
Required:
What is the division’s return on investment (ROI)?
Level: Easy LO: 1
Ans:
ROI = Net operating income ÷ Average operating assets = $667,440 ÷ $2,000,000 = 33.4%

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73. Idom 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?
Level: Easy LO: 2
Ans:
Residual income = Net operating income - Minimum required rate of return × Average operating assets =
$449,280 - 12% × $4,000,000 = -$30,720

74. Hysong Corporation uses residual income to evaluate the performance of its divisions. The minimum
required rate of return for performance evaluation purposes is 11%. The Games Division had average
operating assets of $530,000 and net operating income of $56,200 in June.
Required:
What was the Games Division’s residual income in June?
Level: Easy LO: 2
Ans:

75. The Casket Division of Landazuri Corporation had average operating assets of $620,000 and net
operating income of $86,000 in February. The company uses residual income to evaluate the performance
of its divisions, with a minimum required rate of return of 14%.
Required:
What was the Casket Division’s residual income in February?
Level: Easy LO: 2
Ans:

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