Responsibility Accounting and Performance Measures Paper 14
1
The following is selected data for the Consumer Products
division of Arron Corporations for 200X:
Sales
$50,000,000
Average invested capital (assets)
20,000,000
Net income
2,000,000
Cost of capital
8%
What is the return on sales (ROS) for the division?
Detailed Answer
(b) The requirement is to calculate the return on sales
for the division. Answer (b) is correct because return on sales is
calculated as net income/sales which is equal to 4%
($2,000,000/$50,000,000).
2
The following is selected data for the Consumer Products
division of Arron Corporations for 200X:
Sales
$50,000,000
Average invested capital (assets)
20,000,000
Net income
2,000,000
Cost of capital
8%
What is the asset turnover ratio for the division?
Detailed Answer
(c) The requirement is to calculate the asset turnover
ratio for the division. Answer (c) is correct because the asset
turnover ratio is calculated by dividing sales by the average investment
amount. Therefore, it is equal to 2.5
($50,000,000/$20,000,000).
3
The following is selected data for the Consumer Products
division of Arron Corporations for 200X:
Sales
$50,000,000
Average invested capital (assets)
20,000,000
Net income
2,000,000
Cost of capital
8%
What is the return on investment (ROI) for the division?
Detailed Answer
(a) The requirement is to calculate ROI for the division.
Answer (a) is correct because ROI is calculated by dividing net
income by the amount of the average investment. Therefore,
ROI is equal to 10% ($2,000,000/ $20,000,000).
4
The following is selected data for the Consumer Products
division of Arron Corporations for 200X:
Sales
$50,000,000
Average invested capital (assets)
20,000,000
Net income
2,000,000
Cost of capital
8%
What is the amount of residual income (RI) for the division?
Detailed Answer
(d) The requirement is to calculate RI for the division.
Answer (d) is correct because RI is equal to net income minus
interest on the investment. Therefore, RI is equal to $400,000
[$2,000,000 – ($20,000,000 × 8%)].
5
The following is selected data for the Consumer Products
division of Arron Corporations for 200X:
Sales
$50,000,000
Average invested capital (assets)
20,000,000
Net income
2,000,000
Cost of capital
8%
What is the amount of interest rate spread for the division?
Detailed Answer
(c) The requirement is to calculate the interest rate
spread for the division. Answer (c) is correct because the interest
rate spread is the difference between the return on investment
and the required rate of return (cost of capital). In this case, the
spread is equal to 2% [($2,000,000/ $20,000,000) – 8%].
6
The following is available for Cara Corp. for 2012:
Sales
$2,000,000
Average invested capital
500,000
Net income
300,000
Required rate of return
18%
What is the return on investment at Cara Corp.?
Detailed Answer
(a) The requirement is to calculate the return on investment.
Answer (a) is correct because the return on investment
would be computed by dividing net income by average invested
capital ($300,000/$500,000 = 60%).
7
The following is available for Cara Corp. for 2012:
Sales
$2,000,000
Average invested capital
500,000
Net income
300,000
Required rate of return
18%
What is the residual income for Cara Corp.?
Detailed Answer
(c) The requirement is to calculate the residual income.
Answer (c) is correct because the residual income would be
computed as follows: Net income ($300,000) minus the interest
on invested capital $90,000 (18% × $500,000) is equal to
$210,000.
8
A company’s rate of return on investment (ROI) is equal to
the
Detailed Answer
(b) The requirement is to identify the formula for ROI.
Answer (b) is correct because it describes the DuPont ROI analysis:
ROI = Return on sales multiplied by the capital employed
turnover rate (which can be measured as total asset turnover).
9
Return on investment can be increased by
Detailed Answer
(b) The requirement is to identify how ROI might be
increased. One way of measuring ROI is return on assets (ROA).
The formula is net income/total assets. Answer (b) is correct
since if operating assets decrease (the denominator in ROI), then
ROI would decrease. Answer (a) is incorrect because increasing
operating assets would cause ROI to decrease. Answer (c) is
incorrect because decreasing revenue would cause net income
(the numerator) to decrease. A reduction in operating income
would cause ROA to decrease.
10
Select Co. had the following 2012 financial statement relationships:
Asset turnover 5
Profit margin on sales 0.02
What was Select’s 2012 percentage return on assets?
Detailed Answer
(d) Return on assets, also referred to as return on investment
(ROI), is calculated as follows:
ROI = Profit margin × Asset turnover
ROI = 0.02 × 5
ROI = 0.10, or 10%