Responsibility Accounting and Performance Measures Paper 7

1

The following is an excerpt from a corporation’s most recent financial statements.
Current assets $ 120,000
Total operating assets 1,750,000
Current liabilities 85,000
Total liabilities 985,000
Sales 1,240,000
Operating income $ 365,000
The corporation’s required rate of return is 12%. What is its residual income?






2

A company is considering the addition of a new product line. The new product line is expected to generate a return higher than the cost of capital but lower than the current overall return on investment (ROI). If the company decides to add the potential new product line, residual income will






3

Ramirez, Inc., opens a new retail store every 2 years and currently operates in 24 different locations. Ramirez uses return on investment (ROI) to evaluate store performance. The best comparison among stores will be achieved if Ramirez values long-term assets by






4

The headquarters of a national restaurant chain is trying to better understand the profitability of the Savannah location. Savannah’s total assets are $3,500,000, consisting of $1,000,000 land, $2,000,000 buildings and equipment, and $500,000 intangibles. The net profit is $475,000, and the required rate of return is 12%. Savannah’s return on investment (ROI) is






5

A company uses return on investment (ROI) to evaluate year-end divisional performance. Which one of the following inventory practices would most reduce comparability among two similar divisions?






6

A company uses return on investment (ROI) to measure the performance of its business units. The company manufactures and distributes consumer goods. Last year, management identified a possible shortage of raw materials. To mitigate this risk, a large amount of raw material was bought in advance and stored in the manufacturing plant inventory. As a result of this decision, ROI will






7

Teen Style, a merchandising company, is considering a $1,000,000 upgrade to its retail and warehousing facilities that will allow the company to handle more products and attract more customers. Teen Style anticipates that sales will increase by $500,000 and operating income will increase by $200,000 per year. If Teen Style has a minimum required return on investment of 15%, what would be the residual income resulting from the upgrade?






8

A corporation has set a goal to increase its return on investment (ROI). To facilitate this goal, the corporation has set up an incentive program that rewards each division for increasing its ROI. One possible downfall of this incentive program is that it will






9

Which statement below best represents a benefit of residual income (RI) as a performance measure?






10

REB Service Co. is a computer service center. For the month, REB had the following operating statistics:
Sales $450,000
Operating income 25,000
Net profit after taxes 8,000
Total assets 500,000
Shareholders’ equity 200,000
Cost of capital 6%
Based on the above information, which one of the following statements is true? REB has a






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