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Exam 15: Performance Evaluation

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Question 71

Multiple Choice

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Terra Company has two divisions, the Retail Division and the Wholesale Division. The following information was gathered for the two divisions for the current year: $\begin{array}{cc} & \text { Retall D1vislon }&\text { Wholesale} \\&&\text { Division}\\\text { Operating income } & \$ 2,500,000 &\$6,000,000\\\text { Operating assets } & \$ 16,000,000&\$36,000,000\end{array}$ Terra Company has set a target return on investment (ROI) of 15% for both divisions. Based on ROI, which division appears to have performed better?

A) Retail division.
B) Wholesale division.
C) Both divisions have the same results.
D) The answer cannot be determined using the information provided.

E) B) and D)
F) B) and C)

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Question 72

Multiple Choice

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Which of the following statements about return on investment (ROI) is false?

A) ROI equals margin divided by investment turnover.
B) ROI is used to measure the performance of investment centers.
C) Seeking to maximize ROI can result in a conflict between the interest of a particular manager and the interest of the business as a whole.
D) Most companies use operating assets and operating income to compute ROI.

E) None of the above
F) A) and C)

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Question 73

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The sales volume variance is the difference between sales revenue on the static budget and sales revenue on the flexible budget.

The following static budget is provided: $\begin{array}{lc}&\text { Per Unit }&\text {Total }\\\text { Sales }&\$60&\$900,000\\\text { Less variable costs: }\\ \text { Manufacturing costs } &30 & 450,000 \\ \text { Selling and administrative costs } & \underline{10} & \underline{ 150,000} \\\text { Contribution margin }&\$20&\$300,000\\\text { Less fixed costs: }\\\text { Manufacturing costs } && 75,000 \\\text { Selling and administrative costs } && \underline{ 125,000} \\\text { Total fixed costs } && \underline{ 200,000} \\\text { Net income } && \underline{ \$ 100,000}\end{array}$ What will be the overall volume variance if 12,000 units are produced and sold?

Indicate whether each of the following statements is true or false.The difference between the actual fixed costs and budgeted fixed costs is the spending variance.For fixed costs, there is no flexible budget variance.While total fixed cost does not change in response to changes in the volume of activity, fixed cost per unit does change.To monitor the effects of volume on fixed cost per unit, companies calculate a fixed cost volume variance.The fixed cost volume variance is favorable if actual volume is less than planned because cost per unit is higher than expected.

In the current year, the New Products Division of Testar Company had operating income of $8,000,000 and operating assets of $44,800,000. Testar has set a target return on investment (ROI) of 16% for each of its divisions. Which of the following statements is correct?

The kind of responsibility center that would be evaluated by comparing income on assets to the amount of assets invested is:

Terra Company has two divisions, the Retail Division and the Wholesale Division. The following information was gathered for the two divisions for the current year: $\begin{array}{lcccc}&\text { Retail Division }&\text { Wholesale Divisiot }\\\text { Operating income } & \$ 6,600,000 & \$ 3,100,000 \\\text { Operating assets } & \$ 36,600,000 & \$ 16,600,000\end{array}$ Assuming that these are the only divisions of Terra Company, what is the ROI for the company as a whole?

Decentralization encourages upper level management to concentrate on short-term decisions.

The process of evaluating the performance of individual managers is known as:

The total sales variance includes both price and volume variances.

Spark Company's static budget is based on a planned activity level of 45,000 units. At the same time the static budget was prepared, the management accountant prepared two additional budgets, one based on 40,000 units and one based on 50,000. The company actually produced and sold 49,000 units. In evaluating its performance, management should compare the company's actual revenues and costs to which of the following budgets?

Payne Company reported the following information for the current year: $\begin{array}{llr} \text {Sales } &\$910,000\\ \text { Average operating assets} &\$410,000\\ \text { Desired ROI } &14\%\\ \text { Operating income } &\$61,000\end{array}$ The company's residual income was:

Unless there are other factors to be considered, an investment opportunity with a return on investment that equals or exceeds the company's required rate of return would be accepted.

Select the term from the list that best matches the description or definition. Enter the number of the best answer in "Your Answer" column.

$\begin{array}{lcc}\text { Item to Classify}&\text { Standard }&\text {Actual }\\\text { Sales volume } & 100,000 \text { units } & 96,000 \text { units } \\\text { Sales price } & \$ \quad 4 \text { per unit }&\$ 3.90 \text { per unit }\\\text { Materials usage } & 40,000 \text { gallons } & 42,000 \text { gallons } \\\text { Labor price } & 12.50 \text { per Hour } & 12,45 \text { per hour }\end{array}$ The sales volume variance was:

Which of the following is a difference between a static and a flexible budget?

A static budget is one that shows estimated revenues and costs at multiple activity levels.

Which of the following is a characteristic that is needed for decentralization to work well in an organization?

Retail Sales and Wholesale Sales are the only divisions of Terra Company. The following information was gathered for the two divisions for the current year: $\begin{array}{lcccc}&\text { Retail Division }&\text { Wholesale Divisiot }\\\text { Operating income } & \$ 7,500,000 & \$ 4,000,000 \\\text { Operating assets } & \$ 37,500,000 & \$ 17,500,000\end{array}$ The company has $2,500,000 in operating assets that are not assigned to either of the divisions and $350,000 in corporate expenses that are not reflected in the information above. Based on this information, what is the ROI for the company as a whole?