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Exam 19: Divisional Financial Performance Measures

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Question 1

Multiple Choice

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A disadvantage of ROI is

A) it leads to goal incongruence.
B) its short-run focus.
C) its focus on divisional profit rather than overall profit of the firm.
D) all of the above.

E) A) and C)
F) B) and C)

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D

Question 2

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The Marketing Department is most likely considered to be a(n)

A) profit centre.
B) revenue centre.
C) investment centre.
D) cost centre.

E) A) and D)
F) A) and C)

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Question 3

Multiple Choice

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In order to promote goal congruence, a manager of an investment centre is best evaluated using

The following information is provided: $\begin{array}{rrr}& \text { Operating } & \text { Average Operating } \\\text { Froject } & \text { Income } & \text { Investment }\\\hline\text {A }& £ 44,000 & £ 400,000 \\\text { B } & 70,000 & 800,000 \\\text { C } & 30,000 & 600,000\end{array}$ Assume the division's current ROI is 10 per cent and the firm's minimum required rate of return is 8 per cent. If you were the division manager and you were evaluated based on ROI, which projects would you accept?

Figure 19-4 Beta Division had the following information: $\begin{array}{lr}\text { Asset base in Beta Division } & £ 400,000 \\\text { Net income in Beta Division } & £ 50,000 \\\text { Weighted average cost of capital } & 12 \% \\\text { Target ROI } & 15 \% \\\text { Margin for Beta Division } & 20 \%\end{array}$ -Refer to Figure 19-4. What is EVA for Beta Division?

Profit centre managers would be evaluated based on

GreenWorld Company wants to increase its ROI from 20 per cent to 25 per cent in the current year. They cannot increase operating income and sales from the previous year's levels of £50,000 and £1,200,000, respectively. To increase ROI, GreenWorld should

The operating margin for the Randall Company last year was 8 per cent. If total sales are £1,250,000 and average operating assets are £400,000, ROI was

Investment centre managers would be evaluated based on

A possible disadvantage of a decentralized organization is that

O'Neil Company requires a return on capital of 15 per cent. The following information is available for 2011: $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Division } \mathrm{X} \quad\quad\quad\quad\quad\quad \text { Division } Y \quad\quad\quad\quad\quad \text { Division } \mathrm{Z}$ $\begin{array}{lrrrrrr}&\text { Book }& \text { Current } & \text { Book } &\text { Current }& \text { Book } &\text { Current }\\\hline\text { Sales } & £ 200,000 & £ 200,000 & £ 400,000 & £ 400,000 & £ 600,000 & £ 600,000 \\\text { Income } & 24,000 & 20,000 & 32,000 & 34,000 & 37,500 & 39,000 \\\text { Assets } & 120,000 & 160,000 & 180,000 & 200,000 & 450,000 & 435,000\end{array}$ A)Compute return on investment using both book and current values for each division. (Round answer to three decimal places.) B)Compute residual income for both book and current values for each division. C)Does book value or current value provide the better basis for performance evaluation? D)Which division do you consider the most successful?

Which of the following measures should companies use for performance evaluation?

Correll Company has two divisions, A and B. Information for each division is as follows: $\begin{array}{lcc}&A&B\\\text { Net earnings for divi sion } & £ 40,000 & £ 260,000 \\\text { Asset base for division } & £ 100,000 & £ 1,200,000 \\\text { Target rate of return } & 15 \% & 18 \% \\\text { Margin } & 10 \% & 20 \% \\\text { Weighted average cost of capital } & 12 \% & 12 \%\end{array}$ What is the residual income for A?

The manager of the recently formed Oak Division of Parkes, Incorporated, is evaluating the following four investment opportunities available to the division. Parkes, Incorporated, requires a minimum return of 10 per cent. $\begin{array}{l}\text { Investment }\\\begin{array} { c r c } \text { Opportunity } & { \text { Income } } & \text { Investment } \\\hline 1 & £ 91,000 & £ 650,000 \\2 & 63,000 & 700,000 \\3 & 59,400 & 540,000 \\4 & 117,600 & 980,000\end{array}\end{array}$ a.Calculate the return on investment (ROI) for each investment opportunity. b.If only one investment opportunity can be funded and the division is evaluated based on ROI, which investment opportunity would be accepted? c.If Parkes, Incorporated, can fund all of the projects and wishes to achieve the best possible performance, which investments would be accepted?

An example of an investment centre is a

Decentralization occurs when

Figure 19-1 $\begin{array} { c c c } \text { Project } & \text { Income } & \text { Investment } \\\text { A } & £ 40,000 & £ 800,000 \\\text { B } & 44,000 & 400,000 \\\text { C } & 46,875 & 625,000\end{array}$ Assume the division's current ROI is 10 per cent and the firm's minimum required rate of return is 6 per cent. -Refer to Figure 19-1 above. If you were the president of the firm, which projects would you want the division manager to accept?

The following information is provided: $\begin{array}{crc}\text { Froject } & \text { Income } & \text { Investment } \\\mathrm{A} & £ 33,000 & £ 300,000 \\\mathrm{~B} & 56,250 & 750,000 \\\mathrm{C} & 27,500 & 550,000\end{array}$ Assume the division's current ROI is 10 per cent and the firm's minimum required rate of return is 7 per cent. If you were the president of the company, which projects would you want the division manager to accept?

Dizzy Company's Asian Division employed capital of £250,000 last year. If the weighted average cost of capital is 15 per cent and if last year's after-tax income was £50,000, then EVA for the Asian Division last year was

Which of the following is a disadvantage of both residual income and ROI?