Chapter 11

Question 1

When a manager has control over and is accountable for cost, profit or investments of an organization, it is called ________.

Answer 1

responsibility center

Question 2

For the year 2015, Systems Corporation earned a net operating income of $2 million on sales of $6 million. Assume that the company’s average operating assets were $20 million. What is the company’s ROI?

Answer 2

10%

Question 3

Return on Investment can be calculated by each of the following formulas except ________.

Margin/Turnover
Margin x Turnover
Net Operating Income/Average Operating Assets

Answer 3

Margin/Turnover

Question 4

Residual income = Net operating income less ________.

Answer 4

(Average operating assets x Minimum required rate of return)

Question 5

Axis Corporation’s Division A has average operating assets of $500,000 and the division earned $100,000 as net operating income during a period. The company expects a minimum required rate of return of 15% on its investments. What is the residual income for Division A?

Answer 5

25,000

Question 6

Residual income is a better measure for performance evaluation of an investment center manager than return on investment because ________.

Answer 6

it encourages managers to make investments that are profitable for the entire company

Question 7

A major drawback of residual income is that ________.

Answer 7

it cannot be used to compare the performances of divisions of different sizes