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| 1 | |
Return on investment (ROI) (profit ÷ invested capital) is the most appropriate measure of the performance of: |
| | A) | revenue centre managers |
| | B) | profit centre managers |
| | C) | investment centre managers |
| | D) | profit centre and investment centre managers |
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| 2 | |
If Academic Software Company reported a sales margin of 20% and an investment turnover of 2, the company’s return on investment (ROI) is: |
| | A) | 10% |
| | B) | 20% |
| | C) | 30% |
| | D) | 40% |
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| 3 | |
The Bakery Division of Food Products Unlimited is considering an investment in a new product line. The new product line has an estimated cost of $2 000 000. If Food Products Unlimited has a target rate of return of 15%, the return on investment required by this new product line to generate $200 000 of residual income is: |
| | A) | 10% |
| | B) | 15% |
| | C) | 20% |
| | D) | 25% |
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| 4 | |
Consider the following statements regarding residual income: i. An advantage of residual income is that it promotes goal congruence when used instead of ROI for evaluating managers’ performance.
ii. An advantage of residual income is that it can be used to compare the performance of different sized businesses.
iii. Residual income is a percentage measure, not a dollar measure.
Which of the above statements is (are) false? |
| | A) | i. |
| | B) | ii. |
| | C) | iii. |
| | D) | ii and iii. |
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| 5 | |
The focus of return on investment is on: |
| | A) | the total dollar amount of profit that each investment centre earned |
| | B) | the total dollar amount of the assets used by the investment centre |
| | C) | the total dollar amount of costs incurred by the investment centre |
| | D) | the investment centre’s effective use of its invested capital to earn a profit |
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| 6 | |
The Skateboard Division of Skeg Sporting Goods Company wants to improve its return on investment (ROI). What would be the best way to achieve this? |
| | A) | Increase return on sales and increase profit. |
| | B) | Increase capital invested and increase contribution margin. |
| | C) | Increase return on sales and increase investment turnover. |
| | D) | Decrease return on sales and decrease investment turnover. |
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| 7 | |
Two advantages of ROI are that: |
| | A) | it encourages managers to focus on both profits and short-term financial performance |
| | B) | it encourages managers to defer the replacement of old assets and focus on cost cutting |
| | C) | it encourages managers to focus on profits and the deferment of investment in new projects |
| | D) | it discourages managers from excessive investment in assets and may be used to evaluate the relative performance of investment centres |
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| 8 | |
An increase in investment turnover can be achieved by: |
| | A) | decreasing sales revenue and increasing the business unit’s invested capital |
| | B) | increasing sales revenue and decreasing the business unit’s invested capital |
| | C) | decreasing profit and increasing sales revenue |
| | D) | increasing profit and increasing sales revenue |
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| 9 | |
Consider the following statements regarding dysfunctional decisions arising from the significant emphasis placed on achieving ROI: i. Emphasising ROI encourages managers to focus on short-term financial performance, at the expense of the long term.
ii. Emphasising ROI can encourage managers to defer asset replacement.
iii. Emphasising ROI may discourage managers investing in projects that are acceptable from the total organisation’s point of view.
Which of the above statements is (are) true? |
| | A) | i. |
| | B) | ii. |
| | C) | iii. |
| | D) | i., ii and iii. |
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| 10 | |
The four aspects of value-based management (VBM) are: |
| | A) | valuation, strategy, finance and corporate governance |
| | B) | shareholders, profitability, finance and strategy |
| | C) | managers, shareholders, strategy and corporate governance |
| | D) | profitability, increasing dividends, responsibility accounting and strategy |
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