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Chapter 14 Extra MC Questions

James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

Chapter 14 | MAAW's Textbook Table of Contents

1. Which of the following types of organizations provide the best indicator of decentralization?

a. A company is organized into revenue centers.
b. A company is organized into cost centers.
c. A company is organized into profit centers.
d. A company is organized into investment centers.
e. A company organized into responsibility centers.

2. Return on investment is

a. Net Income ÷ Sales
b. Net Income ÷ Investment
c. Sales ÷ Investment
d. Investment ÷ Sales
e. None of the above.

3. The capital turnover ratio is

a. Net Income ÷ Sales
b. Net Income ÷ Investment
c. Sales ÷ Investment
d. Investment ÷ Sales
e. None of the above.

4. The profit margin on sales is

a. Net Income ÷ Sales
b. Net Income ÷ Investment
c. Sales ÷ Investment
d. Investment ÷ Sales
e. None of the above.

5. Return on investment is

a. (Capital Turnover Ratio)(Net Income ÷ Sales)
b. (Capital Turnover Ratio)(Profit Margin on Sales)
c. (Sales ÷ Investment)(Profit Margin on Sales)
d. (Sales ÷ Investment)(Net Income ÷ Sales)
e. all of the above.

6. Which of the following would increase the capital turnover ratio?

a. Increase sales with the same investment base.
b. Increase the investment base with the same sales level.
c. Increase prices with no unfavorable effects on sales.
d. Increase cost with no unfavorable effects on sales.
e. none of the above.

7. Which of the following would increase the profit margin on sales?

a. Increase sales with the same the investment base.
b. Increase the investment base with the same sales level.
c. Increase prices with no unfavorable effects on sales.
d. Increase cost with no unfavorable effects on sales.
e. none of the above.

8. If the return on investment is 20% and the capital turnover ratio is 2, the profit margin on sales is

a. 1%
b. 10%
c. 22%
d. 40%
e. none of these.

9. If the capital turnover ratio is 2.5 and the return on sales is 8%, the return on investment is

a. 3.2%
b. 8%
c. 10.5%
d. 20%
e. none of these.

10. The contribution margin ratio sets the upper limit for

a. net income.
b. the capital turnover ratio.
c. the profit margin on sales.
d. return on investment.
e. none of the above.

11. Assume that the cost of capital, or minimum desired rate of return is 10% after taxes. If net income after taxes is $150,000 and total assets are $500,000, then residual income is

a. $50,000
b. $100,000
c. $150,000
d. none of the above.

12. Which of the following are objectives of transfer pricing?

a. To aid in evaluating division performance.
b. To maintain division autonomy.
c. To provide the buying segment with the information needed for the make or buy question.
d. a. and b.
e. a., b. and c.

13. Economic value added, or residual income is a measurement mainly used to evaluate

a. revenue centers.
b. cost centers.
c. profit centers.
d. investment centers.
e. responsibility centers.

14. Decomposing, or separating, return on investment (ROI) into two parts provides the

a. return on investment ratio and residual income ratio.
b. net income to investment ratio and sales dollars to costs ratio.
c. sales to net income ratio and investment to net income ratio.
d. sales to investment ratio and net income to sales ratio.
e. none of these.

15. Which investment basis (or bases) for the ROI calculation tend (or tends) to cause managers to dispose of assets too soon?

a. gross book value.
b. net book value.
c. replacement costs.
d. a and b.
e. none of these.

16. Which investment basis (or bases) for the ROI calculation tend (or tends) to cause managers to keep assets too long?

a. gross book value.
b. net book value.
c. replacement costs.
d. a and b.
e. none of these.

17. Residual income is

a. income based on compound or annuity depreciation.
b. income after subtracting interest on long term debt.
c. income after subtracting depreciation. d. income after adjusting assets to current value.
e. income after subtracting a minimum desired amount of income.

18. Which measurement (or measurements) below would tend to favor large divisions over small divisions if the divisions were ranked?

a. Return on investment.
b. Residual income.
c. Net income.
d. a and b.
e. b and c.

19. The main argument for the use of residual income (RI) as a measure of performance for investment centers, as opposed to the ROI, is that

a. RI will not cause managers to reject investment alternatives that generate a return greater than the cost of capital, but lower than the divisions average ROI.
b. RI is a more equitable way to compare different size divisions and different aged divisions.
c. since RI is an absolute amount, rather than a percentage, the problems associated with choosing a denominator (gross book value or net book value etc.) are eliminated.
d. RI is simply easier to calculate than ROI.
e. None of these.

20. Which type of responsibility center has the greatest amount of autonomy?

a. a revenue center.
b. a cost center.
c. a profit center.
d. an investment center.
e. none of these.

Chapter 14 MC Solution