James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
1. Which of the following types of organizations provide the best indicator of decentralization?
d. A company is organized into investment centers.
2. Return on investment is
b. Net Income ÷ Investment
3. The capital turnover ratio is
c. Sales ÷ Investment
4. The profit margin on sales is
a. Net Income ÷ Sales
5. Return on investment is
e. all of the above.
6. Which of the following would increase the capital turnover ratio?
a. Increase sales with
the same investment base.
7. Which of the following would increase the profit margin on sales?
c. Increase prices with no unfavorable effects on sales.
8. If the return on investment is 20% and the capital turnover ratio is 2, the profit margin on sales is
9. If the capital turnover ratio is 2.5 and the return on sales is 8%, the return on investment is
10. The contribution margin ratio sets the upper limit for
c. the profit margin on sales.
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
12. Which of the following are objectives of transfer pricing?
e. a., b. and c.
13. Economic value added, or residual income is a measurement mainly used to evaluate
d. investment centers.
14. Decomposing, or separating, return on investment (ROI) into two parts provides the
d. sales to investment ratio and net income to sales ratio.
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.
16. Which investment basis (or bases) for the ROI calculation tend (or tends) to cause managers to keep assets too long?
b. net book value.
17. Residual income is
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?
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.
20. Which type of responsibility center has the greatest amount of autonomy?
d. an investment center.