CHAPTER 19 STRATEGIC
PERFORMANCE MEASUREMENT—
INVESTMENT CENTERS QUESTIONS
WITH ANSWERS.
What is meant by the term investment center? How is the financial performance of investment center is
measured ? ANS -Investment centers are commonly used when there are a number of businessunits to
be compared, and/or when top management intends to evaluate theeconomic performance of the
business unit relative to alternative investments. Bydefinition, managers of these business units exercise
control over revenues,costs, and the level of investment in the business unit. The profit per
dollarinvested (usually called the "return") can be compared to the rate of return foralternative
investments⎯other types of business units or other investmentpossibilities. Commonly, the rate of return
is determined by taking the ratio of theamount of profit divided by the amount invested in the business
unit.
What is return on investment (ROI), and how is it calulated? ANS -Return on investment (ROI) is the
ratio of some measure of Profit to some measure of "investment capital" for the business unit.
What are the measurement issues to consider when using return in investment (ROI)? ANS -The primary
measurement issues for ROI are:1. The effect of accounting policies, which affect the determination of
"income."
2. Other measurement issues for income, which include the handling of nonrecurring items in the
income statement, differences in the effect of incometaxes across units, differential effect of foreign
currency exchange, and theeffect of cost allocation when two or more units share a facility or cost.
3. Measuring investment: which assets to include.
4. Measuring investment: whether and how to allocate the cost of shared assets.
What are the advantages and limitations of return on investment (ROI) as a performance measure? ANS
-The primary advantages of using return on investment (ROI) as a performance indicator are:
1. It is intuitive and easily understood.
2. It provides a useful basis for comparison among SBUs.
3. It is widely used.
PERFORMANCE MEASUREMENT—
INVESTMENT CENTERS QUESTIONS
WITH ANSWERS.
What is meant by the term investment center? How is the financial performance of investment center is
measured ? ANS -Investment centers are commonly used when there are a number of businessunits to
be compared, and/or when top management intends to evaluate theeconomic performance of the
business unit relative to alternative investments. Bydefinition, managers of these business units exercise
control over revenues,costs, and the level of investment in the business unit. The profit per
dollarinvested (usually called the "return") can be compared to the rate of return foralternative
investments⎯other types of business units or other investmentpossibilities. Commonly, the rate of return
is determined by taking the ratio of theamount of profit divided by the amount invested in the business
unit.
What is return on investment (ROI), and how is it calulated? ANS -Return on investment (ROI) is the
ratio of some measure of Profit to some measure of "investment capital" for the business unit.
What are the measurement issues to consider when using return in investment (ROI)? ANS -The primary
measurement issues for ROI are:1. The effect of accounting policies, which affect the determination of
"income."
2. Other measurement issues for income, which include the handling of nonrecurring items in the
income statement, differences in the effect of incometaxes across units, differential effect of foreign
currency exchange, and theeffect of cost allocation when two or more units share a facility or cost.
3. Measuring investment: which assets to include.
4. Measuring investment: whether and how to allocate the cost of shared assets.
What are the advantages and limitations of return on investment (ROI) as a performance measure? ANS
-The primary advantages of using return on investment (ROI) as a performance indicator are:
1. It is intuitive and easily understood.
2. It provides a useful basis for comparison among SBUs.
3. It is widely used.
