Cost - Ch 14 Business Unit Performance
Measurement questions with answers.
Divisional income, ROI, residual income, and EVA are financial performance measures that consider the
activities of the business unit ______________ ANS -independently of other units in the firm.
One problem with divisional income, ROI, residual income and EVA is they ANS -ignore the effect of
decisions on othe rbuisness units.
The ______________________ ratio includes the effect of divisional activities on taxes. ANS -profit
margin
Financial ratios:
A. address comparing divisions of different sizes
B. address the omission of asset usage in performance measures ANS -Only A. is true
Divisonal income statements: ANS -Serve as a useful summary measure of performance by equally
weighting the division's performance on revenue and cost activities.
An internal performance measure.
Disadvantage: Divisions may be different sizes.
Measure does not fully reflect the manager's decision authority.
May ignore income taxes
May use firmwide averages for some accounts.
, Divisional income ANS -Divisional revenues minus divisional costs
Advantages of using after-tax divisional income as a performance measure include ANS -* It
summarizes the results of decisions affecting revenues and costs.
* The income computation matches the way the firm's income is computed.
Gross margin ANS -(Sales - COGS) / sales
Operating margin ratio ANS -Operating income / sales
The __________________________ ratio ignores costs other than COGS. ANS -gross margin
Evaluating inventory levels would be a possible response to a reduction in ANS -Asset turnover
One issue with accounting information is that it treats ______________ costs as providing benefits in
the future. ANS -sunk
If the NPV of a project is positive: ANS -* the firm will benefit from the project
* it is an acceptable investment
When ROI is used as a performance measure: ANS -* Poorly performing divisions have the incentive to
adopt more projects.
* Both myopia and suboptimation can occur
Measurement questions with answers.
Divisional income, ROI, residual income, and EVA are financial performance measures that consider the
activities of the business unit ______________ ANS -independently of other units in the firm.
One problem with divisional income, ROI, residual income and EVA is they ANS -ignore the effect of
decisions on othe rbuisness units.
The ______________________ ratio includes the effect of divisional activities on taxes. ANS -profit
margin
Financial ratios:
A. address comparing divisions of different sizes
B. address the omission of asset usage in performance measures ANS -Only A. is true
Divisonal income statements: ANS -Serve as a useful summary measure of performance by equally
weighting the division's performance on revenue and cost activities.
An internal performance measure.
Disadvantage: Divisions may be different sizes.
Measure does not fully reflect the manager's decision authority.
May ignore income taxes
May use firmwide averages for some accounts.
, Divisional income ANS -Divisional revenues minus divisional costs
Advantages of using after-tax divisional income as a performance measure include ANS -* It
summarizes the results of decisions affecting revenues and costs.
* The income computation matches the way the firm's income is computed.
Gross margin ANS -(Sales - COGS) / sales
Operating margin ratio ANS -Operating income / sales
The __________________________ ratio ignores costs other than COGS. ANS -gross margin
Evaluating inventory levels would be a possible response to a reduction in ANS -Asset turnover
One issue with accounting information is that it treats ______________ costs as providing benefits in
the future. ANS -sunk
If the NPV of a project is positive: ANS -* the firm will benefit from the project
* it is an acceptable investment
When ROI is used as a performance measure: ANS -* Poorly performing divisions have the incentive to
adopt more projects.
* Both myopia and suboptimation can occur
