Multiple Choice Questions
1. Candy Creations had sales of $950,000 and net operating income of $575,000. Operating assets during the year averaged $450,000. The manager of Candy Creations is considering the acquisition of a new machine that would increase average operating assets by 10 percent.
The new ROI would be:
a. 60.5%
b. 116.2%
c. 127.7%
d. 211.1%

2. Residual income:
a. Is an alternative to ROI for manager performance evaluation
b. Is the amount of income earned in excess of a predetermined minimum level of return on assets
c. Is equal to ROI – (Average operating assets x Minimum required rate of return)
d. Both a and b

3. Economic value added is equal to:
a. Before-tax operating profit – ((Total Assets – Current liabilities) x Weighted-average cost of capital)
b. After-tax operating profit – ((Total Assets – Current liabilities) x Weighted-average cost of capital)
c. Before-tax operating profit – ((Current Assets – Current liabilities) x Weighted-average cost of capital)
d. After-tax operating profit – ((Current Assets – Current liabilities) x Weighted-average cost of capital)

4. Which of the following statements comparing ROI and residual income is correct?
a. ROI is more useful as a performance measure for a single investment center.
b. Residual income is a better comparative measure than ROI.
c. ROI and residual income are equally good performance measures for a single investment center.
d. Residual income is more useful as a performance measure for a single investment center.

5. Managers may not perform at a desired level for a number of reasons. Which of the following is not one of those reasons?
a. Managers may lack the skills and abilities.
b. Managers may not be motivated enough to put forth the required effort.
c. a is a reason, but not b.
d. Neither a nor b is a reason.

6. Congress has restricted the tax deduction for executive compensation that is not tied to company performance. What is the limit on that tax deduction?
a. $1 million
b. $2 million
c. $5 million
d. $10 million

7. Creative Child Learning Company manufactures and sells children’s CD-ROMs. The costs per unit for “Kid Fun” CD-ROMs are as follows:
Direct materials ........... $2.50
Direct labor ............ 4.50
Variable overhead .......... 2.00
Fixed overhead ........... 0.80
Total cost ............. $9.80
The company sells CD-ROMs to retail outlets for full cost plus a 25 percent markup. Each “Kid Fun” CD can also be sold to another corporate division to be upgraded and packaged with other CD-ROMs. The minimum transfer price for “Kid Fun” CD-ROMs, assuming that no contribution margin loss on outside sales exists, is:
a. $7.00
b. $9.00
c. $9.80
d. less than $7.00

8. Silly Slippers Company manufactures and sells children’s slippers. The costs for each pair of infant slippers are as follows:
Direct materials ........... $0.75
Direct labor ........... 1.00
Variable overhead ......... 1.00
Fixed overhead ........... 0.25
Total cost ............. $3.00
The company sells slippers to retail outlets for full cost plus a 20 percent markup. Slippers can also be sold to another corporate division to be packaged with a bib and a rattle as a gift set. Because an outside market exists for the product, the appropriate transfer price would be:
a. $2.25
b. $3.00
c. $3.60
d. It cannot be determined from the information provided.