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Chapter 24: Q19RQ (page 1355)
What does ROI measure?
ROI measures percentage return earned on the average total assets of the business entity.
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What are some limitations of financial performance measures?
Wolf Paints is a national paint manufacturer and retailer. The company is segmented into five divisions: Paint Stores (branded retail locations), Consumer (paint sold through home improvement stores), Automotive (sales to auto manufacturers), International, and Administration. The following is selected divisional information for its two largest divisions: Paint Stores and Consumer.
Net Sales Operating Average
Revenue Income Total Assets
Paint Stores \( 3,980,000 \) 476,000 $ 1,380,000
Consumer 1,315,000 195,000 1,600,000
Management has specified a 21% target rate of return.
Requirements
1. Calculate each division鈥檚 ROI. Round all of your answers to four decimal places.
2. Calculate each division鈥檚 profit margin ratio. Interpret your results.
3. Calculate each division鈥檚 asset turnover ratio. Interpret your results.
4. Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results.
5. Calculate each division鈥檚 RI. Interpret your results, and offer a recommendation for any division with negative RI.
6. Describe some of the factors that management considers when setting its minimum target rate of return.
What is a transfer price?
Question:The accountant for a subunit of Speed Sports Company went on vacation before completing the subunit鈥檚 monthly responsibility report. This is as far as she got:
Speed鈥擲ubunit X Revenue by Product Actual Results Flexible Budget Variance Flexible Budget Sales Volume Variance Static Budget
Downhill-RI \( 321,000 (a) (b) \) 17,000 F \( 295,000
Downhill-RII 151,000 (c) \) 161,000 (d) 145,000
Cross-EXI 285,000 \( 3,000 U 288,000 (e) 303,000
Cross-EXII 259,000 (f) 255,000 16,500 U 271,500
Snow-LXI 425,000 2,000 F (g) (h) 404,000
Total \) 1,441,000 (i) (j) (k) \( 1,418,500
Requirements
1. Complete the responsibility report for this subunit.
2. Based on the data presented, what type of responsibility center is this subunit?
3. Which items should be investigated if part of management鈥檚 decision criteria is to investigate all variances exceeding \)12,000?
Explain the difference between a lag indicator and a lead indicator.
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