A division reports sales of $1,200,000, an operating margin of 12%, and average operating assets of $900,000. Using operating income divided by average operating assets, what is the division's return on investment?
A. 16.0%
B. 12.0%
C. 13.3%
D. 75.0%
Show answer and reasoning
Correct answer: A. 16.0%
Operating income = $1,200,000 × 12% = $144,000. ROI = $144,000 ÷ $900,000 = 16.0%.
- B: This is the operating margin, not ROI; it omits asset utilization.
- C: This divides assets by neither income nor sales and does not reproduce the ROI formula.
- D: This is the asset-turnover denominator relationship inverted and is not a return percentage.
Source: PRIMARY -- Section 9.3, Investment Centers subsection and ROI formula (https://openstax.org/books/principles-managerial-accounting/pages/9-3-describe-the-types-of-responsibility-centers)
A planning system imports unit-demand forecasts from regional spreadsheets. One file contains text in a numeric quantity field and another contains 900,000 units where the approved range is 0–90,000. Which preventive control most directly addresses both errors before the forecasts enter the model?
A. Reconcile total actual sales after the reporting period
B. Back up the model after each successful forecast run
C. Encrypt every spreadsheet while it is stored
D. Validate field type and approved numerical range at import
Show answer and reasoning
Correct answer: D. Validate field type and approved numerical range at import
Type and range validation tests whether inputs conform to defined syntax and acceptable values before processing. Reconciliation is detective and later; backup and encryption protect availability or confidentiality but do not establish input validity.
- A: A later actual-sales reconciliation may detect consequences but does not prevent malformed forecast inputs.
- B: A backup preserves a copy; it does not determine whether imported values are valid.
- C: Encryption protects confidentiality but does not correct an invalid type or out-of-range value.
Source: PRIMARY -- NIST SP 800-53 Rev. 5, control SI-10 Information Input Validation (https://csrc.nist.gov/pubs/sp/800/53/r5/upd1/final)
At the end of March, a company learns that a key material will remain 9% more expensive through December and that expected unit volume has fallen. Management wants an updated twelve-month outlook while preserving the original annual budget as the performance baseline. Which sequence is most appropriate?
A. Overwrite the approved annual budget with actual March results, then hold all remaining assumptions constant
B. Update the rolling forecast; retain the approved budget as the performance baseline
C. Prepare only a cash budget because revised operating assumptions should not affect forecasted income
D. Delay any update until year-end so the original budget and latest forecast cannot differ
Show answer and reasoning
Correct answer: B. Update the rolling forecast; retain the approved budget as the performance baseline
A forecast should incorporate current expectations. Keeping the approved budget separately preserves the original target and allows management to distinguish planning updates from performance against the authorized baseline.
- A: Overwriting the approved baseline destroys the reference needed to evaluate performance and ignores known future changes.
- C: Changed price and volume assumptions affect operating results as well as cash; a cash-only update is incomplete.
- D: A forecast that ignores material new information no longer represents management's current outlook.
Source: PRIMARY -- Section 7.5, budget-to-actual evaluation and variance analysis (https://openstax.org/books/principles-managerial-accounting/pages/7-5-explain-how-budgets-are-used-to-evaluate-goals)
A product has a budgeted selling price of $30 and variable cost of $18 per unit. The company budgeted 10,000 units but sold 12,000 units; fixed costs were unchanged. What is the favorable operating-income effect attributable solely to the 2,000-unit volume increase?
A. $60,000 favorable
B. $36,000 unfavorable
C. $24,000 favorable
D. $20,000 favorable
Show answer and reasoning
Correct answer: C. $24,000 favorable
Contribution margin per unit = $30 − $18 = $12. Volume effect = 2,000 additional units × $12 = $24,000 favorable.
- A: This uses selling price rather than contribution margin and ignores the variable cost of added units.
- B: This uses variable cost per unit and labels a beneficial increase as unfavorable.
- D: This uses the unit increase multiplied by an unsupported $10 amount.
Source: PRIMARY -- Section 3.1, contribution margin per unit and total contribution margin (https://openstax.org/books/principles-managerial-accounting/pages/3-1-explain-contribution-margin-and-calculate-contribution-margin-per-unit-contribution-margin-ratio-and-total-contribution-margin)
A division earns $240,000 on average operating assets of $1,500,000. The company requires 12%. A proposed project would earn 14% on $500,000 of additional assets. If the manager is evaluated on residual income, what is the project's effect and the economically consistent decision?
A. Residual income decreases by $10,000; reject
B. Residual income increases by $10,000; accept
C. Residual income increases by $70,000; accept
D. Residual income is unchanged because the project's ROI is below the division's current ROI
Show answer and reasoning
Correct answer: B. Residual income increases by $10,000; accept
Project income = $500,000 × 14% = $70,000. Required return = $500,000 × 12% = $60,000. Incremental residual income = $10,000, so accepting increases divisional residual income even though 14% is below the division's current 16% ROI.
- A: The project earns two percentage points above the required return, so its residual-income contribution is positive, not negative.
- C: $70,000 is project operating income before deducting the required return on the added assets.
- D: A project below the division's existing ROI can still increase residual income when it exceeds the company's required return.
Source: PRIMARY -- Section 12.3, Calculation and Interpretation of Residual Income (https://openstax.org/books/principles-managerial-accounting/pages/12-3-evaluate-an-operating-segment-or-a-project-using-return-on-investment-residual-income-and-economic-value-added)
