1. One of the divisions at Johnson Co. had a negative amount of Residual Income last year. This indicates that:

a. the divisions ROI was greater than the minimum required rate of return for the division

b. the divisions ROI was less than the minimum required rate of return for the division

c. the divisions ROI was the same as the minimum required rate of return for the division

d. not enough information is available to answer this question

2. ROI used alone as a performance measure encourages managers to accept all investment decisions that will benefit the company as a whole.

a. True b. False

Questions 3-5 refer to the following:

The Jenkins Division recorded operating data as follows for the past year:

Sales $600,000

Gross margin 60,000

Net operating income 30,000

Stockholders equity 50,000

Average operating assets 200,000

Minimum required rate of return 12%

3. For the past year, the return on investment was:

a. 5% c. 30%

b. 15% d. 25%

4. The residual income for the Jenkins Division would be:

a. $6,000 c. $24,000

b. $12,000 d. unknown given the limited data available.

5. Assume that the Jenkins Division has the opportunity to invest in a project that will cost $50,000 and will yield annual net income of $8,000. Which of the two measuresROI or Residual Incomewould be increased if Jenkins made this investment?

a. only ROI would increase

b. only Residual Income would increase

c. both ROI and Residual Income would increase

d. neither ROI nor Residual Income would increase