# Chapter 11 - Performance Measurement in Decentralized Organizations Flashcards

What 3 centers are known as responsibility centers?

- Cost Centers
- Profit Centers
- Investment Centers

What do cost center managers have control over?

Costs

What do profit center managers have control over?

Costs and Revenues

What do investment center managers have control over?

Costs, Revenues, and Investments in operating assets

What are the 2 formulas to find the return on investment?

- Net operating income / Average operating assets

2. Margin x Turnover

List 4 average operating assets

- Cash
- Accounts receivable
- Inventory
- Plant and equipment

What is the formula to find the margin?

Net operating income / Sales

What is the formula to find the turnover?

Sales / Average operating assets

What is the formula to find net operating income?

Sales - Operating expenses

Regal Company reports the following: Net operating income = $30,000 Average operating assets = $200,000 Sales = $500,000 Operating expenses = $470,000

What is the Regal Company’s ROI?

ROI = (NOI / AOA) x 100 ROI = (30,000 / 200,000) x 100 ROI = 15%

Assume that Regal’s manager invests in a $30,000 piece of equipment that increases sales by $35,000, while increasing operating expenses by $15,000.

Regal Company reports the following: Net operating income = $50,000 Average operating assets = $230,000 Sales = $535,000 Operating expenses = $485,000

What is the Regal Company’s ROI?

ROI = (NOI / AOA) x 100 ROI = (50,000 / 230,000) x 100 ROI = 21.8%

What measures net operating income above some minimum return on operating assets?

The residual income

What is the formula to find the residual income?

NOI - (Average operating assets x Min. required rate of return)

The Retail Division of Zephyr, Inc. has average operating assets of $100,000 and is required to earn a return of 20% on these assets.

In the current period, the division earns $30,000.

Calculate the residual income

RI = NOI - (AOA X Min. req RoR) RI = 30,000 - (100,000 x 20%) RI = 30,000 - 20,000 RI = $10,000

What encourages managers to make profitable investments that would be rejected by managers using ROI?

Residual income