Question

Which of the following statements concerning performance evaluation tools used in decentralized operations is​ correct?

A. A​ segment’s return on investment can be calculated by multiplying the​ segment’s sales margin percentage by its capital turnover ratio.

B. Segment margin is calculating by subtracting the common fixed costs allocated to a segment from the​ segment’s contribution margin.

C. A positive residual income indicates that a​ segment’s return on investment is less than the​ company’s target rate of return.

D. Performance reports can only be used to evaluate the performance of cost centers.

E. Segmented income statements are also referred to as budget versus actual reports.

Answer 1

A​ segment’s return on investment can be calculated by multiplying the​ segment’s sales margin percentage by its capital turnover ratio.

Segment’s sales margin = Net operating income/Sales

Capital turnover ratio = Sales/Average Operating assets

Return on investment = Sales margin X Capital turnover ratio

A positive residual income indicates that a​ segment’s return on investment is greater than the​ company’s target rate of return.

Performance reports can only be used to evaluate the performance of cost centers, revenue centers, profit centers, investment centers.

Option A is correct