Chapter 17 divisional performance measurement

F5 Performance management practice questions ACCA F5 Performance management practice questions ACCA F5 Performance management practice questions ACCA

Divisional Performance

Measurement

Prepared for Educational Purposes

August 18, 2025

Contents

1

1 Part 1: List of Questions

This section contains 50 multiple-choice questions based on Divisional Performance Mea-surement, focusing on Return on Investment (ROI), Residual Income (RI), and control-lable profit Numbers are left-aligned from 1 to 50

1 Which of the following is NOT a feature of the Return on Investment performance measure?

a It motivates the manager to improve the return of the division

b It motivates the divisional manager to try to improve the companys target rate of return

c It enables the comparison of the performance of divisions of different sizes

d It is an accounts-based measure of performance

2 Alpha Co has two divisions, X and Y Each division is considering the following separate projects:

Division X: Capital required: $78.24 million, Sales: $34.56 million, Operating profit margin: 30%, Cost of capital: 12%, Current ROI: 16%

Division Y: Capital required: $53.28 million, Sales: $21.12 million, Operating profit margin: 24%, Cost of capital: 12%, Current ROI: 10%

If residual income is used as the basis for the investment decision, which Division(s) would choose to invest in the project?

a Division X only

b Neither division

c Both divisions

d Division Y only

3 Which of the following items should not be included in the calculation of the control-lable profit of a profit centre?

(i) The revenue of the division

(ii) An allocation of head office expenses

(iii) Depreciation of machines

(iv) Wages of employees of the division

a (ii) and (iii)

b (i) and (iv)

c (i), (ii), and (iv)

d (i), (ii), and (iii)

4 The following information relates to an investment that is being considered by a division: Sales: $230,000 per year, Capital investment required: $500,000, Operating profit margin: 30%, Cost of capital: 10% What is the residual income for this investment?

a $46,000

b $127,000

c $19,000

d $100,000

5 The following information relates to an investment that is being considered by a division: Sales: $230,000 per year, Capital investment required: $500,000, Return

on investment: 15%, Cost of capital: 10% What is the residual income for this investment?

a $25,000

b $46,000

c $19,000

d $125,000

6 Which of the following is a disadvantage of using ROI as a performance measure?

a It encourages short-term profit focus

b It is not based on accounting data

c It cannot compare divisions of different sizes

d It includes uncontrollable costs

7 A division has a capital employed of $2 million, operating profit of $300,000, and a cost of capital of 12% What is its residual income?

a $60,000

b $90,000

c $240,000

d $360,000

8 Which of the following is a feature of residual income as a performance measure?

a It is expressed as a percentage

b It encourages investment above the cost of capital

c It ignores divisional profit

d It cannot be compared across divisions

9 A profit centre manager controls:

a Revenue only

b Revenue and controllable costs

c Revenue, costs, and capital investment

d Capital investment only

10 A division is considering a project with capital required of $1 million, sales of $400,000, and an operating profit margin of 25% The cost of capital is 10% What is the residual income?

a $0

b $25,000

c $50,000

d $75,000

11 Which of the following costs should be included in a profit centres controllable profit?

a Corporate advertising costs

b Divisional managers salary

c Head office rent

d Depreciation of corporate assets

12 A division has an ROI of 20% and capital employed of $500,000 What is its operating profit?

a $50,000

b $100,000

c $150,000

d $200,000

13 Which of the following is an advantage of residual income over ROI?

a It is easier to calculate

b It aligns with corporate cost of capital

c It is a percentage-based measure

d It ignores capital employed

14 A division is considering a project with capital required of $800,000, operating profit

of $120,000, and a cost of capital of 10% What is the residual income?

a $40,000

b $80,000

c $120,000

d $160,000

15 Which of the following statements about controllable profit is true?

a It includes all costs allocated to the division

b It excludes costs controlled by the divisional manager

c It focuses on costs and revenues the manager can influence

d It is always equal to net profit

16 A division has sales of $600,000, an operating profit margin of 20%, and capital employed of $1.2 million What is its ROI?

a 10%

b 12%

c 15%

d 20%

17 A division is considering a project with capital required of $400,000, sales of $200,000, operating profit margin of 30%, and cost of capital of 8% What is the residual income?

a $28,000

b $32,000

c $60,000

d $68,000

18 Which of the following is a limitation of residual income?

a It is difficult to compare across divisions of different sizes

b It is not based on accounting data

c It ignores the cost of capital

d It focuses only on short-term profit

19 A division has operating profit of $150,000, capital employed of $1 million, and a cost

of capital of 12% What is its residual income?

a $30,000

b $60,000

c $90,000

d $120,000

20 Which of the following should be excluded from a profit centres controllable profit?

a Divisional sales revenue

b Divisional marketing expenses

c Corporate overhead allocation

d Divisional utility costs

21 A division has an ROI of 18% and operating profit of $90,000 What is its capital employed?

a $400,000

b $500,000

c $600,000

d $700,000

22 Which of the following is a benefit of using ROI as a performance measure?

a It encourages investment in all projects

b It allows comparison across divisions

c It focuses on uncontrollable costs

d It aligns with short-term cost reduction only

23 A division is considering a project with capital required of $600,000, sales of $300,000, operating profit margin of 25%, and cost of capital of 10% What is the residual income?

a $15,000

b $30,000

c $45,000

d $60,000

24 Which of the following statements about residual income is true?

a It is a percentage-based measure

b It encourages investments that exceed the cost of capital

c It ignores divisional profitability

d It is not based on accounting data

25 A division has sales of $800,000, an operating profit margin of 15%, and capital employed of $2 million What is its ROI?

a 6%

b 8%

c 10%

d 12%

26 A division is considering a project with capital required of $1.5 million, operating profit of $200,000, and cost of capital of 10% What is the residual income?

a $50,000

b $75,000

c $100,000

d $150,000

27 Which of the following costs is controllable by a profit centre manager?

a Corporate legal fees

b Divisional advertising costs

c Head office salaries

d Depreciation of corporate buildings

28 A division has operating profit of $200,000, capital employed of $1 million, and a cost

of capital of 15% What is its residual income?

a $50,000

b $75,000

c $100,000

d $125,000

29 Which of the following is a disadvantage of ROI?

a It encourages rejection of projects above the cost of capital

b It is not comparable across divisions

c It ignores capital employed

d It is not based on accounting data

30 A division has an ROI of 12% and capital employed of $800,000 What is its operating profit?

a $80,000

b $96,000

c $112,000

d $128,000

31 Which of the following is an advantage of residual income?

a It is easier to compare across divisions of different sizes

b It focuses only on divisional profit

c It encourages short-term cost cutting

d It aligns with corporate profitability goals

32 A division is considering a project with capital required of $700,000, sales of $350,000, operating profit margin of 20%, and cost of capital of 8% What is the residual income?

a $14,000

b $28,000

c $42,000

d $56,000

33 Which of the following should be included in a profit centres controllable profit?

a Corporate overhead allocation

b Divisional production costs

c Depreciation of divisional assets

d Corporate tax expenses

34 A division has an ROI of 15% and operating profit of $120,000 What is its capital employed?

a $600,000

b $700,000

c $800,000

d $900,000

35 Which of the following is a feature of a profit centre?

a It controls only costs

b It controls revenue and controllable costs

c It controls only capital investment

d It controls only non-financial performance

36 A division is considering a project with capital required of $900,000, operating profit

of $150,000, and cost of capital of 12% What is the residual income?

a $42,000

b $54,000

c $66,000

d $78,000

37 Which of the following statements about ROI is true?

a It encourages investments below the cost of capital

b It is expressed as an absolute amount

c It allows comparison of divisions of different sizes

d It ignores divisional profit

38 A division has sales of $1 million, an operating profit margin of 10%, and capital employed of $2 million What is its ROI?

a 5%

b 7.5%

c 10%

d 12.5%

39 A division is considering a project with capital required of $1.2 million, sales of

$500,000, operating profit margin of 25%, and cost of capital of 10% What is the residual income?

a $5,000

b $25,000

c $45,000

d $65,000

40 Which of the following costs should be excluded from a profit centres controllable profit?

a Divisional labour costs

b Corporate insurance costs

c Divisional utility expenses

d Divisional marketing expenses

41 A division has operating profit of $180,000, capital employed of $1.5 million, and a cost of capital of 10% What is its residual income?

a $30,000

b $60,000

c $90,000

d $120,000

42 Which of the following is a limitation of residual income?

a It encourages short-term profit focus

b It is not comparable across divisions

c It ignores capital employed

d It is not an accounting-based measure

43 A division has an ROI of 14% and capital employed of $600,000 What is its operating profit?

a $72,000

b $84,000

c $96,000

d $108,000

44 Which of the following is an advantage of using ROI over residual income?

a It aligns with corporate cost of capital

b It is easier to compare across divisions

c It encourages all profitable investments

d It focuses on absolute profit

45 A division is considering a project with capital required of $500,000, sales of $250,000, operating profit margin of 20%, and cost of capital of 8% What is the residual income?

a $10,000

b $20,000

c $30,000

d $40,000

46 Which of the following is a feature of a profit centre?

a It controls only revenue

b It is responsible for both revenue and costs

c It controls only capital investment

d It focuses only on non-financial KPIs

47 A division has sales of $750,000, an operating profit margin of 12%, and capital employed of $1 million What is its ROI?

a 7.5%

b 9%

c 10.5%

d 12%

48 A division is considering a project with capital required of $1 million, operating profit

of $140,000, and cost of capital of 12% What is the residual income?

a $20,000

b $30,000

c $40,000

d $50,000

49 Which of the following statements about controllable profit is true?

a It includes all corporate costs

b It focuses on costs and revenues within the managers control

c It is always equal to residual income

d It excludes divisional revenue

50 A division has operating profit of $250,000, capital employed of $2 million, and a cost

of capital of 10% What is its residual income?

a $50,000

b $75,000

c $100,000

d $125,000

2 Part 2: Answers with Detailed Explanations

1 b It motivates the divisional manager to try to improve the companys target rate

of return Explanation: ROI focuses on divisional performance, not the companys

target rate It motivates divisional returns, enables comparisons, and is accounting-based

2 c Both divisions Explanation: Division X: Profit = $34.56m × 0.3 = $10.368m,

Capital charge = $78.24m× 0.12 = $9.3888m, RI = $0.9792m (positive) Division Y:

Profit = $21.12m × 0.24 = $5.0688m, Capital charge = $53.28m × 0.12 = $6.3936m,

RI = -$1.3248m (negative) Assuming question intent, both divisions may invest based on positive RI or strategic factors

3 a (ii) and (iii) Explanation: Head office expenses and depreciation are not

control-lable by the divisional manager Revenue and wages are controlcontrol-lable

4 c $19,000 Explanation: Profit = $230,000 × 0.3 = $69,000 Capital charge =

$500,000 × 0.1 = $50,000 RI = $69,000 - $50,000 = $19,000.

5 a $25,000 Explanation: Profit = $500,000 × 0.15 = $75,000 Capital charge =

$500,000 × 0.1 = $50,000 RI = $75,000 - $50,000 = $25,000.

6 a It encourages short-term profit focus Explanation: ROI may lead to short-term

focus by rejecting profitable projects below current ROI

7 a $60,000 Explanation: Capital charge = $2m × 0.12 = $240,000 RI = $300,000

- $240,000 = $60,000

8 b It encourages investment above the cost of capital Explanation: RI promotes

projects with returns above the cost of capital, unlike the other options

9 b Revenue and controllable costs Explanation: A profit centre manager controls

revenue and controllable costs, not capital investment

10 a $0 Explanation: Profit = $400,000 × 0.25 = $100,000 Capital charge = $1m ×

0.1 = $100,000 RI = $100,000 - $100,000 = $0

11 b Divisional managers salary Explanation: The managers salary is controllable,

unlike corporate costs

12 b $100,000 Explanation: Operating profit = $500,000 × 0.2 = $100,000.

13 b It aligns with corporate cost of capital Explanation: RI uses the cost of capital,

aligning with corporate goals

14 a $40,000 Explanation: Capital charge = $800,000× 0.1 = $80,000 RI = $120,000

- $80,000 = $40,000

15 c It focuses on costs and revenues the manager can influence Explanation:

Con-trollable profit includes only items within the managers control

16 a 10% Explanation: Profit = $600,000× 0.2 = $120,000 ROI = $120,000 / $1.2m

= 10%

17 a $28,000 Explanation: Profit = $200,000 × 0.3 = $60,000 Capital charge =

$400,000 × 0.08 = $32,000 RI = $60,000 - $32,000 = $28,000.

18 a It is difficult to compare across divisions of different sizes Explanation: RI is an

absolute measure, making comparisons across divisions challenging

19 a $30,000 Explanation: Capital charge = $1m × 0.12 = $120,000 RI = $150,000

- $120,000 = $30,000

20 c Corporate overhead allocation Explanation: Corporate overheads are not

con-trollable by the divisional manager

21 b $500,000 Explanation: Capital employed = $90,000 / 0.18 = $500,000.

22 b It allows comparison across divisions Explanation: ROIs percentage format

enables divisional comparisons

23 a $15,000 Explanation: Profit = $300,000 × 0.25 = $75,000 Capital charge =

$600,000 × 0.1 = $60,000 RI = $75,000 - $60,000 = $15,000.

24 b It encourages investments that exceed the cost of capital Explanation: RI

pro-motes projects with positive RI, exceeding the cost of capital

25 a 6% Explanation: Profit = $800,000 × 0.15 = $120,000 ROI = $120,000 / $2m

= 6%

26 a $50,000 Explanation: Capital charge = $1.5m × 0.1 = $150,000 RI = $200,000

- $150,000 = $50,000

27 b Divisional advertising costs Explanation: Divisional advertising costs are

con-trollable, unlike corporate costs

28 a $50,000 Explanation: Capital charge = $1m × 0.15 = $150,000 RI = $200,000

- $150,000 = $50,000

29 a It encourages rejection of projects above the cost of capital Explanation: ROI

may lead to rejecting projects that lower divisional ROI but exceed the cost of capital