Deck 10: Decentralization: Responsibility Accounting, Performance

Question 1

One disadvantage of ROI in evaluating performance is that it encourages managers to slack off.

Answer 1

False

Question 2

Local managers can make better decisions using distant information and outside managers can provide more timely responses to changing conditions.

Answer 2

False

Question 3

In an investment responsibility center, the manager is only responsible for costs.

Answer 3

False

Question 4

In centralized organizations, lower-level managers are responsible only for implementing decisions.

Question 5

Return on investment (ROI) refers to earnings before interest and income taxes.

Question 6

Margin is the ratio of operating income to sales.

Question 7

Decentralization is the practice of delegating decision-making authority to the lower levels of management.

Question 8

It is important for the multinational firm to separate the evaluation of a division manager from the division.

Question 9

The transfer price is revenue to the selling division and cost to the buying division.

Question 10

Cognitive limitations mean it is difficult for central managers to be fully knowledgeable about all products and markets.

Question 11

The transfer pricing problem concerns finding a system that simultaneously satisfies the three objectives of the transfer pricing system.

Question 12

Goal congruence means that the goals of managers are aligned with the goals of the company.

Question 13

Firms encourage goal congruence by constructing management early retirement programs.

Question 14

Economic value added (EVA) is after-tax operating income minus the total annual cost of capital.

Question 15

Decentralization stimulates competition among the divisions of a firm.

Question 16

Transfer pricing exists when one division of a company produces a product that can be used in the production by a different division.

Question 17

A transfer price is the price charged by one division of a company to another company.

Question 18

A responsibility center is a part of a business whose workers are accountable for specified activities.

Question 19

The minimum transfer price is the absolute maximum price that can be accepted.

Question 20

Responsibility accounting is a system that measures the results of each responsibility center and compares those results with some expected or budgeted outcome.

Question 21

A manufacturing division of a company would most likely be evaluated as a(n)

A)cost center.
B)investment center.
C)revenue center.
D)asset center.

Question 22

Which of the following departments would NOT be a cost center?

A)advertising department
B)city police department
C)building and grounds department
D)sales department

Question 23

Which of the following responsibility centers would have a manager responsible for revenues, costs, and investments?

A)cost center
B)investment center
C)profit center
D)expense center

Question 24

__________ limitations make it difficult for any central manager to know everything about all products and markets.

Question 25

When the major functions of a company are controlled by top management, it is called __________.

Question 26

Which of the following departments is likely to be an investment center?

A)machining department
B)food products division
C)personnel department
D)accounting department

Question 27

The manager of an investment center is responsible for

A)decisions regarding costs.
B)decisions regarding revenues.
C)decisions to invest in assets.
D)all of these.

Question 28

An example of an investment center is a

A)production department.
B)company.
C)marketing department.
D)credit department.

Question 29

The __________ transfer price is the minimum price acceptable when transferring a product.

Question 30

The delegation of decision-making authority to successively lower management levels is called __________.

Question 31

Which of the following departments in an organization is a profit center?

A)The Marketing Department
B)The Administration Department
C)The Automotive Department
D)The Accounting Department

Question 32

Both revenue center and profit center managers are responsible for achieving

A)budgeted revenues.
B)budgeted net income.
C)budgeted costs.
D)budgeted contribution margin.

Question 33

__________ are a fringe benefit received over and above salary.

Question 34

Investments are not controlled by managers of a __________ center.

Question 35

__________ is after-tax operating profit minus the total annual cost of capital.

Question 36

The price charged for goods produced in one division to another division within the company is called the __________ price.

Question 37

Responsibility accounting is defined as a system that

A)defines responsibility by function only.
B)measures actual results against a flexible budget.
C)measures the results of a manager responsible for revenues and costs.
D)measures the results of each responsibility center and compares those results with some measure of expected or budgeted outcome.

Question 38

A manager of a profit center does not control:

A)Revenues
B)Costs
C)Profits
D)Investments

Question 39

__________ managers can make better decisions using __________ information.

Question 40

In a multinational firm, it is important to separate the evaluation of a division manager from the __________.

Question 41

The following information pertains to the three divisions of Merrymount Company: $\begin{array}{lrrr}&\text { Division } X& \text { Division } Y& \text { Division } Z\\\text { Sales } & ? & ? & 1,250,000 \\\text { Net operating income } & \$ 36,000 & \$ 25,000 & \$ 7,000 \\\text { Average operating assets } & 300,000 & ? & ? \\\text { Retum on investment } & ? & 20 \% & 15 \% \\\text { Margin } & 0.10 & 0.05 & ? \\\text { Turnover } & 1.5 & ? & ? \\\text { Target ROI } & 15 \% & 12 \% & 10 \%\end{array}$ What are the sales for Division Y?

A)$500,000
B)$125,000
C)$208,333
D)$25,000

Question 42

When top management controls the major functions of an organization it is called:

A)Centralization
B)Decentralization
C)Optimization
D)An unfavorable overhead variance

Question 43

Patron Corporation had sales of $350,000, income of $10,000, and an asset base of $100,000. The turnover is

A)0.035.
B)0.35.
C)3.00.
D)3.50.

Question 44

The following information pertains to the three divisions of Merrymount Company: $\begin{array}{lrrr}&\text { Division } X& \text { Division } Y& \text { Division } Z\\\text { Sales } & ? & ? & 1,250,000 \\\text { Net operating income } & \$ 36,000 & \$ 25,000 & \$ 7,000 \\\text { Average operating assets } & 300,000 & ? & ? \\\text { Retum on investment } & ? & 20 \% & 15 \% \\\text { Margin } & 0.10 & 0.05 & ? \\\text { Turnover } & 1.5 & ? & ? \\\text { Target ROI } & 15 \% & 12 \% & 10 \%\end{array}$ What is the turnover for Division Z?

A)1.500
B)0.150
C)6.670
D)2.500

Question 45

If the Southern Division of American Products Company had a turnover ratio of 4.2 and a margin of 0.10, the return on investment would be

A)23.8%.
B)42.0%.
C)420.0%.
D)238.0%.

Question 46

One of the reasons for decentralization is more timely response. This means

A)lower-level managers being more in contact with immediate operating conditions.
B)central management can be free to focus on strategic planning.
C)allowing an organization to determine each division's contribution to profit and expose each division to market forces.
D)local management both makes and implements decisions.

Question 47

The following information pertains to the three divisions of Merrymount Company: $\begin{array}{lrrr}&\text { Division } X& \text { Division } Y& \text { Division } Z\\\text { Sales } & ? & ? & 1,250,000 \\\text { Net operating income } & \$ 36,000 & \$ 25,000 & \$ 7,000 \\\text { Average operating assets } & 300,000 & ? & ? \\\text { Retum on investment } & ? & 20 \% & 15 \% \\\text { Margin } & 0.10 & 0.05 & ? \\\text { Turnover } & 1.5 & ? & ? \\\text { Target ROI } & 15 \% & 12 \% & 10 \%\end{array}$ What is the margin for Division Z?

A)1.5%
B)100.0%
C)6.0%
D)15.0%

Question 48

Mako Division had the following information: $$\begin{array} { l r } \text { Asset base in Mako Division } & \$ 400,000 \\\text { Net income in Mako Division } & \$ 50,000 \\\text { Weighted average cost of capital } & 12 \% \\\text { Target ROI } & 15 \% \\\text { Margin for Mako Division } & 20 \%\end{array}$$ What is the turnover ratio for Mako Division?

A)0.200
B)0.625
C)0.125
D)8.000

Question 49

The delegation of decision-making authority to successively lower management levels in an organization is called:

A)Centralization
B)Decentralization
C)Optimization
D)An unfavorable overhead variance

Question 50

Which of the following changes would increase return on investment (ROI)?

A)Decrease sales and expenses by the same percentage.
B)Increase total assets.
C)Increase sales and expenses by the same percentage.
D)Decrease sales and expenses by the same dollar amount.

Question 51

The Marketing Department of a factory is an example of a _____.

A)profit center
B)revenue center
C)cost center
D)investment center

Question 52

If a company has sales of $2,500,000, net income of $250,000, and an asset base of $1,250,000, its return on investment is

A)20%.
B)10%.
C)500%.
D)200%.

Question 53

Lowellson Company had sales of $200,000, net income of $10,000, and an asset base of $300,000. Its margin is

A)66.7%.
B)5.0%.
C)3.3%.
D)150.0%.

Question 54

The return on investment is computed as

A)operating income divided by sales.
B)operating income divided by average operating assets.
C)sales divided by average operating assets.
D)operating asset turnover divided by the operating income margin.

Question 55

Which of the following changes would NOT change return on investment (ROI)?

A)Decrease sales and expenses by the same percentage.
B)Increase total assets.
C)Increase sales dollars by the same amount as total assets.
D)Decrease sales and expenses by the same dollar amount.

Question 56

Solister, Inc., had the following information: $$\begin{array} { l r } \text { Asset base in Solister, Inc. } & \$ 625,500 \\\text { Net income in Solister, Inc. } & \$ 75,950 \\\text { Weighted average cost of capital } & 12 \% \\\text { Target return on investment (ROI) } & 15 \% \\\text { Margin for Solister, Inc. } & 20 \%\end{array}$$ If the asset base is decreased by $185,450, with no other changes, what will the return on investment of Solister, Inc. be? (Round the answer to two decimal places.)

A)5.79%
B)12.50%
C)17.26%
D)30.00%

Question 57

The following information pertains to the three divisions of Merrymount Company: $\begin{array}{lrrr}&\text { Division } X& \text { Division } Y& \text { Division } Z\\\text { Sales } & ? & ? & 1,250,000 \\\text { Net operating income } & \$ 36,000 & \$ 25,000 & \$ 7,000 \\\text { Average operating assets } & 300,000 & ? & ? \\\text { Retum on investment } & ? & 20 \% & 15 \% \\\text { Margin } & 0.10 & 0.05 & ? \\\text { Turnover } & 1.5 & ? & ? \\\text { Target ROI } & 15 \% & 12 \% & 10 \%\end{array}$ What are the average operating assets for Division Z?

A)$75,000
B)$500,000
C)$1,250,000
D)$187,500

Question 58

Which of the following would NOT be a reason for decentralization?

A)Managers will make decisions for their own benefit, rather than the organization's benefit.
B)Lower level managers have better access to information.
C)Upper management can spend more time focusing on strategic planning and decision making.
D)Lower level managers with decision-making ability are more motivated.

Question 59

Mycrux Company had the following information: $\begin{array}{lr}\text { Asset base in Mycrux Company } & \$ 987,500 \\\text { Net income in Mycrux Company } & \$ 105,700 \\\text { Weighted average cost of capital } & 12 \% \\\text { Target retum on investment (ROI) } & 15 \% \\\text { Margin for Mycrux Company } & 20 \%\end{array}$ What is the return on investment of Mycrux Company? (Round the answer to two decimal places.)

A)10.70%
B)15.00%
C)20.00%
D)9.34%

Question 60

The following information pertains to the three divisions of Merrymount Company: $\begin{array}{lrrr}&\text { Division } X& \text { Division } Y& \text { Division } Z\\\text { Sales } & ? & ? & 1,250,000 \\\text { Net operating income } & \$ 36,000 & \$ 25,000 & \$ 7,000 \\\text { Average operating assets } & 300,000 & ? & ? \\\text { Retum on investment } & ? & 20 \% & 15 \% \\\text { Margin } & 0.10 & 0.05 & ? \\\text { Turnover } & 1.5 & ? & ? \\\text { Target ROI } & 15 \% & 12 \% & 10 \%\end{array}$ What are the average operating assets for Division Y?

A)$25,000
B)$208,333
C)$5,000
D)$125,000

Question 61

The after-tax operating profit minus the total annual cost of capital equals the:

A)Residual income
B)EVA
C)ROI
D)Net income

Question 62

Which of the following is an advantage of return on investment (ROI)?

A)It encourages myopic behavior.
B)It discourages managers from investing in projects that would increase the divisional ROI.
C)It is an absolute measure of return.
D)It discourages excessive investment in operating assets.

Question 63

Olden Company has a tax rate of 40 percent. Information for the company is as follows: $$\begin{array} { l r c } \text { Mortgage bonds } & \text { Amount } & \text { After-tax Cost } \\\text { Unsecured bonds } & \$ 1,000,000 & 0.048 \\\text { Common stock } & 3,000,000 & 0.050 \\& 6,000,000 & 0.150\end{array}$$ What is the EVA if the before-tax operating income is $1,500,000?

A)$(198,000)
B)$402,000
C)$534,000
D)$1,134,000

Question 64

Which of the following is true of economic value added (EVA)?

A)It emphasizes after-tax operating income and actual cost of capital.
B)It includes all assets used to generate operating income.
C)It is the difference between operating income and operating assets.
D)It typically uses a minimum expected rate of return.

Question 65

Which of the following is NOT a disadvantage of the ROI performance measure?

A)It encourages managers to focus on the long run rather than the short run.
B)It discourages managers from investing in projects that would decrease divisional ROI but increase the profitability of the company as a whole.
C)It encourages myopic behavior.
D)All are disadvantages of the ROI measure.

Question 66

The emphasis on short-run results at the expense of the long run is

A)efficient behavior.
B)effective behavior.
C)optimal behavior.
D)myopic behavior.

Question 67

The Women's Wear of Bigelow Department Store had a net income of $560,000, a net asset base of $4,000,000, and a required rate of return of 12 percent. Sales for the period totaled $3,000,000. The residual income for the period is

A)$480,000.
B)$80,000.
C)$120,000.
D)$360,000.

Question 68

Omikron Division had the following information: $\begin{array}{lr}\text { Asset base in Omikron Division } & \$ 400,000 \\\text { Met income in Omikron Division } & \$ 0,000 \\\text { Weighted average cost of capital } & 12 \% \\\text { Target ROI } & 15 \% \\\text { Margin for Omikron Division } & 20 \%\end{array}$ What is EVA for Omikron Division?

A)$2,000
B)$7,500
C)$48,000
D)$60,000

Question 69

Which of the following is a disadvantage of both residual income and ROI?

A)They are both absolute measures of return.
B)They are both difficult to calculate.
C)They both do not discourage myopic behavior.
D)All of these are disadvantages of both ROI and residual income.

Question 70

Lambda Division had the following information: $\begin{array}{lr}\text { Asset base in Lambda Division } & \$ 400,000 \\\text { Met income in Lambda Division } & \$ 5,000 \\\text { Weighted average cost of capital } & 12 \% \\\text { Target ROI } & 15 \% \\\text { Margin for Lambda Division } & 20 \%\end{array}$ What is the residual income for Lambda Division?

A)$(10,000)
B)$48,000
C)$7,500
D)$60,000

Question 71

If the turnover increased by 30 percent and the margin decreased by 30 percent, the ROI would

A)decrease by 9 percent.
B)increase by 69 percent.
C)increase by 91 percent.
D)stay the same.

Question 72

Cornwall Company has two divisions, A and B. Information for each division is as follows: $\begin{array}{lrr}&A&B\\\text { Net earnings for division } & \$ 40,000 & \$ 260,000 \\\text { Asset base for division } & \$ 100,000 & \$ 1,200,000 \\\text { Target rate of return } & 15 \% & 18 \% \\\text { Margin } & 10 \% & 20 \% \\\text { Weighted average cost of capital } & 12 \% & 12 \%\end{array}$ What is the total sales amount for B?

A)$666,667
B)$800,000
C)$1,300,000
D)$1,200,000

Question 73

Cornwall Company has two divisions, A and B. Information for each division is as follows: $\begin{array}{lrr}&A&B\\\text { Net earnings for division } & \$ 40,000 & \$ 260,000 \\\text { Asset base for division } & \$ 100,000 & \$ 1,200,000 \\\text { Target rate of return } & 15 \% & 18 \% \\\text { Margin } & 10 \% & 20 \% \\\text { Weighted average cost of capital } & 12 \% & 12 \%\end{array}$ What is the return on investment for A?

A)18%
B)40%
C)20%
D)15%

Question 74

The following information pertains to the three divisions of Merrymount Company: $\begin{array}{lrrr}&\text { Division } X& \text { Division } Y& \text { Division } Z\\\text { Sales } & ? & ? & 1,250,000 \\\text { Net operating income } & \$ 36,000 & \$ 25,000 & \$ 7,000 \\\text { Average operating assets } & 300,000 & ? & ? \\\text { Retum on investment } & ? & 20 \% & 15 \% \\\text { Margin } & 0.10 & 0.05 & ? \\\text { Turnover } & 1.5 & ? & ? \\\text { Target ROI } & 15 \% & 12 \% & 10 \%\end{array}$ What is the residual income for Division X?

A)$36,000
B)$45,000
C)$(9,000)
D)$(36,000)

Question 75

If the operating asset turnover increased by 50 percent and the margin increased by 50 percent, the ROI would increase by

A)50 percent.
B)25 percent.
C)100 percent.
D)125 percent.

Question 76

Olden Company has a tax rate of 40 percent. Information for the company is as follows: $$\begin{array} { l r c } & \text { Amount } & \text { After-tax Cost } \\\text { Mortgage bonds }& \$ 1,000,000 & 0.048 \\\text { Unsecured bonds } & 3,000,000 & 0.050 \\\text { Common stock } & 6,000,000 & 0.150\end{array}$$ What is the weighted average cost of capital?

A)0.0827
B)0.2480
C)0.1098
D)0.0366

Question 77

Cornwall Company has two divisions, A and B. Information for each division is as follows: $\begin{array}{lrr}&A&B\\\text { Net earnings for division } & \$ 40,000 & \$ 260,000 \\\text { Asset base for division } & \$ 100,000 & \$ 1,200,000 \\\text { Target rate of return } & 15 \% & 18 \% \\\text { Margin } & 10 \% & 20 \% \\\text { Weighted average cost of capital } & 12 \% & 12 \%\end{array}$ What is the residual income for A?

A)$25,000
B)$28,000
C)$15,000
D)$40,000

Question 78

Cornwall Company has two divisions, A and B. Information for each division is as follows: $\begin{array}{lrr}&A&B\\\text { Net earnings for division } & \$ 40,000 & \$ 260,000 \\\text { Asset base for division } & \$ 100,000 & \$ 1,200,000 \\\text { Target rate of return } & 15 \% & 18 \% \\\text { Margin } & 10 \% & 20 \% \\\text { Weighted average cost of capital } & 12 \% & 12 \%\end{array}$ What is the operating asset turnover for A?

A)0.15
B)0.10
C)4.00
D)2.50

Question 79

If the margin of 0.3 stayed the same and the turnover ratio of 5.0 increased by 10 percent, the ROI would

A)increase by 10 percent.
B)decrease by 10 percent.
C)increase by 15 percent.
D)remain the same.

Question 80

If the operating asset turnover ratio increased by 40 percent and the margin increased by 30 percent, the divisional ROI

A)would decrease by 70 percent.
B)would increase by 82 percent.
C)would increase by 30 percent.
D)cannot be determined.