Deck 10: Decentralization: Responsibility, Accounting, Performance Evaluation, and Transfer Pricing

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

Firms encourage goal congruence by constructing management early retirement programs.

Question 12

Margin is the ratio of operating income to sales.

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

Decentralization stimulates competition among the divisions of a firm.

Question 21

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 22

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

Question 23

A manager of a profit center does not control:

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

Question 24

Investments are not controlled by managers of a center.

Question 25

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 26

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

Question 27

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 28

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

Question 29

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 30

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

Question 31

Which of the following departments would NOT be classified as a profit center?

A) hardware department
B) men's shoes department
C) accounting department
D) automotive department

Question 32

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 33

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

Question 34

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 35

managers can make better decisions using information.

Question 36

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

Question 37

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

Question 38

are a fringe benefit received over and above salary.

Question 39

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 40

An example of an investment center is a

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

Question 41

The following information pertains to the three divisions of Merrymount Company: What are the sales for Division Y?

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

Question 42

Mako Division had the following information: Asset base in Mako Division $400,000
Net income in Mako Division $50,000
Weighted average cost of capital 12%
Target ROI 15%
Margin for Mako Division 20%
What is the turnover ratio for Mako Division?

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

Question 43

Epsilon Division had the following information: If the asset base is decreased by $100,000, with no other changes, the return on investment of Epsilon Division will
Be

A) 100.0%.
B) 600.0%.
C) 16.7%.
D) 62.5%.

Question 44

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 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

The following information pertains to the three divisions of Merrymount Company: What is the turnover for Division Z?

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

Question 47

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 48

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 49

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 50

The following information pertains to the three divisions of Merrymount Company: What are the average operating assets for Division Y?

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

Question 51

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 52

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 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 following information pertains to the three divisions of Merrymount Company: What are the average operating assets for Division Z?

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

Question 55

Responsibility accounting is a system that does NOT consider

A) responsibility.
B) accountability.
C) performance evaluation.
D) static budgeting.

Question 56

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 57

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 58

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 59

Omega Division had the following information: Asset base in Omega Division $500,000
Net income in Omega Division $60,000
Weighted average cost of capital 12%
Target ROI 15%
Margin for Omega Division 20%
What is the return on investment of Omega Division?

A) 12.0%
B) 25.0%
C) 88.0%
D) 833.0%

Question 60

The following information pertains to the three divisions of Merrymount Company: What is the margin for Division Z?

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

Question 61

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 62

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.

Question 63

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 64

Olden Company has a tax rate of 40 percent. Information for the company is as follows: Amount After-tax Cost
Mortgage bonds $1,000,000 0.048
Unsecured bonds 3,000,000 0.050
Common stock 6,000,000 0.150
What is the weighted average cost of capital?

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

Question 65

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 66

Cornwall Company has two divisions, A and B. Information for each division is as follows: What is the total sales amount for B?

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

Question 67

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 68

The following information pertains to the three divisions of Merrymount Company: What is the residual income for Division X?

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

Question 69

Olden Company has a tax rate of 40 percent. Information for the company is as follows: 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 70

Cornwall Company has two divisions, A and B. Information for each division is as follows: What is the return on investment for A?

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

Question 71

Which of the following is NOT an advantage of ROI?

A) It encourages managers of departments with high ROIs to invest in average ROI projects.
B) It encourages managers to pay careful attention to the relationships among sales, expenses, and investment.
C) It encourages cost efficiency.
D) It discourages excessive investment in operating assets.

Question 72

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 73

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 74

Return on investment can be divided into two separate components

A) margin and profit.
B) margin and turnover.
C) value and turnover.
D) liquidity and margin.

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

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 77

Omikron Division had the following information: What is EVA for Omikron Division?

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

Question 78

Lambda Division had the following information: Asset base in Lambda Division $400,000
Net income in Lambda Division $50,000
Weighted average cost of capital 12%
Target ROI 15%
Margin for Lambda Division 20%
What is the residual income for Lambda Division?

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

Question 79

Cornwall Company has two divisions, A and B. Information for each division is as follows: What is the operating asset turnover for A?

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

Question 80

Cornwall Company has two divisions, A and B. Information for each division is as follows: What is the residual income for A?

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