Question 1

Determining the transfer price as the price at which the product or service transferred could be sold to outside buyers is known as the:
A) Cost price approach
B) Negotiated price approach
C) Revenue price approach
D) Market price approach

Accepted Answer

The market price approach involves determining the transfer price based on the price at which the product or service could be sold to outside buyers. This approach ensures that the transfer price is based on market forces and reflects the true value of the product or service being transferred. The other approaches do not necessarily take external market factors into consideration, and may not result in a fair transfer price.

Question 2

Materials used by Square Yard Products Inc. in producing Division 3's product are currently purchased from outside suppliers at a cost of $5 per unit. However, the same materials are available from Division 6. Division 6 has unused capacity and can produce the materials needed by Division 3 at a variable cost of $3 per unit. A transfer price of $3.20 per unit is established, and 40,000 units of material are transferred, with no reduction in Division 6's current sales. How much would Division 6's income from operations increase?
A) $8,000
B) $15,000
C) $80,000
D) $150,000

Accepted Answer

The answer of Materials used by Square Yard Products Inc....

Question 3

The Everest Company has income from operations of $80,000, invested assets of $500,000, and sales of $1,050,000. What is the profit margin?
A) 47.6%
B) 7.6%
C) 55.2%
D) 4.8%

Accepted Answer

Profit margin is calculated as income from operations divided by sales. 
Profit Margin = Income from operations / Sales 
Profit Margin = $80,000 / $1,050,000
Profit Margin = 0.076 or 7.6% 
Therefore, the answer is Choice B.

Question 4

Materials used by Square Yard Products Inc. in producing Division 3's product are currently purchased from outside suppliers at a cost of $5 per unit. However, the same materials are available from Division 6. Division 6 has unused capacity and can produce the materials needed by Division 3 at a variable cost of $3 per unit. A transfer price of $3.20 per unit is established, and 40,000 units of material are transferred, with no reduction in Division 6's current sales. How much would Division 3's income from operations increase?
A) $150,000
B) $50,000
C) $32,000
D) $72,000

Accepted Answer

By using the materials from Division 6 at a transfer price of $3.20 per unit, Division 3 would save $1.80 per unit in variable cost ($5 - $3.20). With 40,000 units transferred, this would result in a cost savings of $72,000 ($1.80 x 40,000). Therefore, Division 3's income from operations would increase by $72,000.

Question 5

A factor in determining the rate of return on investment--the ratio of sales to invested assets--is called:
A) profit margin
B) indirect margin
C) investment turnover
D) cost ratio

Accepted Answer

Investment turnover ratio measures the efficiency and effectiveness of a company's use of its assets to generate sales. It calculates the amount of sales generated for every dollar invested in assets. A higher investment turnover ratio indicates that a company is generating more sales per dollar of assets and is hence more efficient in using its assets.

Question 6

The balanced scorecard measures
A) only financial information
B) only nonfinancial information
C) both financial and nonfinancial information
D) external and internal information

Accepted Answer

The balanced scorecard measures both financial and nonfinancial information, including customer satisfaction, internal processes, and employee learning and growth. It provides a comprehensive picture of an organization's performance that goes beyond just financial metrics.

Question 7

The Everest Company has income from operations of $80,000, invested assets of $500,000, and sales of $1,050,000. What is the investment turnover?
A) 1.8
B) 2.1
C) .48
D) 13.13

Accepted Answer

Investment turnover = Sales / Average invested assets
Average invested assets = (Beginning invested assets + Ending invested assets) / 2
Assuming there are no changes in invested assets throughout the year, the average invested assets for Everest Company would be $500,000.
Investment turnover = $1,050,000 / $500,000 = 2.1

Question 8

Materials used by Jefferson Company in producing Division C's product are currently purchased from outside suppliers at a cost of $10 per unit. However, the same materials are available from Division A. Division A has unused capacity and can produce the materials needed by Division C at a variable cost of $8.50 per unit. A transfer price of $9.50 per unit is negotiated and 25,000 units of material are transferred, with no reduction in Division A's current sales.
How much would Division C's income from operations increase?
A) $0
B) $75,000
C) $12,500
D) $50,000

Accepted Answer

Division C currently pays $10 per unit for materials from outside suppliers, for a total cost of 25,000 units x $10 per unit = $250,000.

If Division A produces the same materials at a variable cost of $8.50 per unit and sells it to Division C at a transfer price of $9.50 per unit, the total cost to Division C would be 25,000 units x $9.50 per unit = $237,500.

Therefore, Division C's cost savings would be $250,000 - $237,500 = $12,500. This is the amount by which Division C's income from operations would increase.

Question 9

Materials used by Square Yard Products Inc. in producing Division 3's product are currently purchased from outside suppliers at a cost of $5 per unit. However, the same materials are available from Division 6. Division 6 has unused capacity and can produce the materials needed by Division 3 at a variable cost of $3 per unit. A transfer price of $3.20 per unit is established, and 40,000 units of material are transferred, with no reduction in Division 6's current sales. How much would Square Yard Products total income from operations increase?
A) $32,000
B) $112,000
C) $80,000
D) $150,000

Accepted Answer

The cost savings per unit of material by transferring from Division 6 ($5 - $3 = $2) is less than the established transfer price ($3.20), meaning Square Yard Products is not getting the maximum benefit from the transfer in terms of lower costs. However, the transfer of 40,000 units of material at the established transfer price will result in a total cost savings of $80,000 ($2 savings per unit x 40,000 units transferred). Therefore, Square Yard Products total income from operations would increase by $80,000.

Question 10

Assume that Division J has achieved income from operations of $165,000 using $900,000 of invested assets. If management desires a minimum rate of return of 11%, the residual income is:
A) $99,000
B) $18,150
C) $264,000
D) $66,000

Accepted Answer

The answer of Assume that Division J has achieved income...

Question 11

Division X of O'Blarney Company has sales of $300,000, cost of goods sold of $120,000, operating expenses of $58,000, and invested assets of $150,000. What is the profit margin for Division X?
A) 81.3%
B) 20.2%
C) 40.7%
D) 60%

Accepted Answer

The answer of Division X of O'Blarney Company has sales...

Question 12

Division X of O'Blarney Company has sales of $300,000, cost of goods sold of $120,000, operating expenses of $58,000, and invested assets of $150,000. What is the rate of return on investment for Division X?
A) 9.15%
B) 81.3%
C) 40.7%
D) 200%

Accepted Answer

The answer of Division X of O'Blarney Company has sales...

Question 13

Which of the following is not a commonly used approach to setting transfer prices?
A) Market price approach
B) Revenue price approach
C) Negotiated price approach
D) Cost price approach

Accepted Answer

The commonly used approaches to setting transfer prices are market price approach, negotiated price approach, and cost price approach. The revenue price approach is not a commonly used approach.

Question 14

The balanced scorecard measures financial and nonfinancial performance of a business. The balanced scorecard measures four areas. Identify one of the following that is not included as a performance measurement.
A) Internal Process
B) Financial
C) Innovation and Learning
D) Employees

Accepted Answer

All of the options listed (internal process, financial, innovation and learning) are included as performance measurements in the balanced scorecard. Therefore, the one that is not included is D, which is employees. However, it is important to note that employee performance can indirectly impact the other areas measured in the balanced scorecard.

Question 15

Division A of Mocha Company has sales of $155,000, cost of goods sold of $83,000, operating expenses of $43,000, and invested assets of $150,000. What is the investment turnover for Division A?
A) 1.03
B) 1.0
C) 5.17
D) 5.34

Accepted Answer

The answer of Division A of Mocha Company has sales...

Question 16

Investment centers differ from profit centers in that they
A) are responsible for net income only.
B) are able to invest in assets.
C) have less responsibilities than cost centers and profit centers.
D) are only responsible for revenues.

Accepted Answer

Investment centers are responsible for not only generating net income but also managing assets efficiently to produce returns on investment. Profit centers are responsible only for generating profits while investment centers have a double responsibility of generating profits and managing assets. Therefore, option B is the correct choice. Options A, C, and D are incorrect.

Question 17

Moon Shoe Factory is an investment center and is responsible for all of their net income and the use of their assets. In 2012, the invested assets totaled $475,000 and net income was $125,000. What is the rate of return on assets?
A) 26.3%
B) 25.0%
C) 4.0%
D) 380.0%

Accepted Answer

The answer of Moon Shoe Factory is an investment center...

Question 18

Division A of Mocha Company has sales of $155,000, cost of goods sold of $83,000, operating expenses of $43,000, and invested assets of $150,000. What is the rate of return on investment for Division A?
A) 19.3%
B) 48.0%
C) 18.7%
D) 5.47%

Accepted Answer

The answer of Division A of Mocha Company has sales...

Question 19

The following is a measure of a manager's performance working in an investment center.
A) rate of return on investment
B) residual income
C) divisional income statements
D) all of the responses

Accepted Answer

A) Rate of return on investment measures how much profit is generated from the investment. 
B) Residual income measures the excess profit earned by an investment center after the required return on investment is deducted. 
C) Divisional income statements provide detailed information on the revenues, expenses, and profits of the investment center.

All of these measures are important indicators of a manager's performance in an investment center, as they allow for a comprehensive understanding of the center's profitability and efficiency.

Question 20

Division A of Mocha Company has sales of $155,000, cost of goods sold of $83,000, operating expenses of $43,000, and invested assets of $150,000. What is the profit margin for Division A?
A) 19.3%
B) 48.0%
C) 18.7%
D) 5.47%

Accepted Answer

Profit Margin = (Sales - Cost of Goods Sold - Operating Expenses) / Sales
Profit Margin = ($155,000 - $83,000 - $43,000) / $155,000
Profit Margin = $29,000 / $155,000
Profit Margin = 0.187 = 18.7%

Quiz 23: Performance Evaluation for Decentralized Operations

Determining the transfer price as the price at which the product or service transferred could be sold to outside buyers is known as the:

The Everest Company has income from operations of $80,000, invested assets of $500,000, and sales of $1,050,000. What is the profit margin?

A factor in determining the rate of return on investment--the ratio of sales to invested assets--is called:

The balanced scorecard measures

The Everest Company has income from operations of $80,000, invested assets of $500,000, and sales of $1,050,000. What is the investment turnover?

Assume that Division J has achieved income from operations of $165,000 using $900,000 of invested assets. If management desires a minimum rate of return of 11%, the residual income is:

Division X of O'Blarney Company has sales of $300,000, cost of goods sold of $120,000, operating expenses of $58,000, and invested assets of $150,000. What is the profit margin for Division X?

Division X of O'Blarney Company has sales of $300,000, cost of goods sold of $120,000, operating expenses of $58,000, and invested assets of $150,000. What is the rate of return on investment for Division X?

Which of the following is not a commonly used approach to setting transfer prices?

The balanced scorecard measures financial and nonfinancial performance of a business. The balanced scorecard measures four areas. Identify one of the following that is not included as a performance measurement.

Division A of Mocha Company has sales of $155,000, cost of goods sold of $83,000, operating expenses of $43,000, and invested assets of $150,000. What is the investment turnover for Division A?

Investment centers differ from profit centers in that they

Moon Shoe Factory is an investment center and is responsible for all of their net income and the use of their assets. In 2012, the invested assets totaled $475,000 and net income was $125,000. What is the rate of return on assets?

Division A of Mocha Company has sales of $155,000, cost of goods sold of $83,000, operating expenses of $43,000, and invested assets of $150,000. What is the rate of return on investment for Division A?

The following is a measure of a manager's performance working in an investment center.

Division A of Mocha Company has sales of $155,000, cost of goods sold of $83,000, operating expenses of $43,000, and invested assets of $150,000. What is the profit margin for Division A?