Question 1

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

Accepted Answer

Investment turnover is the ratio of sales to invested assets, and it measures the efficiency of a company in using its assets to generate sales. A higher investment turnover indicates that a company is generating more sales per dollar of invested assets, which can lead to a higher rate of return on investment. Profit margin is a different financial ratio that measures the percentage of revenue that is left over after deducting expenses, and it does not take into account the amount of assets invested. Indirect margin and cost ratio are not commonly used financial ratios.

Question 2

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

Accepted Answer

The market price approach is the method of determining the transfer price as the price at which the product or service transferred could be sold to outside buyers. This approach ensures that the transfer price is fair and reflects the true market value of the product or service, resulting in a win-win situation for both the selling and buying divisions within the same organization. The other approaches (cost price, negotiated price, and revenue price) do not take into account the prevailing market conditions and may lead to an unfair transfer price.

Question 3

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.

Accepted Answer

Employees are actually included in the balanced scorecard as one of the four areas, specifically in the "Learning and Growth" perspective. Therefore, the best choice would be D, as it is not a correct answer.

Question 4

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?

Accepted Answer

Profit margin is calculated as (Net Income / Sales) * 100. Net Income = Sales - Cost of Goods Sold - Operating Expenses = $300,000 - $120,000 - $58,000 = $122,000. Profit Margin = ($122,000 / $300,000) * 100 = 40.7%.

Question 5

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?

Accepted Answer

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

Question 6

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

Accepted Answer

All of the responses are measures of a manager's performance in an investment center.

A) Rate of return on investment measures the profitability of the investments made by the center under the manager's control.

B) Residual income measures the excess income generated by the investment center after deducting the cost of the capital supplied by the parent company.

C) Divisional income statements provide a detailed breakdown of the revenues, expenses, and profits of the investment center.

Question 7

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?

Accepted Answer

If Division 3 purchased materials from outside suppliers, they would have paid $5 per unit. However, if they purchase from Division 6, they will be charged $3.20 per unit. This means that Division 3 will save $1.80 in costs for each unit of material purchased from Division 6.

Therefore, the total cost savings for Division 3 would be:

$1.80 savings per unit x 40,000 units = $72,000

Since the cost savings would increase Division 3's income from operations, the answer is D) $72,000.

Question 8

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:

Accepted Answer

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

Question 9

Which one of the following is NOT a measure that management can use in evaluating and controlling investment center performance?

Accepted Answer

Negotiated price is not a measure that management can use in evaluating and controlling investment center performance. The other options, including rate of return on investment, residual income, and income from operations, are all commonly used measures for evaluating investment center performance.

Question 10

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?

Accepted Answer

Investment turnover is calculated by dividing sales by invested assets. Therefore, investment turnover for The Everest Company is:
$1,050,000 / $500,000 = 2.1

Question 11

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

Accepted Answer

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

Question 12

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?

Accepted Answer

The formula for profit margin is:

Profit Margin = (Revenue - Cost of goods sold - Operating expenses) / Revenue

Revenue = Sales = $155,000

So, Profit Margin = (155,000 - 83,000 - 43,000) / 155,000 = 29,000 / 155,000 = 0.187 or 18.7%

Therefore, the answer is C) 18.7%.

Question 13

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?

Accepted Answer

The rate of return on investment (ROI) is calculated as (Net Income / Invested Assets) * 100. Net Income = Sales - Cost of Goods Sold - Operating Expenses = $155,000 - $83,000 - $43,000 = $29,000. ROI = ($29,000 / $150,000) * 100 = 19.3%.

Question 14

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?

Accepted Answer

Division 6's income from operations would increase by $8,000 because the transfer price of $3.20 per unit is higher than the variable cost of $3 per unit. The difference of $0.20 per unit multiplied by the 40,000 units transferred results in an increase in Division 6's income from operations of $8,000.

Question 15

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?

Accepted Answer

Profit margin is calculated as income from operations divided by sales.

Profit Margin = (Income from operations / Sales) x 100
Profit Margin = (80,000 / 1,050,000) x 100
Profit Margin = 7.6%

Therefore, the answer is B.

Question 16

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?

Accepted Answer

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

Question 17

Investment centers differ from profit centers in that they

Accepted Answer

Investment centers have the additional responsibility of investing in assets and making decisions regarding capital expenditures, whereas profit centers are only responsible for generating net income. Cost centers are responsible for controlling costs and do not have revenue or net income responsibilities. Therefore, option A and D are incorrect, and option C is incomplete and misleading.

Question 18

A factor in determining the rate of return on investment--the ratio of income from operations to sales--is called:

Accepted Answer

The ratio of income from operations to sales is known as profit margin, which is a crucial factor in determining the rate of return on investment. It represents the amount of profit generated by each dollar of sales and reflects the company's efficiency and profitability. Higher profit margins indicate that the company is managing its costs effectively and generating more income per dollar of sales, which can lead to higher returns on investment.

Question 19

The balanced scorecard measures

Accepted Answer

The balanced scorecard is a performance management tool that measures both financial and nonfinancial information. It provides a comprehensive view of an organization's performance across multiple areas, including financial, customer, internal processes, and learning and growth. By measuring both financial and nonfinancial information, the balanced scorecard helps organizations align their strategic objectives with their overall performance and identify areas for improvement in a more balanced way.

Question 20

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?

Accepted Answer

The rate of return on assets is calculated by dividing net income by invested assets. In this case, the rate of return on assets is $125,000/$475,000 = 26.3%.

Quiz 24: Performance Evaluation for Decentralized Operations