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Exam 10: Decentralized Performance Evaluation

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Question 21

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Avocado Company has an operating income of $80,000 on revenues of $1,000,000. Average invested assets are $500,000 and Avocado Company has an 8% cost of capital. What is the residual income?

A) $100,000
B) $20,000
C) $120,000
D) $40,000

E) None of the above
F) B) and D)

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Question 22

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Investment turnover can be calculated as:

A) sales revenue/average invested assets.
B) operating income/sales revenue.
C) operating income/average invested assets.
D) average invested assets/sales revenue.

E) A) and B)
F) A) and C)

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Question 23

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Which of the following statements best represents the controllability principle?

Dade Corp. has residual income of $10,000. If operating income equals $30,000 and the minimum required rate of return is 8%, what are average invested assets?

Rapid Industries has multiple divisions. One division, Iron Products, makes a component that another division, Austin, is currently purchasing on the open market. Iron Products currently has a capacity to produce 500,000 components at a variable cost of $7.50 and a full cost of $10.00. Iron Products has outside sales of 460,000 components at a price of $12.50 per unit. Austin currently purchases 50,000 units from an outside supplier at a price of $12.00 per unit. Assume that Austin desires to use a single supplier for its component. a. What will be the effect on Rapid Industries' operating profit if the transfer is made internally? Assume the 50,000 units Austin needs are either purchased 100% internally or 100% externally. b. What is the minimum transfer price? c. What is the maximum transfer price?

Tiffany Company has two divisions, Gold and Silver. Gold produces a unit that Silver could use in its production. Silver currently is purchasing 50,000 units from an outside supplier for $25. Gold is operating at less than full capacity and has variable costs of $13.50 per unit. The full cost to manufacture the unit is $20. Gold currently sells 450,000 units at a selling price of $27. If an internal transfer is made, variable shipping and administrative costs of $1 per unit could be avoided. How much will Silver save by not purchasing from outside if a transfer price of $22.50 is agreed upon?

Evergreen Corp. has two divisions, Fern and Bark. Fern produces a widget that Bark could use in the production of units that cost $175 in variable costs, plus the cost of the widget, to manufacture. Fern's variable costs are $60 per widget, and fixed manufacturing costs are applied at a rate of $36 per widget. Widgets sell on the open market for $105 each. Evergreen's policy is that internal transfers will be made at full cost plus 20%. If Bark purchases the widgets from Fern, what will be the transfer price?

Swan Company has two divisions, Hill and Paradise. Hill produces a unit that Paradise could use in its production. Paradise currently is purchasing 5,000 units from an outside supplier for $56. Hill is operating at less than full capacity and has variable costs of $30.80 per unit. The full cost to manufacture the unit is $43.40. Hill currently sells 450,000 units at a selling price of $61.60. What would be the impact on Swan Company's overall profits if the internal transfer is made?

The transfer pricing method that uses the price the company would charge external customers is the:

Florida Inc. has revenues of $1,500,000 resulting in an operating income of $105,000. Average invested assets total $750,000; the cost of capital is 10%. Return on investment is:

The following information is available about the status and operations of the Manufacturing Division of Taylor Company, which has a hurdle rate of 6%. a. Compute the ROI for the Manufacturing Division. b. Break the Manufacturing Division ROI down using the DuPont formula. c. Compute the residual income for the Manufacturing Division.

The balanced scorecard attempts to focus managers' attention on more than just financial measures

Which of the following is the primary tool used by cost centers to manage costs?

Washington Company has two divisions, Jefferson and Adams. Jefferson produces an item that Adams could use in its production. Adams currently is purchasing 100,000 units from an outside supplier for $78.40 per unit. Jefferson is currently operating at full capacity of 900,000 units and has variable costs of $46.40 per unit. The full cost to manufacture the unit is $59.20. Jefferson currently sells 900,000 units at a selling price of $86.40 per unit. a. What will be the effect on Washington Company's operating profit if the transfer is made internally? b. What will be the change in profits for Jefferson if the transfer price is $67.20 per unit? c. What will be the change in profits for Adams if the transfer price is $67.20 per unit?

Hubbard Division of the Market Company has an opportunity to invest in a new project. The project will yield an incremental operating income of $36,750 on average invested assets of $460,000. Hubbard currently has operating income of $210,000 on average invested assets of $2,050,000. Market Company requires a 6% rate of return on new projects. a. What is Hubbard's ROI before making an investment in the project? b. What is Hubbard's residual income before making an investment in the project? c. What is Hubbard's ROI after making the investment in the project? d. What is Hubbard's residual income after making the investment in the project?

Sandy Company has two divisions, Huron and Cortez. Huron produces an item that Cortez could use in its production. Cortez currently is purchasing 50,000 units from an outside supplier for $24 per unit. Huron is currently operating at full capacity of 600,000 units and has variable costs of $13.50 per unit. The full cost to manufacture the unit is $19.50. Huron currently sells 600,000 units at a selling price of $25.50 per unit. a. What will be the effect on Sandy Company's operating profit if the transfer is made internally? b. What is the minimum transfer price from Huron's perspective? c. What is the maximum transfer price from Cortez' perspective?

Sugar Company has two divisions, Lenox and Berkshire. Lenox produces an item that Berkshire could use in its production. Berkshire currently is purchasing 100,000 units from an outside supplier for $43 per unit. Lenox is currently operating at full capacity of 750,000 units and has variable costs of $28 per unit. The full cost to manufacture the unit is $35. Lenox currently sells 750,000 units at a selling price of $44 per unit. a. What will be the effect on Sugar Company's operating profit if the transfer is made internally? b. What will be the change in profits for Lenox if the transfer price is $40 per unit? c. What will be the change in profits for Berkshire if the transfer price is $40 per unit?

Almond, Inc. uses a balanced scorecard. One of the measures on the scorecard is the percentage of revenue from repeat sales. Which balanced scorecard perspective would this measure most likely fit into?

Residual income is a leading indicator of financial performance

Madison Corp. has a hurdle rate of 9%. Calculate the missing values: