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Exam 10: Decentralized Performance Evaluation

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Question 41

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Howard has an ROI of 16% based on revenues of $400,000. The investment turnover is 2. What is the residual income if the cost of capital is 9%?

A) $64,000
B) $36,000
C) ($4,000)
D) $14,000

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

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Question 42

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Profit margin 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) None of the above

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Question 43

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Holiday Corp. has two divisions, Quail and Marlin. Quail produces a widget that Marlin could use in its production. Quail's variable costs are $4 per widget while the full cost is $7. Widgets sell on the open market for $12 each. If Quail has excess capacity, what would be the maximum transfer price if Marlin currently is purchasing 100,000 units on the open market?

Which of the following balanced scorecard perspectives measures how an organization satisfies its stakeholders?

The responsibility center in which the manager has responsibility and authority over revenues, costs and assets is the:

The controllability principle holds that managers should be held responsible for what they can control and for allocated costs

Miami Corp. has an operating income of $120,000, average invested assets of $600,000, and a cost of capital of 7%. What is the residual income?

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. How much will Paradise save by not purchasing from outside if a transfer price of $42 is agreed upon?

Holiday Corp. has two divisions, Quail and Marlin. Quail produces a widget that Marlin could use in its production. Quail's variable costs are $4 per widget while the full cost is $7. Widgets sell on the open market for $12 each. If Quail has excess capacity, what would be the cost savings if the transfer was made and Marlin currently is purchasing 100,000 units on the open market?

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 investment turnover?

Investment center managers have control over the investment of assets

Killian Corp. has a residual income of $30,000 on invested assets of $450,000. If the hurdle rate is 10%, what is the operating income?

The hurdle rate is also called economic value added

Colonial has an ROI of 18% based on revenues of $300,000. The investment turnover is 1.5 and residual income is $20,000. What is the hurdle rate?

Almond, Inc. uses a balanced scorecard. One of the measures on the scorecard is the average education level of the firm's managers. Which balanced scorecard perspective would this measure most likely fit into?

A profit center manager often also supervises revenue and cost center managers

Concord Company has two divisions, Rice and Pine. Rice produces an item that Pine could use in its production. Pine currently is purchasing 12,000 units from an outside supplier for $18 per unit. Rice is currently operating at less than its full capacity of 500,000 units and has variable costs of $10 per unit. The full cost to manufacture the unit is $14. Rice currently sells 450,000 units at a selling price of $20 per unit. a. What will be the effect on Concord Company's operating profit if the transfer is made internally? b. What is the minimum transfer price from Rice's perspective? c. What is the maximum transfer price from Pine' perspective?

When negotiating a transfer price, the highest price the buyer will be willing to pay is the _____________, while the lowest price the seller will be willing to accept is the _______________.

In transfer pricing, the manager of the buying division is motivated to pay the highest price possible, while the manager of the selling division is motivated to sell at the lowest price possible

Estate has an ROI of 16% based on revenues of $400,000. The residual income is $14,000 and the investment turnover is 2. What is the hurdle rate?