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Exam 10: Decentralized Performance Evaluation

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Question 61

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The part of the organization for which managers are responsible is called a:

A) related-party center.
B) responsibility center.
C) cost center.
D) shared center.

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

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Question 62

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Residual income can be calculated as:

A) Operating income - (hurdle rate × average invested assets)
B) Segment margin - (hurdle rate × average invested assets)
C) Operating income - (ROI × average invested assets)
D) Operating income - investment turnover

E) All of the above
F) A) and B)

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Question 63

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Which of the following statement is correct about the functions that fall within various responsibility centers?

Which of the following is not a method used to determine transfer prices?

Calculate the missing values for each unique company.

Devon Inc. has a profit margin of 12% and an investment turnover of 2.5. Sales revenue is $600,000. What is the amount of average invested assets?

Ontario Company has two divisions with the following results: Ontario Company has a hurdle rate of 10%. a. Calculate the return on investment for each division. b. Break each division's return on investment down into its component parts using the DuPont method. c. Calculate the residual income for each division.

Superior Division of the Monroe Company has an opportunity to invest in a new project. The project will yield an incremental operating income of $73,350 on average invested assets of $900,000. Superior Division currently has operating income of $425,000 on average invested assets of $4,325,000. Monroe Company has a 7% hurdle rate for new projects. a. What is Superior Division's ROI before making an investment in the project? b. What is Superior Division's residual income before making an investment in the project? c. What is Superior Division's ROI after making the investment in the project? d. What is Superior Division's residual income after making the investment in the project?

Return on investment is calculated as the return on the segment's assets divided by the value of those assets

Spring Corp. has two divisions, Daffodil and Tulip. Daffodil produces a gadget that Tulip could use in its production. Tulip currently purchases 100,000 gadgets for $12.50 on the open market. Daffodil's variable costs are $6 per widget while the full cost is $9.35. Daffodil sells gadgets for $13 each. If Daffodil is operating at capacity, what would be the minimum transfer price Daffodil would accept for an internal transfer?

The Walnut Division of Benton Corp. has average invested assets of $22,500,000. Sales revenue of $27,000,000 results in an operating income of $2,379,500. The hurdle rate is 8%. a. Calculate the return on investment. b. Calculate the profit margin. c. Calculate the investment turnover. d. Calculate the residual income.

The responsibility center in which the manager does not have responsibility and authority over revenues is:

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 profit margin?

Which of the following statements is not correct about using the balanced scorecard for sustainability accounting?

The balanced scorecard includes both leading and lagging indicators. Which of the following correctly places each indicator on the spectrum of most leading to most lagging?

Almond, Inc. uses a balanced scorecard. One of the measures on the scorecard is the change in stock price. Which balanced scorecard perspective would this measure most likely fit into?

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 variable cost. If Bark purchases the widgets from Fern, what will be the transfer price?

Which of the following is not an advantage of decentralization?

Spice Company has two divisions, Parsley and Sage. Parsley produces a unit that Sage could use in its production. Sage currently is purchasing 50,000 units from an outside supplier for $50. Parsley is operating at less than its full capacity of 550,000 and has variable costs of $27 per unit. The full cost to manufacture the unit is $38. Parsley currently sells 450,000 units at a selling price of $54. If an internal transfer is made, variable shipping and administrative costs of $2 per unit could be avoided. What would be the impact on Spice Company's overall profits if the internal transfer were made?

Warren Company has two divisions with the following results: Warren Company has a hurdle rate of 12%. a. Calculate the return on investment for each division. b. Break each division's return on investment down into its component parts using the DuPont method. c. Calculate the residual income for each division.