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Exam 10: Decentralized Performance Evaluation

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Question 21

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Which of the following is a disadvantage of decentralization?

A) Develops managerial expertise
B) Managers have specialized knowledge
C) Potential duplication of resources
D) Allows top managers to focus on strategic issues

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

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Question 22

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A legal services department would be an example of a cost center.

A) True
B) False

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Question 23

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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:

Coral has a profit margin of 16% based on revenues of $400,000,and investment turnover is 2.What is the residual income when the cost of capital is 10%?

Profit margin is defined as the ratio of sales revenue to operating income.

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?

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.

Reef Corp.has revenues of $500,000 resulting in an operating income of $54,000.Invested assets total $600,000,and the cost of capital is 6%.Calculate the increase in residual income if sales increase by 10% and the profit margin and invested assets remain the same.

Residual income can be calculated as:

Residual income is the difference between:

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 less than full capacity,what would be the minimum transfer price Daffodil would accept for an internal transfer?

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?

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

Which of the following statements is correct about the connection between cost centers and revenue?

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.If the internal transfer is made,what would be the impact on Tiffany Company's overall profits?

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?

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?

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 full capacity 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 minimum transfer price?

Investment center managers have control over the investment of assets.

Dickens Company has two divisions,Bloom and Heath.Bloom produces an item that Heath could use in its production.Heath currently is purchasing 5,000 units from an outside supplier for $44 per unit.Bloom has sufficient capacity and has variable costs of $35 per unit.The full cost to manufacture the unit is $41.Bloom currently sells 450,000 units at a selling price of $48 per unit. a.What will be the effect on Dickens Company's operating profit if the transfer is made internally? b.What will be the change in profits for Bloom if the transfer price is $41 per unit? c.What will be the change in profits for Heath if the transfer price is $41 per unit?