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Exam 10: Decentralized Performance Evaluation

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Question 61

Multiple Choice

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Investment turnover is defined as:

A) the ratio of sales revenue to average invested assets.
B) the ratio of net operating income to average invested assets.
C) the ratio of net operating income to sales revenue.
D) the ratio of profit margin to return on investment.

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

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Question 62

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Which of the following statements contrasting residual income with return on investment is correct?

A) ROI may lead to goal incongruence while residual income does not.
B) ROI is a lagging indicator while residual income is a leading indicator.
C) Residual income is a financial measure while return on investment emphasizes the customer perspective.
D) Residual income is a long-term measure while ROI is a short-term measure.

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

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Question 63

Multiple Choice

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Which of the following is not a limitation of return on investment?

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?

Which of the following responsibility centers will use a segmented income statement as an evaluation tool?

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 maximum transfer price?

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's perspective?

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?

If the ROI of a project is greater than the hurdle rate,the residual income will be:

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?

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?

Segment margin and profit margin are identical terms.

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?

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?

In what type of organization is decision-making authority spread throughout the organization?

A ________ is the amount that one division charges when it sells goods or services to another division within the same company.

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?

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

Calculate the missing values for each unique company.

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%.The investment turnover is: