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Exam 9: Responsibility Accounting

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Question 51

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The New Products Division, of Testar Company, had operating income of $8,000,000 and operating assets of $44,800,000 during the current year. The New Products Division has developed a potential new product that would require $8,500,000 in operating assets and would be expected to provide $1,400,000 in operating income each year. Testar has set a target return on investment (ROI) of 16% for each of its divisions. Assuming that the new product is put into production, calculate the residual income for the division.

A) $832,000
B) $872,000
C) $528,000
D) $672,000

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

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Question 52

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Indicate whether each of the following statements is true or false: A responsibility accounting system is useful for controlling operations but not for evaluating the performance of managers.Return on investment is usually calculated by dividing operating income by operating assets.Many businesses use the return on investment of departments and other segments in deciding how to allocate resources within the company.The use of return on investment to allocate resources within an organization is unlikely to motivate segment managers to improve performance.Return on investment for a division should be calculated based on factors the division manager can control.

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Question 53

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The preferred method for setting transfer prices generally is some form of:

Joseph Company has an investment in assets of $450,000, operating income that is 10% of sales, and an ROI of 18%. From this information the amount of operating income would be:

Clear lines of authority and responsibility are essential to establishing a responsibility accounting system.

Investment centers are often evaluated on the basis of return on investment.

Describe the concept of decentralization as applied to large business organizations. Why do large organizations practice decentralization?

The Electronics Division of Anton Company reports the following results for the current year: Anton Company has set a target return on investment (ROI) of 11% for the Electronics Division. The Electronic Division's turnover (asset utilization) is: $\begin{array} { | l | l r | } \hline \text { Revenues } & \$ & 800,000 \\\hline \text { Operating expenses } & \$ & 720,000 \\\hline \text { Operating income } & \$ & 144,000 \\\hline \text { Operating assets } & \$ & 1,200,000 \\\hline\end{array}$

Reno Company is a decentralized company that has two divisions, Division A and Division B. Division A currently is selling 16,000 units of the product to customers outside the company, incurring the following costs: variable costs of $7 per unit and total fixed costs of $48,000. The selling price to these customers is $16 per unit.Division B needs 4,000 units of the product that Division A makes. It currently is purchasing the units from an outside supplier at a price of $15 each. Division B offers to purchase the units from Division A at a price of $12; the managers of Division A say the price must be at least $14. The managers of the two divisions appear to have reached a stalemate, which threatens to prevent the transfer from occurring within the company. Required: 1) Is it in the best interest of Reno Company for Division B to purchase the units from Division A? Show quantitative support for your answer.2) If the transfer is in the best interest of the company as a whole, should the top managers of Reno Company order the division managers to come to terms? How might the top management of Reno handle the situation other than by ordering the division managers to make the transfer?

Delegating authority and responsibility throughout an organization is known as:

What are the advantages of using a market-based transfer price? Why is it not always used?

Perfect Products provided the following selected information about its consumer products division for the current year: Required: Based on this information, calculate the company's investment amount. Round your answer to the nearest dollar. $\begin{array} { | l | l r | } \hline \text { Desired ROI } & & 14 \% \\\hline \text { Net income } & \$ & 220,000 \\\hline \text { Residual income } & \$ & 15,000 \\\hline\end{array}$

One of the divisions of Phoenix Corporation is the Motor Division. This division currently is designing a new, energy-efficient motor that would require a specialized filter. An outside company has offered to provide the 40,000 filters needed each year at $12.50 each. Phoenix is considering setting up a separate division, the Filter Division, to make the filters. The variable cost per unit would be $4, and total fixed costs incurred by the Filter Division would be $240,000.Required: 1) If the Filter Division is established, Phoenix would need to determine the basis (market-based or other basis) to use in setting the transfer price. What basis would you recommend in this case? 2) What is the maximum transfer price that the Motor Division should be willing to pay for the filters? 3) What is the minimum transfer price that Filter Division should be willing to accept for the filters? 4) Should the transfer be made? What effect would the transfer have on the profits of Phoenix Corporation?

Brookings Company evaluates its managers on the basis of return on investment. Division Three has a return on investment (ROI) of 15% while the company as a whole has an ROI of only 10%. Which of the following performance measures will motivate the manager of Division Three to accept a project earning a 12% return?

One of the divisions in Milsap Manufacturing Company is the Camera Division. The Camera Division is developing a new product that would require a lens not commercially available. The Camera Division believes it can sell 40,000 units of the new product each year at a selling price of $120. Variable costs for the new product would be $60, not including the filter, and there will be $160,000 of incremental fixed costs associated with the product. The Camera Division does not have the expertise to make the lenses. Milsap Manufacturing Company has a Lens Division that could make the lenses and has sufficient idle capacity. It estimates the variable cost per unit would be $16 and incremental fixed costs would be $120,000 each year.Required: 1) There are different bases that can be used in setting transfer prices, including market prices. What basis should be used in this situation? 2) What is the maximum transfer price Camera Division should be willing to pay? Note that, without the lenses, the Camera Division cannot make and sell its new product.3) What is the minimum transfer price that Lens Division should be willing to accept? 4) Should the transfer be made? If not, why not? If so, what transfer price (or range of transfer prices) would you recommend?

The Premium Product Company has three production departments: machining, assembly, and finishing. The three departments are under the control of the vice president of manufacturing. Each department has a manager, and one or more supervisors report to each department manager. Accordingly, the chain of command goes from vice president to department manager to supervisor. The responsibility reports for the two supervisors in the Machining Department are provided below: Other pertinent cost data are provided in the following table: Required: 1) Prepare a responsibility report for the manager of the Machining Department.2) Prepare a responsibility report for the Vice President of Manufacturing.

Responsibility reports should be arranged in a manner that promotes management by exception.

Jacob is a department manager who recently instituted a new recognition program for his employees. He budgeted the cost of the new program at $10 per employee, but actual costs were $15 per employee. The cost associated with the recognition program would be considered which of the following kinds of cost?

When a market-based transfer price is not possible, a transfer price imposed by upper management should preserve a sense of fairness among the divisions of the company affected by the transfer.

Which of the following is a not an advantage of decentralization?