Deck 10: Decentralized Performance Evaluation

Question 1

The DuPont method breaks residual income into profit margin and investment turnover.The DuPont method breaks return on investment into profit margin and investment turnover.

Answer 1

False

Question 2

A profit center manager often also supervises revenue and cost center managers.Because profit center managers are responsible for both costs and revenues,they often supervise revenue and cost center managers.

Answer 2

True

Question 3

The controllability principle holds that managers should not be held responsible only for what they can control but are also responsible for allocated costs.The controllability principle holds that managers should be held responsible only for what they can control.

Answer 3

False

Question 4

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

Question 5

Investment turnover is defined as the ratio of sales revenue to average invested assets.This is the formula for investment turnover.

Question 6

A revenue center manager is responsible for more functions than is a profit center manager.Revenue center managers are responsible for revenues,while profit center managers are responsible for both revenues and costs.

Question 7

Residual income is a leading indicator of financial performance.Residual income is a lagging indicator of financial performance.

Question 8

Residual income can avoid the problems of goal incongruence.Any project that earns more than the hurdle rate will have a positive residual income,which avoids the problems of goal incongruence.

Question 9

In transfer pricing,the manager of the buying division is motivated to pay the highest price possible.The manager of the buying division will want to pay the lowest price possible.

Question 10

Investment center managers have control over the investment of assets.Investment center managers are responsible for generating a profit and investing assets.

Question 11

One disadvantage of decentralization is that it fosters competition among divisions.This is considered a benefit of decentralization.

Question 12

A legal services department would be an example of a cost center.Cost center managers have the authority to incur costs to support their areas of responsibility;corporate support functions such as legal services would fall under this category.

Question 13

The most common method of evaluating a profit center manager is the segmented income statement.The segmented income statement separates costs that are within the profit center manager's control,so it is a valuable tool for evaluating a profit center manager.

Question 14

Return on investment is calculated as the return on the segment's assets divided by the value of those assets.ROI = Operating income/Average invested assets;operating income is a measure of return on the segment's assets.

Question 15

The balanced scorecard attempts to focus managers' attention on more than just financial measures.The balanced scorecard considers measures of long-term success,not just short-term financial results.

Question 16

The part of the organization for which managers are responsible is called a related-party center.The part of the organization for which managers are responsible is called a responsibility center.

Question 17

In a decentralized organization,lower-level managers are given a great deal of autonomy in decision-making.In a decentralized organization,decision-making authority is spread throughout the organization.

Question 18

The hurdle rate is also called economic value added.The hurdle rate is also called the required rate of return,and represents the company's cost of capital.

Question 19

Residual income is the difference between operating profit and the minimum profit the organization must earn to cover the ROI.Residual income is the difference between operating profit and the minimum profit the organization must earn to cover the hurdle rate.

Question 20

Segment margin and profit margin are identical terms.The segment margin includes only those costs that are within the segment manager's control whereas the profit margin includes costs that are not controllable by the manager.

Question 21

Which of the following is not a perspective used by the balanced scorecard?

A)Financial
B)Short-term
C)Customer
D)Learning and growth

Question 22

The responsibility center in which the manager has responsibility and authority over only revenues and costs is

A)a cost center.
B)an investment center.
C)a profit center.
D)a revenue center.

Question 23

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?

A)Customer perspective
B)Learning and growth perspective
C)Internal business perspective
D)Financial perspective

Question 24

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

A)cost center
B)revenue center
C)profit center
D)balanced center

Question 25

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)Customer perspective
B)Learning and growth perspective
C)Internal business perspective
D)Financial perspective

Question 26

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

A)a cost center.
B)an investment center.
C)a profit center.
D)a revenue center.

Question 27

Which of the following is a disadvantage of decentralization?

A)Fosters competition among divisions
B)Managers have specialized knowledge
C)Potential duplication of resources
D)Allows top managers to focus on strategic issues

Question 28

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

A)Centralized organization
B)Decentralized organization
C)Participative organization
D)Top-down organization

Question 29

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

A)a cost center.
B)an investment center.
C)a profit center.
D)a revenue center.

Question 30

Which of the following is not something that should be compiled for each dimension of the balanced scorecard?

A)Performance measures
B)Targets
C)Strategic vision
D)Specific objectives

Question 31

Almond,Inc.uses a balanced scorecard.One of the measures on the scorecard is the percentage of revenue from repeat sales.Which balanced scorecard perspective would this measure most likely fit into?

A)Customer perspective
B)Learning and growth perspective
C)Internal business perspective
D)Financial perspective

Question 32

Which of the following is not an advantage of decentralization?

A)Allows top managers to focus on strategic issues
B)Potential duplication of resources
C)Allows for development of managerial expertise
D)Managers can react quickly to local information

Question 33

Almond,Inc.uses a balanced scorecard.One of the measures on the scorecard is the average age of raw materials inventory.Which balanced scorecard perspective would this measure most likely fit into?

A)Customer perspective
B)Learning and growth perspective
C)Internal business perspective
D)Financial perspective

Question 34

Which of the following is the primary tool used by cost centers to manage costs?

A)Return on investment
B)Budgetary control system
C)Balanced scorecard
D)Transfer pricing

Question 35

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

A)Customer
B)Internal business processes
C)Learning and growth
D)Financial

Question 36

Which of the following statements follows from the controllability principle?

A)A profit center manager should be evaluated based on residual income,not return on investment.
B)An investment center manager should be evaluated based on return on investment,not residual income.
C)A profit center manager should be evaluated based on segment margin,not profit margin.
D)A cost center manager should be evaluated on costs and revenues,not just costs.

Question 37

Which of the following balanced scorecard perspectives measures an organization's ability to change?

A)Customer
B)Internal business processes
C)Learning and growth
D)Financial

Question 38

One of the most important concepts in responsibility accounting is the

A)balanced scorecard.
B)controllability principle.
C)related-party transactions.
D)transfer price.

Question 39

Return on investment can be calculated as

A)ROI = sales revenue/average invested assets
B)ROI = operating income/sales revenue
C)ROI = operating income/average invested assets
D)ROI = average invested assets/sales revenue

Question 40

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

A)a cost center.
B)an investment center.
C)a profit center.
D)a revenue center.

Question 41

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?

A)$100,000
B)$166,667
C)$78,000
D)$42,000

Question 42

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

A)7%
B)14%
C)2.00
D)0.50

Question 43

Palm Inc.has a profit margin of 15% and an investment turnover of 2.Sales revenue is $800,000.What is the amount of average invested assets?

A)$240,000
B)$400,000
C)$120,000
D)$60,000

Question 44

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?

A)10
B)5
C)2
D)16%

Question 45

Investment turnover 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

Question 46

Tropic Corp.has sales revenue of $500,000 resulting in operating income of $54,000.Average invested assets total $600,000,and the cost of capital is 6%.Calculate the return on investment if sales increase by 10% and the profit margin and invested assets remain the same.

A)9.0%
B)9.9%
C)10.8%
D)6.0%

Question 47

Grove Corp.has revenues of $1,500,000 resulting in an operating income of $105,000.Average invested assets total $750,000.If sales increase by 10% and the investment level remains constant,what is the investment turnover?

A)2.00
B)2.20
C)7.0%
D)7.7%

Question 48

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

A)$180,000
B)$28,800
C)$72,000
D)$240,000

Question 49

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 return on investment?

A)8%
B)10%
C)16%
D)20%

Question 50

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

Question 51

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

A)7%
B)14%
C)$75,000
D)$30,000

Question 52

Grove Corp.has revenues of $1,500,000 resulting in an operating income of $105,000.Average invested assets total $750,000.Calculate the ROI if sales increase by 10% and the profit margin and investment level remain constant.

A)7.7%
B)14%
C)15.4%
D)7.0%

Question 53

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 profit margin is

A)7%
B)14%
C)2.00
D)0.50

Question 54

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?

A)8%
B)10%
C)16%
D)20%

Question 55

Palm Inc.has a profit margin of 15% and an investment turnover of 2.Sales revenue is $800,000.What is the operating income?

A)$240,000
B)$60,000
C)$120,000
D)$400,000

Question 56

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

A)equal to operating income.
B)greater than zero.
C)greater than operating income.
D)greater than average invested assets.

Question 57

Crawford Corp.has an ROI of 15% and a residual income of $10,000.If operating income equals $30,000,what is the amount of average invested assets?

A)$200,000
B)$66,667
C)$450,000
D)$150,000

Question 58

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

Question 59

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?

A)$240,000
B)$1,500,000
C)$50,000
D)$72,000

Question 60

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 residual income?

A)$100,000
B)$20,000
C)$120,000
D)$40,000

Question 61

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

A)Use of ROI may lead to goal incongruence.
B)ROI is a lagging indicator of financial performance.
C)ROI evaluates the short-term.
D)ROI is a commonly used measure for financial performance.

Question 62

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 negative
D)$14,000

Question 63

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?

A)$60
B)$96
C)$100
D)$175

Question 64

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

A)market price method
B)cost-based method
C)negotiation
D)balanced scorecard method

Question 65

Indigo Corp.has an ROI of 15% and a residual income of $10,000.If operating income equals $30,000,what is the hurdle rate?

A)15%
B)10%
C)33.3%
D)18.3%

Question 66

Pine Corp.has revenues of $500,000 resulting in an operating income of $54,000.Invested assets total $600,000.Residual income is $18,000.Calculate the new residual income if sales increase by 10% and the profit margin and invested assets remain the same.

A)$23,400
B)$0
C)$3,240
D)$36,000

Question 67

Reef Corp.has revenues of $500,000 resulting in an operating income of $54,000.Invested assets total $600,000,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.

A)$5,400
B)$24,000
C)$0
D)$7,500

Question 68

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?

A)$60
B)$96
C)$105
D)$175

Question 69

King Corp.has revenues of $1,500,000 resulting in an operating income of $105,000.Average invested assets total $750,000,and the hurdle rate is 6%.Calculate the residual income if sales increase by 10% and the profit margin and invested assets remain constant.

A)$115,500
B)$45,000
C)$0
D)$70,500

Question 70

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?

A)18%
B)12%
C)8%
D)15%

Question 71

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?

A)$30,000
B)$45,000
C)$3,000
D)$75,000

Question 72

The transfer pricing method that uses either the variable cost or the full cost as the basis for setting the transfer price is the

A)market price method.
B)cost-based method.
C)negotiation.
D)balanced scorecard methoD.The cost-based method uses cost as a basis for setting the transfer price.

Question 73

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.

Question 74

Dade Corp.has residual income of $10,000.If operating income equals $30,000 and the minimum required rate of return is 8%,what are average invested assets?

A)$125,000
B)$375,000
C)$250,000
D)$500,000

Question 75

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 _______________.

A)market price…full cost
B)full cost…variable cost
C)market price…variable cost
D)variable cost…market price

Question 76

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 plus 20%.If Bark purchases the widgets from Fern,what will be the transfer price?

A)$72.00
B)$115.20
C)$126.00
D)$210.00

Question 77

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

A)$44,000
B)$20,000
C)$40,000
D)$64,000

Question 78

A ________________ is the amount that one division charges when it sells goods or services to another division in the same company

A)residual income
B)negotiated price
C)related price
D)transfer price

Question 79

The transfer pricing method that uses the price the company would charge external customers is the

A)market price method.
B)cost-based method.
C)negotiation.
D)balanced scorecard methoD.The market price is the price that a company would charge to external customers.

Question 80

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?

A)16%
B)8%
C)9%
D)18%