Deck 12: Performance Evaluation and Decentralization

Question 1

Decentralization is usually achieved by creating units called divisions.

Answer 1

True

Question 2

The practice of delegating decision-making authority to lower levels of management in a company is called centralization.

Answer 2

False

Question 3

A production department within the factory,such as assembly,is an example of a profit center.

Answer 3

False

Question 4

Return on investment (ROI)can be calculated by multiplying margin times turnover.

Question 5

Residual income is the difference between operating income and the product of the hurdle rate and the company's average operating assets.

Question 6

Turnover is the ratio of sales to average operating assets.

Question 7

The use of residual income encourages managers to accept any project that earns above the minimum rate.

Question 8

Economic value added is just a specific way of calculating residual income.

Question 9

A key feature of economic value added (EVA)is that it emphasizes after-tax operating income and the actual cost of capital.

Question 10

Unlike ROI,residual income does not encourage a short-run orientation.

Question 11

The net income reduced by the total annual cost of capital is equal to the economic value added.

Question 12

The direct comparison of the performance of two different investment centers is difficult using residual income because residual income is an absolute measure.

Question 13

Economic value added (EVA)is similar to ROI in that it links net income to capital employed.

Question 14

Turnover is the most common measure of performance for an investment center.

Question 15

In a decentralized company,central management is able to focus on strategic planning and decision making.

Question 16

Basically,EVA is residual income with the cost of capital equal to the actual cost of capital for the firm (as opposed to some minimum rate of return desired by the company for other reasons).

Question 17

In a decentralized company,overall profit margins can mask inefficiencies within the various subdivisions.

Question 18

Residual income is sometimes used to overcome the tendency of ROI to discourage investments that are profitable for the company,but that lower the division's ROI.

Question 19

Decreasing inventories leads to a reduction in return on investment (ROI).

Question 20

In calculating residual income,the minimum rate of return is set by top management and is the same as the hurdle rate used for return on investment.

Question 21

Using EVA to calculate residual income,the dollar cost of capital employed is the actual percentage cost of capital multiplied by the total capital employed.

Question 22

An ______________________ is when a manager is responsible for revenues,costs and investments.

Question 23

In terms of operating income for the company as a whole,the transfer price set by the buying and selling divisions nets out.

Question 24

In negotiated transfer pricing,the selling division sets the ceiling (maximum possible transfer price)for the bargaining range.

Question 25

Decentralization usually is achieved by creating units called ___________.

Question 26

A transfer price is the price charged for a component by the selling division to the buying division of the same company.

Question 27

When a product is transferred at market price,the transfer will optimize both divisional and company-wide profits.

Question 28

When a manager is responsible for only costs it is known as a(n)_______________.

Question 29

If there is a competitive outside market for the transferred product,then the best transfer price is the cost-based transfer price.

Question 30

When the selling division can sell and the buying division can buy externally at the market price,the company as a whole will be in the same position whether or not a market price transfer takes place internally.

Question 31

A(n)________________ is when a manager is responsible only for sales.

Question 32

Transfer pricing is a complex issue.

Question 33

In negotiated transfer pricing,the buying division sets the ceiling (maximum possible transfer price)for the bargaining range.

Question 34

The selling division would never agree to a transfer price below its full manufacturing cost.

Question 35

Several transfer pricing policies are used in practice.These transfer pricing policies include market price,cost-based transfer prices,and negotiated transfer prices.

Question 36

The price charged for the transferred good affects the costs of the buying division and the revenues of the selling division.

Question 37

In _______________ decision making,decisions are made at the very top level,and lower-level managers are charged with implementing these decisions.

Question 38

A ____________________ is a segment of the business whose manager is accountable for specific sets of activities.

Question 39

________________ decision making allows managers at lower levels to make and implement key decisions pertaining to their areas of responsibility.

Question 40

The selling division is forced to transfer a product internally when a cost-based transfer pricing policy is set by top management.

Question 41

_________________ emphasizes only effectiveness of implementation.

Question 42

________________ is the difference between realization and sacrifice,where realization is what the customer receives and sacrifices is what is given up in return.

Question 43

Which of the following is a reason for decentralization?

A)Ease of gathering and using local information.
B)Focusing of central management.
C)Training and motivating segment managers.
D)Exposing segments to market forces.
E)All of these.

Question 44

_____________ is the ratio of operating income to sales.

Question 45

Divisions in a decentralized company can be created along which of the following lines?

A)Geographical
B)Types of goods or services produced
C)Type of responsibility given to divisional manager
D)Two or more of the other answers are correct
E)None of these

Question 46

_________________ is found by dividing sales by average operating assets.

Question 47

A responsibility center in which a manager is responsible for revenues,cost,and investment is a(n)

A)cost center.
B)revenue center.
C)profit center.
D)investment center.
E)none of these.

Question 48

If there is a competitive outside market for the transferred product,then the best transfer price is the _____________.

Question 49

The difference between operating income and the minimum dollar return required on a company's operating assets is the _______________.

Question 50

A responsibility center in which a manager is responsible only for costs is a(n)

A)investment center.
B)revenue center.
C)profit center.
D)cost center.
E)center not presented here.

Question 51

A responsibility center in which a manager is responsible only for sales is a(n)

A)cost center.
B)revenue center.
C)profit center.
D)investment center.
E)none of these.

Question 52

The ________________ is a strategic management system that defines a strategic-based responsibility accounting system.

Question 53

Typically,investment centers are evaluated on the basis of __________________.

Question 54

_____________________ refers to earnings before interest and taxes.

Question 55

______________________ occurs whenever managers receive information about the effectiveness of strategy implementation as well as the validity of the assumptions underlying the strategy.

Question 56

The practice of delegating decision-making authority to the lower levels of management in a company is

A)centralization.
B)decentralization.
C)performance evaluation.
D)authorization.
E)hierarchy flattening.

Question 57

_______________ indicate the minimum ROI necessary to accept an investment.

Question 58

A responsibility center in which a manager is responsible for both revenues and costs is a(n)

A)cost center.
B)revenue center.
C)profit center.
D)investment center
E)none of these.

Question 59

___________________ is after tax operating income minus the dollar cost of capital employed.

Question 60

A _________________ is the price charged for a component by the selling division to the buying division of the same company.

Question 61

Return on investment (ROI)is calculated as

A)operating income/average operating assets.
B)average operating assets/operating income.
C)(beginning operating assets + ending operating assets)/2.
D)sales/average operating assets.
E)operating income/sales.

Question 62

Decentralization is frequently chosen by companies because it

A)allows higher management to make all decisions.
B)allows higher management to gather local information to make better decisions.
C)protects segments of the company from competitive pressures.
D)allows for training and motivation of local managers.
E)allows the CEO to make all important decisions.

Question 63

Which of the following is a disadvantage of a focus on return on investment?

A)It can encourage managers to focus on cost cutting efforts.
B)It can produce a narrow focus on divisional profitability at the expense of profitability for the overall firm.
C)It can encourage managers to cut inventories and reduce overall investment.
D)It can encourage managers to focus on the long run at the expense of the short run.
E)It can accomplish all of these disadvantages.

Question 64

If the operating asset turnover increased by 50 percent and the margin increased by 50 percent,the ROI would increase by

A)50%.
B)25%.
C)100%.
D)125%.

Question 65

Shandling Company had operating income of $70,000,sales of $218,750,and turnover of 0.5.What is Shandling's ROI?

A)32%
B)50%
C)16%
D)64%
E)cannot be determined from this information

Question 66

If the operating asset turnover ratio increased by 30 percent and the margin increased by 20 percent,the divisional ROI

A)would increase by 56 percent.
B)would decrease by 60 percent.
C)would increase by 20 percent.
D)cannot be determined.

Question 67

If the National Division of American Products Company had a turnover ratio of 4.2 and a margin of 0.10,the return on investment would be

A)23.8%.
B)420.0%.
C)42.0%.
D)238.0%.

Question 68

The manager of a division is displeased with the ROI of the division.One step that would increase ROI (holding everything else constant)is

A)increasing investment.
B)increasing sales.
C)increasing costs.
D)decreasing operating income.
E)none of these.

Question 69

If the margin of 0.3 stayed the same and the turnover ratio of 5.0 increased by 10 percent,the ROI would

A)increase by 10 percent.
B)decrease by 10 percent.
C)increase by 15 percent.
D)remain the same.

Question 70

The decision-making approach that allows managers at lower levels to make and implement key decisions pertaining to their areas of responsibility is

A)responsibility accounting.
B)controllable accounting.
C)decentralization.
D)optimal strategic accounting.
E)none of these.

Question 71

Division A had ROI of 15% last year.The manager of Division A is considering an additional investment for the coming year.What step will the manager likely choose to take?

A)Accept the investment as long as it provides positive operating income.
B)Accept the investment as long as its ROI is positive.
C)Reject the investment if it returns more than 15% ROI.
D)Reject the investment if it returns less than 15% ROI.
E)Reject the investment if it returns an ROI equal to 15%.

Question 72

A segment of Mega Inc.,manufactures and sells blankets.The various models of blankets are produced in a single factory using stable technology.They are sold by the sales department,also located in the factory.The segment is most probably accounted for as a(n)

A)cost center.
B)revenue center.
C)profit center.
D)investment center.
E)none of these.

Question 73

A positive result that stems from the use of return on investment (ROI)is that it encourages managers to focus on

A)the relationship among sales,expenses,and investment.
B)cost efficiency.
C)operating asset efficiency.
D)the efficient use of resources in generating income.
E)all of these.

Question 74

Castor Company had income of $10,000,average assets of $100,000 and sales of $40,000.What is Castor's ROI?

A)10%
B)20%
C)25%
D)0.4%
E)40%

Question 75

JetSky Airways has three divisions,the Western Division,the Eastern Division,and the Northern Division.The manager of the Western Division had wanted to purchase replacement airplanes for the division.However,he decided against it because,although revenues would increase and the new planes would be less expensive to operate,the initial cost of the planes was quite large.The Western Division is most probably accounted for as a(n)

A)cost center.
B)investment center.
C)profit center.
D)revenue center.
E)none of these.

Question 76

Margin is calculated as

A)operating income/sales.
B)average operating assets/operating income.
C)(beginning operating assets + ending operating assets)/2.
D)sales/average operating assets.
E)operating income/average operating assets operating income/sales.

Question 77

Beta Division had the following information: If the asset base is decreased by $100,000,with no other changes,the return on investment of Beta Division will be

A)100.0%.
B)16.7%.
C)600.0%.
D)62.5%.

Question 78

Which of the following is not a disadvantage of the ROI performance measure?

A)It encourages managers to focus on the long run rather than the short run.
B)It discourages managers from investing in projects that would decrease divisional ROI but increase the profitability of the company as a whole.
C)It encourages myopic behavior.
D)All of these are disadvantages of the ROI measure.

Question 79

Which of the following is not an advantage of ROI?

A)It encourages managers of departments with high ROIs to invest in average ROI projects.
B)It encourages managers to pay careful attention to the relationships among sales,expenses,and investment.
C)It encourages cost efficiency.
D)It discourages excessive investment in operating assets.

Question 80

Turnover is calculated as

A)operating income/average operating assets.
B)average operating assets/operating income.
C)(beginning operating assets + ending operating assets)/2.
D)sales/average operating assets.
E)operating income/sales.