Deck 11: How Do Managers Evaluate Performance in Decentralized Organizations

Question 1

Operating assets would include office buildings leased to other companies.

Answer 1

False

Question 2

Return on investment (ROI)can be calculated several different ways depending on the company.

Answer 2

True

Question 3

Asset turnover is calculated as sales divided by average operating assets.

Answer 3

True

Question 4

An investment center is an organizational segment in which the manager is responsible for costs,revenues,and investment in assets.

Question 5

Return on investment (ROI)can be improved by decreasing operating profit margin.

Question 6

Residual income is the portion of income produced by the division that is not related to its daily activities.

Question 7

Although economic value added (EVA)is similar to residual income,adjustments are made to the financial information to better reflect the economic results of the division.

Question 8

When residual income is used to evaluate division managers,the goal for each division manager is to increase residual income over time.

Question 9

Segments of an organization are often referred to as divisions.

Question 10

Average operating assets are calculated by adding the beginning balance of operating assets from Period 1 to the ending balance of operating assets from Period 1 and multiplying by two.

Question 11

The term decentralized organization refers to an organization that delegates decision-making and operational responsibilities to managers of each segment of the organization.

Question 12

A profit center is an organizational segment in which the manager is responsible for costs and revenues,but not investments in assets.

Question 13

When using the net book value to calculate return on investment (ROI),division managers controlling newer assets with little accumulated depreciation have an advantage over division managers controlling older assets with more accumulated depreciation.

Question 14

Most organizations use only residual income for performance measurement because of the weaknesses associated with using return on investment (ROI).

Question 15

The goal in establishing transfer pricing policies is to encourage managers to do what is in the best interest of the company,while also doing what is in the best interest of the division manager.

Question 16

Residual income is the dollar amount of division operating profit in excess of the division's cost of acquiring capital to purchase operating assets.

Question 17

Operating income typically excludes items such as income tax expense,interest income,and interest expense.

Question 18

The percent cost of capital is typically the company's percentage cost to obtain investment funds.

Question 19

The cost-plus approach is the best approach for establishing transfer prices for all companies.

Question 20

A cost center is an organizational segment in which the manager is responsible for costs and revenues,but not investments in assets.

Question 21

Exhibit 11-1
Ashville Company has two divisions - Bikes and Trikes.


-Refer to Exhibit 11-1.Assume the Trikes Division has average operating assets totaling $400,000 for the year and the company's cost of capital rate is ten percent.What is the residual income for the Trikes division?

A)$585,000
B)$1,380,000
C)$24,000
D)$120,000
E)None of the answer choices is correct.

Question 22

Which of the following statements is true regarding the use of the operating profit margin as a performance measure?

A)It includes the assets that produced the income.
B)It ignores the assets that produced the income.
C)It is calculated as net income divided by sales.
D)It is calculated as sales divided by operating income.
E)None of the answer choices is correct.

Question 23

Which of the following best describes an advantage of decentralization from the company's perspective?

A)Decentralization allows decisions to be made more quickly at the division level.
B)Managers at the division level might make decisions that are in their best interest even if the decision is not in the best interest of the company as a whole.
C)Decentralization allows top-level management at a corporate headquarters to work with division managers in making day-to-day decisions at the division level.
D)Decentralization allows for the duplication of administrative services.
E)None of the answer choices is correct.

Question 24

An advantage of return on investment (ROI)as a performance measure is that:

A)operating assets available at year-end is used in the denominator.
B)it is calculated the same way by different organizations.
C)net income is used in the numerator.
D)it includes the use of assets to evaluate performance.
E)None of the answer choices is correct.

Question 25

Attley Inc.has three separate divisions: Division A,Division B,and Division C.Information about the three divisions follows:

The company has recently implemented a new performance evaluation system.Based on this new system,a division manager would only receive a bonus if the ROI of the division was greater than 25% and residual income was in excess of $20,000.If management uses a cost of capital rate of 18%,which division manager(s)would be eligible for a bonus?

A)Division A and Division B.
B)Division B and Division C.
C)Division A only.
D)Division B only.
E)None of the answer choices is correct.

Question 26

Exhibit 11-2
Manford Inc.has two divisions - Refrigerators and Dish Washer.


-Refer to Exhibit 11-2.Using the segmented income statements,what is the profit margin ratio for the Refrigerator Division (to the nearest hundredth of a percent)?

A)22.44%
B)40.80%
C)58.00%
D)42.00%
E)None of the answer choices is correct.

Question 27

If decisions within a company are made by top management at headquarters,which of the following terms best describes this company?

A)cost center.
B)decentralized organization.
C)centralized organization.
D)investment center.
E)None of the answer choices is correct.

Question 28

Exhibit 11-1
Ashville Company has two divisions - Bikes and Trikes.


-Refer to Exhibit 11-1.Using the segmented income statements,what is the profit margin ratio for the Bikes Division (to the nearest tenth of a percent)?

A)13.5
B)41.7%
C)22.5%
D)58.3%
E)None of the answer choices is correct.

Question 29

Exhibit 11-1
Ashville Company has two divisions - Bikes and Trikes.


-Refer to Exhibit 11-1.Using the segmented income statements,what is the profit margin ratio for the Trikes Division (to the nearest tenth of a percent)?

A)47%
B)53%
C)9.6%
D)16.0%
E)None of the answer choices is correct.

Question 30

Division A has a building with the same original cost as Division B,except that it was purchased four years before Division B's building.If both divisions have identical operating incomes and use the net book value approach for calculating return on investment (ROI),which of the following will be true?

A)Both divisions will have the same ROI.
B)Division B will have a higher ROI.
C)Division A will have a higher ROI.
D)More information is needed to answer this question.
E)None of the answer choices is correct.

Question 31

An organizational segment that is responsible for costs and revenues is known as:

A)a financing center.
B)a profit center.
C)a cost center.
D)an investment center.
E)None of the answer choices is correct.

Question 32

Exhibit 11-2
Manford Inc.has two divisions - Refrigerators and Dish Washer.


-Refer to Exhibit 11-2.Assume the Refrigerator Division has average operating assets totaling $24,000,000 for the year and the company's cost of capital rate is 15 percent.What is the residual income for the Refrigerator division?

A)$2,200,000
B)$2,580,000
C)$6,400,000
D)$480,000
E)None of the answer choices is correct.

Question 33

Exhibit 11-3
Dillon Company has the following information available for one of its divisions:

Refer to Exhibit 11-3.If Dillon's cost of capital is 25%,what is the division's residual income?

A)$ 200,000
B)$800,000
C)$440,000
D)$1,200,000
E)None of the answer choices is correct.

Question 34

All of the following statements are true about return on investment (ROI)except:

A)Breaking out ROI into two ratios provides information that helps division managers identify areas for improvement.
B)ROI can be improved by decreasing the operating profit margin.
C)ROI can be calculated using the gross book value method.
D)ROI can be improved by increasing asset turnover.
E)None of the answer choices is correct.

Question 35

Exhibit 11-3
Dillon Company has the following information available for one of its divisions:

Refer to Exhibit 11-3.Dillon requires a minimum return on its investments of 25%.
Based on this information,what is the division's asset turnover (rounded to two decimal places)?

A)2.78
B)0.83
C)4.00
D)1.20
E)None of the answer choices is correct.

Question 36

Exhibit 11-1
Ashville Company has two divisions - Bikes and Trikes.


-Refer to Exhibit 11-1.Assume the Trikes Division has average operating assets totaling $400,000 for the year.What is the division's return on investment?

A)19.2%
B)40.0%
C)90.0%
D)24.0%
E)None of the answer choices is correct.

Question 37

Exhibit 11-2
Manford Inc.has two divisions - Refrigerators and Dish Washer.


-Refer to Exhibit 11-2.Using the segmented income statements,what is the profit margin ratio for the Dish Washer Division (to the nearest hundredth of a percent)?

A)30.37%
B)50.74%
C)16.70%
D)49.26%
E)None of the answer choices is correct.

Question 38

Exhibit 11-2
Manford Inc.has two divisions - Refrigerators and Dish Washer.


-Refer to Exhibit 11-2.Assume the Dish Washer Division has average operating assets totaling $6,560,000 for the year and the company's cost of capital rate is 15 percent.What is the residual income for the Dish Washer division?

A)$656,000
B)$4,744,000
C)$246,000
D)$2,084,000
E)None of the answer choices is correct.

Question 39

All of the following are disadvantages of decentralizing except:

A)duplication of administrative services.
B)quicker decision making at the division level.
C)loss of control at top management levels.
D)managers at the division level might make decisions that are in their best interest even if the decision is not in the best interest of the company as a whole.
E)None of the answer choices is correct.

Question 40

Exhibit 11-2
Manford Inc.has two divisions - Refrigerators and Dish Washer.


-Refer to Exhibit 11-2.Assume the Refrigerator Division has average operating assets totaling $24,000,000 for the year.What is the division's return on investment (to the nearest hundredth of a percent)?

A)40.80%
B)17.00%
C)24.17%
D)58.00%
E)None of the answer choices is correct.

Question 41

Exhibit 11-4
The following information is for two divisions at Wiley Company.

Refer to Exhibit 11-4.What is the ROI for the Chair Division (rounded to the nearest tenth of a percent)?

A)66.7%
B)14.0%
C)33.3%
D)9.3%
E)None of the answer choices is correct.

Question 42

Cambridge Products manufactures and sells cat toys and cat beds.The Bed Division incurs the following costs for the production of a single cat bed when 5,000 beds are produced each year.

The company sells cat beds to various pet stores for $26.00.The Toy Division is doing a promotion whereby each customer that purchases ten cat toys during the months of January,February,and March will receive a free cat bed.The Toy Division would like to purchase these beds from the Bed Division.
Assuming the Bed Division is at full capacity,what is the optimal transfer price?

A)$ 26.00
B)$13.50
C)$16.00
D)$18.00
E)None of the answer choices is correct.

Question 43

Exhibit 11-4
The following information is for two divisions at Wiley Company.

Refer to Exhibit 11-4.What is the operating profit margin for the Chair Division (rounded to the nearest tenth of a percent)?

A)33.3%
B)66.7%
C)14.0%
D)9.3%
E)None of the answer choices is correct.

Question 44

Starline Inc.manufactures and sells commercial coffee makers and coffee grinders.The Coffee Grinder Division incurs the following costs for the production of each coffee grinder when 4,000 coffee grinders are produced each year.

The company sells the coffee grinders to various retail stores for $60.00.The Coffee Maker Division is doing a promotion whereby each customer that purchases a coffee maker will receive a free coffee grinder.The Coffee Maker Division would like to purchase these coffee grinders from the Coffee Grinder Division.
Assuming the Coffee Grinder Division has excess capacity and there would be no lost sales by selling internally,what is the optimal transfer price that should be charged to the Coffee Maker Division?

A)$30.00
B)$22.50
C)$36.00
D)$60.00
E)None of the answer choices is correct.

Question 45

Exhibit 11-5
Sports Products Inc.sells skis and snowboards.Below is some financial information for each division at Sports Products for the most recent fiscal year.
To calculate economic value added (EVA),management requires adjustments for marketing and non-interest bearing current liabilities as outlined below.
Marketing will be capitalized and amortized over several years resulting in an increase to average operating assets of $125,000 for the Skis division and $82,500 for the Snowboards division.On the income statement,marketing expenses for the year will be added back to operating income,then marketing amortization expense for one year will be deducted.The current year amortization expense will total $60,000 for the Ski division and $45,000 for the Snowboards division.
Non-interest bearing liabilities will be deducted from average operating assets.
Refer to Exhibit 11-5.After the EVA adjustments to average operating assets,what would be the amount of average operating assets (adjusted)for the Snowboards Division?

A)$450,000
B)$495,000
C)$557,500
D)$532,500
E)None of the answer choices is correct.

Question 46

Exhibit 11-5
Sports Products Inc.sells skis and snowboards.Below is some financial information for each division at Sports Products for the most recent fiscal year.
To calculate economic value added (EVA),management requires adjustments for marketing and non-interest bearing current liabilities as outlined below.
Marketing will be capitalized and amortized over several years resulting in an increase to average operating assets of $125,000 for the Skis division and $82,500 for the Snowboards division.On the income statement,marketing expenses for the year will be added back to operating income,then marketing amortization expense for one year will be deducted.The current year amortization expense will total $60,000 for the Ski division and $45,000 for the Snowboards division.
Non-interest bearing liabilities will be deducted from average operating assets.
Refer to Exhibit 11-5.After the EVA adjustments to average operating assets,what would be the amount of average operating assets (adjusted)for the Skis Division?

A)$1,000,000
B)$1,200,000
C)$1,125,000
D)$1,060,000
E)None of the answer choices is correct.

Question 47

Exhibit 11-5
Sports Products Inc.sells skis and snowboards.Below is some financial information for each division at Sports Products for the most recent fiscal year.
To calculate economic value added (EVA),management requires adjustments for marketing and non-interest bearing current liabilities as outlined below.
Marketing will be capitalized and amortized over several years resulting in an increase to average operating assets of $125,000 for the Skis division and $82,500 for the Snowboards division.On the income statement,marketing expenses for the year will be added back to operating income,then marketing amortization expense for one year will be deducted.The current year amortization expense will total $60,000 for the Ski division and $45,000 for the Snowboards division.
Non-interest bearing liabilities will be deducted from average operating assets.
Refer to Exhibit 11-5.What is the EVA for the Skis division?

A)$522,500,000
B)$420,500
C)$386,700
D)$436,650
E)None of the answer choices is correct.

Question 48

Katsen Company can sell its products to an external market for $150 per unit.The division's variable manufacturing costs are $45 per unit and fixed manufacturing costs are $9 per unit.If the division is operating at full capacity,what would be the opportunity cost of selling internally?

A)$150
B)$45
C)$96
D)$105
E)None of the answer choices is correct.

Question 49

Exhibit 11-4
The following information is for two divisions at Wiley Company.

Refer to Exhibit 11-4.What is the ROI for the Couch Division (rounded to the nearest tenth of a percent)?

A)22.0%
B)9.0%
C)5.5%
D)12.5%
E)None of the answer choices is correct.

Question 50

When defining operating income for return on investment (ROI)purposes,many organizations do not include which of the following?

A)Cost of goods sold.
B)Allocated overhead.
C)Operating expenses.
D)Sales revenue.
E)None of the answer choices is correct.

Question 51

Which of the following ratios can managers use to break down return on investment (ROI)for improving performance?

A)Inventory turnover and gross margin ratio.
B)Inventory turnover and profit margin ratio.
C)Operating profit margin and EVA.
D)Operating profit margin and asset turnover.
E)None of the answer choices is correct.

Question 52

Titus Inc.has two divisions - Southeast and Northwest.

(1)Using the segmented income statements presented,determine the profit margin ratio for each division.
(2)Assume the Southeast division had average operating assets totaling $6,000,000 for the year,and the Northwest division had average operating assets totaling $1,800,000.Calculate return on investment (ROI)for each division.
(3)Assume Titus has a cost of capital rate of nine percent.Calculate residual income for each division.

Question 53

Genoa Equipment Company has three separate divisions: Tractors,Trailers,and Trucks.Information about the three divisions follows:

The company has recently implemented a new performance evaluation system.Based on this new system,a division manager would only receive a bonus if the ROI of the division was greater than 45% and residual income was in excess of $6,000,000.If management uses a cost of capital rate of 22%,which division manager(s)would be eligible for a bonus?

A)The Trucks Division.
B)The Trailers Division.
C)The Tractors Division.
D)All of the divisions.
E)None of the answer choices is correct.

Question 54

Exhibit 11-5
Sports Products Inc.sells skis and snowboards.Below is some financial information for each division at Sports Products for the most recent fiscal year.
To calculate economic value added (EVA),management requires adjustments for marketing and non-interest bearing current liabilities as outlined below.
Marketing will be capitalized and amortized over several years resulting in an increase to average operating assets of $125,000 for the Skis division and $82,500 for the Snowboards division.On the income statement,marketing expenses for the year will be added back to operating income,then marketing amortization expense for one year will be deducted.The current year amortization expense will total $60,000 for the Ski division and $45,000 for the Snowboards division.
Non-interest bearing liabilities will be deducted from average operating assets.
Refer to Exhibit 11-5.After the EVA adjustments to operating income,what would be the amount of net operating profit after tax (adjusted)for the Skis Division?

A)$890,000
B)$577,500
C)$665,000
D)$623,000
E)None of the answer choices is correct.

Question 55

All of the following are false about transfer pricing except:

A)using negotiated transfer pricing is always the best approach.
B)the cost approach can base the transfer price on either the variable cost or full absorption cost.
C)using the cost approach is always the best approach.
D)companies should always use the selling division's variable cost as the transfer price.
E)None of the answer choices is correct.

Question 56

Petra Company has the following information available for one of its divisions:

If Petra's cost of capital is 25%,what is the division's residual income?

A)$1,500,000
B)$1,000,000
C)$375,000
D)$975,000
E)None of the answer choices is correct.

Question 57

Exhibit 11-5
Sports Products Inc.sells skis and snowboards.Below is some financial information for each division at Sports Products for the most recent fiscal year.
To calculate economic value added (EVA),management requires adjustments for marketing and non-interest bearing current liabilities as outlined below.
Marketing will be capitalized and amortized over several years resulting in an increase to average operating assets of $125,000 for the Skis division and $82,500 for the Snowboards division.On the income statement,marketing expenses for the year will be added back to operating income,then marketing amortization expense for one year will be deducted.The current year amortization expense will total $60,000 for the Ski division and $45,000 for the Snowboards division.
Non-interest bearing liabilities will be deducted from average operating assets.
Refer to Exhibit 11-5.What is the EVA for the Snowboards division?

A)$397,650
B)$443,400
C)$420,500
D)$474,000
E)None of the answer choices is correct.

Question 58

Exhibit 11-4
The following information is for two divisions at Wiley Company.

Refer to Exhibit 11-4.What is the asset turnover for the Chair Division (rounded to the nearest tenth)?

A)0.7
B)7.1
C)1.5
D)0.1
E)None of the answer choices is correct.

Question 59

All of the following are true about Economic Value Added (EVA)except:

A)EVA requires compliance with GAAP.
B)EVA was trademarked.
C)EVA uses operating income after taxes.
D)EVA does not require compliance with GAAP.
E)None of the answer choices is correct.

Question 60

Exhibit 11-5
Sports Products Inc.sells skis and snowboards.Below is some financial information for each division at Sports Products for the most recent fiscal year.
To calculate economic value added (EVA),management requires adjustments for marketing and non-interest bearing current liabilities as outlined below.
Marketing will be capitalized and amortized over several years resulting in an increase to average operating assets of $125,000 for the Skis division and $82,500 for the Snowboards division.On the income statement,marketing expenses for the year will be added back to operating income,then marketing amortization expense for one year will be deducted.The current year amortization expense will total $60,000 for the Ski division and $45,000 for the Snowboards division.
Non-interest bearing liabilities will be deducted from average operating assets.
Refer to Exhibit 11-5.After the EVA adjustments to operating income,what would be the amount of net operating profit after tax (adjusted)for the Snowboards Division?

A)$493,500
B)$467,250
C)$705,000
D)$570,000
E)None of the answer choices is correct.

Question 61

Car Deals Inc.has two divisions: New Cars and Used Cars.The following segmented financial information is for the most recent fiscal year:

The New Cars division had average operating assets totaling $17,400,000 for the year,and the Used Cars division had average operating assets of $22,800,000.Assume the cost of capital rate is 15 percent,and the company's tax rate is 40 percent.
a.Prepare a segmented income statement,including the profit margin ratio for each division at the bottom of the segmented income statement.
b.Calculate return on investment (ROI)for each division.
c.Calculate residual income for each division.
c.What does this information tell you about each division?
d.Summarize the answers to parts a,b,and

Question 62

Becky's Bikes Inc.has two divisions: Retail and Service.The following information is for each division at Becky's Bikes for the most recent fiscal year.

To calculate EVA,management requires adjustments for marketing and non-interest bearing current liabilities as outlined below.
Marketing will be capitalized and amortized over several years resulting in an increase to average operating assets of $50,000 for the Retail division and $32,500 for the Services division.On the income statement,marketing expense for the year will be added back to operating income,then marketing amortization expense for one year will be deducted.The current year amortization expense will total $30,000 for the Retail division and $20,000 for the Services division.
Non-interest bearing liabilities will be deducted from average operating assets.
Calculate economic value added (EVA)for each division and comment on your results.

Question 63

Pete's Paint Company produces paint and has two divisions: Consumer and Commercial.Each division manager is evaluated based on profit produced by each division.The Commercial division sells paint to the Consumer division for $12 per gallon to cover variable costs.The Commercial division also sells to outside customers for $15 per gallon.
a.Using the general economic transfer pricing rule,calculate the optimal transfer price assuming the Commercial division is below capacity.
b.Using the general economic transfer pricing rule,calculate the optimal transfer price assuming the Commercial division is at capacity.