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.

Accepted Answer

The DuPont method breaks return on investment (ROI) into profit margin, asset turnover, and financial leverage, not residual income.

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.

Accepted Answer

Profit center managers have overarching responsibilities for the financial success of their department or division, including generating revenue and managing expenses. As a result, they may also supervise managers of revenue and cost centers to ensure that all resources are being used effectively and efficiently to achieve profitability.

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.

Accepted Answer

The controllability principle states that managers should be held responsible only for the costs and outcomes they can control, not for allocated costs beyond their control.

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.

Accepted Answer

Profit margin is defined as the ratio of operating income to sales revenue, not the other way around.

Question 5

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

Accepted Answer

The statement accurately describes the formula for investment turnover ratio.

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.

Accepted Answer

A profit center manager is responsible for more functions than a revenue center manager, as they manage both revenues and costs, whereas a revenue center manager focuses only on revenues.

Question 7

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

Accepted Answer

Residual income is a leading indicator of financial performance because it reflects the income earned after deducting the cost of capital. It gives insight into the profitability of a business and the effectiveness of its management.

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.

Accepted Answer

Residual income is the excess income earned by a project after the cost of capital has been accounted for. If a project earns more than the hurdle rate (the minimum rate of return required by investors), it will have a positive residual income. This aligns the goals of managers with those of investors because both parties want the project to earn a return that is greater than the cost of capital. Therefore, residual income can help avoid the problem of goal incongruence, which occurs when the goals of managers and investors are not aligned.

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.

Accepted Answer

The manager of the buying division is motivated to pay the lowest price possible in order to maximize the division's profits. This is because the buying division will typically be evaluated based on its profitability. On the other hand, the manager of the selling division may be motivated to receive the highest price possible in order to maximize the division's revenues and profitability. This creates a potential conflict of interest in setting transfer prices, which must be carefully managed to ensure that they are fair and reasonable.

Question 10

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

Accepted Answer

Investment center managers are responsible for both generating a profit and investing assets, giving them control over the investment of those assets.

Question 11

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

Accepted Answer

Fostering competition among divisions is generally considered a benefit of decentralization, as it can lead to increased innovation and efficiency.

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.

Accepted Answer

A cost center is a department or function within an organization that is responsible for incurring costs to support its primary activities or other areas of the organization. Legal services, as a corporate support function, would fall under this category of cost center.

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.

Accepted Answer

The statement accurately describes the use of the segmented income statement for evaluating profit center managers, making option A true.

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.

Accepted Answer

This is the correct formula for calculating return on investment (ROI).

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.

Accepted Answer

The statement accurately describes the purpose of the balanced scorecard.

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.

Accepted Answer

The correct term is "responsibility center," not "related-party center." A responsibility center is a part of an organization where a manager is accountable for its activities and performance.

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.

Accepted Answer

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

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.

Accepted Answer

The hurdle rate is the minimum acceptable rate of return on an investment, often equated with the required rate of return or cost of capital, but it is not the same as economic value added (EVA), which measures a company's financial performance.

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.

Accepted Answer

Residual income is the difference between operating profit and the minimum profit the organization must earn to cover the hurdle rate, not the ROI.

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.

Accepted Answer

Segment margin and profit margin are not identical terms. Segment margin only includes costs that are directly related to the segment, while profit margin includes all costs incurred by the company.

Quiz 10: Decentralized Performance Evaluation