Question 1

Operating assets would include office buildings leased to other companies.

Accepted Answer

False

Question 2

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

Accepted Answer

Different companies may use different methods to calculate their ROI, depending on the nature of the investment and their specific goals and objectives.

Question 3

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

Accepted Answer

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

Question 4

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

Accepted Answer

An investment center is a segment in which the manager has responsibility for all three elements: costs, revenues, and investment in assets.

Question 5

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

Accepted Answer

ROI is calculated by dividing the net profit by the investment. Therefore, to improve ROI, companies typically aim to increase their operating profit margin (profit from each sale), which will result in higher net profit. Therefore, decreasing operating profit margin would likely result in a decrease in ROI.

Question 6

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

Accepted Answer

Residual income is the amount of net income generated in excess of the minimum rate of return on a company's investments or operations, not specifically unrelated 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.

Accepted Answer

Economic Value Added (EVA) is similar to residual income but adjustments are made to the financial information to better reflect the economic results of the division. These adjustments include adjustments for the cost of capital and other expenses that may not be included in traditional accounting methods.

Question 8

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

Accepted Answer

Yes, when residual income is used to evaluate division managers, the goal for each division manager is to increase residual income over time, as it reflects the amount of income a division generates above its cost of capital. This indicates the overall profitability and efficiency of the division, and an increase in residual income is a sign of improved performance.

Question 9

Segments of an organization are often referred to as divisions.

Accepted Answer

This statement is true. Segments of an organization can be referred to as divisions, which are separate business units within the larger organization.

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.

Accepted Answer

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 2 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.

Accepted Answer

A decentralized organization allows for decision-making and operational responsibilities to be spread among managers of each segment, rather than being centralized at the top 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.

Accepted Answer

A profit center is responsible for generating revenue and controlling costs, but typically does not make decisions regarding 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.

Accepted Answer

The net book value is lower for older assets due to more accumulated depreciation, which can actually lead to a higher ROI since ROI is calculated based on the net book value, making it easier for managers of older assets to show a higher return relative to the book value of their assets.

Question 14

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

Accepted Answer

This statement is not true. While there are weaknesses associated with using ROI as a performance measure, such as its reliance on accounting measures and the potential for manipulation, many organizations still use it alongside other performance measures like residual income.

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.

Accepted Answer

Transfer pricing policies should balance the interests of both the company as a whole and the division managers, encouraging them to make decisions that benefit both.

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.

Accepted Answer

Residual income is calculated as division operating profit minus the cost of capital to purchase division operating assets. It represents the amount of profit that exceeds the minimum amount of return required by investors or the cost of capital used in the business.

Question 17

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

Accepted Answer

Operating income is calculated as income from operations minus operating expenses. It does not include items such as taxes or interest income/expense.

Question 18

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

Accepted Answer

The percent cost of capital represents the cost a company incurs to obtain funds from investors, including both debt and equity.

Question 19

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

Accepted Answer

The cost-plus approach may not be the best approach for all companies as it does not take into account market conditions, competition, and other external factors that can influence prices. Different companies may have different pricing strategies based on their business model and market positioning.

Question 20

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

Accepted Answer

A cost center is an organizational segment where the manager is responsible only for costs, not for revenues or investments in assets.

Quiz 11: How Do Managers Evaluate Performance in Decentralized Organizations