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Chapter 24--Performance Evaluation for Decentralized Operations

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Chapter 24--Performance Evaluation for Decentralized Operations

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1. Separation of businesses into more manageable operating units is termed decentralization. 
True    False

 

2. The process of measuring and reporting operating data by areas of responsibility is termed responsibility accounting. 
True    False

 

3. A decentralized business organization is one in which all major planning and operating decisions are made by top management. 
True    False

 

4. A centralized business organization is one in which all major planning and operating decisions are made by top management. 
True    False

 

5. The primary disadvantage of decentralized operations is that decisions made by one manager may affect other managers in such a way that the profitability of the entire company may suffer. 
True    False

 

6. The three common types of responsibility centers are referred to as cost centers, profit centers, and investment centers. 
True    False

 

7. One of the advantages of decentralization is that delegating authority to managers closest to the operation always results in better decisions. 
True    False

 

8. Developing and retaining quality managers is an advantage of decentralization. 
True    False

 

9. A responsibility center in which the department manager has responsibility for and authority over costs, revenues, and assets invested in the department is termed a cost center. 
True    False

 

10. Budget performance reports prepared for the vice-president of production would generally contain less detail than reports prepared for the various plant managers. 
True    False

 

11. The amount of detail presented in a budget performance report for a cost center depends upon the level of management to which the report is directed. 
True    False

 

12. The primary accounting tool for controlling and reporting for cost centers is a budget. 
True    False

 

13. Responsibility accounting reports that are given to lower level managers are usually very detailed, in turn, higher level managers will be given a summary report. 
True    False

 

14. A manager in a cost center also has responsibility and authority over the revenues and the costs. 
True    False

 

15. The plant managers in a cost center can be held responsible for major differences between budgeted and actual costs in their plants. 
True    False

 

16. A responsibility center in which the authority over and responsibility for costs and revenues is vested in the department manager is termed a profit center. 
True    False

 

17. Operating expenses directly traceable to or incurred for the sole benefit of a specific department and usually subject to the control of the department manager are termed direct expenses. 
True    False

 

18. Sales commissions expense for a department store is an example of a direct expense. 
True    False

 

19. Operating expenses incurred for the entire business as a unit that are not subject to the control of individual department managers are called indirect expenses. 
True    False

 

20. Office salaries expense for a department store is an indirect expense. 
True    False

 

21. The underlying principle of allocating operating expenses to departments is to assign to each department an amount of expense proportional to the revenues of that department. 
True    False

 

22. Property tax expense for a department store's store equipment is an example of a direct expense. 
True    False

 

23. Depreciation expense on store equipment for a department store is an indirect expense. 
True    False

 

24. Responsibility accounting reports for profit centers are normally in the form of income statements. 
True    False

 

25. The manager of a profit center does not make decisions concerning the fixed assets invested in the center. 
True    False

 

26. The profit center income statement should include only revenues and expenses that are controlled by the manager. 
True    False

 

27. The manager of the furniture department of a leading retailer does not control the salaries of departmental personnel. 
True    False

 

28. Service department charges are similar to the expenses of a profit center that purchased services from a source outside the company. 
True    False

 

29. Purchase requisitions for Purchasing and the number of payroll checks for Payroll Accounting are examples of activity bases. 
True    False

 

30. The rates at which services are charged to each division are called service department charge rates. 
True    False

 

31. The service department will determine its service department charge rate and charge the company’s divisions or departments according to their use of that particular service department. 
True    False

 

32. The profit center income statement should include only controllable revenues and expenses. 
True    False

 

33. Controllable expenses are those that can be influenced by the decisions of the profit center management. 
True    False

 

34. In an investment center, the manager has the responsibility and the authority to make decisions that affect not only costs and revenues, but also the plant assets invested in the center. 
True    False

 

35. Three measures of investment center performance are income from operations, rate of return on investment, and residual income. 
True    False

 

36. The major shortcoming of income from operations as an investment center performance measure is that it ignores the amount of revenues earned by the center. 
True    False

 

37. If Division Q's income from operations was $30,000 on invested assets of $200,000, the rate of return on investment is 15%. 
True    False

 

38. The rate of return on investment may be computed by multiplying investment turnover by the profit margin. 
True    False

 

39. If the profit margin for a division is 8% and the investment turnover is 1.20, the rate of return on investment is 9.6%. 
True    False

 

40. If the profit margin for a division is 11% and the investment turnover is 1.5, the rate of return on investment is 7.3%. 
True    False

 

41. Investment turnover (as used in determining the rate of return on investment) focuses on the rate of profit earned on each sales dollar. 
True    False

 

42. The ratio of sales to investment is termed the rate of return on investment. 
True    False

 

43. The major advantage of the rate of return on investment over income from operations as a divisional performance measure is that divisional investment is directly considered and thus comparability of divisions is facilitated. 
True    False

 

44. By using the rate of return on investment as a divisional performance measure, divisional managers will always be motivated to invest in proposals which will increase the overall rate of return for the company. 
True    False

 

45. The excess of divisional income from operations over a minimum amount of desired income from operations is termed the residual income. 
True    False

 

46. The minimum amount of desired divisional income from operations is set by top management by establishing a maximum rate of return considered acceptable for invested assets. 
True    False

 

47. The major advantage of residual income as a performance measure is that it gives consideration to not only a minimum rate of return on investment but also the total magnitude of income from operations earned by each division. 
True    False

 

48. The ratio of income from operations to sales is termed the profit margin component of the rate of return on investment. 
True    False

 

49. The ratio of sales to invested assets is termed the investment turnover component of the rate of return on investment. 
True    False

 

50. If income from operations for a division is $5,000, invested assets are $25,000, and sales are $30,000, the profit margin is 20%. 
True    False

 

51. If income from operations for a division is $6,000, invested assets are $25,000, and sales are $30,000, the profit margin is 20%. 
True    False

 

52. If income from operations for a division is $6,000, invested assets are $25,000, and sales are $30,000, the investment turnover is 1.2. 
True    False

 

53. If income from operations for a division is $6,000, invested assets are $25,000, and sales are $30,000, the investment turnover is 5. 
True    False

 

54. If income from operations for a division is $30,000, sales are $263,750, and invested assets are $187,500, the investment turnover is 1.3. 
True    False

 

55. If income from operations for a division is $120,000, sales are $975,000, and invested assets are $750,000, the investment turnover is 1.3. 
True    False

 

56. If divisional income from operations is $75,000, invested assets are $737,500, and the minimum rate of return on invested assets is 6%, the residual income is $36,750. 
True    False

 

57. If divisional income from operations is $100,000, invested assets are $850,000, and the minimum rate of return on invested assets is 8%, the residual income is $68,000. 
True    False

 

58. The profit margin component of rate of return on investment analysis focuses on profitability by indicating the rate of profit earned on each sales dollar. 
True    False

 

59. In rate of return on investment analysis, the investment turnover component focuses on efficiency in the use of assets and indicates the rate at which sales are being generated for each dollar of invested assets. 
True    False

 

60. The minimum amount of desired divisional income from operations is set by top management by establishing a minimum rate of return considered acceptable for invested assets. 
True    False

 

61. A disadvantage to using the residual income performance measure is that it encourages managers to spend only the minimum acceptable rate of return on assets set by upper management. 
True    False

 

62. The DuPont formula uses financial information to measure the performance of a business. 
True    False

 

63. The DuPont formula uses financial and nonfinancial information to measure the performance of a business. 
True    False

 

64. The balanced scorecard is a set of financial and nonfinancial measures that reflect the performance of the business. 
True    False

 

65. The objective of transfer pricing is to encourage each division manager to transfer goods and services between divisions if overall company income can be increased by doing so. 
True    False

 

66. Transfer prices may be used when decentralized units are organized as cost, profit, or investment centers. 
True    False

 

67. Under the cost price approach, the transfer price is the price at which the product or service transferred could be sold to outside buyers. 
True    False

 

68. Under the negotiated price approach, the transfer price is the price at which the product or service transferred could be sold to outside buyers. 
True    False

 

69. The negotiated price approach allows the managers of decentralized units to agree among themselves as to the transfer price. 
True    False

 

70. It is beneficial for divisions in a company to negotiate a transfer price when the supplying division has unused capacity in its plant. 
True    False

 

71. It is beneficial for two related companies to use the cost price approach for transfer pricing when both of the companies operate as cost centers and are not concerned with the revenue. 
True    False

 

72. An activity base is used to charge service department expenses. Match each of the following questions with an activity base. 

1. Equally amongst divisions 

     Maintenance 

  ____ 

2. Number of work orders 

     Human Resources 

  ____ 

3. Number of computers in department 

     Payroll Accounting 

  ____ 

4. Number of advertising campaigns 

     Purchasing 

  ____ 

5. Number of payroll checks 

     President’s office 

  ____ 

6. Number of employees 

     Marketing 

  ____ 

7. Number of miles 

     Transportation 

  ____ 

8. Number of purchase requisitions 

     Information Systems 

  ____ 

 

73. Match the following terms with the best definition given below. 

1. Ratio of income from operations to sales 

     Residual income 

  ____ 

2. Income from operations minus minimum acceptable income from operations 

     Rate of return on investments 

  ____ 

3. Income from operations divided by invested assets 

     Profit margin 

  ____ 

4. Earned by profit centers. 

     Controllable revenues 

  ____ 

5. Ratio of sales to invested assets 

     Investment turnover 

  ____ 

 

74. Which of the following would be most effective in a small owner/manager-operated business? 
A. Profit centers
B. Centralization
C. Investment centers
D. Cost centers

 

75. Businesses that are separated into two or more manageable units in which managers have authority and responsibility for operations are said to be: 
A. decentralized
B. consolidated
C. diversified
D. centralized

 

76. Which of the following is NOT a disadvantage of decentralized operation? 
A. Competition among managers decreases profits
B. Duplication of operations
C. Price cutting by departments that are competing in the same product market
D. Top management freed from everyday tasks to do strategic planning

 

77. Which is the best example of a decentralized operation? 
A. One owner who prepares plans and makes decisions for the entire company.
B. Each unit is responsible for their own operations and decision making.
C. In a major company, operating decisions are made by top management.
D. None of the above. All are examples of a centralized management.

 

78. All of the following are advantages of decentralization except: 
A. Managers make better decisions when closer to the operation of the company.
B. Expertise in all areas of the business is difficult, decentralization makes it better to delegate certain responsibilities.
C. Each decentralized operation purchases their own assets and pays for operating costs.
D. Decentralized managers can respond quickly to customer satisfaction and quality service.

 

79. Which of the following is not one of the common types of responsibility centers? 
A. Cost Center
B. Profit Center
C. Investment Center
D. Revenue Center

 

80. Which of the following is a disadvantage of decentralization? 
A. Decisions made by one manager may negatively affect the profitability of the entire company.
B. Helps retain quality managers.
C. Decision making by managers closest to the operations.
D. Managers are able to acquire expertise in their areas of responsibility.

 

81. A manager is responsible for costs only in a(n): 
A. profit center
B. investment center
C. volume center
D. cost center

 

82. In a cost center, the manager has responsibility and authority for making decisions that affect: 
A. revenues
B. assets
C. both costs and revenues
D. costs

 

83. For higher levels of management, responsibility accounting reports: 
A. are more detailed than for lower levels of management
B. are more summarized than for lower levels of management
C. contain about the same level of detail as reports for lower levels of management
D. are rarely provided or reviewed

 

84. Most manufacturing plants are considered cost centers because they have control over 
A. sales and costs.
B. fixed assets and costs.
C. costs only.
D. fixed assets and sales.

 

85. The following is a measure of a manager’s performance working in a cost center. 
A. budget performance report
B. rate of return and residual income measures
C. divisional income statements
D. balance sheet

 

86. A responsibility center in which the department manager has responsibility for and authority over costs and revenues is called a(n): 
A. profit center
B. investment center
C. volume center
D. cost center

 

87. In a profit center, the department manager has responsibility for and the authority to make decisions that affect: 
A. not only costs and revenues, but also assets invested in the center
B. the assets invested in the center, but not costs and revenues
C. both costs and revenues for the department or division
D. costs and assets invested in the center, but not revenues

 

88. Which of the following expenses incurred by the sporting goods department of a department store is a direct expense? 
A. Depreciation expense--office equipment
B. Insurance on inventory of sporting goods
C. Uncollectible accounts expense
D. Office salaries

 

89. Which of the following expenses incurred by a department store is an indirect expense? 
A. Insurance on merchandise inventory
B. Sales salaries
C. Depreciation on store equipment
D. Salary of vice-president of finance

 

90. In a profit center, the manager has responsibility and authority for making decisions that affect: 
A. liabilities
B. assets
C. investments
D. costs

 

91. Operating expenses directly traceable to or incurred for the sole benefit of a specific department and usually subject to the control of the department manager are termed: 
A. miscellaneous administrative expenses
B. direct expenses
C. indirect expenses
D. fixed expenses

 

92. In evaluating the profit center manager, the income from operations should be compared: 
A. across profit centers
B. to historical performance or budget
C. to the competitor's net income
D. to the total company earnings per share

 

93. Income from operations of the Commercial Aviation Division is $2,225,000. If income from operations before service department charges is $3,250,000: 
A. operating expenses are $1,025,000
B. total service department charges are $1,025,000
C. noncontrollable charges are $1,025,000
D. direct manufacturing charges are $1,025,000

 

94. The costs of services charged to a profit center on the basis of its use of those services are called: 
A. operating expenses
B. noncontrollable charges
C. service department charges
D. activity charges

 

95. Division X reported income from operations of $975,000 and total service department charges of $575,000. Therefore: 
A. net income was $400,000
B. the gross profit margin was $400,000
C. income from operations before service department charges was $1,550,000
D. consolidated net income was $400,000

 

96. To calculate income from operations, total service department charges are: 
A. added to income from operations before service department charges
B. subtracted from operating expenses
C. subtracted from income from operations before service department charges
D. subtracted from gross profit margin

 

97. Income from operations for Division Z is $250,000, total service department charges are $400,000 and operating expenses are $2,266,000. What are the revenues for Division Z? 
A. $650,000
B. $2,516,000
C. $2,916,000
D. $2,666,000

 

98. Income from operations for Division K is $220,000, and income from operations before service department charges is $975,000. Therefore: 
A. total operating expenses are $755,000
B. total manufacturing expenses are $755,000
C. direct materials, direct labor, and factory overhead total $755,000
D. total service department charges are $755,000

 

99. The following data are taken from the management accounting reports of Dulcimer Co.:
 

 

Div. A

Div. B

Div. C

Income from operations

$1,900,000

$1,450,000

$1,450,000

Total service department charges

1,700,000

1,050,000

1,100,000

 

 

 

 


If an incentive bonus is paid to the manager who achieved the highest income from operations before service department charges, it follows that: 
A. Division A's manager is given the bonus
B. Division B's manager is given the bonus
C. Division C's manager is given the bonus
D. The managers of Divisions B and C divide the bonus

 

100. What is the term used to describe expenses that are incurred for the benefit of a specific department? 
A. Indirect expenses
B. Margin expenses
C. Departmental expenses
D. Direct expenses

 

101. The following financial information was summarized from the accounting records of Train Corporation for the current year ended December 31:
 

 

Rails
Division

Locomotive
Division

Corporate
Total

Cost of goods sold

$47,200

$30,720

 

Direct operating expenses

27,200

20,040

 

Net sales

108,000

78,000

 

Interest expense

 

 

$  2,040

General overhead

 

 

18,160

Income tax

 

 

4,700

 

 

 

 



 The gross profit for the Rails Division is: 
A. $60,800
B. $33,600
C. $8,700
D. $21,150

 

102. The following financial information was summarized from the accounting records of Train Corporation for the current year ended December 31:
 

 

Rails
Division

Locomotive
Division

Corporate
Total

Cost of goods sold

$47,200

$30,720

 

Direct operating expenses

27,200

20,040

 

Net sales

108,000

78,000

 

Interest expense

 

 

$  2,040

General overhead

 

 

18,160

Income tax

 

 

4,700

 

 

 

 



 The income from operations for the Rails Division is: 
A. $60,800
B. $33,600
C. $8,700
D. $21,150

 

103. The following financial information was summarized from the accounting records of Train Corporation for the current year ended December 31:
 

 

Rails
Division

Locomotive
Division

Corporate
Total

Cost of goods sold

$47,200

$30,720

 

Direct operating expenses

27,200

20,040

 

Net sales

108,000

78,000

 

Interest expense

 

 

$  2,040

General overhead

 

 

18,160

Income tax

 

 

4,700

 

 

 

 



 The gross profit for the Locomotive Division is: 
A. $57,960
B. $14,790
C. $27,240
D. $47,280

 

104. The following financial information was summarized from the accounting records of Train Corporation for the current year ended December 31:
 

 

Rails
Division

Locomotive
Division

Corporate
Total

Cost of goods sold

$47,200

$30,720

 

Direct operating expenses

27,200

20,040

 

Net sales

108,000

78,000

 

Interest expense

 

 

$  2,040

General overhead

 

 

18,160

Income tax

 

 

4,700

 

 

 

 



 The income from operations for the Locomotive Division is: 
A. $57,960
B. $14,790
C. $27,240
D. $47,280

 

105. The following financial information was summarized from the accounting records of Train Corporation for the current year ended December 31:
 

 

Rails
Division

Locomotive
Division

Corporate
Total

Cost of goods sold

$47,200

$30,720

 

Direct operating expenses

27,200

20,040

 

Net sales

108,000

78,000

 

Interest expense

 

 

$  2,040

General overhead

 

 

18,160

Income tax

 

 

4,700

 

 

 

 



 The net income for Train Corporation is: 
A. $83,180
B. $35,940
C. $48,390
D. $60,840

 

106. Responsibility accounting reports for profit centers will include  
A. costs.
B. revenues.
C. expenses and fixed assets.
D. revenues, expenses, net income or loss from operations.

 

107. Some organizations use internal service departments to provide like services to several divisions or departments within an organization. Which of the following would probably not lend itself as a service department? 
A. Inventory Control
B. Payroll Accounting
C. Information Systems
D. Human Resources

 

108. The following is a measure of a manager’s performance working in a profit center. 
A. balance sheet
B. rate of return and residual income measures
C. budget performance report
D. divisional income statements

 

109. Which of the following would not be considered an internal centralized service department? 
A. Payroll accounting department
B. Manufacturing department
C. Information systems department
D. Purchasing department

 

110. Avey Corporation had $275,000 in invested assets, sales of $330,000, income from operations amounting to $49,500 and a desired minimum rate of return of 7.5%. The rate of return on investment for Avey Corporation is: 
A. 8%
B. 10%
C. 18%
D. 7.5%

 

111. Mason Corporation had $650,000 in invested assets, sales of $700,000, income from operations amounting to $99,000, and a desired minimum rate of return of 15%.

 The profit margin for Mason is: 
A. 7.1%
B. 20%
C. 15.2%
D. 14.1%

 

112. Mason Corporation had $650,000 in invested assets, sales of $700,000, income from operations amounting to $99,000, and a desired minimum rate of return of 15%.

 The investment turnover for Mason is: 
A. 1.08
B. .93
C. 6.57
D. 7.07

 

113. Mason Corporation had $650,000 in invested assets, sales of $700,000, income from operations amounting to $99,000, and a desired minimum rate of return of 15%.

 The residual income for Mason is: 
A. $0
B. $84,150
C. ($6,000)
D. $1,500

 

114. Hamlin Corporation had $220,000 in invested assets, sales of $242,000, income from operations amounting to $70,400, and a desired minimum rate of return of 3%. The rate of return on investment for Hamlin is: 
A. 7%
B. 32%
C. 3%
D. 29%

 

115. Chicks Corporation had $1,100,000 in invested assets, sales of $1,210,000, income from operations amounting to $302,500, and a desired minimum rate of return of 15%.

 The profit margin for Chicks is: 
A. 25%
B. 22%
C. 15%
D. 27.5%

 

116. Chicks Corporation had $1,100,000 in invested assets, sales of $1,210,000, income from operations amounting to $302,500, and a desired minimum rate of return of 15%.

 The investment turnover for Chicks is: 
A. 1.3
B. 1.5
C. 1.0
D. 1.1

 

117. Chicks Corporation had $1,100,000 in invested assets, sales of $1,210,000, income from operations amounting to $302,500, and a desired minimum rate of return of 15%.

 The residual income for Chicks is: 
A. $165,000
B. $302,500
C. $137,500
D. $191,500

 

118. The Clydesdale Company has sales of $4,500,000. It also has invested assets of $2,000,000 and operating expenses of $3,600,000. The company has established a minimum rate of return of 7%.

 What is Clydesdale Company's profit margin? 
A. 20%
B. 80%
C. 44.4%
D. 18%

 

119. The Clydesdale Company has sales of $4,500,000. It also has invested assets of $2,000,000 and operating expenses of $3,600,000. The company has established a minimum rate of return of 7%.

 What is Clydesdale Company's investment turnover? 
A. 1.80
B. 2.25
C. 1.25
D. 1.4

 

120. The Clydesdale Company has sales of $4,500,000. It also has invested assets of $2,000,000 and operating expenses of $3,600,000. The company has established a minimum rate of return of 7%.

 What is Clydesdale Company's rate of return on investment? 
A. 56%
B. 20%
C. 45%
D. 25%

 

121. The Clydesdale Company has sales of $4,500,000. It also has invested assets of $2,000,000 and operating expenses of $3,600,000. The company has established a minimum rate of return of 7%.

 What is Clydesdale Company's residual income? 
A. $252,000
B. $900,000
C. $1,400,000
D. $760,000

 

122. Managers of what type of decentralized units have authority and responsibility for revenues, costs, and assets invested in the unit? 
A. Profit center
B. Investment center
C. Production center
D. Cost center

 

123. A responsibility center in which the department manager is responsible for costs, revenues, and assets for a department is called: 
A. a cost center
B. a profit center
C. an operating center
D. an investment center

 

124. In an investment center, the manager has the responsibility for and the authority to make decisions that affect: 
A. the assets invested in the center, but not costs and revenues
B. costs and assets invested in the center, but not revenues
C. both costs and revenues for the department or division
D. not only costs and revenues, but also assets invested in the center

 

125. In an investment center, the manager has responsibility and authority for making decisions that affect: 
A. costs
B. revenues
C. assets
D. costs, revenues, and assets

 

126. The profit margin is the: 
A. ratio of income from operations to sales
B. ratio of income from operations to invested assets
C. ratio of assets to liabilities
D. ratio of sales to invested assets

 

127. The investment turnover is the: 
A. ratio of income from operations to sales
B. ratio of income from operations to invested assets
C. ratio of assets to liabilities
D. ratio of sales to invested assets

 

128. Identify the formula for the rate of return on investment. 
A. Invested Assets/Income From Operations
B. Sales/Invested Assets
C. Income From Operations/Sales
D. Income From Operations/Invested Assets

 

129. Which of the following expressions is termed the profit margin factor as used in determining the rate of return on investment? 
A. Sales/Income From Operations
B. Income From Operations/Sales
C. Invested Assets/Sales
D. Sales/Invested Assets

 

130. Which of the following expressions is termed the investment turnover factor as used in determining the rate of return on investment? 
A. Invested Assets/Sales
B. Income From Operations/Invested Assets
C. Income From Operations/Sales
D. Sales/Invested Assets

 

131. The profit margin for Atlantic Division is 28% and the investment turnover is 2.8. What is the rate of return on investment for Atlantic Division? 
A. 20%
B. 28%
C. 14%
D. 78.4%

 

132. Pacific Division for Bean Company has a rate of return on investment of 28% and an investment turnover of 1.4. What is the profit margin? 
A. 28%
B. 20%
C. 14%
D. 39.2%

 

133. The Eastern Division of Kentucky Company has a rate of return on investment of 28% and a profit margin of 20%. What is the investment turnover? 
A. 3.6
B. 1.4
C. 5.0
D. .7

 

134. What additional information is needed to find the rate of return on investment if income from operations is known? 
A. Invested assets
B. Residual income
C. Direct expenses
D. Sales

 

135. The Western Division of Bestboot Company has a rate of return on investment of 15% and an investment turnover of 1.2. What is the profit margin? 
A. 10%
B. 12.5%
C. 9%
D. 6%

 

136. The best measure of managerial efficiency in the use of investments in assets is: 
A. rate of return on stockholders' equity
B. investment turnover
C. income from operations
D. inventory turnover

 

137. Two divisions of Central Company (Divisions X and Y) have the same profit margins. Division X's investment turnover is larger than that of Division Y (1.2 to 1.0). Income from operations for Division X is $55,000, and income from operations for Division Y is $43,000. Division X has a higher return on investment than Division Y by: 
A. using income from operations as a performance measure
B. comparing the profit margins
C. applying a negotiated price measure
D. using its assets more efficiently in generating sales

 

138. The profit margin for Division B is 8% and the investment turnover is 1.20. What is the rate of return on investment for Division B? 
A. 8%
B. 6.7%
C. 7.3%
D. 9.6%

 

139. The excess of divisional income from operations over a minimum amount of divisional income from operations is termed: 
A. profit margin
B. residual income
C. rate of return on investment
D. gross profit

 

140. Assume that divisional income from operations amounts to $192,000 and top management has established 15% as the minimum rate of return on divisional assets totaling $1,000,000. The residual income for the division is: 
A. $42,000
B. $28,800
C. $92,000
D. $0

 

141. Which one of the following is NOT a measure that management can use in evaluating and controlling investment center performance? 
A. Rate of return on investment
B. Negotiated price
C. Residual income
D. Income from operations

 

142. A factor in determining the rate of return on investment--the ratio of income from operations to sales--is called: 
A. profit margin
B. indirect expenses
C. investment turnover
D. cost

 

143. A factor in determining the rate of return on investment--the ratio of sales to invested assets--is called: 
A. profit margin
B. indirect margin
C. investment turnover
D. cost ratio

 

144. Assume that Division J has achieved income from operations of $165,000 using $900,000 of invested assets. If management desires a minimum rate of return of 11%, the residual income is: 
A. $99,000
B. $18,150
C. $264,000
D. $66,000

 

145. Division A of Mocha Company has sales of $155,000, cost of goods sold of $83,000, operating expenses of $43,000, and invested assets of $150,000.

 What is the rate of return on investment for Division A? 
A. 19.3%
B. 48.0%
C. 18.7%
D. 5.47%

 

146. Division A of Mocha Company has sales of $155,000, cost of goods sold of $83,000, operating expenses of $43,000, and invested assets of $150,000.

 What is the profit margin for Division A? 
A. 19.3%
B. 48.0%
C. 18.7%
D. 5.47%

 

147. Division A of Mocha Company has sales of $155,000, cost of goods sold of $83,000, operating expenses of $43,000, and invested assets of $150,000.

 What is the investment turnover for Division A? 
A. 1.03
B. 1.0
C. 5.17
D. 5.34

 

148. Division X of O'Blarney Company has sales of $300,000, cost of goods sold of $120,000, operating expenses of $58,000, and invested assets of $150,000.

 What is the rate of return on investment for Division X? 
A. 9.15%
B. 81.3%
C. 40.7%
D. 200%

 

149. Division X of O'Blarney Company has sales of $300,000, cost of goods sold of $120,000, operating expenses of $58,000, and invested assets of $150,000.

 What is the profit margin for Division X? 
A. 81.3%
B. 20.2%
C. 40.7%
D. 60%

 

150. Investment centers differ from profit centers in that they 
A. are responsible for net income only.
B. are able to invest in assets.
C. have less responsibilities than cost centers and profit centers.
D. are only responsible for revenues.

 

151. Moon Shoe Factory is an investment center and is responsible for all of their net income and the use of their assets. In 2012, the invested assets totaled $475,000 and net income was $125,000. What is the rate of return on assets? 
A. 26.3%
B. 25.0%
C. 4.0%
D. 380.0%

 

152. The balanced scorecard measures financial and nonfinancial performance of a business. The balanced scorecard measures four areas. Identify one of the following that is not included as a performance measurement. 
A. Internal Process
B. Financial
C. Innovation and Learning
D. Employees

 

153. The following is a measure of a manager’s performance working in an investment center. 
A. rate of return on investment
B. residual income
C. divisional income statements
D. all of the responses

 

154. The Everest Company has income from operations of $80,000, invested assets of $500,000, and sales of $1,050,000.

 What is the profit margin? 
A. 47.6%
B. 7.6%
C. 55.2%
D. 4.8%

 

155. The Everest Company has income from operations of $80,000, invested assets of $500,000, and sales of $1,050,000.

 What is the investment turnover? 
A. 1.8
B. 2.1
C. .48
D. 13.13

 

156. The balanced scorecard measures 
A. only financial information
B. only nonfinancial information
C. both financial and nonfinancial information
D. external and internal information

 

157. Which of the following is not a commonly used approach to setting transfer prices? 
A. Market price approach
B. Revenue price approach
C. Negotiated price approach
D. Cost price approach

 

158. Determining the transfer price as the price at which the product or service transferred could be sold to outside buyers is known as the: 
A. Cost price approach
B. Negotiated price approach
C. Revenue price approach
D. Market price approach

 

159. Materials used by Square Yard Products Inc. in producing Division 3's product are currently purchased from outside suppliers at a cost of $5 per unit. However, the same materials are available from Division 6. Division 6 has unused capacity and can produce the materials needed by Division 3 at a variable cost of $3 per unit. A transfer price of $3.20 per unit is established, and 40,000 units of material are transferred, with no reduction in Division 6's current sales.

 How much would Division 3's income from operations increase? 
A. $150,000
B. $50,000
C. $32,000
D. $72,000

 

160. Materials used by Square Yard Products Inc. in producing Division 3's product are currently purchased from outside suppliers at a cost of $5 per unit. However, the same materials are available from Division 6. Division 6 has unused capacity and can produce the materials needed by Division 3 at a variable cost of $3 per unit. A transfer price of $3.20 per unit is established, and 40,000 units of material are transferred, with no reduction in Division 6's current sales.

 How much would Division 6's income from operations increase? 
A. $8,000
B. $15,000
C. $80,000
D. $150,000

 

161. Materials used by Square Yard Products Inc. in producing Division 3's product are currently purchased from outside suppliers at a cost of $5 per unit. However, the same materials are available from Division 6. Division 6 has unused capacity and can produce the materials needed by Division 3 at a variable cost of $3 per unit. A transfer price of $3.20 per unit is established, and 40,000 units of material are transferred, with no reduction in Division 6's current sales.

 How muc

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Answer-key: Chapter 24--Performance Evaluation for Decentralized Operations 1. Separation of businesses into more manageable operating units is termed decentralization. TRUE 2. The process of measuring and reporting operatin...
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