Exam 12: Performance Evaluation and Decentralization

Figure 12-4. Quinn Inc.has a number of divisions.One division,Style,makes zippers that are used in the manufacture of boots.Another division,LeatherStuff,makes boots that use the zippers and needs 90,000 zippers per year.Style incurs the following costs for one zipper: Quinn has capacity to make 950,000 zippers per year,but due to a soft market,only plans to produce and sell 620,000 zippers next year.LeatherStuff currently buys zippers from an outside supplier for $3.50 each (the same price that Style receives). Refer to Figure 12-4.Assume that Style and LeatherStuff have agreed on a transfer price of $3.25.What is the total benefit for Quinn,Inc.?

Decentralization usually is achieved by creating units called ___________.

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

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

Which of the following is a reason for decentralization?

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

_____________ is the ratio of operating income to sales.

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).

The Southern Division of Jenkins Company had income of $48,300,average assets of $345,000 and sales of $241,500.The minimum rate of return for Jenkins Company is 12%.

The process value chain consists of

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

The Engine Division provides engines for the Tractor Division of a company.The standard unit costs for Engine Division are: The engine department has excess capacity.What is the best transfer price to avoid transfer price problems?

_____________________ refers to earnings before interest and taxes.

The performance measure that uses after-tax operating income and the actual cost of capital employed is

Figure 12-8 Bostonian Inc.has a number of divisions,including Delta Division and ListenNow Division.The ListenNow Division owns and operates a line of MP3 players.Each year the ListenNow Division purchases component AZ in order to manufacture the MP3 players.Currently it purchases this component from an outside supplier for $6.50 per component.The manager of the Delta Division has approached the manager of the ListenNow Division about selling component AZ to the ListenNow Division.The full product cost of component AZ is $3.10.The Delta Division can sell all of the components AZ it makes to outside companies for $6.50.The ListenNow Division needs 18,000 component AZs per year; the Delta Division can make up to 60,000 components per year. Refer to Figure 12-8.Although the Delta Division has been operating at capacity (60,000 components per year),it expects to produce and sell only 45,000 components for $6.50 each next year.The Delta Division incurs variable costs of $1.50 per component.The company policy is that all transfer prices are negotiated by the divisions involved. Required: A.What is the maximum transfer price? Which division sets it? B.What is the minimum transfer price? Which division sets it? C.Suppose that the two divisions agree on a transfer price of $5.75.What is the change in operating income for the Delta Division? For the ListenNow Division? For Bostonian Inc.as a whole?

Figure 12-4. Quinn Inc.has a number of divisions.One division,Style,makes zippers that are used in the manufacture of boots.Another division,LeatherStuff,makes boots that use the zippers and needs 90,000 zippers per year.Style incurs the following costs for one zipper: Quinn has capacity to make 950,000 zippers per year,but due to a soft market,only plans to produce and sell 620,000 zippers next year.LeatherStuff currently buys zippers from an outside supplier for $3.50 each (the same price that Style receives). Refer to Figure 12-4.Assume that Style and LeatherStuff have agreed on a transfer price of $3.25.What are the total cost savings for LeatherStuff?

Figure 12-1. Dempsey Company provided the following information for last year: Refer to Figure 12-1.Dempsey's turnover ratio for last year was