Exam 12: Performance Evaluation in Decentralized Organizations

The Greenberg Company reported average operating assets of $400,000 and sales of $1,200,000 in 2009. If the company's margin is 12%, their ROI must have been: a. 24% B) 36% C) 33.3% D) 40%

Which of the following transfer prices, in theory, is the most sound because it provides the best measure of the opportunity cost of inter-divisional transfers? a. Variable cost-based transfer prices. B) Full cost-based transfer prices. C) Market-based transfer prices. D) Negotiated transfer prices. E) None of the above.

The Brett Company has provided the following information for its two stores: If Store B increases its sales by $50,000 with no change in fixed expenses the overall company net income will: a. Increase by $12,500. B) Increase by $35,000. C) Increase by $50,000. D) Increase by $15,000.

Divisional managers have a keen interest in the transfer price because their individual compensation often depends on the profit reported by their division.

The Grisham Company has reported the following information for 2009: The company's economic value added is: a. $156,800 B) $220,000 C) $1,008,000 D) $851,200

Firms often use profit before taxes to evaluate profits centers, computed as contribution margin less traceable fixed costs.

Which of the following transfer prices gives divisions considerable autonomy? a. Variable cost-based transfer prices. B) Full cost-based transfer prices. C) Market-based transfer prices. D) Negotiated transfer prices. E) None of the above.

The maximum amount the buying division in an inter-company transfer is willing to pay is opportunity cost.

A cost center for which there is a clear relation between inputs and outputs is referred to as a: a. Discretionary cost center. B) Budget center. C) Engineered cost center. D) Kaizen center. E) None of the above.

Net book value is the original acquisition cost of plant and equipment less accumulated depreciation.

Gant Manufacturing Company has provided the following financial information: What is Gant's residual income?

A characteristic of an effective performance measure is that it yields maximum information about the decisions or actions of the individual or organizational unit.

Decentralizing authority empowers employees at the higher levels.

Ideally, the best performance measures: a. Reflect the decision rights assigned to the individual/organizational unit. B) Yield the maximum information about the decisions or actions of the individual/organizational unit. C) Have low measurement error. D) Are easy to understand and communicate. E) All of the above.

Which of the following is not a common approach to transfer pricing? a. Variable cost-based transfer prices. B) Full cost -based transfer prices. C) Market-based transfer prices. D) Negotiated transfer prices. E) All of the above are common approaches to transfer pricing. L

Which of the following is not a role of a cost center manager in an organization? a. To achieve cost targets for a given level of output In the short term. B) Making continuous efficiency improvements to cut costs in the long term. C) To achieve sales targets for a given level of output. D) Neither A nor B are roles of a cost center manager.

Which of the following describes ROI? a. It fosters underinvestment. B) It ignores future period considerations. C) It is less suitable for evaluating long-term performance. D) None of the above. E) All of the above.

A common approach to setting transfer prices is using cost-based transfer prices (including variable and full cost).

Which of the following is not a responsibility center?

The Gallagher Company is decentralized and has a required opportunity cost of capital of 20%. The West division, whose current return on investment (ROI) is 15%, is considering an investment which will earn a return of 18%. The East Division, whose current ROI is 25%, is considering an investment which will earn a return of 22%. If the objective is to maximize ROI, each division will make the following choice: