Exam 12: Decentralization and Performance Evaluation

It is difficult to compare investment centers using return on investment when there is a significant difference in the _________ between the investment centers.

Last year, Green Thumb's Residential Division reported sales of $950,000, interest expense of $100,000, and net income of $126,000. The company's tax rate is 30 percent, and it has an 8 percent cost of capital and a 9 percent required rate of return. Residential Division has noninterest-bearing current liabilities that total $75,000 and it has total assets of $820,000. How much is the Residential Division's invested capital?

RedEx Transport's Rail Division has an annual capacity to process 800,000 tons of gravel used as a base under railroad tracks by railroads. The normal selling price is $62 per ton. At current operating levels, fixed costs are $10 per ton and variable costs are $32 per ton. The Air Division of RedEx Transport would like to buy 200,000 tons of gravel from the Rail Division to use in producing quality aggregate to be used for runways. The Rail Division is operating at 80 percent of capacity. The Air Division currently buys the gravel for $55 per ton from an outside source. How much is the lowest transfer price the Rail Division should accept to maintain current profitability?

In decentralized organizations, upper level corporate managers provide substantial authority to subunits because they have the most expertise.

The Grain Division of Goodness Grains produces oat grain with the following characteristics: Capacity in bushels 90,000 Selling price per bushel \ 22 Variable cost per bushel \ 10 Fixed cost per bushel \ 4 The Cereal Division within the same company would like to buy the oat grain from the Grain Division. It is now purchasing its oat grain from an outside supplier for $20 per bushel. If the Grain Division sells to the Cereal Division, $3 in variable costs can be avoided. The Grain Division is currently operating at capacity and selling all production outside the company. If the Grain Division decides to sell to the Cereal Division, what is the minimum transfer price per bushel?

The Produce Division of Saveway Shop had invested capital of $520,000 last year with $20,000 of noninterest-bearing current liabilities. If the minimum required rate of return is 9 percent, the cost of capital is 7 percent, and last year's residual income was $52,000, how much was last year's NOPAT?

The Component Division of Sharp Ware Products produces blades for knives with the following characteristics: Annual capacity- number of knives 60,000 Selling price per unit \ 7.00 Variable cost per unit \ 3.80 Fixed cost per unit \ 1.60 The Hunting Division within the same company would like to buy its required supply of blades from the Component Division. Currently, the Hunting Division purchases the blades it uses to manufacture hunting knives from an outside supplier for $5.80 each. If the Component Division sells to the Hunting Division, it can save $0.70 per blade. The Component Division is currently operating at capacity and selling all its production outside the company. If the Component Division decides to sell to the Hunting Division, what is the transfer price?

One of the primary tools for evaluating the performance of profit centers is residual income.

RedEx Transport's Rail Division has an annual capacity to process 800,000 tons of gravel used as a base under railroad tracks by railroads. The normal selling price is $62 per ton. At current operating levels, fixed costs are $10 per ton and variable costs are $32 per ton. The Air Division of RedEx Transport would like to buy 200,000 tons of gravel from the Rail Division to use in producing quality aggregate to be used for runways. The Rail Division is operating at 100 percent of capacity. The Air Division currently buys the gravel for $55 per ton from an outside source. What is the lowest price the Rail Division should accept if it wishes to see no decline in profits?

The following information is reported for the current year for North Atlantic Division of XT Enterprises: Sales \ 3,800,000 Interest expense \ 250,000 Net income \ 500,000 Total assets \ 5,000,000 Noninterest-bearing current liabilities \ 400,000 Cost of capital 8\% Required rate of return 14\% Tax rate 30\% How much is the division's invested capital?

Standard Media has a required rate of return of 5 percent, a cost of capital of 4 percent, and an income tax rate of 30 percent. The following information about its two divisions has been provided by management: Audio Division Video Division NOPAT \ 1,400,000 \ 2,000,000 Sales \ 10,000,000 \ 12,500,000 Invested capital \ 15,000,000 \ 17,500,000 An opportunity is available that yields an expected income of $45,900 on an investment of $450,000. If the divisions are evaluated based on residual income, which division(s) will accept the opportunity?

Evaluating the performance of a subunit is the same as evaluating the performance of the subunit manager.

Managers tend to over invest when profit is used to evaluate them.

Managers who are evaluated favorably when profit is used as the performance measure will most likely be evaluated favorably when return on investment is used as the performance measure.

Under which one of the following performance evaluation methods will a manager most likely 'overinvest'?

An investment center manager is responsible for controllable revenues and costs, and controllable investments.

Evaluating segments based on the segment's return on investment will

A profit center is a subunit that has responsibility for controlling costs and revenues and generating a return on assets invested in the subunit.

Which of the following units of Walmart will most likely be a cost center?

Which of the following is an advantage of a decentralized organization?