Exam 12: Decentralization and Performance Evaluation

Return on investment is the ratio of

Managers of cost centers are evaluated in order to decide if a division should be expanded, contracted, or changed.

Which of the following determines the level of decentralization in a company?

The following data pertains to the Retail Division of Motor Express: Sales \ 700,000 Invested capital 200,000 Net operating profit after taxes 49,000 Noninterest-bearing current liabilities 20,000 The minimum rate of return specified by Motor Express is 12 percent and the cost of capital is 8 percent. How much is residual income?

The following income statements for the year ending December 31 and other information are available for the Langston Division of Act Company: $\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\text { For the Year Ending December } 31$ 2014 2013 Sales \ 250,000,000 \ 220,000,000 Cost of goods sold Gross margin 145,000,000 124,000,0000 Selling and administrative costs 25,000,000 22,500,000 Research and development 15,600,000 12,400,000 Income from operations 104,400,000 89,100,000 Less taxes on income \ 31,320,000 26,730,000 Net income \ 73,080,000 \ 62,370,000 Total assets \ 650,000,000 \ 605,000,000 Noninterest-bearing current liabilities \ 15,000,000 \ 12,300,000 Required rate of return 12\% 12\% Cost of capital 10\% 10\% Interest expense is $0 and the tax rate is 30 percent. Langston Division amortizes intangible costs over 4 years. By how much is NOPAT adjusted as it relates to computing EVA for 2014?

A transfer price is the price that is used to value transfers of goods and services

Hardin Division of WestCo. has sales of $300,000 and NOPAT of $15,000. The company's invested capital is $240,000 and its noninterest-bearing current liabilities are $20,000. What is Hardin Division's investment turnover as it relates to investment center performance evaluation?

One disadvantage of evaluating performance using return on investment is that assets are measured at their market value.

Most service departments, such as machine maintenance and janitorial services, are examples of

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

The manager of the West Division of Beach Clothing Company is evaluating the acquisition of a new embroidery machine. The budgeted operating income of the West Division was $4,000,000 with total assets of $22,000,000 and noninterest-bearing current liabilities of $1,000,000. The proposed investment would add $750,000 to operating income and would require an additional investment of $3,500,000. The targeted rate of return for the West Division is 14 percent and the cost of capital is 9 percent. Ignoring taxes, how much is the residual income of the West division if the embroidery machine is not purchased?

Responsibility accounting holds managers responsible for all direct and allocated costs charged to their operational unit.

Thomas Company compiled the following information from its financial records for the year ending December 31, 2014: Research and development costs incurred during 2014 \1 ,200,000 Total assets 5,200,000 Current liabilities, interest bearing 300,000 Current liabilities, noninterest-bearing 800,000 Net income 950,000 Sales 11,300,000 Interest expense 670,000 Cost of capital 10\% income tax rate 30\% Thomas' amortization policy is 4 years. How much is the accounting distortion adjustment to invested capital when calculating EVA?

When residual income is calculated, an amount is subtracted to cover the profit that the company believes should be earned by the assets invested in the subunit.

Which one of the following is not an acceptable base for determining the transfer price?

Thomas Company compiled the following information from its financial records for the year ending December 31, 2014: Research and development costs incurred during 2014 \1 ,200,000 Total assets 5,200,000 Current liabilities, interest bearing 300,000 Current liabilities, noninterest-bearing 800,000 Net income 950,000 Sales 11,300,000 Interest expense 670,000 Cost of capital 10\% income tax rate 30\% Thomas' amortization policy is 4 years. How much is the accounting distortion adjustment to NOPAT when calculating EVA?

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\% As it relates to investment center evaluation, how much is the division's investment turnover?

Consider the following information for Haley and Morris, Inc. December 31 2013 2014 Total assets \ 40,000,000 \ 50,000,000 Noninterest-bearing current liabilities 800,000 1,400,000 Net income 2,600,000 3,400,000 Interest expense 300,000 400,000 Tax rate 30\% 30\% How much is the return on investment for 2014?

What does ROI measure?

The Media Division of Winslow Company has invested capital of $1,250,000, sales of $590,000, net income of $44,250, and interest expense of $7,000. Winslow's income tax rate is 40 percent. What is the Media Division's return on investment?