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: $\begin{array}{lrr}&\text { Audio Division }&\text { Video Division }\\\hline \text { NOPAT } & \$ 1,400,000 & \$ 2,000,000 \\ \text { Sales } & \$ 10,000,000 & \$ 12,500,000 \\ \text { Invested capital } & \$ 15,000,000 & \$ 17,500,000 \end{array}$ 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 return on investment, which division(s) will accept the opportunity?

A) Both will accept. B) Neither will accept. C) Only the Video Division will accept. D) Only the Audio division will accept. A) Both will accept. B) Neither will accept. C) Only the Video Division will accept. D) Only the Audio division will accept.

The following information is reported for the current year for North Atlantic Division of XT Enterprises: \[\begin{array} { l r } \text { Sales } & \$ 3,800,000 \\ \text { Interest expense } & \$ 250,000 \\ \text { Net income } & \$ 500,000 \\ \text { Total assets } & \$ 5,000,000 \\ \text { Noninterest-bearing current liabilities } & \$ 400,000 \\ \text { Cost of capital } & 8 \% \\ \text { Required rate of return } & 14 \% \\ \text { Tax rate } & 30 \% \end{array}\] How much is the division's NOPAT?

A) $575,000 B) $500,000 C) $750,000 D) $675,000 A) $575,000 B) $500,000 C) $750,000 D) $675,000

Pegasus Recycling has a subsidiary that recycles yard waste and another that recycles paper. Information related to the two subsidiaries follows. $\begin{array}{lrr}&\text { Yard Recycling }&\text { Paper Recycling }\\\hline \text { Total assets } & \$ 8,000,000 & \$ 15,000,000 \\ \text { Noninterest-bearing current liabilities } & 500,000 & 1,000,000 \\ \text { Net income } & 1,500,000 & 2,600,000 \\ \text { Interest expense } & 600,000 & 800,000 \\ \text { Required rate of return } & 8 \% & 11 \% \\ \text { Cost of capitall } & 7 \% & 9 \% \\ \text { Tax rate } & 30 \% & 32 \% \end{array}$ Which subsidiary has added the most to shareholder value in the last year?

A) Yard recycling, because it has a higher return on investment B) Paper recycling, because it has a higher residual income C) Both contributed equally in different ways D) More information is needed to determine the answer A) Yard recycling, because it has a higher return on investment B) Paper recycling, because it has a higher residual income C) Both contributed equally in different ways D) More information is needed to determine the answer

The income statement for the Commercial Construction Division of the Kenyon Company is as follows: $\begin{array}{lr} \text { Sales } & \$ 272,000 \\ \text { Operating expenses } & \underline{132,000} \\ \text { Net operating income } & 140,000 \\ \text { Interest expense } & 20,000 \\ \text { Earnings before taxes } & 120,000 \\ \text { Income tax expense }(30 \%) & 36,000 \\ \text { Net income } & \$ 84,000 \end{array}$ If this division's invested capital is $500,000, how much is its return on investment?

A) 19.6% B) 16.8% C) 20.8% D) 14.0% A) 19.6% B) 16.8% C) 20.8% D) 14.0%

Pegasus Recycling has a subsidiary that recycles yard waste and another that recycles paper. Information related to the two subsidiaries follows. $\begin{array}{lrr}&\text { Yard Recycling }&\text { Paper Recycling }\\\hline \text { Total assets } & \$ 8,000,000 & \$ 15,000,000 \\ \text { Noninterest-bearing current liabilities } & 500,000 & 1,000,000 \\ \text { Net income } & 1,500,000 & 2,600,000 \\ \text { Interest expense } & 600,000 & 800,000 \\ \text { Required rate of return } & 8 \% & 11 \% \\ \text { Cost of capitall } & 7 \% & 9 \% \\ \text { Tax rate } & 30 \% & 32 \% \end{array}$ How much is the return on investment for the Paper Recycling Division?

A) 19.65% B) 20.40% C) 22.46% D) 14.69% A) 19.65% B) 20.40% C) 22.46% D) 14.69%

A) is responsible for generating profit. B) should be evaluated using return on investment to best motivate managers. C) places its managers responsible for all costs under their control. D) requires a set of performance measures that are more complex than those for an investment center. A) is responsible for generating profit. B) should be evaluated using return on investment to best motivate managers. C) places its managers responsible for all costs under their control. D) requires a set of performance measures that are more complex than those for an investment center.

Western Electric reported the following results for 2014: $\begin{array}{lr} \text { Sales } & \$ 8,400,000 \\ \text { Investment turnover } & 2.5 \\ \text { Return on investment } & 12 \% \end{array}$ Given this information, how much is the company's NOPAT?

A) $1,008,000 B) $2,520,000 C) $403,200 D) $3,360,000 A) $1,008,000 B) $2,520,000 C) $403,200 D) $3,360,000

Exam 12: Decentralization and Performance Evaluation

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 return on investment, which division(s) will accept the opportunity?

(Multiple Choice)

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Question 61

If a manager is evaluated using the return on investment, the manager may be reluctant to invest in new equipment because the additional investment

(Multiple Choice)

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Question 62

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 NOPAT?

(Multiple Choice)

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Question 63

Pegasus Recycling has a subsidiary that recycles yard waste and another that recycles paper. Information related to the two subsidiaries follows. Yard Recycling Paper Recycling Total assets \ 8,000,000 \ 15,000,000 Noninterest-bearing current liabilities 500,000 1,000,000 Net income 1,500,000 2,600,000 Interest expense 600,000 800,000 Required rate of return 8\% 11\% Cost of capitall 7\% 9\% Tax rate 30\% 32\% Which subsidiary has added the most to shareholder value in the last year?

(Multiple Choice)

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Question 64

For what does responsibility accounting hold managers responsible?

(Multiple Choice)

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Question 65

An adjustment is made to net income when calculating residual income to remove

(Multiple Choice)

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Question 66

Which of the following is a disadvantage of a decentralized organization?

(Multiple Choice)

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Question 67

The income statement for the Commercial Construction Division of the Kenyon Company is as follows: Sales \ 272,000 Operating expenses Net operating income 140,000 Interest expense 20,000 Earnings before taxes 120,000 Income tax expense (30\%) 36,000 Net income \ 84,000 If this division's invested capital is $500,000, how much is its return on investment?

(Multiple Choice)

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Question 68

The Pastry Division of Dream Bread has invested capital of $1,300,000. During the past year, the Pastry Division reported sales of $5,590,000 and earned $400,000 of NOPAT. By how many times did revenue exceed the Pastry Division's investment?

(Multiple Choice)

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Question 69

Pegasus Recycling has a subsidiary that recycles yard waste and another that recycles paper. Information related to the two subsidiaries follows. Yard Recycling Paper Recycling Total assets \ 8,000,000 \ 15,000,000 Noninterest-bearing current liabilities 500,000 1,000,000 Net income 1,500,000 2,600,000 Interest expense 600,000 800,000 Required rate of return 8\% 11\% Cost of capitall 7\% 9\% Tax rate 30\% 32\% How much is the return on investment for the Paper Recycling Division?

(Multiple Choice)

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Question 70

Last year, Processor Division of Mathews PC Company earned NOPAT of $200,000 on sales of $2,600,000. The division had invested capital of $1,600,000 with $62,000 of noninterest-bearing current liabilities. How much is the division's return on investment?

(Multiple Choice)

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Question 71

If responsibility centers are ranked in order of increasing responsibility, the ranking is

(Multiple Choice)

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Question 72

Economic value added is residual income adjusted for

(Multiple Choice)

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Question 73

A cost center

(Multiple Choice)

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Question 74

Bottling Division of Fizzies Drink Company bottles soft drink produced by other divisions of Fizzies Drink Company. The Bottling Division had sales last year of $1,200,000, and earned $300,000 in income (NOPAT). Its invested capital was $1,000,000. How much are the Bottling Division's profit margin, investment turnover, and return on investment?

(Multiple Choice)

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Question 75

Western Electric reported the following results for 2014: Sales \ 8,400,000 Investment turnover 2.5 Return on investment 12\% Given this information, how much is the company's NOPAT?

(Multiple Choice)

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Question 76

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 purchased?

(Multiple Choice)

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Question 77

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

(Multiple Choice)

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Question 78

Division 3 of Baritune Enterprises reported sales of $820,000, NOPAT totaling $61,500, interest expense of $8,000, and invested capital totaling $512,500. Its income tax rate is 30 percent. As it pertains to evaluating investment centers, how much is Division 3's profit margin?

(Multiple Choice)

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Question 79

The evaluation of a subunit should be separated from the evaluation of the subunit's manager because

(Multiple Choice)

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Question 80

If a manager is evaluated using the return on investment, the manager may be reluctant to invest in new equipment because the additional investment

For what does responsibility accounting hold managers responsible?

An adjustment is made to net income when calculating residual income to remove

Which of the following is a disadvantage of a decentralized organization?

The Pastry Division of Dream Bread has invested capital of $1,300,000. During the past year, the Pastry Division reported sales of $5,590,000 and earned $400,000 of NOPAT. By how many times did revenue exceed the Pastry Division's investment?

Last year, Processor Division of Mathews PC Company earned NOPAT of $200,000 on sales of $2,600,000. The division had invested capital of $1,600,000 with $62,000 of noninterest-bearing current liabilities. How much is the division's return on investment?

If responsibility centers are ranked in order of increasing responsibility, the ranking is

Economic value added is residual income adjusted for

A cost center

Western Electric reported the following results for 2014: Sales \ 8,400,000 Investment turnover 2.5 Return on investment 12\% Given this information, how much is the company's NOPAT?

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

Division 3 of Baritune Enterprises reported sales of $820,000, NOPAT totaling $61,500, interest expense of $8,000, and invested capital totaling $512,500. Its income tax rate is 30 percent. As it pertains to evaluating investment centers, how much is Division 3's profit margin?

The evaluation of a subunit should be separated from the evaluation of the subunit's manager because

Managerial Accounting in the Information Age

Job-Order Costing for Manufacturing and Service Companies

Process Costing

Cost-Volume-Profit Analysis

Variable Costing

Cost Allocation and Activity-Based Costing

The Use of Cost Information in Management Decision Making

Pricing Decisions

Capital Budgeting Decisions

Budgetary Planning and Control

Standard Costs and Variance Analysis

Statement of Cash Flows

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