Exam 12: Decentralization and Performance Evaluation

A strategy map is a diagram of relationships across the four dimensions of a balanced scorecard.

Transfer prices should represent the opportunity costs of the transferred item. Material from the appendix to the chapter is marked with an asterisk (*).

Which of the following statements is true? I. Managers have a tendency to overinvest when return on investment is used as a performance measure. II. Managers have a tendency to underinvest when profit is used as a performance measure.

Rail Star Company reported the following results for 2014: Sales \ 6,000,000 Investment turnover 2.4 Return on investment 10\% Given this information, how much is the company's invested capital?

Doral Division of Resorts International reported net operating profit after taxes totaling $120,000 in 2014. The cost of capital is 10.5 percent and the invested capital is $560,000. R&D incurred in 2014 was $100,000. The company's policy is to amortize intangible assets over 4 years. The income tax rate is 30 percent. How much is the company's economic value added for 2014?

Managers tend to under invest when return on investment is used to evaluate them.

A subunit that has responsibility for controlling costs, but does not have responsibility for generating revenue is a(n)

Why is return on investment better than income as a measure of performance for an investment center?

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 invested capital adjusted as it relates to computing EVA for 2014?

Bajalia Company compiled the following information for the year ending December 31, 2014: Research and development costs \8 00,000 Sales 6,400,000 Net income 1,200,000 Interest expense 400,000 income tax rate 30\% At the end of 2014, total assets totaled $6,900,000. Bajalia's total current liabilities were $1,400,000, of which $600,000 were interest-bearing obligations. Bajalia's cost of capital is 12 percent and it amortizes intangibles over 4 years. What adjustment must Bajalia make to income for accounting distortions if EVA is to be calculated for 2014?

Which of the following components are evaluated when using the Balanced Scorecard approach?

The income amount that is used in the calculation of return on investment is usually

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\% Based on the limited information, which subsidiary is the best candidate for expansion?

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 residual income?

Tomlinson Tech has a cost of capital of 8 percent, a required rate of return of 9.5%, and an income tax rate of 30 percent. The Consumer Division of Tomlinson Tech has assets totaling $2,800,000 and current liabilities at $180,000 with $40,000 of this amount being interest-bearing. Sales for the year totaled $1,900,000 and interest expense totaled $20,000. Net income was $166,500 for the year. How much is the Consumer Division's invested capital?

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 return on investment rounded to one decimal?

South Division of Renato Enterprises reported net income of $480,000 in March on sales of $7,900,000. If this division has no interest expense, an income tax rate of 30 percent, and reported a return on investment of 12 percent, how much is invested capital?

Marine Division of Sando Company reported net operating profit after taxes of $27,000 in 2014. The cost of capital was 14 percent and the invested capital was $150,000. Current year R&D expense is $80,000. If R&D had been capitalized, amortization would have been $20,000 for 2014. The income tax rate is 30 percent. How much is adjusted NOPAT to be used in calculating EVA for 2014?

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 NOPAT?

The West Division produces a part with the following characteristics: Capacity (units) 20,000 Selling price per unit \ 33 Variable cost per unit \ 18 Fixed cost per unit \ 4 East Division within the same company would like to buy this part from the West Division. The East Division is currently purchasing the part from an outside supplier for $40 per unit. If the West Division sells to the East Division, $5 in variable costs can be avoided. Suppose that the West Division has enough capacity to handle the demand from the East division with no change in fixed costs. From the West Division's perspective, what is the minimum sales transfer price that West division should charge to the East Division?