Exam 10: Management Control in Decentralized Organizations

Robin Company records reveal the following: The variable costs of Division Y will be incurred whether it buys from Division X or from an outside supplier. If Division X is not at full capacity, the lowest transfer price at which it would be willing to sell to Division Y would be:

Managers tend to focus their efforts in areas where performance is measured and where their performance affects rewards.

Generally, the transfer price = outlay cost + opportunity cost.

If segments do much buying from the same outside suppliers, they are candidates for heavier decentralization.

Decentralization is most successful when an organization's segments are relatively independent of one another.

Company's cost of capital x amount of investment

is an approach used for establishing a market- based transfer price.

ROI tells us how much a company's after- tax operating income exceeds what it is paying for capital.

The following information pertains to Tyler Company: Total assets \ 150,000 Total current liabilities 110,000 Total expens es 160,000 Total liabilities 115,000 Total revenues 180,000 If invested capital is defined as total assets, a project earning an ROI of 12% should be:

The following information is available for the Sting Company: Sales \2 50,000 Invested capital 156,250 ROI 10\% The capital turnover ratio is:

The rate of return on net book value decreases as the equipment ages.

Profit centers can exist only in a decentralized organization.

Dysfunctional behavior is action taken in conflict with organizational goals.

Cost of capital is the company's cost of capital multiplied by the amount of the investment.

Usually, perfect measurement of a manager's performance is worth its cost.

Net income less "imputed" interest

A drawback to market- based prices is that in an imperfectly competitive market, the price of one division has to pay to buy an item may be less than the amount another division gets for selling the same item.

Optimal corporate decisions are made:

Accounting measures provide relatively subjective evaluations of performance.

Lincoln Company paid $8 million cash for research and development. EVA capital was computed as $20 million. Lincoln Company cost of capital was 15%. To add economic value to the firm, Lincoln Company must generate revenues less operating costs of at least: