Exam 10: Management Control in Decentralized Organizations

The decision- making power of segment managers

Urbandale Company has two fabric divisions-Linen and Cotton. The following information is available: Linen Cotton Revenue \ 200,000 \ 250,000 Income 30,000 90,000 Invested capital 100,000 150,000 Cost of capital 12\% 10\% Compute the following for each division: a. ROI b. return on sales c. capital turnover d. residual income

The Table and Chair Divisions are part of the same company. Currently the Chair Division buys a part from Table for $384. The Table Division wants to increase the price of the part it sells to Chair by $96 to $480. The manager of Chair has stated that it cannot afford to go that high, as it will decrease the division's profit to near zero. Chair can buy the part from an outside supplier for $448. The cost data for the Table Division is as follows: Direct materials \ 136 Direct labor 200 Variable overhead 40 Fixed overhead 42 If Table ceases to produce the parts for Chair, it will be able to avoid one- third of the fixed manufacturing overhead. The Table Division has excess capacity but no alternative uses for its facilities. is the minimum transfer price that should be charged.

An improvement in either capital turnover or return on sales, without changing the other, will also improve the:

Identify which of the following statements is not a problem with decentralization.

In all ROI calculations, invested capital should be measured as an average for the period under review.

Return on sales = revenue / income.

In cases of constrained capacity, the opportunity cost is zero.

is the original cost of an asset less any accumulated depreciation.

Incentives do not enhance managerial effort toward goal congruence.

Transfer prices are:

Russell Company's records reveal the following: Division $A$ M arket pric of finished part to out siders \ 75 Variable costs per part 51 Contribution margin per part \ 24 Tot al contribution for 10000 parts \ 240,000 Division $B$ ales price of finished product \1 05 Variable costs: Division A (1 p art @ \ 51) \5 1 Division B Processing \2 7 Selling 12 39 -90 Contribution margin per unit \1 5 Total contribution for 10,000 \1 50,000 units The variable costs of Division B will be incurred whether it buys from Division A or from an outside supplier. If Division A is working at full capacity, the lowest transfer price it would be willing to accept from Division B would be:

Possible definitions of invested capital include total assets employed and stockholders' equity.

When a division has idle production capacity, variable cost is the transfer price that leads to optimal decision making.

Outlay cost is often the variable cost for producing the item transferred.

"Decentralization has benefits and costs." Name three of each.

Explain how the linking of rewards to responsibility center results affects incentives and risk.

Rewards may be nonmonetary.

In measuring the performance of a division manager, stockholders' equity should not be used as the amount of invested capital.

Identify which of the following adjustments to after- tax operating income is used to approximate cash income.