Exam 12: Performance Evaluation and Decentralization

Figure 12-2. The manager of Stock Division projects the following for next year: The manager can invest in an additional project that would require $40,000 investment in additional assets and would generate $6,000 of additional income. The company's minimum rate of return is 14%. -Refer to Figure 12-2. What is the residual income for Stock Division with the additional project?

Transfer pricing is a complex issue.

Decentralization is frequently chosen by companies because it

Which of the following is not an advantage of ROI?

The decision-making approach that allows managers at lower levels to make and implement key decisions pertaining to their areas of responsibility is

A responsibility center in which a manager is responsible only for costs is a(n)

When a product is transferred at market price, the transfer will optimize both divisional and company-wide profits.

The Engine Division provides engines for the Tractor Division of a company. The standard unit costs for Engine Division are: The engine department has excess capacity. What is the best transfer price to avoid transfer price problems?

Figure 12-8 Bostonian Inc. has a number of divisions, including Delta Division and ListenNow Division. The ListenNow Division owns and operates a line of MP3 players. Each year the ListenNow Division purchases component AZ in order to manufacture the MP3 players. Currently it purchases this component from an outside supplier for $6.50 per component. The manager of the Delta Division has approached the manager of the ListenNow Division about selling component AZ to the ListenNow Division. The full product cost of component AZ is $3.10. The Delta Division can sell all of the components AZ it makes to outside companies for $6.50. The ListenNow Division needs 18,000 component AZs per year; the Delta Division can make up to 60,000 components per year. -Refer to Figure 12-8. Assume that the company policy is that all transfer prices are negotiated by the divisions involved. Required: A. What is the maximum transfer price? Which division sets it? B. What is the minimum transfer price? Which division sets it? C. If the transfer takes place, what will be the transfer price?

Figure 12-3. Grey Inc. has many divisions that are evaluated on the basis of ROI. One division, Centra, makes boxes. A second division, Mantra, makes chocolates and needs 80,000 boxes per year. Centra incurs the following costs for one box: Centra has capacity to make 700,000 boxes per year. Mantra currently buys its boxes from an outside supplier for $1.80 each (the same price that Centra receives). -Refer to Figure 12-3. Assume that Grey Inc. allows division managers to negotiate transfer price. Centra is producing 600,000 boxes. If Centra and Mantra agree to transfer boxes, what is the ceiling of the bargaining range and which division sets it?

Pautner Company had the following historical accounting data per unit: The units are normally transferred internally from Division A to Division B. The units also may be sold externally for $210 per unit. The minimum profit level accepted by the company is a markup of 30%. There were no beginning or ending inventories. What would be the transfer price if Division X uses full cost plus markup?

Unlike ROI, residual income does not encourage a short-run orientation.

The net income reduced by the total annual cost of capital is equal to the economic value added.

Several transfer pricing policies are used in practice. These transfer pricing policies include

Dixie Company has the following data for 2011: Dixie Company has a target ROI of 20%. Required: Calculate the following amounts for each division:

_________________ emphasizes only effectiveness of implementation.

In calculating residual income, the variable set by top management is called the

Figure 12-7 Monfett Manufacturing earned operating income last year as shown in the following income statement: At the beginning of the year, the value of operating assets was $263,000. At the end of the year, the value of operating assets was $336,000. Monfett Manufacturing requires a minimum rate of return of 15%. Total capital employed equal $350,000 and actual cost of capital is 6%. -Refer to Figure 12-7. Calculate the following: (Carry computations out to two decimal places.)

Shandling Company had operating income of $70,000, sales of $218,750, and turnover of 0.5. What is Shandling's ROI?

What are the advantages and disadvantages of return on investment (ROI)?