Exam 12: Performance Evaluation and Decentralization

Economic value added (EVA) is similar to ROI in that it links net income to capital employed.

An ______________________ is when a manager is responsible for revenues, costs and investments.

Select the appropriate definition for each of the items listed below. a. Turnover b. Margin c. ROI d. Residual income -The most common measure of performance for an investment center.

MATCHING Select the term from below to match with the correct statement. a. centralization b. revenue center c. profit center d. cost center e. investment center f. decentralization -The practice of delegating decision-making authority to lower levels is __________.

________________ is the difference between realization and sacrifice, where realization is what the customer receives and sacrifices is what is given up in return.

If the operating asset turnover increased by 50% and the margin increased by 50%, the ROI would increase by

A transfer price is the price charged for a component by the selling division to the buying division of the same company.

The Dear Division of Zimmer Company sells all of its output to the Finishing Division of the company. The only product of the Dear Division is chair legs that are used by the Finishing Division. The retail price of the legs is $20 per leg. Each chair completed by the Finishing Division requires four legs. Production quantity and cost data for 2011 are as follows: Required: Compute the transfer price for a chair leg using:

Return on investment (ROI) can be calculated by multiplying margin times turnover.

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. Although the Delta Division has been operating at capacity (60,000 components per year), it expects to produce and sell only 45,000 components for $6.50 each next year. The Delta Division incurs variable costs of $1.50 per component. 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. Suppose that the two divisions agree on a transfer price of $5.75. What is the change in operating income for the Delta Division? For the ListenNow Division? For Bostonian Inc. as a whole?

The pager manufacturing cell has 1,200 hours of time available per quarter. The cell could make 7,200 pagers but only made 6,000 during that time. Calculate the following:

If the margin of 0.3 stayed the same and the turnover ratio of 5.0 increased by 10%, the ROI would

Residual income is sometimes used to overcome the tendency of ROI to discourage investments that are profitable for the company, but that lower the division's ROI.

Figure 12-4. Quinn Inc. has a number of divisions. One division, Style, makes zippers that are used in the manufacture of boots. Another division, LeatherStuff, makes boots that use the zippers and needs 90,000 zippers per year. Style incurs the following costs for one zipper: Quinn has capacity to make 950,000 zippers per year, but due to a soft market, only plans to produce and sell 620,000 zippers next year. LeatherStuff currently buys zippers from an outside supplier for $3.50 each (the same price that Style receives). -Refer to Figure 12-4. Assume that Quinn allows negotiated transfer pricing. What is the floor of the bargaining range and which division sets it?

The practice of delegating decision-making authority to the lower levels of management in a company is

Divisions in a decentralized company can be created along which of the following lines?

Paige Inc. has a division that makes paint and another division that constructs subdivisions. The paint division incurs the following costs for one gallon of paint: The Paint Division can make 1,000,000 gallons per year, and expects to produce 800,000 gallons next year. The Construction Division currently buys 200,000 gallons of paint from an outside supplier for $5.30 per gallon (the same price that the Paint Division receives).

Select the appropriate definition for each of the items listed below. a. Turnover b. Margin c. ROI d. Residual income -The dollar difference between operating income and minimum required return on a company's operating assets.

The process value chain consists of

A responsibility center in which a manager is responsible for both revenues and costs is a(n)