Exam 11: Setting Performance Expectations in Large, Complex Organizations

If you require a 5% annual rate of return, the present value of $1,000 received three years from today is given by:

The congruence problem can be avoided by assessing managerial performance using financial accounting measures that are grounded in generally accepted accounting principles.

A company's weighted average cost of capital will increase with the proportion of debt included in its capital structure.

Which of the following is a drawback to using return on investment (ROI)to assess performance by managers?

The most objective measure of an asset's value is its market price in an arm's length sale between well-informed buyers and sellers.

SWOT analysis refers to the body of techniques commonly used to allocate scarce financial capital among competing investment projects.

When one division of a decentralized entity transfers product to another, the minimum transfer price should reflect the availability of excess capacity in the selling division.

Oakmont Company has two divisions, Household Appliances and Construction Equipment. The manager of the Household Appliances division is evaluated on the basis of return on investment (ROI). The manager of the Construction Equipment division is evaluated on the basis of residual income. The cost of capital has been 12% and the ROI has been 16% for the two divisions. Each manager is currently considering a project with a 14% rate of return. According to the current evaluation system for managers, which manager(s) would have incentive to undertake the project?

Depending on the circumstances, an adequate transfer price could be based on:

Residual income measures give investment center managers incentive to invest in all projects that promise returns greater than the corporation's cost of capital.

A well-designed responsibility accounting system should hold a manager responsible for:

Transfers of products between divisions should never take place at market prices.

A given cash flow to be received 10 years in the future has:

Wilcox Industrial has two support departments, the Information Systems Department and the Personnel Department, and two manufacturing departments, the Machining Department and the Assembly Department. The support departments service each other as well as the two production departments. Company studies have shown that the Personnel Department provides support to a greater number of departments than the Information Systems Department. If Wilcox uses the step-down method of departmental allocation, which one of the following cost allocations would not occur? Some of the costs of the:

The Assembly Division of Ikon Aircraft Corporation purchases hydraulic valves from the company's Machining Division. Assembly is free to purchase one particular valve from vendors outside the company and can do so at a market price of $800 per unit. The Machining Division currently has adequate capacity to supply all of the Assembly Division's needs for the valve, and can produce the valve at a unit variable cost of $500 and unit fixed costs of $200. The Machining Division also incurs variable selling costs of $40 on each unit sold outside the company. Under these circumstances, the maximum transfer price for the valve is:

The financial performance of managers of cost centers can be effectively evaluated using return on investment measures.

Sara Bellows, manager of the telecommunication sales team, has the following department budget. Billings - long distance $350,000 Billings - phone card 75,000 Billings - toll-free 265,000 Her responsibility center is best described as a:

Because common corporate costs must be covered, the manager of a profit center in a decentralized firm is held accountable for allocations of such costs even though that manager has no control over those costs.

An investment opportunity has an expected 20% rate of return. If the company's cost of capital is 15%, the use of return on investment to measure investment center performance will ensure that this project is undertaken.

Render Inc. has four support departments (maintenance, power, human resources, and legal) and three operating departments. The support departments provide services to the operating departments as well as to the other support departments. The method of allocating the costs of the support departments that best recognizes the mutual services rendered by support departments to other support departments is the: