Exam 10: Decentralizing and Performance Evaluation

Generally Accepted Accounting Principles GAAP require companies to

Jumbo Industries is considering the purchase of equipment costing $80,000.The company has a 15% required minimum rate of return.The equipment is expected to generate $20,000 in additional operating income.What is the equipment's residual income?

Warner Company produces flash drives. The Custom division would like to buy 1,000,000 units from the Thumb Drive division, which currently has sufficient excess capacity. The units are normally sold for $9.99. The Thumb Drive division’s variable production cost per unit is $2.10, variable selling and administrative expenses are $.80 and fixed cost per unit are $1.65. The drives could be purchased from another company for $9.75. Both the Thumb Drive and the Custom divisions are operated as profit centers. If the company choses to use a cost-plus-based transfer price based on variable cost for the drives, what transfer price would the company use assuming a 50% markup?

Breton Corporation's Longboat division's segment margin as a percentage of net sales is 12% for the current reporting period.The division has net sales revenue of $2,500,000.Operating assets were $800,000 at the beginning of the period and $1,200,000 at the end.What is the division's ROI?

When does a traceable fixed cost become a common cost?

Tillamoke Company produces gourmet cheejes.Selected results from the most current year were as follows: Production manager Melinda Penland is investing the purchase of a new fermenting station that will increase the plant's production capacity.Based on her research,Melinda thinks the station would cost $140,000 and would increase sales revenue by $200,000 and operating profit by $32,000. Required a.Calculate Tillamoke's current margin,asset turnover,and return on investment. b.Calculate Tillamoke's margin,asset turnover,and return on investment assuming the company purchases the new fermenting station. c.Assume Melinda Penland's annual bonus is based on the company's return on investment.Will Melinda support the purchase of the new fermenting station? Why or why not?

To calculate the weighted-average cost of capital we need to know

People's Construction Company has set a 15% required minimum rate of return.The company's CFO is considering investing in a $125,000 crane that is expected to generate $25,000 in additional operating income.What is the crane's residual income?

In a centralized organization,decision-making authority

What is EVA and how is it calculated?

A disadvantage of decentralization is that the process does not give lower-level managers practice in developing their decision-making skills.

A manager who is responsible for both the revenue and the cost incurred in generating a product is managing an investment center.

Which of the following is a shortcoming of ROI as a performance measure?

When evaluating managerial actions,which of the following alternate measures overcomes many of the problems with ROI?

In a responsibility accounting environment,which of the following managers is considered to have the broadest responsibility?

Bill Jones,Flooring's accountant,has prepared the following income statement for the month of May. In preparing the income statement,Bill was unsure what to do with $240,000 in corporate fixed expenses that cannot be traced to a particular division.Since these costs were incurred to run the business as a whole,and he believed that each division benefited equally,he just allocated half to each division. Required a.How do you think Bill should have handled the $240,000 in corporate fixed expenses? b.Prepare a segment margin income statement that highlights each division's contribution to corporate profits.

People's Construction Company has set a 15% required minimum rate of return.The company's CFO is considering investing in a $125,000 crane that is expected to generate $25,000 of additional operating income.People's weighted-average cost of capital is 10% and its tax rate is 30%.What is the crane's EVA?

Brooke Bundi,president of the Seco Corporation,has mandated a minimum 10% return on investment for any project undertaken by the company.Given the company's decentralization,Brooke leaves all investment decisions to the divisional managers as long as they anticipate a minimum rate of return of at least 12%.The Flavored Water division,under the direction of manager Karl Martin,has achieved a 14% return on investment for the past three years.This year in not expected to be different from the past three.Martin has just received a proposal to invest $1,700,000 in a new line of flavored water that is expected to generate $221,000 in operating income. Required a.Calculate the residual income for the proposed new line of flavored water. b.If Karl Martin is evaluated based on residual income,will he choose to invest in the new line of flavored water? Why or why not?

In calculating ROI,the return on investment is based on

Nobles Corporation provided the following income statement for two of its divisions: East and West. Required: The home office allocated common fixed costs of $80,000 to East and $60,000 to West. Prepare a segment margin income statement.