Exam 11: How Do Managers Evaluate Performance in Decentralized Organizations

Return on investment (ROI)can be improved by decreasing operating profit margin.

The percent cost of capital is typically the company's percentage cost to obtain investment funds.

An advantage of return on investment (ROI)as a performance measure is that:

Exhibit 11-4 The following information is for two divisions at Wiley Company. -Refer to Exhibit 11-4.What is the operating profit margin for the Chair Division (rounded to the nearest tenth of a percent)?

Car Deals Inc.has two divisions: New Cars and Used Cars.The following segmented financial information is for the most recent fiscal year: The New Cars division had average operating assets totaling $17,400,000 for the year,and the Used Cars division had average operating assets of $22,800,000.Assume the cost of capital rate is 15 percent,and the company's tax rate is 40 percent. a.Prepare a segmented income statement,including the profit margin ratio for each division at the bottom of the segmented income statement. b.Calculate return on investment (ROI)for each division. c.Calculate residual income for each division. c.What does this information tell you about each division? d.Summarize the answers to parts a,b,and

Average operating assets are calculated by adding the beginning balance of operating assets from Period 1 to the ending balance of operating assets from Period 1 and multiplying by two.

All of the following are disadvantages of decentralizing except:

Although economic value added (EVA)is similar to residual income,adjustments are made to the financial information to better reflect the economic results of the division.

Asset turnover is calculated as sales divided by average operating assets.

Pete's Paint Company produces paint and has two divisions: Consumer and Commercial.Each division manager is evaluated based on profit produced by each division.The Commercial division sells paint to the Consumer division for $12 per gallon to cover variable costs.The Commercial division also sells to outside customers for $15 per gallon. a.Using the general economic transfer pricing rule,calculate the optimal transfer price assuming the Commercial division is below capacity. b.Using the general economic transfer pricing rule,calculate the optimal transfer price assuming the Commercial division is at capacity.

Segments of an organization are often referred to as divisions.

The term decentralized organization refers to an organization that delegates decision-making and operational responsibilities to managers of each segment of the organization.

Genoa Equipment Company has three separate divisions: Tractors,Trailers,and Trucks.Information about the three divisions follows: The company has recently implemented a new performance evaluation system.Based on this new system,a division manager would only receive a bonus if the ROI of the division was greater than 45% and residual income was in excess of $6,000,000.If management uses a cost of capital rate of 22%,which division manager(s)would be eligible for a bonus?

When residual income is used to evaluate division managers,the goal for each division manager is to increase residual income over time.

Exhibit 11-2 Manford Inc.has two divisions - Refrigerators and Dish Washer. -Refer to Exhibit 11-2.Using the segmented income statements,what is the profit margin ratio for the Dish Washer Division (to the nearest hundredth of a percent)?

Exhibit 11-1 Ashville Company has two divisions - Bikes and Trikes. -Refer to Exhibit 11-1.Using the segmented income statements,what is the profit margin ratio for the Trikes Division (to the nearest tenth of a percent)?

The cost-plus approach is the best approach for establishing transfer prices for all companies.

Most organizations use only residual income for performance measurement because of the weaknesses associated with using return on investment (ROI).

Exhibit 11-2 Manford Inc.has two divisions - Refrigerators and Dish Washer. -Refer to Exhibit 11-2.Assume the Refrigerator Division has average operating assets totaling $24,000,000 for the year.What is the division's return on investment (to the nearest hundredth of a percent)?

An organizational segment that is responsible for costs and revenues is known as: