Exam 10: Management Control in Decentralized Organizations

The lower in the organization that authority is delegated,the greater the decentralization.

Wisconsin Division has operating income of $40,000 for the year ending December 31,2011.Average invested capital is $800,000 and the weighted-average cost of capital is 10%.The division is considering a new investment that would cost $800,000 and earn 7% annually.If return on investment is the performance metric,should the manager of the Wisconsin Division accept the new investment?

The following information is available for Arnett Company: Current assets \ 100,000 Current liabilities \ 175,000 Property, plant and Long-term liabilities 100,000 equipment 150,000 Stockholders' equity 25,000 Other assets 50,000 Total liabilities and Total assets \3 00,000 stockholders' equity \3 00,000 Invested capital is defined as total assets.Net operating income is $60,000.What is ROI?

Selected data for two divisions of the Ramble Company are given below: South Division North Division Net sales \ 4,000,000 \ 7,000,000 Average total assets \ 2,000,000 \ 2,000,000 Net operating income after taxes \ 360,000 \ 420,000 Average plant assets \ 950,000 \ 800,000 Average cost of capital 10\% 12\% Each division is considering a capital investment of $1,000,000.The annual return on the capital investment is 11%.Invested capital is defined as total assets. Required: A) The South Division's manager is evaluated using residual income. Should South Division accept the capital investment? Why? B) The North Division's manager is evaluated using residual income. Should North Division accept the capital investment? Why? C) The South Division's manager is evaluated using return on investment. Should South Division accept the capital investment? Why?

________ is an approach for establishing a market-based transfer price.

Cost-based transfer prices are easy to implement but can lead to ________ decisions.

Division South does not have excess capacity to produce Product Y.The division can sell Product Y for $10 per unit outside the company.Variable costs are $6 per unit.Division North wants to purchase Product Y from Division South to use in Product ZZ.The selling price of Product ZZ is $25 per unit and variable costs to finish the product after the transfer are $12 per unit.An outside supplier will sell Product Y for $12 per unit.What is the maximum price Division North will pay for Product Y?

Managers in decentralized units may waste time negotiating with other units about goods or services one unit transfers to the other.

When a company uses return on investment as a performance metric,managers have an incentive to invest only in projects ________.

The South and North Divisions are divisions in the same company.Currently the North Division buys a part from South Division for $384 per unit.The South Division wants to increase the price of the part it sells to North Division by $96 to $480.The manager of the North Division has stated that he cannot pay that much insofar as the division's profit goes below zero.The manager of the North Division can buy the part from an outside supplier for $448 per unit.The cost data pertaining to the part is supplied by the South Division: Direct materials \1 36.00 Direct labor 200.00 Variable overhead 40.00 Fiyed orrerhead 38.40 If South Division does not produce the parts for the North Division,it will be able to avoid one-third of the fixed manufacturing overhead costs.The South Division has excess capacity but no alternative uses for the facilities.North Division will sell the finished product with the part (from South Division)for $1,000 after incurring additional processing costs of $600.What is the maximum transfer price per unit that North Division should pay for the part?

Local managers in decentralized organizations tend to duplicate services that may be less expensive if centralized.

It is recommended that standard costs be used instead of actual costs for cost-based transfer prices.

The following information is available for the Thompson Company: Sales for year \ 1,000,000 Average invested capital for year \5 00,000 return on investment 10\% What is the capital turnover ratio?

Garcia Company reports the following information: Net operating income after taxes \ 100,000 Before-tax operating income \ 300,000 Average invested capital \ 500,000 After-tax cost of capital 10\% What is the residual income for Garcia Company?

A variable-costing transfer pricing system is appropriate when there is ________.

Evaluation of capital investments based on economic profit motivates managers to invest in projects that ________ because those investments increase the division's economic profit.

The variable cost of Part X is $50 per unit and the full cost of the part is $80 per unit.The part is produced in Country Z and transferred to a plant in Country B.Country Z has a 10% income tax rate.Country B has a 50% income tax rate and an import duty equal to 10% of the price of the item.Part X can be transferred at full cost or variable cost.Assume Part X is transferred at full cost.By using full cost instead of variable cost for the transfer price,the net savings is ________.

If a selling segment has excess capacity,the opportunity cost of selling a product internally equals ________.

Wendell Division has operating income of $40,000 for the year ending December 31,2011.Average invested capital is $800,000 and the weighted-average cost of capital is 10%.The division is considering a new investment that would cost $800,000 and earn 7% annually.If economic profit is the performance metric,should the manager of the Wendell Division accept the new investment?

If market prices are not available for transfer prices,most companies use ________ transfer prices.