Exam 10: Management Control in Decentralized Organizations

North Division sells a part internally to South Division.South Division uses the part to produce inexpensive products sold at discount stores.North Division incurs costs of $1.50 per part,while South Division incurs additional costs of $4.80 per product.North Division sells the part to South Division for $2.00 per part.The final product is sold to external customers for $8.00 each.Which of the following formulas correctly reflects the company's operating income?

The greater the influence of noncontrollable factors on responsibility center results,the more problems there are in using the results to measure and reward a manager's performance.

Division AA does not have excess capacity to produce Product XX.The division can sell Product XX for $10 per unit outside the company.Variable costs are $6 per unit.Division BB wants to purchase Product XX from Division AA 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 XX for $12 per unit.What is the minimum transfer price for Division AA?

The following information pertains to Singh Company: Average total assets \ 50,000 Net operating profit after taxes \ 15,000 Total current liabilities \ 30,000 Total expenses \ 60,000 Total liabilities \ 35,000 Total revenues \ 80,000 Invested capital is defined as total assets.The capital charge is 10%.What is the residual income?

Which of the following statements is FALSE about performance metrics?

The following information is available for Applegate Company: Current assets \ 100,000 Current liabilities \ 175,000 Property, plant and Long-term liabilities 100,000 equipment 150,000 Stockholders'equity Other assets 50,000 Total liabilities and Total assets \ 300,000 stockholders'equity \ 300,000 Invested capital is defined as total assets less current liabilities.The after-tax operating income is $150,000.The after-tax cost of capital is 20%.The before-tax operating income is $200,000.What is the residual income?

The use of net book value for plant assets promotes a more conservative approach to asset replacement when compared to gross book value.

When compared to a decentralized organization,there are really no advantages to a centralized organization.

________ is a measure of income divided by the investment required to obtain that income.

The transfer price is revenue to the acquiring segment,and it is a cost to the segment producing the product.

Capital turnover equals revenue divided by invested capital.

If capacity constraints prevent a segment from meeting internal and external demand for a product,the opportunity cost of selling internally equals ________.

According to agency theory,employment contracts will balance three factors that include ________.

Transfer prices are the amounts charged by one segment of an organization for a product that it supplies to an outside firm.

Which of the following statements about management control systems is FALSE?

Division Big does have excess capacity to produce Product XX.The division can sell Product XX for $10 per unit outside the company.Variable costs are $6 per unit.Division Small wants to purchase Product XX from Division Big 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 XX for $12.What is the minimum transfer price for Division Big?

Why do some companies prefer the use of economic profit over return on investment in decision-making?

Multinational companies use transfer pricing to minimize their worldwide income taxes,duties and tariffs.

Which of the following statements is NOT a benefit of decentralization?

Selected data for two divisions of the Royal Company are given below: South North Division Division Net sales for year \ 4,000,000 \ 7,000,000 Average total assets for year \ 2,000,000 \ 2,000,000 Operating income before taxes for year \ 360,000 \ 420,000 Tax rate 20\% 20\% Average after-tax cost of capital 10\% 12\% Required: A) Compute the ROI for each division. Income is defined as operating income after taxes. B) Based on the ROI, which division manager should receive a bonus? Bonuses are awarded if ROI equals or exceeds 15 percent. C) Compute the residual income for each division. Invested capital is defined as total assets. D) Based on the residual income, which division manager should receive a bonus? Bonuses are awarded if residual income is greater than $100,000.