Exam 12: Performance Evaluation and Decentralization

The market price is always the best transfer pricing policy.

Games R Us Company makes children's board games. One popular game requires three hours of processing time, seven hours of waiting time, and five hours of moving time. What is the manufacturing cycle efficiency (MCE) for Games R Us Company?

The Wood Parts Division of Alpha Company sells all of its output to the Finishing Division of the company. The only product of the Wood Parts Division is chair legs that are used by the Finishing Division. The retail price of the legs is $20 per leg. Each chair completed by the Finishing Division requires four legs. Production quantity and cost data are as follows: Number of chair legs produced each year 30,000 Direct materials \ 135,000 Direct labour \ 90,000 Manufacturing overhead (25\% is variable) \ 90,000 Required: Compute the transfer price for a chair leg using: A. Market price B. Variable product costs plus a fixed fee of 20% C. Full cost plus 20% markup D. Variable costs

Corrugated, Inc.Corrugated, Inc. has many divisions that are evaluated on the basis of ROI. One division, the Box Division, makes boxes. The Candy Division makes candy and needs 50,000 boxes per year. The Box Division incurs the following costs for one box: Direct materials \ 0.20 Direct labour 0.70 Variable overhead 0.10 Fixed overhead Total The Box Division has capacity to make 500,000 boxes per year. The Candy Division currently buys its boxes from an outside supplier for $1.40 each (the same price that the Box Division receives). -Refer to Corrugated, Inc. Assume that Corrugated, Inc. allows division managers to negotiate the transfer price. The Box Division is producing 400,000 boxes. Suppose the Box Division and the Candy Division agree to transfer boxes. What would be the ceiling of the bargaining range, and which division sets it?

Xulu Company had the following income statement for last year: Sales \ 400,000 Less: Cost of goods sold 220,000 Gross profit \ 180,000 Less: Selling and administrative expense 80,000 Operating income Beginning assets were $575,000, and ending assets were $625,000. Required: (Carry computations out to three decimal places.) A. Calculate the average operating assets. B. Calculate the margin. C. Calculate the turnover. D. Calculate the ROI.

What is a disadvantage of a focus on return on investment?

Transfer pricing does NOT affect divisional profits.

Which Balanced Scorecard perspective defines the customer and market segments in which the business unit will compete?

The following information is available for Northern Division: Asset base \ 500,000 Sales revenues \ 725,000 Operating expenses plus cost of goods sold \ 662,500 Required: A. Calculate the margin, turnover, and ROI. B. The Northern Division has an option to make an additional investment that would add $100,000 to the asset base. It would generate an additional $50,000 in sales revenue and no additional expenses. What would be the effect on margin, turnover, and ROI? C. Another alternative (independent of alternative B) for the Northern Division is to run an advertising campaign that would require additional advertising expenses of $37,500, but the best estimate is the campaign would generate an additional $75,000 of revenue. What would be the effect on margin, turnover, and ROI?

In which of the following responsibility centres is a manager responsible for revenues, cost, and investment?

Refer to Sunshine National Bank. Calculate the following: A. Conversion cost per minute B. Theoretical conversion cost per unit C. Actual conversion cost per unit D. How much more is the department spending per application than it should be if perfect efficiency could be attained?

Decentralization is usually achieved by creating units called divisions.

The Southern Division of Kenmost Company had operating income of $50,000, average assets of $350,000, and sales of $250,000. The minimum rate of return for Kenmost Company is 12%. Required: A. Calculate the margin for the Southern Division. B. Calculate the turnover for the Southern Division. C. Calculate the ROI for the Southern Division. D. Calculate the residual income for the Southern Division.

A manager assessing an investment using return on investment may make a different decision than had the manager assessed the Investment using residual income.

Which formula is used to calculate MCE (manufacturing cycle efficiency)?

Daytona, Inc. has a division that makes paint and another division that constructs subdivision houses. The paint division incurs the following costs for one litre of paint: Direct materials \ 1.10 Direct labour 1.45 Variable overhead 0.90 Fixed overhead 1.15 Total \4 .60 The Paint Division can make 1,000,000 L per year and is operating at capacity. The Construction Division currently buys its paint from an outside supplier for $8.20 per litre (the same price that the Paint Division receives). Required: A. The maximum transfer price per litre of paint is $__________________. This price is set by which of the two divisions? B. The minimum transfer price per litre of paint is $__________________. This price is set by which of the two divisions?

Why is decentralization frequently chosen by companies?

What does the difference between realization and sacrifice define?

In negotiated transfer pricing, the selling division sets the ceiling (maximum possible transfer price) for the bargaining range.

Match each of the following terms with their correct description from the items listed below.* Each term may be used more than once, and it is possible that one or more of the classifications may not be used at all. -The most common measure of performance for an investment centre