Exam 12: Performance Evaluation and Decentralization

The practice of delegating decision-making authority to lower levels of management in a company is called centralization.

Condor Company Condor Company provided the following information for last year: Operating income \ 60,000 Sales \ 240,000 Beginning operating assets \ 440,000 Ending operating assets \ 450,000 -Refer to Condor Company. What was the company's margin?

A production department within the factory, such as assembly, is an example of a profit centre.

Economic value added (EVA) can be calculated by multiplying margin by turnover.

Suppose the margin of 0.2 stayed the same and the turnover ratio of 4.0 increased by 10%. What would be the effect on the ROI?

Black Sea Company has two divisions, the Old Division and the New Division. Last year, the Old Division earned operating income of $66,000 using average operating assets of $550,000. Last year, the New Division earned $260,000 of operating income using average operating assets of $2,000,000. Minimum required rate of return for Black Sea is 9%. Required: A. For the Old Division, residual income is __________________. B. For the New Division, residual income is __________________. Now assume that the minimum required rate of return for Black Sea is 12%. C. For the Old Division, residual income is __________________. D. For the New Division, residual income is __________________.

Decreasing inventories leads to a reduction in return on investment (ROI).

Gamma Division The manager of Gamma Division projects the following for next year: Sales \ 100,000 Operating income \ 30,000 Operating assets \ 200,000 The manager can invest in an additional project that would require $30,000 investment in additional assets and would generate $4,200 of additional income. The company's minimum rate of return is 12%. -Refer to Gamma Division. What is the residual income without the additional investment?

Suppose the operating asset turnover increased by 75% and the margin increased by 50%. What would be the percentage increase in the ROI?

Division A produces a component and wants to sell it to Division B. Which of the following best describes the relationship of the transfer price to Division A and Division B?

SkyJet Airways has three divisions, the Western Division, the Eastern Division, and the Northern Division. The manager of the Western Division had wanted to purchase replacement airplanes for the division. However, he decided against it because, although revenues would increase and the new planes would be less expensive to operate, the initial cost of the planes was quite large. What centre is most probably used to account for the Western Division?

The selling division would never agree to a transfer price below its full manufacturing cost.

Alpha Division Alpha Division had the following information: Asset base in Alpha Division \ 800,000 Net income in Alpha Division \ 100,000 Cost of capital 12\% Target ROI 15\% Margin for Alpha Division 20\% -Refer to Alpha Division. Suppose the asset base is decreased by $200,000, with no other changes. What would be the return on investment?

What is the variable set by top management when calculating residual income?

Using return on investment to calculate residual income, the dollar cost of capital employed is the actual percentage cost of capital multiplied by the total capital.

Ding Company had operating income of $140,000, sales of $437,500, and turnover of 0.5. What is Ding's ROI?

When using economic value added (EVA) to calculate residual income, what is the formula for the cost of capital employed?

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 the company mandates that any transfers take place at full manufacturing cost. What would be the transfer price if the Box Division transferred boxes to the Candy Division?

In which of the following responsibility centres is a manager responsible for both revenues and costs?

In which of the following responsibility centres is a manager responsible only for sales?