Exam 23: Performance Evaluation for Decentralized Operations

Materials used by Jefferson Company in producing Division C's product are currently purchased from outside suppliers at a cost of $10 per unit. However, the same materials are available from Division A. Division A has unused capacity and can produce the materials needed by Division C at a variable cost of $8.50 per unit. A transfer price of $9.50 per unit is negotiated and 25,000 units of material are transferred, with no reduction in Division A's current sales. How much would Division C's income from operations increase?

The rates at which services are charged to each division are called service department charge rates.

The ratio of sales to invested assets is termed the investment turnover component of the rate of return on investment.

In a profit center, the department manager has responsibility for and the authority to make decisions that affect:

A centralized business organization is one in which all major planning and operating decisions are made by top management.

Managers of what type of decentralized units have authority and responsibility for revenues, costs, and assets invested in the unit?

ABC Corporation has three service departments with the following costs and activity base: ABC has three operating divisions, Micro, Macro and Super. Their revenue, cost and activity information are as follows: What will the income of the Super Division be after all service department allocations?

Materials used by Square Yard Products Inc. in producing Division 3's product are currently purchased from outside suppliers at a cost of $5 per unit. However, the same materials are available from Division 6. Division 6 has unused capacity and can produce the materials needed by Division 3 at a variable cost of $3 per unit. A transfer price of $3.20 per unit is established, and 40,000 units of material are transferred, with no reduction in Division 6's current sales. How much would Division 6's income from operations increase?

Franklin Industries has several divisions. The Northern Division has $350,000 of invested assets, income from operations of $200,000, and residual income of $158,000. Determine the minimum acceptable rate of return on divisional assets.

The Clydesdale Company has sales of $4,500,000. It also has invested assets of $2,000,000 and operating expenses of $3,600,000. The company has established a minimum rate of return of 7%. What is Clydesdale Company's residual income?

A factor in determining the rate of return on investment--the ratio of sales to invested assets--is called:

Which of the following is not a commonly used approach to setting transfer prices?

A manager in a cost center also has responsibility and authority over the revenues and the costs.

Division A of Mocha Company has sales of $155,000, cost of goods sold of $83,000, operating expenses of $43,000, and invested assets of $150,000. What is the investment turnover for Division A?

The ratio of income from operations to sales is termed the profit margin component of the rate of return on investment.

Which is the best example of a decentralized operation?

Responsibility accounting reports for profit centers are normally in the form of income statements.

If income from operations for a division is $6,000, invested assets are $25,000, and sales are $30,000, the investment turnover is 1.2.

It is beneficial for two related companies to use the cost price approach for transfer pricing when both of the companies operate as cost centers and are not concerned with the revenue.

The Clydesdale Company has sales of $4,500,000. It also has invested assets of $2,000,000 and operating expenses of $3,600,000. The company has established a minimum rate of return of 7%. What is Clydesdale Company's investment turnover?