Exam 10: Decentralization: Responsibility, Accounting, Performance Evaluation, and Transfer Pricing

Olden Company has a tax rate of 40 percent. Information for the company is as follows: Amount After-tax Cost Mortgage bonds $1,000,000 0.048 Unsecured bonds 3,000,000 0.050 Common stock 6,000,000 0.150 What is the weighted average cost of capital?

O'Malley Company requires a return on capital of 15 percent. The following information is available for 2016: Required: a. Compute return on investment using both book and current values for each division. (Round answer to three decimal places.) b. Compute residual income for both book and current values for each division. c. Does book value or current value provide the better basis for performance evaluation? d. Which division do you consider the most successful?

Compare and discuss the advantages and disadvantages of the following performance measures: ROI, EVA, and Residual Income.

Division 'A' produces a component and wants to sell it to Division 'B'. The transfer price is

Worldwide Inc., is a multinational company with divisions around the world. Division A in the United States purchases a part from Division G in China. There is no outside market for the part because it is used to manufacture another product. The manufacturing cost for the part is $5. Transportation is $1 and commissions are $.5 but do not need to be paid. What is the transfer price using the cost-plus method?

Omikron Division had the following information: What is EVA for Omikron Division?

Cornwall Company has two divisions, A and B. Information for each division is as follows: What is the residual income for A?

Which of the following is NOT an advantage of ROI?

In an investment responsibility center, the manager is only responsible for costs.

Margin is the ratio of operating income to sales.

Which of the following is a political or legal factor affecting performance evaluation in a multinational firm?

Cognitive limitations mean it is difficult for central managers to be fully knowledgeable about all products and markets.

Gunnison Furniture had the following historical accounting data, per hundred board feet, concerning one of its products: The shelving is normally transferred internally from the Cutting Division to the Finishing Division. It also may be sold externally for $110 per hundred board feet. The minimum profit level accepted by the company is a markup of 20 percent. If the negotiated price is used, Gunnison Furniture's transfer price should be a

Which of the following responsibility centers would have a manager responsible for revenues, costs, and investments?

The following information pertains to the three divisions of Merrymount Company: What is the turnover for Division Z?

Investments are not controlled by managers of a center.

Which of the following would NOT be a reason for decentralization?

A manager of a profit center does not control:

The transfer price that would leave the selling division no worse off if the good is sold to an internal division is(are) called:

Nantucket Company has two divisions that report on a decentralized basis. Their results for 2016 were as follows: a. Return on investment (ROI). b. Residual income if the desired rate of return is 20 percent. c. EVA. d. Turnover. e. Margin for each division.