Deck 12: Decentralization and Performance Evaluation

Question 1

Most service departments, such as machine maintenance and computer services, are considered cost centers.

Answer 1

True

Question 2

A profit margin of 12 percent indicates that each dollar of assets invested generated 12 cents of profit.

Answer 2

False

Question 3

Managers who are evaluated favorably when profit is used as the performance measure will most likely be evaluated favorably when return on investment is used as the performance measure.

Answer 3

False

Question 4

If managers are evaluated using return on investment, they are often over aggressive of accepting new investments because the investment will provide an increase in net income.

Question 5

Managers of cost centers are evaluated in order to decide if a division should be expanded, contracted, or changed.

Question 6

Responsibility accounting holds managers responsible for all direct and allocated costs charged to their operational unit.

Question 7

In a decentralized organization, performance evaluations encourage managers to behave as if their own personal goals are congruent with the goals of the company as a whole.

Question 8

One disadvantage of evaluating performance using return on investment is that assets are measured at their market value.

Question 9

A profit center is a subunit that has responsibility for controlling costs and revenues and generating a return on assets invested in the subunit.

Question 10

Lack of goal incongruence is a problem in decentralized organizations.

Question 11

Increased motivation of managers is an advantage of decentralization.

Question 12

In decentralized organizations, upper level corporate managers provide substantial authority to subunits because they have the most expertise.

Question 13

Return on investment can be improved by increasing net income or increasing the assets invested.

Question 14

Managers tend to over invest when profit is used to evaluate them.

Question 15

An advantage of decentralization is that subunit managers can respond more quickly to changing circumstances.

Question 16

An investment center manager is responsible for controllable revenues and costs, and controllable investments.

Question 17

Evaluating the performance of a subunit is the same as evaluating the performance of the subunit manager.

Question 18

One of the primary tools for evaluating the performance of profit centers is residual income.

Question 19

One of the primary tools for evaluating the performance of investment centers is residual income.

Question 20

Cost centers, profit centers, and investment centers are all responsible for controlling costs in the respective subunit.

Question 21

A strategy map is a diagram of relationships across the four dimensions of a balanced scorecard.

Question 22

When residual income is calculated, an amount is subtracted to cover the profit that the company believes should be earned by the assets invested in the subunit.

Question 23

Using NOPAT as 'income' in the residual income model is appropriate because managers do not control the choice of using debt versus equity financing for the assets invested in their division.

Question 24

If a company uses responsibility accounting, a shift supervisor in the Austin production plant should be held responsible for

A) all costs associated with the Austin plant.
B) direct costs incurred on the supervisor's shift.
C) a share of all of the company's costs.
D) direct material, direct labor, and all manufacturing overhead incurred on the supervisor's shift.

Question 25

The four dimensions of performance that are considered in a balanced scorecard are financial, customer, internal processes, and strategy.

Question 26

For what does responsibility accounting hold managers responsible?

A) All costs charged to a manager's subunit
B) All costs charged to a manager's subunit plus a share of company-wide fixed costs
C) Only the costs that a manager can control
D) Only the costs that a manager have personally approved

Question 27

When an efficient market exists, the variable cost will generally be the best transfer price.

Question 28

Which of the following is not an advantage of decentralization of a company?

A) Subunit managers have better information.
B) Subunit managers will act to benefit the organization as a whole.
C) Subunit managers can respond quicker to changing circumstances.
D) Subunit managers receive training helpful to future transition into top-level management positions.

Question 29

A balanced scorecard is used to evaluate investment centers.

Question 30

Goal congruence refers to the match between

A) locations of manufacturing plants and customers.
B) goals based on profits and those based on return on investment.
C) number of units produced and number of units sold.
D) goals of the individual managers and those of the company as a whole.

Question 31

Transfer prices should represent the opportunity costs of the transferred item.
Material from the appendix to the chapter is marked with an asterisk (*).

Question 32

Economic value added is calculated as the return on investment adjusted for accounting distortions.

Question 33

Firms that grant substantial decision-making authority to the managers of subunits are referred to as

A) residual organizations.
B) profit centers.
C) responsibility organizations.
D) decentralized organizations.

Question 34

Which of the following is a disadvantage of a decentralized organization?

A) Managers' goals are congruent with the goals of the company as a whole.
B) Some activities may be duplicated and incur unnecessary costs.
C) Managers with the highest authority may take inappropriate decisions.
D) Managers may take more time to respond to changing circumstances.

Question 35

Which of the following is an advantage of a decentralized organization?

A) Allows for duplication of activities
B) Enables managers to enhance goal incongruence
C) Provides excellent training for potential top-level executives
D) Allows only top-level managers to make all decisions

Question 36

The evaluation of a subunit should be separated from the evaluation of the subunit's manager because

A) a subunit always shows better performance.
B) an excellent manager may be doing the best job possible in a poor subunit.
C) poor performance by managers may cause subunits to perform poorly.
D) GAAP requires separate evaluations of managers and the respective subunits.

Question 37

Which of the following determines the level of decentralization in a company?

A) The diversity of the company's products
B) The number of levels of employees and management in the company
C) The extent of decision-making authority given to the subunit managers
D) The globalization of the company's sales

Question 38

Companies evaluate performance of subunits and subunit managers in order to

A) identify successful operations.
B) influence the behavior of managers.
C) determine areas that need improvement.
D) All of these answer choices are correct.

Question 39

Managers tend to under invest when return on investment is used to evaluate them.

Question 40

When performance evaluation is based on return on investment, managers will usually accept projects that yield less than the required rate of return.

Question 41

What does ROI measure?

A) The amount of profit generated out of each sales dollar
B) The amount of sales generated out of each dollar of assets invested
C) The amount of profit generated out of each dollar of assets invested
D) The amount of revenue generated out of each sales dollar

Question 42

A cost center

A) is responsible for generating profit.
B) should be evaluated using return on investment to best motivate managers.
C) places its managers responsible for all costs under their control.
D) requires a set of performance measures that are more complex than those for an investment center.

Question 43

Which of the following units of Walmart will most likely be a cost center?

A) A Walmart store in Dallas, Texas
B) The corporate payroll department
C) The pharmacy department
D) The optical department

Question 44

NOPAT is used for 'income' in the return on investment formula because

A) investment center managers should not be evaluated based on long-term financing decisions since they do not have responsibility for making those decisions.
B) NOPAT represents the return to stockholders, and divisions are free to issue stock.
C) NOPAT represents the return to debt capital, and division managers generally are free to issue debt needed to acquire new investments.
D) All of these answer choices are correct.

Question 45

Return on investment is the ratio of

A) investment center income to invested capital.
B) sales to net income.
C) profit center revenues to assets invested.
D) profit center revenues to profit center expenses.

Question 46

NOPAT is

A) net income with costs removed that managers at the divisional level are unable to control.
B) net income plus noncash flow amounts.
C) net income less the cost of financing.
D) net income minus noninterest-bearing current liabilities.

Question 47

If responsibility centers are ranked in order of increasing responsibility, the ranking is

A) investment centers, cost centers, profit centers.
B) cost centers, investment centers, profit centers.
C) cost centers, profit centers, investment centers.
D) investment centers, profit centers, cost centers.

Question 48

Most service departments, such as machine maintenance and janitorial services, are examples of

A) investment centers.
B) profit centers.
C) cost centers.
D) transfer centers.

Question 49

Which of the following can improve a company's return on investment?
I) Increase the profit margin
II) Decrease total assets
III) Decrease the contribution margin

A) I, II, and III
B) I and III
C) II and III
D) I and II

Question 50

Which of the following is a responsibility that distinguishes an investment center manager from a profit center manager?

A) Setting prices for products
B) Controlling costs
C) Generating revenues while controlling costs
D) Significantly influencing investment decisions

Question 51

Which of the following consists of noninterest-bearing current liabilities?

A) Accrued income taxes and income taxes payable
B) Accounts receivable and accounts payable
C) Accounts payable and dividends declared
D) Wages payable and notes payable

Question 52

Return on investment is used to evaluate

A) profit centers.
B) cost centers.
C) investment centers.
D) revenue centers.

Question 53

NOPAT does not hold the investment center manager responsible for

A) interest expense.
B) interest expense and noninterest-bearing current liabilities.
C) noninterest-bearing current liabilities.
D) assets invested in the division.

Question 54

The Cadillac division of General Motors is considered

A) a profit center.
B) an investment center.
C) a cost center.
D) a center that will be evaluated on profit margin.

Question 55

A manager who has the ability to replace assets within his division, is in control of what type of center?

A) Business center
B) Profit center
C) Cost center
D) Investment center

Question 56

Which of the following is a characteristic of a profit center?

A) The center's manager has control over revenues and costs.
B) The subunit has responsibility for generating revenues, controlling costs, and generating a return on assets.
C) The subunit can be evaluated using residual income.
D) The subunit can be evaluated by comparing it to other investment centers.

Question 57

A subunit that has responsibility for controlling costs, but does not have responsibility for generating revenue is a(n)

A) investment center.
B) cost center.
C) profit center.
D) value added center.

Question 58

Profit margin is

A) the ratio of sales to income.
B) multiplied by investment turnover to calculate return on investment.
C) the amount of income earned on each dollar of assets invested.
D) All of these answer choices are correct.

Question 59

The income amount that is used in the calculation of return on investment is usually

A) earnings before interest and taxes.
B) net income as defined by GAAP.
C) operating cash flows.
D) net operating profit after taxes.

Question 60

Why is return on investment better than income as a measure of performance for an investment center?

A) The calculation for income is determined by GAAP, while return on investment is adjusted to meet the needs of the company.
B) Return on investment is easier to calculate than income.
C) Return on investment considers the amount invested as well as the income.
D) Return on investment is forward looking, while income is backward looking.

Question 61

Rail Star Company reported the following results for 2014: $\begin{array}{lr}\text { Sales } & \$ 6,000,000 \\\text { Investment turnover } & 2.4 \\\text { Return on investment } & 10 \%\end{array}$ Given this information, how much is the company's invested capital?

A) $2,500,000
B) $1,440,000.
C) $600,000
D) $1,440,000

Question 62

West Division of PoolGuard has invested capital of $900,000. This division incurred $80,000 in interest expense and $20,000 in income tax expense related to interest in July. If this division reported a return on investment of 15 percent, how much is NOPAT?

A) $60,000
B) $75,000
C) $135,000
D) $195,000

Question 63

An adjustment is made to net income when calculating residual income to remove

A) noninterest-bearing current liabilities.
B) interest and the related tax effect.
C) financing costs that the manager is able to control.
D) accounting distortions.

Question 64

Western Electric reported the following results for 2014: $\begin{array}{lr}\text { Sales } & \$ 8,400,000 \\\text { Investment turnover } & 2.5 \\\text { Return on investment } & 12 \%\end{array}$ Given this information, how much is the company's NOPAT?

A) $1,008,000
B) $2,520,000
C) $403,200
D) $3,360,000

Question 65

The manager of the Beach Division of Treat Time is evaluating the acquisition of a new mobile ice cream server. The budgeted operating income of the Beach Division is currently $2,940,000 with total assets of $28,600,000 and noninterest-bearing current liabilities of $600,000. The proposed investment would add $18,000 to operating income and would require an additional investment of $120,000. The targeted rate of return for the Beach Division is 9 percent. Ignoring taxes, how much is the return on investment of the Beach Division if the ice cream server is purchased?

A) 10.52%
B) 15.00%
C) 10.56%
D) 12.75%

Question 66

The 2014 income statement for the Clothing Division of Tom Ron Surf Company is as follows: $\begin{array}{lr}\text { Sales } & \$ 445,000 \\\text { Operating expenses } & 270,000 \\\text { Net operating income } & 175,000 \\\text { Interest expense } & 35,000 \\\text { Earnings before taxes } & 140,000 \\\text { Income tax expense }(30 \%) & 42,000 \\\text { Net income } & \$ 98,000\end{array}$ How much is net operating profit after taxes?

A) $108,500
B) $133,000
C) $73,500
D) $122,500

Question 67

The Florida Division of Garner Furniture reported the following results for 2014: $\begin{array}{lr}\text { Invested capital } & \$ 800,000 \\\text { Profit margin } & 5 \% \\\text { Return on investment } & 8 \%\end{array}$ Given this information, how much was sales?

A) $1,280,000
B) $500,000
C) $1,600,000
D) $64,000

Question 68

The manager of the Beach Division of Treat Time is evaluating the acquisition of a new mobile ice cream server. The budgeted operating income of the Beach Division is currently $2,940,000 with total assets of $28,600,000 and noninterest-bearing current liabilities of $600,000. The proposed investment would add $18,000 to operating income and would require an additional investment of $120,000. The targeted rate of return for the Beach Division is 9 percent. Ignoring taxes, how much is the return on investment of the Beach Division if the ice cream server is not purchased?

A) 15.0%
B) 10.5%
C) 10.2%
D) 9.73%

Question 69

The manager of the West Division of Beach Clothing Company is evaluating the acquisition of a new embroidery machine. The budgeted operating income of the West Division was $4,000,000 with total assets of $22,000,000 and noninterest-bearing current liabilities of $1,000,000. The proposed investment would add $750,000 to operating income and would require an additional investment of $3,500,000. The targeted rate of return for the West Division is 14 percent and the cost of capital is 9 percent. Ignoring taxes, how much is the residual income of the West division if the embroidery machine is purchased?

A) $2,545,000
B) $1,320,000
C) $2,860,000
D) $4,456,000

Question 70

The 2014 income statement for the East Division of Procter Wells Company is as follows: $$\begin{array} { l r } \text { Sales } & \$ 1,800,000 \\\text { Operating expenses } & 1,380,000 \\\text { Net operating income } & 420,000 \\\text { Interest expense } & 120,000 \\\text { Earnings before taxes } & 300,000 \\\text { Income tax expense } ( 40 \% ) & 120,000 \\\text { Net income } & \$ 180,000 \\\hline\end{array}$$ This division's invested capital is $4,000,000. How much is the East Division's return on investment?

A) 6.3%
B) 5.7%
C) 10.5%
D) 7.5%

Question 71

A manager is evaluated based on return on investment. The corporate minimum required return is 11 percent and the manager runs a division that has attained a 14 percent return on investment. Which of the following statements is true?

A) The manager will most likely not invest in a project that has a return on investment of 13 percent.
B) The manager will invest in all projects that increase operating income.
C) The manager will not consider projects that exceed 14 percent.
D) The manager may prefer to invest in projects that have a return on investment that is very close 11 percent to stay in line with corporate expectations.

Question 72

It is difficult to compare investment centers using return on investment when there is a significant difference in the _________ between the investment centers.

A) age of the assets
B) net operating profit after taxes
C) amount of noninterest-bearing current liabilities
D) market share

Question 73

Which of the following statements is true?
I) Managers have a tendency to overinvest when return on investment is used as a performance measure.
II) Managers have a tendency to underinvest when profit is used as a performance measure.

A) I only
B) II only
C) Both I and II
D) Neither I nor II

Question 74

The Jersey Division of Yankee Products has invested capital of $1,400,000. This division incurred $80,000 in interest expense and $140,000 in income tax expense in 2014. If this division reported a return on investment of 14 percent, how much is net operating profit after taxes?

A) $416,000
B) $196,000
C) $116,000
D) $276,000

Question 75

Consider the following information for Haley and Morris, Inc. $\begin{array}{lrr}&\text { December } 31\\&2013&2014\\\text { Total assets } & \$ 40,000,000 & \$ 50,000,000 \\\text { Noninterest-bearing current liabilities } & 800,000 & 1,400,000 \\\text { Net income } & 2,600,000 & 3,400,000 \\\text { Interest expense } & 300,000 & 400,000 \\\text { Tax rate } & 30 \% & 30 \%\end{array}$ How much is the return on investment for 2014?

A) 7.57%
B) 7.24%
C) 6.42%
D) 7.82%

Question 76

If a manager is evaluated using the return on investment, the manager may be reluctant to invest in new equipment because the additional investment

A) may reduce profit by the cost of the investment.
B) will decrease the level of assets.
C) may decrease the return on investment.
D) may increase investment turnover.

Question 77

The manager of the West Division of Beach Clothing Company is evaluating the acquisition of a new embroidery machine. The budgeted operating income of the West Division was $4,000,000 with total assets of $22,000,000 and noninterest-bearing current liabilities of $1,000,000. The proposed investment would add $750,000 to operating income and would require an additional investment of $3,500,000. The targeted rate of return for the West Division is 14 percent and the cost of capital is 9 percent. Ignoring taxes, how much is the residual income of the West division if the embroidery machine is not purchased?

A) $202,000
B) $1,930,000
C) $2,110,000
D) $1,060,000

Question 78

The income statement for the Commercial Construction Division of the Kenyon Company is as follows: $\begin{array}{lr}\text { Sales } & \$ 272,000 \\\text { Operating expenses } & \underline{132,000} \\\text { Net operating income } & 140,000 \\\text { Interest expense } & 20,000 \\\text { Earnings before taxes } & 120,000 \\\text { Income tax expense }(30 \%) & 36,000 \\\text { Net income } & \$ 84,000\end{array}$ If this division's invested capital is $500,000, how much is its return on investment?

A) 19.6%
B) 16.8%
C) 20.8%
D) 14.0%

Question 79

South Division of Renato Enterprises reported net income of $480,000 in March on sales of $7,900,000. If this division has no interest expense, an income tax rate of 30 percent, and reported a return on investment of 12 percent, how much is invested capital?

A) $948,000
B) $4,000,000
C) $2,800,000
D) More information is needed to determine the answer.

Question 80

Canal Tower is a division of Sounder Products. For the most recent year, Canal Tower had net income of $16,000,000. Included in income was interest expense of $1,200,000. The operation's tax rate is 40 percent. Total assets of Canal Tower are $225,000,000, current liabilities are $40,000,000, of which $35,000,000 are noninterest-bearing. How much is return on investment for Canal Tower?

A) 8.0%
B) 8.8%
C) 9.1%
D) 7.4%