Deck 10: Management Control in Decentralized Organizations

Question 1

All of the following should be considered when determining transfer pricing except:

A) international taxation
B) import duties
C) income or dividend payment restrictions
D) currency exchange rates

Answer 1

D

Question 2

The asset section of the January 1, 20X7, balance sheet of Petticoat Company includes a machine which was acquired on January 1, 20X3. The machine's original cost was $500,000, and the estimated life was determined to be 10 years. The estimated residual value was zero, and the straight- line method of depreciation was chosen. If operating income before depreciation is $90,000, the rate of return on average net book value for 20X7 is:

A) 32.79%
B) 14.55%
C) 13.33%
D) 16.00%

Answer 2

B

Question 3

In agency theory, incentive is:

A) the relationship between goal congruence and managerial effort
B) the extent to which a manager's reward depends on a performance measure
C) the influence of uncontrollable factors on a manager's performance
D) the relationship between cost and perceived benefit

Answer 3

B

Question 4

The following information is available for the Soupy Company: $\begin{array}{ll}\text { Sales } & \$ 1,000,000 \\\text { Invested capital } & 350,000 \\\text { ROI } & 10 \%\end{array}$ The capital turnover ratio is:

A) 0.1000
B) 0.3500
C) 2.8571
D) None of these answers is correct.

Question 5

Tyson Company's revenues are $300 and invested capital is $240. Expenses are currently 80% of sales. Tyson Company's current return on investment is:

A) 80%
B) 25%
C) 100%
D) None of these answers is correct.

Question 6

Garvey Company's records reveal the following: The variable costs of Division B will be incurred whether it buys from Division A or from an outside supplier. If Division A is working at full capacity, the best transfer price from the viewpoint of the company as a whole would be:

A) $24
B) $75
C) $51
D) $105

Question 7

The following information pertains to Stewart Company: Property, plant and $\begin{array}{rrrr}\text { Currentassets } & \$ 100,000 & \text { Currentliabilities } & \$ 75,000 \\\text { equipment } & 150,000 & \text { Long term liabilities } & 100,000\\\text { Constructioninprogress } &50,000&\text { Stockholders'equity }&125,000\\\text { Total assets }&\$300,000&\text { Total equities }&\$300,000\end{array}$ $\begin{array}{rrrr}\text { Currentassets } & \$ 100,000 & \text { Currentliabilities } & \$ 75,000 \\\text { equipment } & 150,000 & \text { Long term liabilities } & 100,000\\\text { Constructioninprogress } &50,000&\text { Stockholders'equity }&125,000\\\text { Total assets }&\$300,000&\text { Total equities }&\$300,000\end{array}$ Invested capital is _ if it is defined as total assets.

A) $100,000
B) $250,000
C) $225,000
D) $300,000

Question 8

The following information pertains to Webster Company: Property, plant and $\begin{array}{rrrr}\text { Currentassets } & \$ 100,000 & \text { Currentliabilities } & \$ 75,000 \\\text { equipment } & 150,000 & \text { Long term liabilities } & 100,000\\\text { Constructioninprogress } &50,000&\text { Stockholders'equity }&125,000\\\text { Total assets }&\$300,000&\text { Total equities }&\$300,000\end{array}$ Invested capital is if it is defined as total assets less current liabilities.

A) $100,000
B) $225,000
C) $250,000
D) $300,000

Question 9

Optimal corporate decisions are made:

A) when goods or services are transferred at market prices
B) when goods or services are transferred at full cost prices
C) when goods or services are transferred at fixed cost prices
D) when goods or services are transferred at variable cost prices

Question 10

The following information pertains to Calhoun Company: Property, plant and $\begin{array}{rrrr}\text { Currentassets } & \$ 100,000 & \text { Currentliabilities } & \$ 75,000 \\\text { equipment } & 150,000 & \text { Long term liabilities } & 100,000\\\text { Constructioninprogress } &50,000&\text { Stockholders'equity }&125,000\\\text { Total assets }&\$300,000&\text { Total equities }&\$300,000\end{array}$ Invested capital is _ if it is defined as total assets employed.

A) $225,000
B) $250,000
C) $300,000
D) $100,000

Question 11

Diaz Company makes internal transfers at 180% of full cost. The Soda Refining division purchases 30,000 containers of carbonated water per day, on average, from a local supplier who delivers the water for $30 per container via an external shipper. To reduce costs, the company located an independent producer in Iowa who is willing to sell 30,000 containers at $20 each, delivered to Diaz Company's shipping division in Iowa. The company's Shipping Division in Iowa has excess capacity and can ship the 30,000 containers at a variable cost of $2.50 per container. is the total cost of purchasing the water from the Iowa supplier and shipping it to the Soda Division.

A) $1,080,000
B) $600,000
C) $1,215,000
D) $675,000

Question 12

According to agency theory, employment contracts will trade off .

A) incentive, risk, and cost of measuring performance
B) cost of measuring performance, cost- benefit, and risk
C) cost- benefit, risk, and uncontrollable factors
D) goal congruence, incentive, and risk

Question 13

The following information pertains to Gable Company: Property, plant and $\begin{array}{rrrr}\text { Currentassets } & \$ 200,000 & \text { Currentliabilities } & \$ 100,000 \\\text { equipment } & 400,000 & \text { Long term liabilities } & 200,000\\\text { Constructioninprogress } &50,000&\text { Stockholders'equity }&350,000\\\text { Total assets }&\$650,000&\text { Total equities }&\$650,000\end{array}$ Invested capital is if it is defined as total assets less current liabilities.

A) $650,000
B) $550,000
C) $600,000
D) $350,000

Question 14

Clarke Company records reveal the following: $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Division } X$
$\begin{array}{ll}\begin{array}{l}\text { Market price of finished comp onent to } \\\text { outsiders }\end{array} & \$ 32 \\\text { V ariable costs per component }& \underline{24} \\\text { Contribution margin per comp onent } & \underline{\$ 8}\\\text { Total contribution for } 20,000 \text { comp onents } & \underline{\$ 160,000}\end{array}$
The variable costs of Division Y will be incurred whether it buys from Division X or from an outside supplier. If Division X is working at full capacity, the lowest transfer price it would be willing to accept from Division Y would be:

A) $32
B) $22
C) $24
D) $8

Question 15

The following information is available for the Hodge Podge Company: $$\begin{array} { l l } \text { Sales } & \$ 250,000 \\\text { Invested capital } & 156,250 \\\text { ROI } & 10 \%\end{array}$$ The return on sales is:

A) 6.25%
B) 62.50%
C) 10.00%
D) None of these answers is correct.

Question 16

The following information pertains to Gloria Company: Property, plant and $\begin{array}{rrrr}\text { Currentassets } & \$ 200,000 & \text { Currentliabilities } & \$ 100,000 \\\text { equipment } & 400,000 & \text { Long term liabilities } & 200,000\\\text { Constructioninprogress } &50,000&\text { Stockholders'equity }&350,000\\\text { Total assets }&\$650,000&\text { Total equities }&\$650,000\end{array}$ $\begin{array}{rrrr}\text { Currentassets } & \$ 200,000 & \text { Currentliabilities } & \$ 100,000 \\\text { equipment } & 400,000 & \text { Long term liabilities } & 200,000\\\text { Constructioninprogress } &50,000&\text { Stockholders'equity }&350,000\\\text { Total assets }&\$650,000&\text { Total equities }&\$650,000\end{array}$ Invested capital is _ if it is defined as total assets employed.

A) $650,000
B) $350,000
C) $550,000
D) $600,000

Question 17

The following information pertains to Clark Company: Property, plant and $\begin{array}{rrrr}\text { Currentassets } & \$ 200,000 & \text { Currentliabilities } & \$ 100,000 \\\text { equipment } & 400,000 & \text { Long term liabilities } & 200,000\\\text { Constructioninprogress } &50,000&\text { Stockholders'equity }&350,000\\\text { Total assets }&\$650,000&\text { Total equities }&\$650,000\end{array}$ $\begin{array}{rrrr}\text { Currentassets } & \$ 200,000 & \text { Currentliabilities } & \$ 100,000 \\\text { equipment } & 400,000 & \text { Long term liabilities } & 200,000\\\text { Constructioninprogress } &50,000&\text { Stockholders'equity }&350,000\\\text { Total assets }&\$650,000&\text { Total equities }&\$650,000\end{array}$ Invested capital is _ if it is defined as stockholders' equity.

A) $550,000
B) $350,000
C) $600,000
D) $650,000

Question 18

An improvement in either capital turnover or return on sales, without changing the other, will also improve the:

A) level of sales
B) net book value
C) rate of return on invested capital
D) cost of capital

Question 19

Invested capital can mean any of the following, except:

A) total assets less current liabilities
B) total assets
C) total assets less total liabilities
D) total assets less long- term liabilities

Question 20

is an approach used for establishing a market- based transfer price.

A) Variable cost plus unavoidable fixed cost
B) External market price plus a profit markup
C) Full cost plus a normal profit markup
D) External market price less selling and delivery costs

Question 21

Identify which of the following adjustments to after- tax operating income is used to approximate cash income.

A) expensing research and development costs
B) using taxes paid rather than tax expense
C) using LIFO valuation
D) deducting interest payable

Question 22

is not an acceptable means of asset valuation.

A) Gross book value at historical cost
B) Net book value at current cost
C) Net book value at historical cost
D) Gross book value at future cost

Question 23

is not a usual definition of cost assuming a company uses a cost- based pricing system for transfer pricing.

A) Variable cost
B) Actual cost
C) Fixed cost
D) Full cost

Question 24

The following information is available for the Copeland Company: $\begin{array}{ll}\text { Sales } & \$ 1,000,000 \\\text { Invested c apital } & 312,500 \\\text { ROI } & 10 \%\end{array}$ The return on sales is:

A) 1.000%
B) 3.125%
C) 10.000%
D) None of these answers is correct.

Question 25

In agency theory, risk is:

A) the relationship between cost and perceived benefit
B) the probability that a desired outcome may not be achieved
C) the possibility that performance will be measured incorrectly
D) the influence of uncontrollable factors on a manager's performance

Question 26

Angelo Company's revenues are $300 on invested capital of $240. Expenses are currently 85% of sales. If Angelo Company can reduce its invested capital by 20%, return on investment will be:

A) 23.44%
B) 75%
C) 93.75%
D) 18.75%

Question 27

Identify which of the following statements is a benefit of decentralization.

A) Managers acquire decision- making ability and other management skills that help them move upward in the organization, assuring continuity of leadership.
B) Managers make decisions which enhance their segment's performance.
C) Managers save time dealing with managers from other segments regarding transfer prices.
D) Top- level managers have the best information concerning local conditions.

Question 28

is a measure of income or profit divided by the investment required to obtain that income or profit.

A) Return on investment
B) Return on sales
C) Residual income
D) Capital turnover

Question 29

The following information pertains to Polk Company: Property, plant and $\begin{array}{rrrr}\text { Currentassets } & \$ 100,000 & \text { Currentliabilities } & \$ 75,000 \\\text { equipment } & 150,000 & \text { Long term liabilities } & 100,000\\\text { Constructioninprogress } &50,000&\text { Stockholders'equity }&125,000\\\text { Total assets }&\$300,000&\text { Total equities }&\$300,000\end{array}$ Invested capital is _ if it is defined as stockholders' equity.

A) $225,000
B) $125,000
C) $300,000
D) $250,000

Question 30

The following information pertains to Bundy Company: $$\begin{array} { l l } \text { Total assets } & \$ 50,000 \\\text { Total current liabilities } & 30,000 \\\text { Total expenses } & 60,000 \\\text { Total liabilities } & 35,000 \\\text { Total revenues } & 80,000\end{array}$$ If invested capital is defined as total assets, the return on investment is:

A) 40%
B) 60%
C) 70%
D) 160%

Question 31

Transfer pricing systems exist to:

A) maximize worldwide taxes, duties, and tariffs
B) evaluate segment performance
C) encourage managers to purchase goods and services internally
D) All of these answers are correct.

Question 32

North Division sells cloth internally to South Division. South Division uses the cloth to produce inexpensive curtains sold at discount stores. North Division incurs costs of $1.50 per pound, while South Division incurs additional costs of $4.80 per pound. The product is sold to external customers for $8.00 per set of curtains. Identify which of the following formulas correctly reflects the company's operating income.

A) $8.00 - $1.50 = $6.50
B) $8.00 - $4.80 = $3.20
C) $8.00 - ($1.50 + $4.80) = $1.70
D) $8.00 - ($1.50 + $6.30) = $0.20

Question 33

The following information pertains to Tyler Company: $$\begin{array} { l l } \text { Total assets } & \$ 150,000 \\\text { Total current liabilities } & 110,000 \\\text { Total expens es } & 160,000 \\\text { Total liabilities } & 115,000 \\\text { Total revenues } & 180,000\end{array}$$ If invested capital is defined as total assets, a project earning an ROI of 12% should be:

A) rejected if the desired rate of return is less than 12%
B) rejected
C) accepted
D) rejected if the cost of capital is greater than 12%

Question 34

Identify which of the following statements is not a problem with decentralization.

A) Managers may make decisions that are not in the organization's best interests.
B) Costs of accumulating and processing information are frequently reduced.
C) Managers may waste time dickering with other segment managers about transfer prices.
D) Managers tend to duplicate services that might be less expensive if centralized.

Question 35

Identify which of the following statements about cost centers and decentralization is true.

A) Cost centers are centralized, but profit centers are decentralized.
B) Decentralized organizations are organized into profit centers.
C) Accountability for revenues and expenses exists independently of the ability to make decisions.
D) Accountability for revenues and expenses requires the ability to make decisions.

Question 36

A division of Sarge Company is located in a country that places restrictions on the amount of funds that may be paid as dividends to foreign owners. If Sarge Company wishes to maximize the amount of cash received from the foreign division, Sarge Company should:

A) establish a low transfer price of goods transferred into the country
B) establish a high transfer price of goods transferred out of the country
C) establish a high transfer price of goods transferred into the country
D) establish a low transfer price of goods transferred out of the country

Question 37

Foreman Company's revenues are $300 on invested capital of $240. Expenses are currently 84% of sales. If Foreman Company can reduce its expenses to 75% of sales, return on investment will be:

A) 31.25%
B) 93.75%
C) 20%
D) None of these answers is correct.

Question 38

would not increase return on investment.

A) A decrease in expenses
B) An increase in sales revenue
C) A decrease in inventories
D) All of these answers are correct.

Question 39

Morgan Company records reveal the following: The variable costs of Division Y will be incurred whether it buys from Division X or from an outside supplier. The highest price that Division Y would want to pay Division X for the components would be:

A) $22
B) $32
C) $24
D) $8

Question 40

The fact that is not a disadvantage of transferring items at cost.

A) the buying segment will not be able to plan its costs
B) cost inefficiencies are passed along to the buying department
C) it cannot be used to evaluate segment performance
D) transferring items at cost can disguise a cost's behavior pattern

Question 41

Kent Company records reveal the following: The variable costs of Division Y will be incurred whether it buys from Division X or from an outside supplier. If Division X is working at full capacity, the best transfer price from the viewpoint of the company as a whole would be:

A) $24
B) $32
C) $8
D) $42

Question 42

is any action taken in conflict with organizational goals.

A) Congruent behavior
B) Negotiating
C) Dysfunctional behavior
D) Managerial effort

Question 43

Lincoln Company paid $8 million cash for research and development. EVA capital was computed as $20 million. Lincoln Company cost of capital was 15%. To add economic value to the firm, Lincoln Company must generate revenues less operating costs of at least:

A) $4.2 million
B) $28 million
C) $11 million
D) $9.2 million

Question 44

Historical cost is widely used for asset valuation because it:

A) requires no additional data collection
B) is more objective than current cost
C) is more useful for predicting the effects of decision making
D) All of these answers are correct.

Question 45

Robin Company records reveal the following: The variable costs of Division Y will be incurred whether it buys from Division X or from an outside supplier. If Division X is not at full capacity, the lowest transfer price at which it would be willing to sell to Division Y would be:

A) $24
B) $8
C) $32
D) $22

Question 46

The following information is available for the Sting Company: $\begin{array} { l } \text { Sales}& \$250,000\\ \text {Invested capital }&156,250 \\ \text { ROI}& 10\%\\\end{array}$
The capital turnover ratio is:

A) 0.625
B) 1.600
C) 0.100
D) None of these answers is correct.

Question 47

The asset section of the January 1, 20X9, balance sheet of Big Valley Company includes a machine which was acquired on January 1, 20X5. The machine's original cost was $500,000, and the estimated life was determined to be 10 years. The estimated residual value was zero, and the straight- line method of depreciation was chosen. The book value of the machine as of January 1, 20X9, is:

A) $450,000
B) $300,000
C) $500,000
D) $250,000

Question 48

The following information pertains to Newhart Company: $$\begin{array} { l l } \text { Total asset } & \$ 50,000 \\\text { Total current liabilities } & 10,000 \\\text { Total expenses } & 60,000 \\\text { Total liabilities } & 15,000 \\\text { Total revenues } & 80,000\end{array}$$ If invested capital is defined as total assets minus current liabilities, the residual income at an imputed interest rate of 10% is:

A) $16,000
B) $2,600
C) $20,000
D) $4,000

Question 49

Wayne Company's records reveal the following: Division $A$
$\begin{array}{ll}\text { M arket pric of finished part to out siders } & \$ 75 \\\text { Variable costs per part } & 51 \\\text { Contribution margin per part } & \$ 24 \\\text { Tot al contribution for } 10000 \text { parts } & \$ 240,000\end{array}$

Division $B$
$\begin{array} { l } \text {ales price of finished product }& \$105\\\text {Variable costs: }& \\\text { Division A (1 p art @ \( \$ 51) \)}&\$51 \\\text {Division \( B \) }& \\\text {Processing }&\$27 \\\text {Selling }&12&39&-90 \\\text { Contribution margin per unit}&&&\$15 \\\text { Total contribution for } 10,000&&&\$150,000 \\\text {units }& \\\end{array}$
The variable costs of Division B will be incurred whether it buys from Division A or from an outside supplier. If Division A wants to transfer the parts to Division B for $81, the manager of Division B would:

A) buy from Division A, as this would be in the best interest of the company as a whole
B) probably ask Division A's manager to split the difference between the $81 and the market price of $75 to arrive at a transfer price of $78
C) buy the part from Division A as long as Division A could supply a large enough quantity to make it profitable to Division B
D) not want to buy from Division A, as the same product could be purchased at the market price of $75

Question 50

ROI is computed as:

A) residual income x capital turnover
B) income percentage of revenue x return on sales
C) cost of capital x income percentage of revenue
D) capital turnover x return on sales

Question 51

Decentralization may increase a firm's costs because:

A) managers duplicate services that might be less expensive if centralized and information costs rise as responsibility reports are needed
B) managers duplicate services that might be less expensive if centralized
C) information costs rise as responsibility reports are needed
D) None of these answers is correct.

Question 52

The Table and Chair Divisions are part of the same company. Currently the Chair Division buys a part from Table for $384. The Table Division wants to increase the price of the part it sells to Chair by $96 to $480. The manager of Chair has stated that it cannot afford to go that high, as it will decrease the division's profit to near zero. Chair can buy the part from an outside supplier for $448. The cost data for the Table Division is as follows: $$\begin{array} { l l } \text { Direct materials } & \$ 136.00 \\\text { Direct labor } & 200.00 \\\text { Variable overhead } & 40.00 \\\text { Fixed overhead } & 38.40\end{array}$$ If Table ceases to produce the parts for Chair, it will be able to avoid one- third of the fixed manufacturing overhead. The Table Division has excess capacity but no alternative uses for its facilities. _ is the maximum transfer price that should be charged.

A) $480.00
B) $414.40
C) $388.80
D) $448.00

Question 53

The variable cost of Part X is $50 and the full cost of the part is $80. The part is produced in country A and transferred to a plant in country B. Country A has a 30% income tax rate. Country B has a 50% income tax rate and an import duty equal to 10% of the price of the item. Part X can be transferred at full cost or variable cost. Assume that Part X is priced at full cost. The income tax effect per unit in country B is:

A) an increase in tax by $9 per unit
B) an increase in tax by $15 per unit
C) a decrease in tax by $9 per unit
D) a decrease in tax by $15 per unit

Question 54

The following information pertains to Milton Company: $$\begin{array} { l l } \text { Total assets } & \$ 150,000 \\\text { Total current liabilities } & 110,000 \\\text { Total expenses } & 160,000 \\\text { Total liabilities } & 115,000 \\\text { Total revenues } & 180,000\end{array}$$ If invested capital is defined as total assets minus current liabilities, a project earning an ROI of 30% should be:

A) rejected
B) accepted
C) rejected if the cost of capital is less than 30%
D) rejected if the desired rate of return is greater than 30%

Question 55

The variable cost of Part X is $50 and the full cost of the part is $80. The part is produced in country A and transferred to a plant in country B. Country A has a 30% income tax rate. Country B has a 50% income tax rate and an import duty equal to 10% of the price of the item. Part X can be transferred at full cost or variable cost. Assume that Part X is priced at full cost. The net tax effect is:

A) an increase in tax by $6 per unit
B) a decrease in tax by $15 per unit
C) a decrease in tax by $3 per unit
D) an increase in tax by $9 per unit

Question 56

Division Y sells soybean paste internally to Division Z, which, in turn, produces soybean burgers that sell for $5 per pound. Division Y incurs costs of $0.75 per pound, while Division Z incurs additional costs of $2.50 per pound. Identify which of the following formulas correctly reflects the company's operating income.

A) $5.00 - ($0.25 + $1.25 + $3.50) = $- 0-
B) $5.00 - ($0.75 + $2.50) = $1.75
C) $5.00 - ($1.25 + $2.50) = $1.25
D) $5.00 - ($0.75 + $3.75) = $0.50

Question 57

Reed Company records reveal the following: The variable costs of Division Y will be incurred whether it buys from Division X or from an outside supplier. If Division X wants to transfer the components to Division Y for $34 each, the manager of Division Y would:

A) buy from Division X as long as Division X could supply a large enough quantity to make it profitable to Division Y
B) probably ask Division X's manager to split the difference between the $34 and the market price of $32 to arrive at a transfer price of $36
C) not want to buy from Division X, as the same component could be purchased at the market price of $32
D) buy from Division X, as this would be in the best interest of the company as a whole

Question 58

Gonzalez Company's after- tax operating income was $882 million. Total assets were $4,900 million and stockholder's equity was $2,050 million. Gonzalez Company's cost of capital was 10%. Gonzalez Company's EVA was:

A) $392 million
B) $667 million
C) $187 million
D) $597 million

Question 59

The following information pertains to Saturn Company: $\begin{array}{ll}\text { Total assets } & \$ 50,000 \\\text { Total current liabilities } & 30,000 \\\text { Total expenses } & 60,000 \\\text { Total liabilities } & 45,000 \\\text { Total revenues } & \$8 0,000\end{array}$ If invested capital is defined as total assets, the capital turnover is:

A) 0.633
B) 0.400
C) 1.792
D) 1.600

Question 60

The joint formulation by a manager and his or her superior of a set of goals and plans for achieving the goals for a forthcoming period is known as:

A) managerial effort
B) management by objectives
C) management by opinion
D) capital budgeting

Question 61

The following information is available for the Bumbling Company: $\begin{array} { l } \text { Sales}& \$250,000\\ \text {Invested capital }&156,250 \\ \text { ROI}& 10\%\\\end{array}$
The net income is:

A) $93,750
B) $50,000
C) $156,250
D) $15,625

Question 62

is the decision- making power of segment managers.

A) Goal congruence
B) Managerial effort
C) Segment autonomy
D) Segment superiority

Question 63

is the result of the calculation which divides income by revenue.

A) Capital turnover
B) Residual income
C) Return on investment
D) Return on sales

Question 64

A firm is a good candidate for decentralization if:

A) segments buy from the same suppliers
B) an organization's segments are relatively independent of one another
C) segments sell to the same customers
D) there is frequent transferring of products between segments

Question 65

The asset section of the January 1, 20X9, balance sheet of Junction Company includes a machine which was acquired on January 1, 20X5. The machine's original cost was $500,000, and the estimated life was determined to be 10 years. The estimated residual value was zero, and the straight- line method of depreciation was chosen. If operating income before depreciation is $95,000, the rate of return on gross book value for 20X9 is:

A) 9%
B) 18%
C) 14.4%
D) 35%

Question 66

The following information pertains to Caravan Company: $\begin{array}{ll}\text { Total assets } & \$ 150,000 \\\text { Total current liabilities } & 110,000 \\\text { Total expenses } & 60,000 \\\text { Total liabilities } & 115,000 \\\text { Total revenues } & 80,000\end{array}$ The income percentage of revenue is:

A) 25%
B) 50%
C) 133%
D) 75%

Question 67

Identify which of the following definitions of invested capital is not recommended for measuring the performance of division managers.

A) total assets less current liabilities
B) total assets employed
C) total assets less total liabilities
D) total assets

Question 68

The following information pertains to Moore Company: $$\begin{array} { l l } \text { Total assets } & \$ 50,000 \\\text { Total current liabilities } & 30,000 \\\text { Total expens es } & 60,000 \\\text { Total liabilities } & 35,000 \\\text { Total revenues } & 80,000\end{array}$$ If invested capital is defined as total assets, and the imputed interest rate is 8%, the residual income is:

A) $20,000
B) $4,000
C) $1,600
D) $16,000

Question 69

Transfer prices are:

A) revenues of the segment producing the product or service
B) revenues of the segment acquiring the product or service
C) costs of the segment producing the product or service
D) None of these answers is correct.

Question 70

The variable cost of Part X is $50 and the full cost of the part is $80. The part is produced in country Z and transferred to a plant in country B. Country A has a 30% income tax rate. Country B has a 50% income tax rate and an import duty equal to 10% of the price of the item. Part X can be transferred at full cost or variable cost. Assume that Part X is priced at full cost. The income tax effect per unit in country Z is:

A) a decrease in tax by $24 per unit
B) a decrease in tax by $9 per unit
C) an increase in tax by $24 per unit
D) an increase in tax by $9 per unit

Question 71

is the original cost of an asset less any accumulated depreciation.

A) Net book value
B) Gross book value
C) A net asset
D) Current cost

Question 72

One reason companies use full- cost transfer pricing is that it provides:

A) relevant costs for short- run decisions at the expense of the company
B) relevant costs for long- run decisions and for short- run decisions
C) relevant costs for short- run decisions even though poor long- run decisions may result
D) relevant costs for long- run decisions even though poor short- run decisions may result

Question 73

Wills Company's records reveal the following: Division $A$
$\begin{array}{ll}\text { M arket pric of finished part to out siders } & \$ 75 \\\text { Variable costs per part } & 51 \\\text { Contribution margin per part } & \$ 24 \\\text { Tot al contribution for } 10000 \text { parts } & \$ 240,000\end{array}$

Division $B$
$\begin{array} { l } \text {ales price of finished product }& \$105\\\text {Variable costs: }& \\\text { Division A (1 p art @ \( \$ 51) \)}&\$51 \\\text {Division \( B \) }& \\\text {Processing }&\$27 \\\text {Selling }&12&39&-90 \\\text { Contribution margin per unit}&&&\$15 \\\text { Total contribution for } 10,000&&&\$150,000 \\\text {units }& \\\end{array}$
The variable costs of Division B will be incurred whether it buys from Division A or from an outside supplier. The highest price that Division B would want to pay to Division A for the parts would be:

A) $66
B) $24
C) $51
D) $75

Question 74

Baker Company's records reveal the following: Division $A$
$\begin{array}{ll}\text { M arket pric of finished part to out siders } & \$ 75 \\\text { Variable costs per part } & 51 \\\text { Contribution margin per part } & \$ 24 \\\text { Tot al contribution for } 10000 \text { parts } & \$ 240,000\end{array}$

Division $B$
$\begin{array} { l } \text {ales price of finished product }& \$105\\\text {Variable costs: }& \\\text { Division A (1 p art @ \( \$ 51) \)}&\$51 \\\text {Division \( B \) }& \\\text {Processing }&\$27 \\\text {Selling }&12&39&-90 \\\text { Contribution margin per unit}&&&\$15 \\\text { Total contribution for } 10,000&&&\$150,000 \\\text {units }& \\\end{array}$
The variable costs of Division B will be incurred whether it buys from Division A or from an outside supplier. If Division A is not at full capacity, the lowest transfer price at which it would be willing to sell to Division B would be:

A) $66
B) $51
C) $24
D) $75

Question 75

is the formal and informal performance- based reward that enhances managerial effort toward organizational goals.

A) Evaluation
B) Risk
C) Feedback
D) Incentive

Question 76

Sandler Company makes internal transfers at 180% of full cost. The Soda Refining division purchases 30,000 containers of carbonated water per day, on average, from a local supplier who delivers the water for $30 per container via an external shipper. To reduce costs, the company located an independent producer in Ohio who is willing to sell 30,000 containers at $20 each, delivered to Sandler Company's shipping division in Ohio. The company's Shipping Division in Ohio has excess capacity and can ship the 30,000 containers at a variable cost of $2.50 per container. is the total cost to Sandler Company if the carbonated water is purchased from the local supplier.

A) $1,620,000
B) $1,501,000
C) $900,000
D) $1,200,000

Question 77

Russell Company's records reveal the following: Division $A$
$\begin{array}{ll}\text { M arket pric of finished part to out siders } & \$ 75 \\\text { Variable costs per part } & 51 \\\text { Contribution margin per part } & \$ 24 \\\text { Tot al contribution for } 10000 \text { parts } & \$ 240,000\end{array}$

Division $B$
$\begin{array} { l } \text {ales price of finished product }& \$105\\\text {Variable costs: }& \\\text { Division A (1 p art @ \( \$ 51) \)}&\$51 \\\text {Division \( B \) }& \\\text {Processing }&\$27 \\\text {Selling }&12&39&-90 \\\text { Contribution margin per unit}&&&\$15 \\\text { Total contribution for } 10,000&&&\$150,000 \\\text {units }& \\\end{array}$
The variable costs of Division B will be incurred whether it buys from Division A or from an outside supplier. If Division A is working at full capacity, the lowest transfer price it would be willing to accept from Division B would be:

A) $24
B) $51
C) $75
D) $66

Question 78

The Table and Chair Divisions are part of the same company. Currently the Chair Division buys a part from Table for $384. The Table Division wants to increase the price of the part it sells to Chair by $96 to $480. The manager of Chair has stated that it cannot afford to go that high, as it will decrease the division's profit to near zero. Chair can buy the part from an outside supplier for $448. The cost data for the Table Division is as follows: $$\begin{array} { l l } \text { Direct materials } & \$ 136 \\\text { Direct labor } & 200 \\\text { Variable overhead } & 40 \\\text { Fixed overhead } & 42\end{array}$$ If Table ceases to produce the parts for Chair, it will be able to avoid one- third of the fixed manufacturing overhead. The Table Division has excess capacity but no alternative uses for its facilities. From the standpoint of the company as a whole, should Chair continue to buy from Table or start to buy from the outside supplier?

A) Chair should buy from an outside supplier.
B) Chair should buy from Table Division because the company's profit would be $58.00 per unit larger.
C) Chair should buy from Table Division because the company's profit would be $32.00 per unit larger.
D) None of these answers is correct.

Question 79

Residual income is defined as:

A) sales less expenses
B) net income less "imputed" interest
C) the same as ROI
D) income divided by revenue

Question 80

The following information is available for the Leno Company: $\begin{array}{ll}\text { Sales } & \$ 1,000,000 \\\text { Invested capital } & 312,500 \\\text { ROI } & 10 \%\end{array}$ The net income is:

A) $31,250
B) $312,500
C) $100,000
D) $687,500