Deck 17: Management Control Systems and Transfer Pricing

Question 1

Management control systems can typically be placed into one of two broad categories: Centralized or Decentralized. While most businesses may start as centralized, they may shift towards a decentralized system over time. Which of the following would be considered a benefit of a decentralized system?

A) Duplication of activities
B) Faster decision-making
C) Less responsiveness to local needs
D) Less specialization

Answer 1

Faster decision-making

Question 2

Management control systems can typically be placed into one of two broad categories: Centralized or Decentralized. While most businesses may start as centralized, they may shift towards a decentralized system over time. Which of the following would be considered a drawback of a decentralized system?

A) Duplication of activities
B) More specialization
C) Optimal decision-making
D) Slower decision-making

Answer 2

Duplication of activities

Question 3

In an effort to optimize decentralization, work towards accomplishing its mission, and achieve goal-congruence, an organization will strive to utilize a lot of planning in the design and implementation of their management system. Which of the following represents one of the four pillars of management control systems?

A) Irresponsibility centers
B) Performance measurement
C) Production
D) Unit pricing

Answer 3

Performance measurement

Question 4

As companies become established and shift from a centralized to a decentralized business model, employees start to become empowered to own and manage certain processes. While this comes with its own set of implementation challenges initially, it is usually considered worthwhile in the long run. Which of the following represents a benefit of decentralization?

A) Certain activities are likely to be duplicated, and that can mean that money will be saved as the work gets completed faster.
B) Increased levels of management mean the turnaround times for approvals will decrease.
C) Managers will likely show more initiative when they have the authority to make decisions for their own business unit.
D) The company increases its ability to place employees and managers in areas where they are not currently specialized.

Question 5

As companies become established and shift from a centralized to a decentralized model, employees start to become empowered to own and manage certain processes. While this comes with its own set of implementation challenges initially, it is usually considered worthwhile in the long run. Even so, there could be some drawbacks to this type of management system. Which of the following represents a drawback of decentralization?

A) Certain activities are likely to be duplicated across departments, and that can mean that money will be wasted.
B) High-level managers find they have increased distance from day-to-day operations and now have greater freedom to think strategically.
C) Managers will likely show less initiative when they are in control and have the authority to make decisions for their own business unit.
D) The organization chart is likely to take on a wide but shallow appearance from top-to-bottom indicating increased bureaucracy.

Question 6

In a well-structured organization, management will strive to achieve goal congruence. While managers may find that they are being evaluated on the performance of their own business unit, the overall congruence of goals must be kept in mind when setting objectives for these managers. Which of the following represents an optimal outcome that is aligned with the company-wide objective of saving money for short and long-term future goals?

A) Sanford, the plant manager, knows that a large machine needs to be replaced in order to get orders done on time, but Sanford chooses not to replace the machine as this is not in his budget for the year.
B) Susan, a manager, makes her employees clock-out during the last fifteen minutes of their shifts, but they must stay and complete their work to help the company save on expenses.
C) Teresa, an assembly line worker, has advocated for her department to hire an occupational therapist to evaluate repetitive work injuries and reduce sick time used to recover from these on-the-job injuries.
D) Trent, a production employee, chooses to donate some of his unused sick time to a fellow employee so the company will not penalize the department for having to cover that employee's short-term leave.

Question 7

In a well-structured organization, management will strive to achieve goal congruence. While managers may find that they are being evaluated on the performance of their own business unit, the overall congruence of goals must be kept in mind when setting objectives for these managers. Which of the following represents a suboptimal outcome that is misaligned with the company-wide objective of saving money?

A) Sanford, the plant manager, knows that a large machine needs to be replaced in order to get orders done on time, but Sanford chooses not to replace the machine since this was not in his budget for the year.
B) Susan, a manager, makes her employees clock-out during the last fifteen minutes of their shifts, but they must stay to complete their work to help the company save on expenses.
C) Teresa, an assembly line worker, has advocated for her department to hire an occupational therapist to evaluate repetitive work injuries and reduce sick time used to recover from these on-the-job injuries.
D) Trent, a production employee, chooses to donate some of his unused sick time to a fellow employee so that the company will not penalize the department for having to cover that employee's short-term leave.

Question 8

When an organization wants to optimize decentralization, achieve goal-congruent outcomes, and accomplish its mission, management will look to implement a well-designed and well-planned management control system. A system such as this will utilize the four pillars of management control systems to achieve a major impact on employee behavior. Which of the following is an example of the proper usage of one of the pillars?

A) Allowing managers to spend money as it is needed as long as they have an accountable plan and submit their receipts and paperwork in a timely fashion
B) Dividing up work and responsibilities for the company into smaller departments with their own assigned manager
C) Encouraging a department to sell to another internal department at any price they feel is fair, even if it surpasses the current market rate
D) Setting a performance goal for management of a 50% increase in sales when a 10% increase in sales has been realized historically.

Question 9

When an organization wants to optimize decentralization, achieve goal-congruent outcomes, and accomplish its mission, management will look to implement a well-designed and well-planned management control system. A system such as this will utilize the four pillars of management control systems to achieve a major impact on employee behavior. Which of the following is an example of an improper usage of one of the pillars?

A) Asking all new employees to do any physical labor-intensive work to give more senior employees a break, regardless of their department
B) Asking management to create a formalized budget based on historical data for their department
C) Creating a logical and methodical system for determining the transfer price between two internal departments
D) Having yearly performance measurement for management based on department-specific benchmarks

Question 10

A large public University has been undergoing some changes as it attempts to modernize and adopt a more online-friendly learning environment. The University has decided that one step that must be taken is to decentralize its operations. Previously, the President of the University was charged with making all decisions ranging from final say on supply purchases to hiring decisions. Which of the following examples shows a way that the University might successfully decentralize?

A) Deans are assigned to each college and are permitted to make college-specific decisions.
B) The Basketball Coach has been instructed to request final approval from the University Vice President after an initial selection of players is complete.
C) The President is responsible for overseeing the administrative staff for the College of Fine Arts.
D) The President will have the final say on all faculty hires rather than each College's Dean.

Question 11

A large public University has been undergoing some changes as it attempts to modernize and adopt a more online-friendly learning environment. The University has decided that one step that must be taken is to decentralize its operations. Previously, the President of the University was charged with making all decisions ranging from final say on supply purchases to hiring decisions. Which of the following is an example of an unsuccessful attempt to decentralize?

A) Central executives will be placed in charge of recruiting and hiring faculty for all colleges and disciplines.
B) Faculty will be permitted to select teaching assistants for their courses.
C) Newly created Dean positions allow for a person to make college-specific decisions without having to await approval from an executive.
D) The football coach will make the final decision on which players make the team after initial tryouts.

Question 12

Recently, a manager at a grocery store voiced concerns that the higher-ups have set completely unrealistic goals that the store can in no way achieve this year. This manager fears that the pressure of trying to succeed may lead some employees to make unethical decisions in order to achieve the unrealistic goals. Management and employees are evaluated on their abilities to meet these goals. Which of the following is an example that is indicative of unethical behavior that might be employed by someone to meet unrealistic goals?

A) A cashier has been ringing up some items twice when checking a customer out even though one of those items was purchased by the customer.
B) A manager has been working extra hours without clocking in to increase revenue and decrease labor costs.
C) An employee noticed that a coworker has been taking bottled drinks without paying while on their break.
D) Management has implemented a new membership program that costs $50 per year and would give some customers preferential treatment.

Question 13

Recently, a manager at a grocery store voiced concerns that the higher-ups have set completely unrealistic goals that the store can in no way achieve this year. This manager fears that the pressure of trying to succeed may lead some employees to make unethical decisions in order to achieve the unrealistic goals. Management and employees are evaluated on their abilities to meet these goals. Which of the following is an example that is indicative of ethical behavior that might be employed by someone to meet sales goals?

A) A cashier has been asking customers to round up their totals to give the excess funds to a charity.
B) A manager has been asking the employees to work extra hours without clocking in to increase revenue and decrease labor costs.
C) Cashiers have been encouraged to ask customers if they would like to sign up for a store credit card.
D) Management has approved a new customer incentive program where customers will receive a discount coupon for a future visit by spending a certain amount today.

Question 14

As organizations grow and move towards a decentralized model, one goal will often be to empower employees. One way that this is accomplished is by creating responsibility centers and assigning managers to oversee the operations of their particular area of expertise. Which of the following best represents an accurate representation of a responsibility center?

A) John is overseeing the production department at his job, and he must create a budget to implement for the upcoming year.
B) Sarah has been promoted to manage the maintenance team at a local hotel, but she must get approval for all hiring through the company president.
C) The CEO of the company has decided to oversee the customer service department since they do not trust the current manager of the department.
D) The president of the organization will oversee all business units and delegate few tasks to managers.

Question 15

As organizations grow and move towards a decentralized model, one goal will often be to empower employees. One way that this is accomplished is by creating responsibility centers and assigning managers to oversee the operations of a particular area of expertise. Which of the following represents an inaccurate representation of a responsibility center?

A) Aliyah, an owner and president of a retail store, appoints John to be the manager of the garden center at the store.
B) Arthur oversees the marketing department for a local sports bar, and he asks another employee to work on social media posts.
C) Samantha, a manager, runs the payroll processing department and reports to a regional manager.
D) The president of the organization will oversee all business units and delegate few tasks to managers.

Question 16

All business units are created with certain goals against which they are measured. Regardless of the type of business unit, evaluations are utilized to ensure that management is directing the team towards the achievement of goals that are congruent with the overall company goals set forth by the highest levels of management. Which of the following best represent metrics used to evaluate a profit center?

A) Return on Investment, Sales Mix, Dollar Value of Sales
B) Target Profit, Budget-to-Actual Profit Reports, Net Income
C) Target Profit, Dollar Value of Sales, Return on Investment
D) Year-to-Date Expenditures, Return on Sales, Residual Income

Question 17

Decentralized organizations have the ability to create divisions of itself that are called responsibility centers. One of the features and advantages of this is that managers have decision-making independence and are empowered to run their own departments. Which of the following best represents the presence of authority, one of the three characteristics of a responsibility center?

A) A company moves from a model where a department is able to set working hours for its employees to a company-wide policy for all employees.
B) Carleigh, the divisional manager delegates analysis tasks to his employees and has the decision-making authority to purchase assets for his division.
C) The company CEO insists that they must approve any new hires selected by the accounting department.
D) The sales manager decides not to delegate paperwork to subordinates so that they can monitor all activity.

Question 18

Decentralized organizations have the ability to create divisions of itself that are called responsibility centers. One of the features and advantages of this is that managers have decision-making independence and are empowered to run their own departments. Which of the following represents the lack of authority, one of the three characteristics of a responsibility center?

A) A bank branch manager has delegated the task of signing off on new accounts to lower-level employees.
B) A company moves from a model where there is a company-wide policy for set working hours to one where each department can determine what hours employees will work.
C) A hospital CEO would like to oversee the hiring of all nursing staff since they believe the manager has allowed too much turnover.
D) The sales manager has asked senior-level sales staff to take charge of the inventory count beginning next month.

Question 19

One of the largest differences between a centralized and decentralized organization is the division of power. In a decentralized organization, power is given to managers of individual departments or business units. Responsibility is one of the three characteristics of a responsibility center. Which of the following best represents the delegation of responsibility within a decentralized organization?

A) Bobby is a sales associate who was just asked to assume responsibility for checking out guests but has not received any instruction regarding what needs to be done.
B) Sharon, the manager of the research department, has tasked a research assistant with doing an equipment inventory count each month and takes timely updates to be sure task is done.
C) The company CEO decides that they will continue to oversee the production department but places all responsibility for sales outcome on the department manager.
D) The women's clothing manager of a retail store has assumed responsibility for overseeing the men's department, delegated folding to a sales associate, but has not requested an update.

Question 20

In a decentralized organization, business units are created to better achieve a sense of independence amongst management. In a business unit, management is responsible for ensuring that tasks in their department are being completed and for overseeing their subordinates. One of the three main characteristics of a decentralized organization is accountability, which means that one will have to answer for the job when it is done. Which of the following best represents the existence of accountability in an organization?

A) A manager in charge of the product design team asked a lower-level associate to order supplies that are needed by the department to function. She is busy and did not follow up and ending up placing the order herself when supplies were about to run out.
B) A new office assistant was asked to check the company voicemail in the morning but has neglected to do it, so messages were missed.
C) A pharmaceutical sales representative does not submit a mileage report for the week and is denied a reimbursement by the manager for not following protocol.
D) The maintenance person was asked in passing by a manager to hang updated workplace safety posters and forgot to follow up.

Question 21

In a decentralized organization, business units are created to better achieve a sense of independence amongst management. In a business unit, management is responsible for ensuring that tasks in their department are being completed and for overseeing their subordinates. One of the three main characteristics of a decentralized organization is accountability, which means that one will have to answer for the job when it is done. Which of the following represents the non-existence of accountability in an organization?

A) A paralegal has been issued a warning after neglecting to file some documents with the courts that will delay the trial her manager is involved with.
B) A receptionist was in charge of submitting the sales department timesheets and was reprimanded by a manager when this was not completed.
C) A staff accountant was asked by their manager to come in over the weekend to complete the work the accountant had overlooked that had a deadline of the Friday before.
D) The manager of the production department has decided to make the task of cleaning the employee bathroom a volunteer-based task rather than assigning it to one employee.

Question 22

A decentralized organization will have various responsibility centers including revenue centers, whose sole purpose is to generate revenue. These centers will also incur the cost of having employees work there, but their goal is to generate sales and hit targets set by management. Of the following examples, which best represents a revenue center?

A) Housekeeping at a small hotel
B) Payroll processing at a local bank
C) Sales department at an HVAC company
D) The pharmacy at a local grocery store

Question 23

A large home improvement retail company is moving towards a decentralized management system from a centralized system after years in business. They are aware that this will entail generating various responsibility centers and placing the appropriate people in charge. Which of the following would be considered a profit center for the company?

A) The garden center in the store
B) The home projects consulting department
C) The janitorial department
D) The payroll department

Question 24

A boutique hotel is in the process of upgrading all of its systems including its management control system. Since its inception, the hotel has employed a centralized system, but the hotel has grown enough to consider decentralization. Of the following units or departments, which would be considered a cost center for the boutique hotel?

A) Food and beverages department
B) The gift shop
C) The hotel bar
D) The housekeeping department

Question 25

Some organizations choose a responsibility center to focus on selecting assets to reach a target return and then putting those profits back into the business or other assets. Certain organizations have done this to great success including Amazon, Netflix, and the New York Yankees. Which of the following best represents the most accurate responsibility center as described?

A) Cost Center
B) Investment Center
C) Profit Center
D) Revenue Center

Question 26

One of the largest differences between a centralized and decentralized organization is the division of power. In a decentralized organization, power is given to managers of individual departments, or business units. Responsibility is one of the three characteristics of a responsibility center. Which of the following best represents the absence of delegation of responsibility within a decentralized organization?

A) Laura, the night clerk at a hotel, has been covering all of the phones as instructed since the manager believes Laura is ready to learn some additional skills.
B) The company CEO decides that they will continue to oversee the production department but places all responsibility for sales outcomes on the department manager.
C) The company CEO implements a new policy where managers will be responsible for all departmental budget information for areas they oversee.
D) The men's clothing manager of a retail store has delegated cash register duties to a new sales associate and has followed up to ensure the task is being completed.

Question 27

Turner Inc. is a factory that creates laptop bags that contain an added sleeve for increased protection. The sewing department is currently debating on the best way to proceed with sourcing the materials needed to create the end product. What is most likely to impact a potential price with an internal department?

A) The maximum selling price established by the seller of the product
B) The minimum price that would be established by the buyer of the product
C) Whether the internal department has any idle capacity or not as this would impact the minimum acceptable transfer price
D) Whether the managers of the departments have good peer-to-peer relationship

Question 28

Jones Enterprises is evaluating their divisions over the past few months to determine what department has done the most effective job at meeting or exceeding the Return on Investment (ROI) metric of 16% required by the company. They begin by looking at Sheila's division which purchased a new machine in the last year. This large piece of equipment cost $9,000, generated $3,420 of sales, and incurred $1,904 of operating expenses. Given this information, what is the profit margin of this new equipment, and was this a successful decision?

A) No, this would not be considered successful with a negative return of $0.44.
B) No, this would not be considered successful with a negative return of $0.80.
C) Yes, this would be considered successful with a positive return of $0.44.
D) Yes, this would be considered successful with a positive return of $0.80.

Question 29

Jones Enterprises is evaluating their divisions over the past few months to determine what department has done the most effective job at meeting or exceeding the Return on Investment (ROI) metric of 16% required by the company. They begin by looking at Sheila's division, which purchased a new machine in the last year. This large piece of equipment cost $9,000, generated $3,420 of sales, and incurred $1,904 of operating expenses. Given this information, what is the ROI of this new equipment, and was this a good decision made by Sheila?

A) No, this would not be considered a good decision with a negative return of 16.84%.
B) Yes, this would be considered a good decision with a positive return of 16.84%.
C) Yes, this would be considered a good decision with a positive return of 21.16%.
D) Yes, this would be considered a good decision with a positive return of 28.63%.

Question 30

The printing division at a small factory is in need of a new printer and is currently comparing their choices. They have narrowed it down to two options: Which machine will have the higher investment turnover based on the information provided? (Do not round intermediate calculations.)

A) Machine 1's investment turnover is higher than Machine 2's by 4.43%.
B) Machine 1's investment turnover is higher than Machine 2's by 5.18%.
C) Machine 2's investment turnover is higher than Machine 1's by 4.43%.
D) Machine 2's investment turnover is higher than Machine 1's by 5.18%.

Question 31

The printing division at a small factory is in need of a new printer and is currently comparing their choices. They have narrowed it down to two options: What is the difference in Return on Investment between the two machines based on the information provided? (Do not round intermediate calculations.)

A) Machine 1 has an ROI that is 4.43% higher than Machine 2.
B) Machine 1 has an ROI that is 4.43% lower than Machine 2.
C) Machine 1 has an ROI that is 5.17% higher than Machine 2.
D) Machine 1 has an ROI that is 5.17% lower than Machine 2.

Question 32

A clothing company would like to purchase a new piece of equipment and has been debating the purchase of either (a) a new sewing machine that would improve the existing department or (b) an embellisher that would afford the company the opportunity to add new and unique clothing to their existing lines. They gathered the following prospective information: Which machine choice yields the highest profit margin and by how much? (Do not round intermediate calculations.)

A) The embellisher has a 2.12% higher profit margin than the sewing machine.
B) The embellisher has a 5.39% higher profit margin than the sewing machine.
C) The sewing machine has a 2.12% higher profit margin than the embellisher.
D) The sewing machine has a 5.39% higher profit margin than the embellisher.

Question 33

A clothing company would like to purchase a new piece of equipment and has been debating the purchase of either (a) a new sewing machine that would improve the existing department or (b) an embellisher that would afford the company the opportunity of adding new and unique clothing to their existing lines. They have gathered the following prospective information: What is the Return on Investment (ROI) for each choice?

A) Sewing Machine: 93.66%, Embellisher: 122.4%
B) Sewing Machine: 106.16%, Embellisher: 132.4%
C) Sewing Machine: 122.40%, Embellisher: 93.66%
D) Sewing Machine: 132.40%, Embellisher: 106.16%

Question 34

Sacha works for an organization that follows a decentralized model. Erin, the production manager of her business unit has come to Sacha to discuss the possibility of purchasing a new piece of equipment. Erin indicated that this new equipment could generate $23,500 of sales, and the expenses (after depreciation) to support it would be 70% of the new sales. After speaking to a supplier, Erin learns that the new equipment can be purchased for $15,750. What are the Profit Margin and the Investment Turnover for the new equipment?

A) Profit Margin: 0.30, Investment Turnover: 1.492
B) Profit Margin: 0.70, Investment Turnover: 1.044
C) Profit Margin: 1.044, Investment Turnover: 0.70
D) Profit Margin: 1.492, Investment Turnover: 0.30

Question 35

Sacha works for an organization that follows a decentralized model. Erin, the production manager of her business unit has come to Sacha to discuss the possibility of purchasing a new piece of equipment. Erin has indicated this new equipment could generate $23,500 of sales, and the expenses (after depreciation) to support it would be 70% of the new sales. After speaking to a supplier, Erin learns that the new equipment can be purchased for $15,750. What is the Return on Investment for the new equipment?

A) 30.00%
B) 44.76%
C) 95.74%
D) 104.44%

Question 36

The Riggs Company manufactures monogrammed t-shirts that are sold online. The manager of one of the business units would like to consider replacing their current embroidery machine and has a choice between buying either (a) a brand new one for $12,840 or (b) a refurbished model for $9,703. The new machine will incur $4,906 of expenses, and the refurbished machine will incur $4,677 of expenses. Both machines will have a Return on Investment (ROI) of 9%. How much Sales will the new machine generate? (Do not round calculations.)

A) $1,155.60
B) $5,550.27
C) $5,832.60
D) $6,061.60

Question 37

The Riggs Company manufactures monogrammed t-shirts that are sold online. The manager of one of the business units would like to consider replacing their current embroidery machine and has a choice of buying either (a) a brand new one for $12,840 or (b) a refurbished model for $9,703. The new machine will incur $4,906 of expenses, and the refurbished machine will incur $4,677 of expenses. Both machines will have a Return on Investment (ROI) of 9%. How much Sales will the refurbished machine generate? (Do not round calculations.)

A) $873.27
B) $5,550.27
C) $5,779.27
D) $6,061.60

Question 38

Residual Income represents an excess of income that is earned above a firm's Required Rate of Return on its investment. Businesses often find that any Residual Income is the preferred outcome for both managers and the company as a whole. Which of the following correctly identifies the formula for Residual Income?

A) Operating Income - (Required Rate of Return × Investment)
B) Operating Income - Investment
C) Operating Income + (Required Rate of Return × Investment)
D) Required Rate of Return × Investment

Question 39

Economic Value Added (EVA) is a very well-received metric used to evaluate a company's success generating a return that exceeds the cost of capital. Some have claimed that a business should always strive to focus on and generate EVA. Which of the following correctly identifies the formula for Economic Value Added?

A) After-tax Operating Income - (Weighted Average Cost of Capital × Invested Capital)
B) After-tax Operating Income + (Weighted Average Cost of Capital/Invested Capital)
C) Pre-tax Operating Income - (Weighted Average Cost of Capital/Invested Capital)
D) Pre-tax Operating Income + (Weighted Average Cost of Capital × Invested Capital)

Question 40

Jasmine Inc. is a small flower shop that is performing some analysis based on their most recent year. They have determined that their profit margin was 0.2876 and investment turnover was 0.2188. They had purchased a new piece of equipment for $3,000. Based upon this information, what was their Return on Investment (ROI)?

A) 0.0629
B) 0.0688
C) 0.5064
D) 0.7608

Question 41

A publishing company is finalizing data for their most recently completed year. The production department spent $5,000 on a new printer and $3,000 on a new supercomputer. The Operating Income tied to the new printer is expected to be $556 while the supercomputer is expected to have an Operating Income of $337. The company's Required Rate of Return is 6%. Management would like to know how much Residual Income to expect from the new printer.

A) $219
B) $256
C) $300
D) $556

Question 42

A publishing company is finalizing data for their most recently completed year. The production department spent $5,000 on a new printer and $3,000 on a new supercomputer. The Operating Income tied to the new printer is expected to be $556 while the supercomputer is expected to have an Operating Income of $337. The company's Required Rate of Return is 6%. Management would like to know how much Residual Income to expect from the supercomputer.

A) $157
B) $180
C) $219
D) $337

Question 43

A small paper producer is considering the purchase of a new machine to add to their assembly line. This machine would afford them the opportunity to increase their production by 15%. They are currently gathering pricing information from vendors and are trying to figure out what they would want to invest. They have gathered the following information: If the company has a Required Rate of Return of 8%, then what amount would they want to spend on the new machine?

A) $102.72
B) $1,342.00
C) $8,560.00
D) $16,050.00

Question 44

A small paper producer is considering the purchase of a new machine to add to their assembly line. This machine would afford them the opportunity to increase their production by 15%. They are currently gathering pricing information from vendors and are trying to figure out what they would want to invest. They have gathered the following information: If the company has a Required Rate of Return of 6.3%, then what is the amount they would want to spend on the new machine?

A) $84.55
B) $1,400.00
C) $8,560.00
D) $20,380.95

Question 45

A bicycle manufacturer is in talks to invest in some new equipment for their production department, and they are exploring different options. The first option is equipment that will cost $13,000, have Operating Income of $999, and have Residual Income of $18. The second option will cost them $11,400, have Operating Income of $918, and have Residual Income of $37. If the company selects the first option, what is their Required Rate of Return? (Round the percentage to two decimal places.)

A) 0.14%
B) 7.55%
C) 7.68%
D) 8.61%

Question 46

A bicycle manufacturer is in talks to investment in some new equipment for their production department, and they are exploring different options. The first option is equipment that will cost $13,000, have Operating Income of $999, and have Residual Income of $18. The second option will cost them $11,400, have Operating Income of $918, and have Residual Income of $37. If the company selects the second option, what is their required rate of return? (Round to the percentage to two decimal places.)

A) 0.32%
B) 6.78%
C) 7.73%
D) 8.05%

Question 47

A small surveying company has decided they would like to move their accounting in-house and will be training a new employee. In anticipation of this new development, they have decided to purchase a new accounting software package that should service all of their needs. Bob, a manager, has put together the following information: If the company selects Software 1, then how much Operating Income should they expect it to generate?

A) $88.00
B) $442.44
C) $448.78
D) $536.78

Question 48

A small surveying company has decided they would like to move their accounting in-house and will be training a new employee. In anticipation of this new development, they have decided to purchase a new accounting software package that should service all of their needs. Bob, a manager, has put together the following information: If the company selects Software 2, then how much Operating Income should they expect it to generate?

A) $104.00
B) $489.24
C) $496.73
D) $600.73

Question 49

Kit works for a company that creates brochures for travel agencies to distribute to their clients. The company's printer has recently broken down and will need to be replaced immediately so they can meet several upcoming client deadlines. A manager has found a vendor that has a model available for sale and has compiled the following information and estimates: If the company has a Required Rate of Return of 8.25%, then what is the amount of Residual Income that they should anticipate after installing the new printer?

A) $107.37
B) $137.12
C) $1,662.00
D) $17,289.37

Question 50

Kit works for a company that creates brochures for travel agencies to distribute to their clients. The company's printer has recently broken down and will need to be replaced immediately so that they can meet several client deadlines. A manager has found a vendor that has a model available for sale and has compiled the following information and estimates: If the company has a Required Rate of Return of 7.75%, then what is the amount of Residual Income that they should anticipate after installing the new printer?

A) $121.00
B) $201.59
C) $1,460.41
D) $17,504.59

Question 51

Crosby Inc. creates handmade silk neckties that it then sells on their website through a monthly subscription service. In an effort to increase membership, Crosby has promised their customers a one-day turnaround time on all orders. The largest bottleneck Crosby experiences is the cutting department due to the delicate nature of the material. To improve this process, Crosby has decided to buy a new cutting machine that would cost $12,400 with a useful life of 5 years. They estimated that this machine would generate $17,500 of sales and incur $8,788 of asset-specific expenses (excluding depreciation). If the company has a Required Rate of Return of 9.5%, then what is the Residual Income of this investment?

A) $5,054.00
B) $6,168.00
C) $6,232.00
D) $17,500.00

Question 52

Crosby Inc. creates handmade silk neckties that it then sells on their website through a monthly subscription service. In an effort to increase membership, Crosby has promised their customers a one-day turnaround time on all orders. The largest bottleneck Crosby experiences is the cutting department due to the delicate nature of the material. To improve this process, Crosby has decided to buy a new cutting machine that would cost $12,400 with a useful life of 5 years. They estimated that this machine would generate $17,500 of sales and incur $8,788 of asset-specific expenses (excluding depreciation). If the company has a Required Rate of Return of 7.3%, then what is their Residual Income?

A) $5,100.00
B) $5,326.80
C) $6,232.00
D) $17,500.00

Question 53

Esther is the manager of the sales department for a local appliance store. The employees have been voicing their concerns over the current Point-of-Sale (POS) system they use for various aspects of their job. A new machine would afford them the opportunity to better service customers, including real-time pricing and an on-the-spot checkout process. The new POS system would cost $31,828 and would generate $7,442 of Operating Income. The company has a Required Rate of Return of 8% and their tax rate is 23%. If the Weighted Average Cost of Capital (WACC) is 6.7%, then what would their Economic Value Added (EVA) be? (Do not round intermediate calculations.)

A) $3,184.10
B) $3,597.86
C) $4,895.76
D) $5,309.52

Question 54

Esther is the manager of the sales department for a local appliance store. The employees have been voicing their concerns over the current Point-of-Sale (POS) system they use for various aspects of their job. A new machine would afford them the opportunity to better service customers, including real-time pricing and an on-the-spot checkout process. The new POS system would cost $31,828 and would generate $7,442 of Operating Income. The company has a Required Rate of Return of 8% and their tax rate is 23%. If the Weighted Average Cost of Capital (WACC) is 7.7%, then what would their Economic Value Added (EVA) be?

A) $3,184.10
B) $3,279.58
C) $4,895.76
D) $4,991.24

Question 55

A company is debating replacing the GPS system in a company vehicle that is used every day of the work week. By replacing the current older model GPS system in the vehicle, the company anticipates being able to add an additional $1,324 of Operating Income this year that will ultimately result in an Economic Value Added (EVA) of $806.43. If the company has a tax rate of 24% and a Weighted Average Cost of Capital (WACC) of 6%, then what is the cost of the new investment?

A) $60.37
B) $1,812.67
C) $3,330.17
D) $13,440.50

Question 56

A company is debating replacing the GPS system in a company vehicle that is used every day of the work week. By replacing the current older model GPS system in the vehicle, the company anticipates being able to add an additional $1,324 of Operating Income this year that will ultimately result in an Economic Value Added (EVA) of $806.43. If the company has a tax rate of 22% and a Weighted Average Cost of Capital (WACC) of 7.5%, then what is the cost of the new investment?

A) $2,130.43
B) $3,017.20
C) $10,752.40
D) $13,769.60

Question 57

Brown Bag, Inc. is a company that manufactures colorful lunch bags made from compostable paper. Management would like to increase production and knows the only way to do this would be to add an additional industrial cutting machine. Brown Bag has a Required Rate of Return of 8.2%, a Weighted Average Cost of Capital (WACC) of 6.3%, and a tax rate of 25%. The cutting machine will cost $22,407 and has a useful life of 15 years. How much Operating Income (before tax) must be generated to achieve an Economic Value Added (EVA) of $1,356.00? (Do not round intermediate calculations.)

A) $55.64
B) $2,767.64
C) $3,690.19
D) $4,257.83

Question 58

Brown Bag, Inc. is a company that manufactures colorful lunch bags made from compostable paper. Management would like to increase production and knows the only way to do this would be to add an additional industrial cutting machine. Brown Bag has a required rate of return of 8.2%, a Weighted Average Cost of Capital (WACC) of 6.3%, and a tax rate of 25%. The cutting machine will cost $22,407 and has a useful life of 15 years. How much Operating Income (before tax) must be generated to achieve an Economic Value Added (EVA) of $551.43? (Do not round intermediate calculations.)

A) $1,882.19
B) $1,963.07
C) $2,617.43
D) $3,185.07

Question 59

Cordelia is a machine operator for Forever Twenty-Five and specifically works on handbags. Forever Twenty-Five would like to begin offering tie-dyed backpacks. In addition to a new product, Forever Twenty-Five will also need to purchase a piece of equipment that is able to stretch and then tie-dye the fabric for the backpack. Cordelia has priced out two different machines. The first will cost $5,674, generate $1,560 of sales, and will incur $992 of operating expenses. The second will cost $6,782, generate $1,733 of sales, and will incur $1,020 of operating expenses. The company has Weighted Average Cost of Capital (WACC) of 6.1% and a Required Rate of Return of 7.2%. Forever Twenty-Five has a current tax rate of 22%. What will the Economic Value Added (EVA) be for the first machine? (Do not round intermediate calculations.)

A) $96.93
B) $346.11
C) $443.04
D) $568.00

Question 60

Cordelia is a machine operator for Forever Twenty-Five and specifically works on handbags. Forever Twenty-Five would like to begin offering tie-dyed backpacks. In addition to a new product, Forever Twenty-Five will also need to purchase a piece of equipment that is able to stretch and then tie-dye the fabric for the backpack. Cordelia has priced out two different machines. The first will cost $5,674, generate $1,560 of sales, and will incur $992 of operating expenses. The second will cost $6,782, generate $1,733 of sales, and will incur $1,020 of operating expenses. The company has Weighted Average Cost of Capital (WACC) of 6.1% and a Required Rate of Return of 7.2%. Forever Twenty-Five has a current tax rate of 22%. What will the Economic Value Added (EVA) be for the second machine? (Do not round intermediate calculations.)

A) $96.93
B) $142.44
C) $299.30
D) $413.70

Question 61

A company has gathered the following information about a potential fixed asset purchase: If the company has a 20% tax rate and their Economic Value Added (EVA) is $112.00, then what is their Weighted Average Cost of Capital (WACC)?

A) 8.2%
B) 16.20%
C) 16.94%
D) 21.18%

Question 62

A company has gathered the following information about a potential fixed asset purchase: If the company has a 24% tax rate and their Economic Value Added (EVA) is $246.00, then what is their Weighted Average Cost of Capital (WACC)?

A) 14.46%
B) 16.10%
C) 17.74%
D) 21.28%

Question 63

Oscar is the manager of the component division for a small manufacturing company, and his department is evaluated using various metrics each year including their Return on Investment (ROI). Oscar is debating whether he should purchase a new machine for his department. Oscar is determined to have an ROI of at least 7%. He is considering the purchase of Machine A with a return on sales of 0.3877, sales of $2,349, and a 10-year useful life or Machine B with a return on sales of 0.3994, sales of $2,560, and a 9-year useful life. Each machine would be depreciated using straight-line method. What is the yearly Depreciation Expense for Machine A? (Do not round intermediate calculations.)

A) $1,301.01
B) $1,310.64
C) $1,417.50
D) $1,445.18

Question 64

Oscar is the manager of the component division for a small manufacturing company, and his department is evaluated using various metrics each year including Return on Investment (ROI). Oscar is debating whether he should purchase a new machine for his department. Oscar is determined to have an ROI of at least 7%. He is considering the purchase of Machine A with a return on sales of 0.3877, sales of $2,349, and a 10-year useful life or Machine B with a return on sales of 0.3994, sales of $2,560, and a 9-year useful life. Each machine would be depreciated using straight-line machine. What is the yearly Depreciation Expense for Machine B? (Do not round intermediate calculations.)

A) $1,339.99
B) $1,460.35
C) $1,488.88
D) $1,622.96

Question 65

Smith Industries is in desperate need of a new press machine for their production department. The manager has been asked to select the most favorable option while keeping in mind that any decision made may also impact their department's evaluation. Given this, the manager knows that performing a thorough analysis is crucial. A machine could be purchased from Grove Inc. for a total cost of $9,677 and would generate Operating Income of $3,705. A different machine could be purchased from Forest Inc. for a total cost of $9,003 and would generate Operating Income of $3,432. The company has provided the following information: What is the tax rate for the press machine from Grove? Assume the company uses an effective tax rate that is rounded to the four places. (Do not round intermediate calculations.)

A) 12.34%
B) 14.66%
C) 17.84%
D) 18.62%

Question 66

Smith Industries is in desperate need of a new press machine for their production department. The manager has been asked to select the most favorable option while keeping in mind that any decision made may also impact their department's evaluation. Given this, the manager knows that performing a thorough analysis is crucial. A machine could be purchased from Grove Inc. for a total cost of $9,677 and would generate Operating Income of $3,705. A different machine could be purchased from Forest Inc. for a total cost of $9,003 and would generate Operating Income of $3,432. The company has provided the following information: What is the percentage difference in EVA for the press machine from Grove when compared to the press machine from Forest? (Do not round intermediate calculations.)

A) The EVA of the press machine from Forest is 7.49% higher than the EVA of the press machine from Grove.
B) The EVA of the press machine from Forest is 8.1% higher than the EVA of the press machine from Grove.
C) The EVA of the press machine from Grove is 7.49% higher than the EVA of the press machine from Forest.
D) The EVA of the press machine from Grove is 8.1% higher than the EVA of the press machine from Forest.

Question 67

Landry Corp. is evaluating one of its recent investments and the financial aspects of their investment. The Investment Center has provided the following data: Based on the information provided above, what is the company's Cost of Debt? (Do not round intermediate calculations.)

A) 10.22%
B) 12.74%
C) 14.19%
D) 24.20%

Question 68

Landry Corp. is evaluating one of its recent investments and the financial aspects of their investment. The Investment Center has gathered the following data: Based on the information provided above, what is the company's Cost of Equity? (Do not round intermediate calculations.)

A) 8.13%
B) 12.74%
C) 17.35%
D) 29.03%

Question 69

All business units are created with certain goals against which they are measured. Regardless of the type of business unit, evaluations are utilized to ensure that management is directing the team towards the achievement of goals that are congruent with the overall company goals set forth by the highest levels of management. Which of the following best represent metrics used to evaluate an investment center?

A) Profit Margin, Investment Turnover, Year-to-Date Expenditures
B) Residual Income, Sales Order per Customer, Profit Margin
C) Return on Investment, Residual Income, Investment Turnover
D) Return on Investment, Target Profit, Economic Value Added

Question 70

The crinkle-cut division of a French fry company had the following results last year with all production sold to outside customers: The crinkle-cut division has a 30,000 pound of processing capacity. If the crinkle-cut division were to transfer the remaining capacity to an internal division or unit, what would the minimum acceptable transfer price be?

A) $0.13
B) $0.14
C) $0.16
D) $0.40

Question 71

The crinkle-cut division for a French fry company had the following results last year with all production sold to outside customers: The crinkle-cut division has a 30,000-pound processing capacity. If the crinkle-cut division were to transfer the remaining capacity to an internal division or unit, what would the minimum additional amount of profit be?

A) $0
B) $800
C) $4,000
D) $4,800

Question 72

A marble factory has two divisions: Kiln Division and Painting Division. The Kiln Division had Sales of $33,000 and Variable Costs of $25,000 while the Painting Division had Sales of $30,000 and Variable Costs of $21,000. Production and sales for each division are 66,000 pounds. The Kiln Division sells its all-unpainted marble to the Painting Division and does not sell to anyone else. What is the current transfer price?

A) $0.12 per pound
B) $0.14 per pound
C) $0.45 per pound
D) $0.50 per pound

Question 73

A jewelry company has several business units, including their Silver Processing unit and their Earrings unit. The Silver Processing unit typically sells all of its silver to external companies unless an internal division or business unit decides to use them as their supplier. The Earrings unit has decided to add a line of silver hoops to the line of gold hoops they have been selling for several years. Prior to this request, the Silver Processing unit reported the following numbers for the year: The Silver Processing unit has a capacity of 15,000 ounces of silver, and the Earrings unit has expressed an interest in purchasing the remaining ounces in Silver's processing capacity. What is the minimum acceptable transfer price on the ounces of silver if the Earrings division purchases them?

A) $3.59 per ounce
B) $9.45 per ounce
C) $12.67 per ounce
D) $22.12 per ounce

Question 74

A jewelry company has several business units, including their Silver Processing unit and their Earrings unit. The Silver Processing unit typically sells all of its silver to external companies unless an internal division or business unit decides to use them as their supplier. The Earrings unit has decided to add a line of silver hoops to the line of gold hoops they have been selling for several years. Prior to this request, the Silver Processing unit reported the following numbers for the year: The Silver Processing unit has a capacity of 15,000 ounces of silver, and the Earrings unit has expressed an interest in purchasing 1,000 ounces from the Silver Processing unit. What is the total revenue generated on the ounces of silver sold to the Earrings unit?

A) $8,848.00
B) $12,670.00
C) $16,450.00
D) $22,120.00

Question 75

Sally is compiling some numbers for the factory where she works. This factory has many business units, and some sell to external customers only, some sell internally only, and some sell to both internal and external customers. She is specifically looking at Business Unit A which sells primarily to external customers but will also sell to other internal business units. Business Unit A currently has no idle capacity, $2.97 per unit of opportunity cost, and $189,650 in fixed costs. Determine the overall variable cost if business unit A had sales of 75,000 units for a total of $322,500.

A) $33,100
B) $99,750
C) $222,750
D) $322,500

Question 76

Sally is compiling some numbers for the factory where she works. This factory has many business units, some sell to external customers only, some sell internally only, and some sell to both internal and external customers. She is specifically looking at Business Unit A which sells primarily to external customers but will also sell to other internal business units within the company. Business Unit A currently has no idle capacity, $2.97 per unit of opportunity cost, and $189,650 in fixed costs. Business Unit A had sales of 75,000 units for a total of $322,500. If an internal department wants to purchase 4,370 units, then what would Business Unit A's additional profit be?

A) $0.00
B) $5,812.10
C) $12,978.90
D) $18,791.00

Question 77

The Happy Coffee Company manufactures coffee mugs and sells them to external vendors. They have several divisions that are involved in the process and sell to one another internally. The very last department involved in this process is the Distribution department who sells the final product to local coffee shops. The Distribution department purchases all their units internally from the Glazing department. The sales from the Distribution department to the external vendors amounted to 19,412 mugs for a total of $181,725.72. If the Operating Incomes per unit were as follows for each division: Distribution, $4.56; and Glazing, $1.90; then what is the Cost of Goods Sold (COGS) for the Glazing department? (Do not round your calculations.)

A) $56,324.20
B) $88,518.72
C) $93,177.60
D) $181,725.72

Question 78

The Happy Coffee Company manufactures coffee mugs in-house that it then sells to external vendors. They have several divisions that are involved in the process and sell to one another internally. The very last department involved in this process is the Distribution department who sells the final product to local coffee shops. The Distribution department purchases all of their units internally from the Glazing department. The sales from the Distribution department to the external vendors amounted to 19,412 mugs for a total of $181,725.72. If the Operating Incomes per unit were as follows for each division: Distribution, $4.56; and Glazing, $1.90; then what is the Cost of Goods Sold (COGS) per unit for the Glazing department?

A) $1.90
B) $2.90
C) $4.56
D) $4.80

Question 79

Most companies begin with a centralized organizational model and gradually move towards a decentralized model. As some companies grow, they acquire other companies in an effort to streamline operations and become more efficient. One result of these acquisitions is integration. Which of the following is an example of vertical integration?

A) A company that manufactures coffee makers acquires their largest competitor in the market, making them the largest coffee maker manufacturers in the United States.
B) A company that manufactures handbags acquires a company that manufactures wallets so that they can expand their customer offerings.
C) A factory that manufactures furniture purchases a furniture marketing and distribution firm.
D) A factory that produces tortilla chips acquires a company that produces salsa so they can begin to offer deals on both products when purchased at the same time.

Question 80

Most companies begin with a centralized organizational model and gradually move towards a decentralized model. As some companies grow, they will acquire others in an effort to streamline operations and become more efficient. One result of these acquisitions is integration. Which of the following is an example of an integration type other than vertical integration?

A) A factory that produces paint acquires a factory that produces dyes.
B) A frozen pizza manufacturer acquires a factory that produces pizza sauce.
C) A peanut butter producer buys a factory that manufactures jelly.
D) An automobile manufacturer purchases a factory that produces tires.