Deck 19: Strategic Performance Measurement: Investment Centers and Transfer Pricing

Question 1

Under the notion of controllability, it is most appropriate for top management to evaluate the profitability of an investment center in terms of:

A)Profits in relation to the amount of capital invested in the unit.
B)Returns expressed as a percentage.
C)Profits expressed in absolute terms.
D)Operating profit generated.
E)Returns expressed in actual dollar amounts.

Answer 1

A

Question 2

In contrast to residual income (RI), economic value added (EVA) uses:

A)The firm's cost of capital rather than its minimum rate of return.
B)A measure (or estimate) of economic, not accounting, income.
C)A required rate of return in estimating the amount of profit generated.
D)Values determined by using conventional accounting policies (i.e., GAAP).
E)Accounting, not economic, measures of income and investment.

Answer 2

B

Question 3

The difference between the historical cost and the net book value (NBV) of a plant asset is the:

A)Residual value of the asset.
B)Depreciation expense for the current period.
C)An estimate of the remaining useful life of the asset.
D)Accumulated depreciation expense of the asset.
E)Estimated replacement cost of the asset.

Answer 3

D

Question 4

Determination of the useful life of an asset and choice of a depreciation method will affect all of the following except:

A)The amount of operating income earned by an investment center for any given period.
B)The investment base for purposes of calculating ROI.
C)Amount of depreciation expense recorded for any given period.
D)Net book value (NBV) of an asset as of any point in time.
E)The opportunity cost of lost sales on alternative projects.

Question 5

Return on investment (ROI) is the result of multiplying:

A)Return times average investment.
B)Profit times average operating assets.
C)Return on sales (ROS) times asset turnover (AT).
D)Return on assets (ROA) times asset turnover (AT).
E)Margin on sales times return on assets (ROA).

Question 6

Which one of the following is an advantage of both ROI and Residual Income (RI)?

A)They both measure all elements important for measuring short-term financial performance of investment centers: revenues, costs, and investment.
B)They are both very widely used.
C)They both can use the minimum rate of return to adjust for differences in risk across different investment centers.
D)They are both comparable to interest rates and to rates of return on alternate investments.
E)They can both use a different minimum rate of return for different types of assets used by an investment center.

Question 7

The use of gross book value (GBV) for measuring the level of investment in depreciable assets (for purposes of calculating return on investment, ROI) is preferred by those who value the objectivity of:

A)An historical cost number.
B)The depreciation process.
C)Price-level adjusted data.
D)A declining book value.
E)Current-cost information.

Question 8

When investments in facilities are shared by different subunits in a firm, allocation of cost of these common facilities to sharing units should be determined by:

A)Reference to Generally Accepted Accounting Principles (GAAP).
B)Amount of capacity only.
C)The relative amount of use of the facilities, or demand for the facilities, by the various investment centers in the organization.
D)Special techniques prescribed by the AICPA.
E)Some measure of current value (e.g., replacement cost).

Question 9

Use of net book value (NBV) in valuing investment in operating plant assets, in contrast to using current value, will:

A)Have no appreciable effect on ROI.
B)Have no appreciable effect on plant asset book value.
C)Have no appreciable effect on operating income.
D)Usually understate ROI.
E)Usually overstate ROI.

Question 10

Firms with high operating leverage tend to have:

A)High asset turnover and high return on sales.
B)Low asset turnover and low return on sales.
C)Low asset turnover and high return on sales.
D)High asset turnover and low return on sales.
E)Decreased levels of short-term fixed costs.

Question 11

The use of replacement cost of assets for purposes of calculating ROI has the advantage(s) of:

A)Historical accuracy.
B)Being a sound and relevant measure of the level of investment in a continuing business.
C)Objectivity.
D)Consistency with generally accepted accounting principles (GAAP).
E)Avoiding the need for developing estimates of current cost.

Question 12

Put simply, transfer pricing is a management tool for assigning a "price" to internally transferred goods (or services) in order to simulate the marketplace, thus encouraging mangers to make decisions that are in the best interest of the:

A)Operating managers.
B)Producing (i.e., selling) unit within the firm.
C)Firm as a whole.
D)Manager of the buying (i.e., purchasing) unit.
E)Operating units in the short run, and the firm in the long-run.

Question 13

Because residual income (RI) is a dollar amount, in contrast to a percentage (as is return on investment, ROI), RI:

A)Allows, through different discount rates, adjustment for differing levels of risk across investment centers within an organization.
B)Cannot be used to evaluate the financial performance of a given investment center over time.
C)Is less useful than ROI for performance-evaluation purposes.
D)Allows for differing investment amounts for different investment centers.
E)Is less useful to stockholders of the company.

Question 14

Return on investment (ROI) encourages business units-such as investment centers- to invest only in projects that earn:

A)A rate of return greater than borrowing costs.
B)An amount greater than the amount of EVA currently being generated.
C)A rate of return greater than the amount of residual income currently being earned.
D)A rate of return less than the unit's current ROI.
E)A rate of return higher than the unit's current ROI.

Question 15

The conventional return on investment (ROI) performance measure calculates "profit" and "investment" based on:

A)American Accounting Association (AAA) recommendations.
B)Generally Accepted Accounting Principles (GAAP).
C)The American Institute of Certified Public Accountants (AICPA) regulations.
D)The legal and business professions' practices.
E)Ordinary and customary practices in accounting.

Question 16

Since residual income (RI) is not a percentage, it is not useful for:

A)Comparing business units of significantly different size.
B)Evaluating the performance of subunits with high ROIs.
C)Motivating goal-congruent behavior on the part of divisional managers.
D)Evaluating the short-term financial performance of small divisions.
E)Evaluating the short-term financial performance of larger divisions.

Question 17

As a general rule, leased assets should be included as part of the calculation of "investment" (for calculating ROI and residual income) since they represent assets used:

A)As collateral to borrow funds.
B)To generate operating income.
C)To offset current operating expenses.
D)To reduce taxes.
E)To estimate earnings per share for a given period.

Question 18

The choice of valuation method for inventories would normally not affect which item(s) used in calculating ROI?

A)The valuation of fixed assets (e.g., Plant, Property, and Equipment) used by an investment center.
B)The amount of operating income earned by an investment center in a given period.
C)Both the investment base and the level of operating income reported by an investment center.
D)The estimated value of current assets of a business entity, such as an investment center.
E)The return on sales (ROS) of an investment center for the period.

Question 19

A primary limitation of ROI as a performance-evaluation metric for investment centers is that ROI:

A)Is a long-term, not short-term, performance indicator.
B)Excludes the level of investment from the performance metric.
C)Understates the level of "investment" for organizations operating in the knowledge-based economy.
D)Cannot handle current-value estimates of assets.
E)Is not a relative performance indicator.

Question 20

Which of the following is the most appropriate and comprehensive short-term financial-performance indicator for an investment center that is a division of a larger business entity?

A)Residual income (RI).
B)Operating income, pre-tax
C)Return on equity (ROE).
D)Operating income, after-tax.
E)Return on sales (ROS).

Question 21

If after-tax income of Grey Division, adjusted for economic value, is 15% of sales, capital employed is $5,000,000 (adjusted for equity-equivalents), the divisional cost of capital (discount rate) is 8%, and sales are $12,000,000, then EVA is:

A)$1,800,000
B)$400,000
C)$1,400,000
D)$3,200,000
E)Undeterminable given the information above.

Question 22

Which one of the following establishes an "arm's-length price" by using the sales prices of similar products made by unrelated firms?

A)Wholesale-price method.
B)Retail-price method.
C)Related-products method.
D)Cost-plus method.
E)Comparable-price method.

Question 23

Which one of the following determines the transfer price based on the seller's costs, plus a gross profit percentage determined from comparison of sales of the seller to those of unrelated parties?

A)Wholesale-price method.
B)Resale-price method.
C)Net-price method.
D)Cost-plus method.
E)Comparable-price method.

Question 24

A dollar amount equal to the operating income of a division less a charge for the level of investment in the division is called:

A)Operating profit after tax.
B)Return on investment (ROI).
C)Earnings from continuing operations.
D)Return on equity (ROE).
E)Residual income (RI).

Question 25

A key standard in international transfer pricing is:

A)Consistency.
B)Reliability.
C)The arm's-length standard.
D)Open marketability.
E)Translatability.

Question 26

A measure of the manager's ability to control expenses and increase revenues in order to improve profitability is:

A)Residual income (RI) divided by level of invested capital.
B)Return on equity (ROE).
C)Return on investment (ROI).
D)Return on sales (ROS).
E)Asset turnover (AT).

Question 27

Use of the market-price method (when such prices exist) satisfies a key objective of transfer pricing, namely:

A)Objectivity.
B)Selectivity.
C)Usability.
D)Transportability.
E)Reliability.

Question 28

Which one of the following transfer pricing alternatives is based on determining an appropriate markup, where the markup is based on gross profits of unrelated firms selling similar products?

A)Wholesale-price method.
B)Resale-price method.
C)Net-price method.
D)Cost-plus method.
E)Comparable-price method.

Question 29

Because the full-cost method of transfer pricing includes fixed cost, it can:

A)Pass strict accounting requirements for determining transfer prices.
B)Pass strict income tax requirements for determining transfer prices.
C)Establish consistency across state and national borders.
D)Violate OECD agreements.
E)Cause sub-optimal short-term decision making.

Question 30

The estimated cost to replace assets at the current level of service and functionality is defined as:

A)Gross book value.
B)Historical cost, plus accumulated depreciation to date.
C)Liquidation value.
D)Replacement cost.
E)Price-level adjusted original cost.

Question 31

The biggest problem with cost-based transfer prices is:

A)The fact that their use may result in sub-optimal decisions from the standpoint of the organization as a whole.
B)Too much negotiation is involved in determining the transfer price.
C)Data unavailability.
D)They are difficult to put into place.
E)They may lead to goal congruence within the firm.

Question 32

The historical cost of an asset less its accumulated depreciation is:

A)Net book value (NBV).
B)Return on equity (ROE).
C)Return on investment (ROI).
D)A rough measure of current replacement cost of the asset.
E)An estimate of liquidation value of the asset.

Question 33

A measure of the manager's ability to produce increased sales from a given level of investment is:

A)Residual income (RI) divided by level of invested capital.
B)Return on equity (ROE).
C)Return on investment (ROI).
D)Return on sales (ROS).
E)Asset turnover (AT).

Question 34

Replacement cost of a division's assets will most probably be greater than:

A)Gross book value (GBV) of the assets.
B)Historical cost of the assets.
C)Liquidation value of the assets.
D)Price-level adjusted cost of the assets.
E)Current cost of the assets.

Question 35

All of the following are listed as possible transfer pricing methods except:

A)Market price.
B)Variable cost.
C)Fixed cost.
D)Full cost.
E)Negotiated price.

Question 36

Which one of the following is not a limitation shared by residual income (RI) and return on investment (ROI) divisional performance measures?

A)They are both short-term performance indicators.
B)They both may fail to capture significant value-creating activities of the organization.
C)They are both subject to short-term manipulation on the part of divisional managers.
D)Both are subject to a number of measurement issues that complicate their use in practice.
E)They both relate, in percentage terms, earnings to the level of investment in each division.

Question 37

The estimated price that could be received for the sale of divisional assets is referred to as:

A)Gross book value (GBV), plus accumulated depreciation to date.
B)Gross book value (GBV).
C)Price-level adjusted cost.
D)Replacement cost.
E)Liquidation value.

Question 38

ROI, though widely used, is subject to which one of the following limitations?

A)ROI cannot incorporate differences in risk across different divisions.
B)ROI ignores the amount of capital invested in a division.
C)ROI may not capture value-creation for firms operating in capital-intensive industries.
D)ROI may motivate managers to take suboptimal decisions from the standpoint of the organization as a whole.
E)ROI cannot be used to judge the performance of units of different size.

Question 39

A division's after-tax cash operating income less depreciation and less an imputed cost of capital is called its:

A)After-tax operating income.
B)Income from continuing operations.
C)Return on sales (ROS).
D)Economic value added (EVA).
E)Residual income (RI).

Question 40

Consider the following data for three divisions of a company, X, Y, and Z:
$\begin{array}{lrrr}\text { Divisional: } & \text { X } & \text { Y } &{\text { Z }} \\\text { Sales } & \$ 1,800,000 & \$ 900,000 & \$ 4,800,000 \\\text { Operating Income } & 252,000 & 108,000 & 240,000 \\\text { Investment in assets } & 630,000 & 540,000 & 3,000,000\end{array}$ The return on investment (ROI) for Division X is:

A) 8.0%.
B) 12.0%.
C) 20.0%.
D) 25.0%.
E) 40.0%.

Question 41

Selected data from Chering Division's accounting records revealed the following:
$\begin{array}{lcc}\text { Sales } & \$ 825,000 \\\text { Average investment } & \$ 440,000 \\\text { Net operating income } & \$ 66,000 \\\text { Minimum rate of return (divisional cost of capital) } & 14 \%\end{array}$
Chering Division's return on investment (ROI) is:

A)6.0%.
B)8.0%.
C)14.0%.
D)15.0%.
E)20.0%.

Question 42

Selected data from Chering Division's accounting records revealed the following:
$\begin{array}{lcc}\text { Sales } & \$ 825,000 \\\text { Average investment } & \$ 440,000 \\\text { Net operating income } & \$ 66,000 \\\text { Minimum rate of return (divisional cost of capital) } & 14 \%\end{array}$ Chering Division's asset turnover (AT) is calculated to be:

A)1.070.
B)1.625.
C)1.875.
D)4.270.
E)12.500.

Question 43

Consider the following data for three divisions of a company, X, Y, and Z:
$\begin{array}{lrrr}\text { Divisional: } & \text { X } & \text { Y } & \text { Z } \\\text { Sales } & \$ 1,800,000 & \$ 900,000 & \$ 4,800,000 \\\text { Operating Income } & 252,000 & 108,000 & 240,000 \\\text { Investment in assets } & 630,000 & 540,000 & 3,000,000\end{array}$ The return on sales (ROS) for Division Z is:

A) 5.0%.
B) 8.0%.
C) 12.0%.
D) 14.0%.
E) 20.0%.

Question 44

Consider the following data from two divisions of a company, P and Q:
$\begin{array}{lrrrr}\text { Divisional } &{\mathrm{P}} & \mathrm{Q} \\\text { Sales } & \$ 1,500,000 & \$ 1,000,000 \\\text { Operating Income } & \$ 600,000 & \$ 450,000 \\\text { Investment } & \$ 4,000,000 & \$ 2,750,000\end{array}$ If both divisions were presented with an opportunity to invest in a project that is estimated to achieve an ROI of 15%, what will the units likely decide?

A) Division P will invest; Division Q will not invest.
B) Division P will invest; Division Q will be indifferent.
C) Division P will not invest; Division Q will invest.
D) Division P will be indifferent; Division Q will not invest.
E) Neither unit will invest in the projects.

Question 45

Return on investment (ROI) is a term often used to express income earned on capital invested in a division (investment center).A division's ROI would increase if:

A)Sales increased by the same dollar amount as expenses and total assets increased.
B)Sales remained the same and expenses were reduced by the same dollar amount that total assets increased.
C)Sales decreased by the same dollar amount that expenses increased.
D)Sales and expenses increased by the same percentage that total assets increased.
E)Net profit margin on sales increased by the same percentage that total assets increased.

Question 46

Selected data from Chering Division's accounting records revealed the following:
$\begin{array}{lcc}\text { Sales } & \$ 825,000 \\\text { Average investment } & \$ 440,000 \\\text { Net operating income } & \$ 66,000 \\\text { Minimum rate of return (divisional cost of capital) } & 14 \%\end{array}$ Chering Division's residual income (RI) is:

A)$4,400.
B)$8,800.
C)$9,240.
D)$22,380.
E)$49,500.

Question 47

Consider the following data for three divisions of a company, X, Y, and Z:
$\begin{array}{lrrr}\text { Divisional: } & \text { X } & \text { Y } & \text { Z } \\\text { Sales } & \$ 1,800,000 & \$ 900,000 & \$ 4,800,000 \\\text { Operating Income } & 252,000 & 108,000 & 240,000 \\\text { Investment in assets } & 630,000 & 540,000 & 3,000,000\end{array}$ The asset turnover (AT) for Division Y is calculated to be (rounded):

A) 1.43.
B) 1.60.
C) 1.67.
D) 2.86.
E) 3.33.

Question 48

The return on investment (ROI) ratio measures:

A)The rate of return on average shareholders' equity.
B)Only earnings as a percent of sales.
C)Both asset turnover (AT) and return on sales (ROS).
D)Asset turnover (AT) and earnings as a percent of sales, correcting for the effects of differing depreciation methods.
E)Operating income less a charge for divisional investment (assets).

Question 49

Selected data from Chering Division's accounting records revealed the following:
$\begin{array}{lcc}\text { Sales } & \$ 825,000 \\\text { Average investment } & \$ 440,000 \\\text { Net operating income } & \$ 66,000 \\\text { Minimum rate of return (divisional cost of capital) } & 14 \%\end{array}$ Chering Division's return on sales (ROS) is:

A)6.0%.
B)8.0%.
C)14.0%.
D)15.0%.
E)20.0%.

Question 50

Consider the following data for three divisions of a company, X, Y, and Z:
$\begin{array}{lrrr}\text { Divisional: } & \text { X } & \text { Y } & \text { Z } \\\text { Sales } & \$ 1,800,000 & \$ 900,000 & \$ 4,800,000 \\\text { Operating Income } & 252,000 & 108,000 & 240,000 \\\text { Investment in assets } & 630,000 & 540,000 & 3,000,000\end{array}$ The return on sales (ROS) for Division X is:

A) 5.0%.
B) 8.0%.
C) 12.0%.
D) 14.0%.
E) 20.0%.

Question 51

An investment center's return on investment (ROI) is affected by a change in: $\begin{array}{|l|c|c|}\hline & \text { Asset Turnover } & \text { Return on Sales } \\\hline \text { (A) } & \text { Yes } & \text { Yes } \\\hline \text { (B) } & \text { Yes } & \text { No } \\\hline \text { (C) } & \text { No } & \text { No } \\\hline \text { (D) } & \text { No } & \text { Yes } \\\hline \text { (E) } & \text { Yes } & \text { Not likely } \\\hline\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D
E)Option E

Question 52

Consider the following data from two divisions of a company, P and Q:
$\begin{array}{lrrrr}\text { Divisional } &{\mathrm{P}} & \mathrm{Q} \\\text { Sales } & \$ 1,500,000 & \$ 1,000,000 \\\text { Operating Income } & \$ 600,000 & \$ 450,000 \\\text { Investment } & \$ 4,000,000 & \$ 2,750,000\end{array}$
If the minimum rate of return is 11%, what is Division P's residual income (RI)?

A)$160,000.
B)$1,040,000.
C)$1,060,000.
D)$1,434,000.
E)$3,934,000.

Question 53

Consider the following data for three divisions of a company, X, Y, and Z:
$\begin{array}{lrrr}\text { Divisional: } & \text { X } & \text { Y } & {\text { Z }} \\\text { Sales } & \$ 1,800,000 & \$ 900,000 & \$ 4,800,000 \\\text { Operating Income } & 252,000 & 108,000 & 240,000 \\\text { Investment in assets } & 630,000 & 540,000 & 3,000,000\end{array}$ The return on investment (ROI) for Division Z is:

A) 8.0%.
B) 12.0%.
C) 20.0%.
D) 25.0%.
E) 40.0%.

Question 54

Consider the following data for three divisions of a company, X, Y, and Z:
$\begin{array}{lrrr}\text { Divisional: } & \text { X } & \text { Y } & \text { Z } \\\text { Sales } & \$ 1,800,000 & \$ 900,000 & \$ 4,800,000 \\\text { Operating Income } & 252,000 & 108,000 & 240,000 \\\text { Investment in assets } & 630,000 & 540,000 & 3,000,000\end{array}$ The return on investment (ROI) for Division Y is:

A) 8.0%.
B) 12.0%.
C) 20.0%.
D) 25.0%.
E) 40.0%.

Question 55

Residual income (RI) is:

A)Contribution margin of an investment center, less the imputed interest on the invested capital used by the center.
B)Operating income of an investment center divided by average total assets.
C)Another name for Economic Value Added (EVA)
D)Operating income of an investment center, less the imputed interest on the invested capital used by the center.
E)Operating income of an investment center, plus the imputed interest on the invested capital used by the center.

Question 56

Consider the following data for three divisions of a company, X, Y, and Z:
$\begin{array}{lrrr}\text { Divisional: } & \text { X } & \text { Y } & \text { Z } \\\text { Sales } & \$ 1,800,000 & \$ 900,000 & \$ 4,800,000 \\\text { Operating Income } & 252,000 & 108,000 & 240,000 \\\text { Investment in assets } & 630,000 & 540,000 & 3,000,000\end{array}$ The asset turnover (AT) for Division X is (rounded):

A) 1.43.
B) 1.60.
C) 1.67.
D) 2.86.
E) 3.33.

Question 57

Consider the following data for three divisions of a company, X, Y, and Z:
$\begin{array}{lrrr}\text { Divisional: } & \text { X } & \text { Y } & \text { Z } \\\text { Sales } & \$ 1,800,000 & \$ 900,000 & \$ 4,800,000 \\\text { Operating Income } & 252,000 & 108,000 & 240,000 \\\text { Investment in assets } & 630,000 & 540,000 & 3,000,000\end{array}$ The asset turnover (AT) for Division Z is:

A)1.43.
B)1.60.
C)1.67.
D)2.86.
E)3.33.

Question 58

Consider the following data from two divisions of a company, P and Q:
$\begin{array}{lrrrr}\text { Divisional } &{\mathrm{P}} & \mathrm{Q} \\\text { Sales } & \$ 1,500,000 & \$ 1,000,000 \\\text { Operating Income } & \$ 600,000 & \$ 450,000 \\\text { Investment } & \$ 4,000,000 & \$ 2,750,000\end{array}$
If the minimum rate of return is 11%, what is Division Q's residual income (RI)?

A)$147,500.
B)$490,000.
C)$752,000.
D)$950,000.
E)$1,049,500.

Question 59

Selected data from Chering Division's accounting records revealed the following:
$\begin{array}{lcc}\text { Sales } & \$ 825,000 \\\text { Average investment } & \$ 440,000 \\\text { Net operating income } & \$ 66,000 \\\text { Minimum rate of return (divisional cost of capital) } & 14 \%\end{array}$ If the minimum rate of return (i.e., cost of capital) was 13%, Chering Division's residual income (RI) would calculate to be:

A)$4,400.
B)$8,800.
C)$9,240.
D)$22,380.
E)$49,500.

Question 60

Consider the following data for three divisions of a company, X, Y, and Z:
$\begin{array}{lrrr}\text { Divisional: } & \text { X } & \text { Y } & \text { Z } \\\text { Sales } & \$ 1,800,000 & \$ 900,000 & \$ 4,800,000 \\\text { Operating Income } & 252,000 & 108,000 & 240,000 \\\text { Investment in assets } & 630,000 & 540,000 & 3,000,000\end{array}$ The return on sales (ROS) for Division Y is:

A) 5.0%.
B) 8.0%.
C) 12.0%.
D) 14.0%.
E) 20.0%.

Question 61

The primary limitation of a full-cost based transfer pricing system is that:

A)The supplying and purchasing divisions are more likely to make decisions that are inconsistent with the goals of the organization as a whole.
B)There will be little incentive on the part of the supplying manager to supply goods and services efficiently.
C)Managers may spend too much time negotiating the transfer price.
D)Managers may find that the transfer price is difficult to compute.
E)Such transfer prices are not currently allowed for federal income tax purposes.

Question 62

A fully-owned subsidiary of a multinational company reports its return on investment (ROI) periodically during the year.This unit of the company, for performance evaluation purposes, is likely considered a(n):

A)Profit center.
B)Revenue center.
C)Investment center.
D)Operating center.
E)Cost center.

Question 63

Selected data from Division A of Green Company are as follows:
$\begin{array}{lcc}\text { Sales } & \$ & 500,000 \\\text { Average investment } & \$ & 300,000 \\\text { Operating income } & \$ & 60,000 \\\text { Minimum rate of return } & & 15 \%\end{array}$ Division A's residual income (RI) is:

A)$15,000.
B)$24,000.
C)$30,000.
D)$36,000.
E)$54,000.

Question 64

Selected data from Division A of Green Company are as follows:
$\begin{array}{lcc}\text { Sales } & \$ & 500,000 \\\text { Average investment } & \$ & 300,000 \\\text { Operating income } & \$ & 60,000 \\\text { Minimum rate of return } & & 15 \%\end{array}$
Division A's return on investment (ROI) is:

A)1.8%.
B)7.5%.
C)12.0%.
D)20.0%.
E)48.0%.

Question 65

The two approaches for estimating EVA are:

A)The operating approach and the capital approach.
B)The financing approach and the operating approach.
C)The discounted approach and the financing approach.
D)The operating approach and the discounted approach.
E)The residual income approach and the operating-income approach.

Question 66

Expropriation occurs when the government in which a foreign company's investment assets are located:

A)Takes ownership and control of those assets.
B)Charges additional taxes for the use of those assets.
C)Uses domestic currency to purchase those assets.
D)Uses foreign currency to purchase those assets.
E)Does not allow transnational transfers of currency.

Question 67

The following results pertain to an investment center.
$\begin{array}{lc}\text { Sales } & \$ 1,500,000 \\\text { Variable costs } & 800,000 \\\text { Traceable fixed costs } & 100,000 \\\text { Average investment } & 1,000,000 \\\text { Divisional cost of capital (discount rate) } & 10 \%\end{array}$ How much is the return on investment (ROI) for this investment center?

A)5%.
B)50%.
C)60%.
D)70%.
E)75%.

Question 68

Residual income (RI) may be a better measure for performance evaluation of an investment center than return on investment (ROI) because:

A)The problems associated with measuring the asset base are eliminated.
B)Desirable investment decisions will not be discouraged by high-rate-of-return divisions.
C)Only the gross book value (GBV) of assets needs to be calculated.
D)Returns do not increase as assets are depreciated.
E)The arguments over the appropriate discount rate to use in the calculations are eliminated.

Question 69

Selected data from Division A of Green Company are as follows:
$\begin{array}{lcc}\text { Sales } & \$ & 500,000 \\\text { Average investment } & \$ & 300,000 \\\text { Operating income } & \$ & 60,000 \\\text { Minimum rate of return } & & 15 \%\end{array}$ Division A's return on sales (ROS) is:

A)1.8%.
B)7.5%.
C)12.0%.
D)20.0%.
E)48.0%.

Question 70

Selected data from Division A of Green Company are as follows:
$\begin{array}{lcc}\text { Sales } & \$ & 500,000 \\\text { Average investment } & \$ & 300,000 \\\text { Operating income } & \$ & 60,000 \\\text { Minimum rate of return } & & 15 \%\end{array}$ If the minimum rate of return was 10%, Division A's residual income (RI) would be:

A)$15,000.
B)$24,000.
C)$30,000.
D)$36,000.
E)$45,000.

Question 71

The following results pertain to an investment center.
$\begin{array}{lc}\text { Sales } & \$ 1,500,000 \\\text { Variable costs } & 800,000 \\\text { Traceable fixed costs } & 100,000 \\\text { Average investment } & 1,000,000 \\\text { Divisional cost of capital (discount rate) } & 10 \%\end{array}$
How much is the residual income (RI) for this investment center?

A)$100,000.
B)$500,000.
C)$600,000.
D)$700,000.
E)$800,000.

Question 72

In the context of transfer pricing, dual pricing is:

A)Never used when numerous conflicts exist between two units.
B)The simultaneous use of two or more transfer pricing methods.
C)The use of two or more transfer pricing methods by the buyer only.
D)Not recommended because of negative behavioral consequences.
E)Not recommended because it conflicts with current income tax requirements.

Question 73

Selected data from Division A of Green Company are as follows:
$\begin{array}{lcc}\text { Sales } & \$ & 500,000 \\\text { Average investment } & \$ & 300,000 \\\text { Operating income } & \$ & 60,000 \\\text { Minimum rate of return } & & 15 \%\end{array}$ Division A's asset turnover (AT) is (rounded):

A)0.72.
B)1.00.
C)1.58.
D)1.67.
E)2.08.

Question 74

Given a competitive outside market for identical intermediate goods, what is the best transfer price, assuming all relevant information is readily available?

A)Average cost of production.
B)Average cost of production, plus average production department allocated profit.
C)Market price of the intermediate goods.
D)Market price of the intermediate goods, less average production department allocated profit.
E)Full cost, plus a mark-up for profit.

Question 75

Division A, which is operating at capacity, produces a component that it currently sells in a competitive market for $25 per unit.At the current level of production, the fixed cost of producing this component is $8 per unit and the variable cost is $10 per unit.Division B would like to purchase this component from Division A.The price that Division A should charge Division Y for this component is:

A) $10 per unit.
B) $18 per unit.
C) $20 per unit.
D) $25 per unit.
E) $35 per unit.

Question 76

One approach to measuring the short-term financial performance of a business unit considered an investment center is return on investment (ROI).ROI is expressed as operating income of the investment center

A)Divided by the current year's capital expenditures plus cost of capital.
B)Minus imputed interest charged for the use of invested capital by the investment center.
C)Divided by fixed assets.
D)Divided by total assets used by the investment center.
E)Minus the asset turnover (AT) of the investment center.

Question 77

One advantage of the return on investment (ROI) metric is that it:

A)Can use the minimum rate of return to adjust for differences in risk.
B)Can use a different minimum rate of return for different types of assets.
C)Eliminates goal congruency problems, particularly for better-performing divisions.
D)Requires disclosure under current international financial reporting standards.
E)Can be compared to interest rates and to rates of return on alternative investments.

Question 78

Transfer prices based on actual costs of the selling division as opposed to standard costs incurred by that division:

A)Are preferred by the purchasing division.
B)Often fail to provide the selling division with an incentive to control costs.
C)Often encourage the selling division to control costs.
D)Are required by international financial reporting standards.
E)Often encourage the purchasing division to control costs.

Question 79

A company has two divisions, X and Y, each operated as an investment center.X charges Y $55 per unit for each unit transferred to Y.Other data are: $$\begin{array} { | l | r | l | } \hline \text { X's variable cost per unit } & \$ 40 & \\\hline \text { X's fixed costs } & \$ 100,000 & \\\hline \text { X's annual sales to Y } & 5,000 & \text { units } \\\hline \text { X's sales to outsiders } & 10,000 & \text { units } \\\hline\end{array}$$ X is planning to raise its transfer price to $65 per unit. Division Y can purchase units at $50 each from outsiders, but doing so would idle X's facilities now committed to producing units for Y. Division X cannot increase its sales to outsiders. From the perspective of the short-term profit position of the company as a whole, from which source should Division Y acquire the units?

A) Outside vendors.
B) Division X, but only at the variable cost per unit.
C) Division X, but only until fixed costs are covered, then should purchase from outside vendors.
D) Division X, in spite of the increased transfer price.
E) It is not possible to tell without additional information.

Question 80

A company established a branch to sell automobile seat covers. The company purchases these covers and stores them in a warehouse. The covers are then shipped from the warehouse to both the home office and the new branch, FOB (Free On Board) destination. Home office management is responsible for setting the transfer price of the covers charged to the branch. Per-unit costs of the covers are: $$\begin{array} { | r | l | } \hline \$ 60.00 & \text { purchase price } \\\hline \$ 2.50 & \text { shipping cost to warehouse } \\\hline \$ 3.00 & \text { handling cost, including } \$ 1 \text { allocated administrative overhead } \\\hline \$ 3.50 & \text { shipping cost to branch, paid by home office } \\\hline\end{array}$$ According to the general transfer-pricing formula given in the text, the minimum transfer price that home office should charge the branch is:

A)$62.50.
B)$63.50.
C)$66.00.
D)$68.00.
E)$69.00.