Deck 11: Responsibility Accounting, Investment Centres, and Transfer Pricing

Question 1

When the managers of subunits throughout an organization strive to achieve the goals set by top management, the result is:

A)goal congruence.
B)planning and control.
C)responsibility accounting.
D)delegation of decision-making.
E)strategic control.

Answer 1

A

Question 2

A cost pool is:

A)a collection of homogeneous costs to be assigned.
B)almost always the combined result of decisions made by different responsibility centre managers.
C)the primary function of a responsibility accounting system.
D)the amount of cost that has been allocated, say, 10%, to a user department.
E)the tool used to allocate cost dollars to user departments.

Answer 2

A

Question 3

The South American Division of a multinational manufacturing organization would likely be classified as a(n):

A)cost centre.
B)revenue centre.
C)profit centre.
D)investment centre.
E)contribution centre.

Answer 3

D

Question 4

Vacation Properties Limited owns six hotels in the province of Quebec, collectively known as the Eastern Townships Division. The various hotels, including the Richelieu Hotel, have operating departments (such as Maintenance, Housekeeping, and Food and Beverage) that are evaluated as either cost centres or profit centres. The Food and Beverage Department, for example, is a profit centre, with activities divided into three segments: Banquets and Catering, Restaurants, and Kitchen. If Vacation Properties Limited uses a performance-reporting system that is based on responsibility accounting, which of the following disclosures is likely to occur?

A)The detailed operating costs of the Richelieu Hotel's Kitchen Department will appear on the Eastern Townships Division's performance report.
B)The Food and Beverage Department's profit will appear on Kitchen's performance report.
C)The profit of the Richelieu Hotel will appear on the Eastern Townships Division's performance report.
D)The Food and Beverage profit at the Richelieu Hotel will appear on the performance report of Vacation Properties Limited.
E)The profit of the Richelieu Hotel will appear on Food and Beverage's performance report.

Question 5

If the head of a hotel's food and beverage operation is held accountable for revenues and costs, the food and beverage operation would be considered a(n):

A)cost centre.
B)revenue centre.
C)profit centre.
D)investment centre.
E)contribution centre.

Question 6

Which of the following is not an example of a responsibility centre?

A)Cost centre.
B)Revenue centre.
C)Profit centre.
D)Investment centre.
E)Contribution centre.

Question 7

Decentralized firms can delegate authority by structuring an organization into responsibility centres. Which of the following organizational segments is most like a totally independent, standalone business where managers are expected to "make it on their own?"

A)Cost centre.
B)Revenue centre.
C)Profit centre.
D)Investment centre.
E)Contribution centre.

Question 8

The senior management of Teens Love Chocolate (TLC), an operator of day-care facilities, wants the company's profit to be subdivided by centre. The firm's management accountant has provided the following data for the period ended December 31, 2012: $\begin{array} { | l | r | r | r | r | } \hline { \text { Centre } } & \text { Actual Revenue } & \text { Budgeted Revenue } & \text { Actual Direct Costs } & \begin{array} { c } \text { Budgeted Direct } \\\text { Costs }\end{array} \\\hline \text { Brooklyn } & \$ 440,000 & \$ 420,000 & \$ 400,000 & 400,000 \\\hline \text { Manhattan } & 634,200 & 660,000 & \$ 440,000 & 610,000 \\\hline \text { Queens } & \underline { 845,300 } & \underline { 820,000 } & \underline { 840,000 } & \underline { 790,000 } \\\hline \text { Totals } & \underline { \$ 1.919,700 } & \underline { \$ 1,900,000 } & \$ 1.780,000 & \$ 1.800,000 \\\hline\end{array}$ TLC's advertising, which is handled by the home office, is not reflected in the preceding figures and amounted to $80,000. If advertising expense were allocated to centres based on actual centre profitability, how much advertising would be allocated to Manhattan?

A)$17,684.
B)$24,270.
C)$26,429.
D)$53,920.
E)$80,000.

Question 9

Common costs:

A)are always traceable to a segment's activities:
B)are easily related to a segment's activities.
C)are charged to a company's operating segments when preparing a segmented income statement.
D)are not charged to a company's operating segments when preparing a segmented income statement.
E)are not easily related to a segment's activities and are not charged to a company's operating segments when preparing a segmented income statement.

Question 10

The Painting Department in an automobile plant is an example of a(n):

A)profit centre.
B)cost centre.
C)investment centre.
D)revenue centre.
E)contribution centre.

Question 11

Iris Company is in the process of evaluating allocation bases so that selected costs can be charged to responsibility centres. Would the number of employees likely be a good base to use to allocate the costs of Human Resources, Building and Grounds, and Repairs and Maintenance to user centres respectively? $\begin{array} { | l | c | c | c | } \hline & \begin{array} { c } \text { Human } \\\text { Resources }\end{array} & \begin{array} { c } \text { Buildings and } \\\text { Grounds }\end{array} & \begin{array} { c } \text { Repairs and } \\\text { Maintenance }\end{array} \\\hline 1 & \text { Yes } & \text { Yes } & \text { Yes } \\\hline 2 & \text { Yes } & \text { No } & \text { Yes } \\\hline 3 & \text { Yes } & \text { No } & \text { No } \\\hline 4 & \text { No } & \text { Yes } & \text { Yes } \\\hline 5 & \text { No } & \text { Yes } & \text { No } \\\hline\end{array}$

A)1
B)2
C)3
D)4
E)5

Question 12

Seaway Hotels owns numerous hotels on many of the islands in the thousand islands region of the St. Lawrence Seaway. The company's performance reporting system is structured around the firm's organizational structure, with information flowing from operating departments at a particular property and later respectively grouped by individual hotel, island operation (i.e., division), and the company as a whole. Which of the following best depicts the detail level of the information given to a department manager versus that reported to a company vice-president? $\begin{array} { l l l } & \underline{\text { Department Manager }} & \underline{\text { Company Vice-President } }\\\text { 1. } & \text { Somewhat detailed } & \text { Somewhat detailed } \\\text { 2. } & \text { Somewhat detailed } & \text { Somewhat summarized } \\\text { 3. } & \text { Somewhat summarized } & \text { Somewhat detailed } \\\text { 4. } & \text { Somewhat summarized } & \text { Somewhat summarized } \\\text { 5. } & \text { Extremely vague } & \text { Extremely detailed }\end{array}$

A)1
B)2
C)3
D)4
E)5

Question 13

Which of the following is an appropriate base to distribute the cost of building depreciation to responsibility centres?

A)Number of employees in the responsibility centres.
B)Budgeted sales dollars of the responsibility centres.
C)Square feet occupied by the responsibility centres.
D)Budgeted net income of the responsibility centres.
E)Total budgeted direct operating costs of the responsibility centres.

Question 14

Controllable costs, as used in a responsibility accounting system, consist of:

A)only fixed costs.
B)only direct materials and direct labour.
C)those costs that a manager can influence in the time period under review.
D)those costs about which a manager has some knowledge.
E)those costs that are influenced by parties external to the organization.

Question 15

Beatnick Inc., with operations throughout Europe, will soon allocate corporate overhead to the firm's various responsibility centres. Which of the following is definitely not a cost object in this situation?

A)The maintenance department.
B)Model A produced by Beatnick Inc.
C)Beatnick Inc.
D)The Spanish Division.
E)The Telemarketing Centre.

Question 16

Mobile Minx Incorporated is in the process of overhauling the performance evaluation system for its Mississauga Manufacturing Division, which produces and sells materials that are popular in the textiles industry. Which of the following is least likely to be chosen to evaluate the overall operations of the Mississauga Division?

A)Cost centre.
B)Revenue centre.
C)Profit centre.
D)Investment centre.
E)The profit centre and investment centre are equally unlikely to be chosen.

Question 17

A cost object is:

A)a collection of costs to be assigned.
B)a responsibility centre, product, or service to which cost is to be assigned.
C)the tool used to charge cost dollars to user departments.
D)the primary function of a responsibility accounting system.
E)a common cost.

Question 18

Performance reports help managers:

A)to effectively forecast operations.
B)decide whether a cost, profit, or investment centre framework is appropriate.
C)design their organizational hierarchy.
D)to ignore trouble spots.
E)by assisting with pinpointing trouble spots and using management by exception reports to effectively control operations.

Question 19

The senior management of Teens Love Chocolate (TLC), an operator of day-care facilities, wants the company's profit to be subdivided by centre. The firm's management accountant has provided the following data for the period ended December 31, 2012: $\begin{array} { | l | r | r | r | r | } \hline { \text { Centre } } & \text { Actual Revenue } & \text { Budgeted Revenue } & \text { Actual Direct Costs } & \begin{array} { c } \text { Budgeted Direct } \\\text { Costs }\end{array} \\\hline \text { Brooklyn } & \$ 440,000 & \$ 420,000 & \$ 400,000 & 400,000 \\\hline \text { Manhattan } & 634,200 & 660,000 & \$ 440,000 & 610,000 \\\hline \text { Queens } & \underline { 845,300 } & \underline { 820,000 } & \underline { 840,000 } & \underline { 790,000 } \\\hline \text { Totals } & \underline { \$ 1.919,700 } & \underline { \$ 1,900,000 } & \$ \underline { \$ 180,000 } & \$ 1.800,000 \\\hline\end{array}$ TLC's advertising, which is handled by the home office, is not reflected in the preceding figures and amounted to $80,000. Assume that management used the allocation base that is most influenced by advertising effort and consistent with sound managerial accounting practices. How much advertising would be allocated to Manhattan?

A)$24,270.
B)$26,249.
C)$27,111.
D)$27,790.
E)$80,000.

Question 20

A manufacturer's raw material purchasing department would likely be classified as a:

A)cost centre.
B)revenue centre.
C)profit centre.
D)investment centre.
E)contribution centre.

Question 21

On a segmented income statement, common fixed expenses will have an effect on a company's:

A)segment contribution margin.
B)profit margin controllable by the segment manager.
C)segment profit margin.
D)segment profit margin and the profit margin controlled by the segment manager.
E)income before taxes.

Question 22

Kattan Inc. reported a sales margin of 11%, a capital turnover of 5, and investment capital in the amount of $30,000,000. On the basis of this information, the company's sales revenue is:

A)$600,000.
B)$16,500,000.
C)$30,000,000.
D)$33,000,000.
E)$150,000,000.

Question 23

Capital turnover shows:

A)the amount of income generated by each dollar of capital investment.
B)the number of sales dollars generated by each dollar of capital investment.
C)the amount of contribution margin generated by each dollar of capital investment.
D)the amount of capital investment generated by each sales dollar.
E)the amount of capital investment generated by each dollar of income.

Question 24

Webb Brothers Inc. had sales revenue and operating expenses of $6,000,000 and $5,400,000, respectively, for the year just ended. If invested capital amounted to $8,000,000, the firm's ROI was:

A)7.5%.
B)10%.
C)67.5%.
D)75%.
E)148.1%.

Question 25

The ROI calculation will indicate:

A)the percentage of each sales dollar that is invested in assets.
B)the sales dollars generated from each dollar of income.
C)how effectively a company used its invested capital to generate income.
D)the invested capital generated from each dollar of income.
E)the overall quality of a company's earnings.

Question 26

A segment contribution margin would reflect the impact of:

A)variable operating expenses.
B)fixed expenses controllable by the segment manager.
C)fixed expenses traceable to the segment but controllable by others.
D)common fixed expenses.
E)income tax expense.

Question 27

Sassy Scents operates two retail outlets in Vaughan Mills and Yorkville. The following information relates to the Yorkville location: $\begin{array} { l r } \text { Sales Revenue } & \$ 800,000 \\\text { Variable operating expenses } & 300,000 \\\text { Fixed expenses: } & \\\text { Traceable to Yorkville and controllable by Yorkville } & 175,000 \\\text { Traceable to Yorkville and controllable by others } & 100,000\end{array}$ Yorkville's segment profit margin is:

A)$225,000.
B)$325,000.
C)$400,000.
D)$500,000.
E)$525,000.

Question 28

The Tooling Division of Lakes Costmetics reported a profit of $4.6 million. Divisional capital was $10.5 million and the imputed interest rate is 13%. Residual income must be:

A)$598,000.
B)$1,365,000.
C)$3,235,000.
D)$4,600,000.
E)$9,902,000.

Question 29

Alexandra Corp. uses an imputed interest rate of 14% in the calculation of residual income. The modeling division, which is part of Alexandra, had invested capital of $1,300,000 and an ROI of 16%. On the basis of this information, the modeling division's residual income was:

A)$0.
B)$26,000.
C)$182,000.
D)$208,000.
E)$1,300,000.

Question 30

Century Limited is preparing a segmented income statement, subdivided into departments (billing, purchasing, and telemarketing). Which of the following choices correctly describes the accounting treatment of the firm's compensation cost for key executives (president and vice-presidents)?

A)The cost is charged to the departments.
B)The cost is not charged to the departments because, although easily traceable to the departments, it is not controllable at the departmental level.
C)The cost is not charged to the departments because, although controllable at the departmental level, it is not easily traceable to the departments.
D)The cost is not charged to the departments because it is both easily traceable to the departments and controllable by the departments.
E)The cost is not charged to the departments because it is neither easily traceable to the departments nor controllable by the departments.

Question 31

Which of the following would be the best measure on which to base a segment manager's performance evaluation for purposes of granting a bonus?

A)Segment sales revenue.
B)Segment contribution margin.
C)Profit margin controllable by the segment manager.
D)Segment profit margin.
E)Segment net income.

Question 32

Which of the following measures would reflect the variable costs incurred by a business segment? $\begin{array} { | l | c | c | c | c | } \hline & \begin{array} { c } \text { Segment } \\\text { Contribution } \\\text { Margin }\end{array} & { \begin{array} { c } \text { Profit Margin } \\\text { Controllable by Segment } \\\text { Manager }\end{array} } & \begin{array} { c } \text { Segment } \\\text { Profit Margin }\end{array} \\\hline 1 & \text { Yes } & \text { No } & \text { No } \\\hline 2 & \text { Yes } & \text { No } & \text { Yes } \\\hline 3 & \text { Yes } & \text { Yes } & \text { No } \\\hline 4 & \text { Yes } & \text { Yes } & \text { Yes } \\\hline 5 & \text { No } & \text { Yes } & \text { Yes } \\\hline\end{array}$

A)1
B)2
C)3
D)4
E)5

Question 33

Kanata Division reported a residual income of $100,000 for the year just ended. The division had $6,000,000 of invested capital and $500,000 of income. On the basis of this information, the imputed interest rate was:

A)6.67%.
B)8.33%.
C)20.00%.
D)120.0%.
E)550%.

Question 34

Which of the following is used in the calculation of both return on investment and residual income?

A)Total stockholders' equity.
B)Retained earnings.
C)Invested capital.
D)Total liabilities.
E)The cost of capital.

Question 35

Sunrise Corporation has a return on investment of 15%. Recently, the Bottling Division reported the following: $\begin{array} { | l | r | } \hline \text { ROI } & 13 \% \\\hline \text { Residual Income } & 750,000 \\\hline\end{array}$ The Bottling Division is contemplating a massive new investment that will (1) reduce divisional ROI and (2) produce $120,000 of residual income. If Sunrise Corporation wants to strive for goal congruence, the investment:

A)should not be acquired because it reduces divisional ROI.
B)should not be acquired because it produces $120,000 of residual income.
C)should not be acquired because the division's ROI is less than the corporate ROI before the investment is considered.
D)should be acquired because it produces $120,000 of residual income for the division.
E)should be acquired because after the acquisition, the division's ROI and residual income are both positive numbers.

Question 36

Department No. 8 of Brockville Corporation reported a segment contribution margin of $600,000. If the profit margin controllable by the segment manager and the segment profit margin were $210,000 and $175,000, respectively, fixed expenses controllable by segment manager are:

A)$175,000.
B)$210,000.
C)$390,000.
D)$425,000.
E)$600,000.

Question 37

Badger Limited had a sales margin of 7%, sales of $8,000,000, and invested capital of $4,000,000. The company's ROI was:

A)3.5%.
B)5%.
C)7%.
D)14%.
E)50%.

Question 38

Simon Corporation reported a return on investment of 15%, a capital turnover of 10, and income of $200,000. On the basis of this information, the company's invested capital was:

A)$20,000.
B)$200,000.
C)$1,333,333.
D)$2,000,000.
E)$13,333,333.

Question 39

The difference between the profit margin controllable by a segment manager and the segment profit margin is caused by:

A)variable operating expenses.
B)allocated common expenses.
C)fixed expenses controllable by the segment manager.
D)fixed expenses traceable to the segment but controllable by others.
E)sales revenue.

Question 40

The Magellan Division of Global Corporation, which has income of $250,000 and an asset investment of $1,562,500, is studying an investment opportunity that will cost $450,000 and yield a profit of $67,500. Assuming that Global uses an imputed interest charge of 14%, would the investment be attractive to: 1-Divisional management if ROI is used to evaluate divisional performance?
2-Divisional management if RI is used to evaluate divisional performance?
3-The management of Global Corporation? $\begin{array} { | l | c | c | c | } \hline & \text { Attractive to Magellan: ROI } & \text { Attractive to Magellan: RI } & \text { Attractive to Global } \\\hline 1 & \text { Yes } & \text { Yes } & \text { Yes } \\\hline 2 & \text { Yes } & \text { No } & \text { No } \\\hline 3 & \text { Yes } & \text { No } & \text { Yes } \\\hline 4 & \text { No } & \text { Yes } & \text { Yes } \\\hline 5 & \text { No } & \text { Yes } & \text { No }\\\hline\end{array}$

A)1
B)2
C)3
D)4
E)5

Question 41

Richmond Corporation has no excess capacity. If the firm desires to implement the general transfer-pricing rule, opportunity cost would be equal to:

A)zero.
B)the direct expenses incurred in producing the goods.
C)the total difference in the cost of production between two divisions.
D)the contribution margin forgone from lost external sales.
E)the summation of variable cost plus fixed cost.

Question 42

The amounts charged for goods and services exchanged between two divisions are known as:

A)opportunity costs.
B)transfer prices.
C)standard variable costs.
D)residual prices.
E)target prices.

Question 43

All of the following actions will increase ROI except:

A)an increase in sales revenues.
B)a decrease in operating expenses.
C)a decrease in a company's invested capital.
D)a decrease in the number of units sold.
E)an improvement in manufacturing efficiency.

Question 44

A general calculation method for transfer prices that achieves goal congruence begins with the additional outlay cost per unit incurred because goods are transferred and then

A)adds the opportunity cost per unit to the organization because of the transfer.
B)subtracts the opportunity cost per unit to the organization because of the transfer.
C)adds the sunk cost per unit to the organization because of the transfer.
D)subtracts the sunk cost per unit to the organization because of the transfer.
E)adds the sales revenue per unit to the organization because of the transfer.

Question 45

Which of the following transfer-pricing methods can lead to dysfunctional decision-making behaviour by managers?

A)Variable cost.
B)Full cost.
C)External market price.
D)A professionally negotiated, amicable settlement between the buying and selling divisions.
E)Cost plus markup.

Question 46

Laissez Faire has two divisions: the Cologne Division and the Bottle Division. The Bottle Division produces containers that can be used by the Cologne Division. The Bottle Division's variable manufacturing cost is $2, shipping cost is $0.10, and the external sales price is $3. No shipping costs are incurred on sales to the Cologne Division, and the Cologne Division can purchase similar containers in the external market for $2.60. The Bottle Division has sufficient capacity to meet all external market demands in addition to meeting the demands of the Cologne Division. Using the general rule, the transfer price from the Bottle Division to the Cologne Division would be:

A)$2.00.
B)$2.10.
C)$2.60.
D)$2.90.
E)$3.00.

Question 47

Fraser Corporation's Western Division is currently purchasing a part from an outside supplier. The company's Eastern Division, which has excess capacity, makes and sells this part for external customers at a variable cost of $32 and a selling price of $44. If the Eastern Division begins sales to the Western Division, it (1) will use the general transfer-pricing rule and (2) will be able to reduce variable cost on internal transfers by $6. If sales to outsiders will not be affected, the Eastern Division would establish a transfer price of:

A)$26.
B)$32.
C)$38.
D)$44.
E)$50.

Question 48

Whitby Corporation has excess capacity. If Whitby desires to implement the general transfer-pricing rule, the opportunity cost to Whitby would be equal to:

A)zero.
B)the direct expenses incurred in producing the goods.
C)the total difference in the cost of production between two divisions.
D)the contribution margin forgone from the lost external sale.
E)the summation of variable cost plus fixed cost.

Question 49

For the period just ended, Bax Corporation's Delta Division reported profit of $31.9 million and invested capital of $220 million. If the imputed interest rate is 12%, which of the following choices correctly denotes Delta's ROI and residual income? $\begin{array}{|l|c|l|c|}\hline & \text { Return on Investment } & & \text { Residual Income } \\\hline 1 & 12.0\%& & \$(5.5) \text { million } \\\hline 2 & 12.0 \% & & \$ \text { 5.5 million } \\\hline 3 & 14.5 \% & & \$(5.5) \text { million } \\\hline 4 & 14.5 \% & & \$ 5.5 \text { million } \\\hline 5 & 14.5 \% & & \text { \$26.4 million } \\\hline\end{array}$

A)1
B)2
C)3
D)4
E)5

Question 50

Thatcher Corporation has an after-tax operating income of $4,200,000 and an 8% weighted-average cost of capital. Assets total $8,000,000 and current liabilities total $1,500,000. On the basis of this information, Thatcher's economic value added is:

A)$3,560,000.
B)$3,680,000.
C)$4,080,000.
D)$4,200,000.
E)$6,500,000.

Question 51

Which of the following elements is not used in the calculation of economic value added for an investment centre?

A)An investment centre's after-tax operating income.
B)An investment centre's total assets.
C)An investment centre's return on investment.
D)An investment centre's current liabilities.
E)A company's weighted-average cost of capital.

Question 52

CableTech's Suburban Division is currently purchasing a part from an outside supplier. The company's Metro Division, which has no excess capacity, makes and sells this part for external customers at a variable cost of $20 and a selling price of $32. If Metro begins sales to Suburban, it (1) will use the general transfer-pricing rule and (2) will be able to reduce variable cost on internal transfers by $4. On the basis of this information, Metro would establish a transfer price of:

A)$12.
B)$16.
C)$20.
D)$28.
E)$32.

Question 53

Montreal Corporation has two divisions, Longueuil and Verdun, and evaluates management on the basis of return on investment. Longueuil currently makes a part that it sells to both Verdun and outsiders. Selected data follow. $\begin{array} { | l | r | } \hline \text { Selling price to Verdun } & \$ \\\hline \text { Variable cost } & 18 \\\hline \text { Fixed costs } & 80,000 \\\hline\end{array}$ Longueuil is seeking an increase in its selling price to $28 per unit because of rising costs. Verdun can obtain comparable units from an outside supplier for $23; however, if Verdun uses the supplier, Longueuil will have idle capacity because of an inability to increase sales to outsiders. From the perspective of Montreal Corporation.

A)Longueuil should continue to do business with Verdun and charge $28 per unit.
B)Longueuil should continue to do business with Longueuil and charge $25 per unit.
C)Longueuil should continue to do business with Verdun because Longueuil's variable cost per unit is only $18.
D)Verdun should do business with the outside supplier.
E)Verdun should split its business between Longueuil and the outside supplier.

Question 54

When an organization allows divisional managers to be responsible for short-term loans and credit, the division's invested capital should be measured by

A)total assets minus total liabilities.
B)average total assets minus average current liabilities.
C)average total assets minus average total liabilities.
D)average total liabilities minus average current assets.
E)average total liabilities minus total assets.

Question 55

Which of the following describes the goal that should be pursued when setting transfer prices?

A)Maximize profits of the buying division.
B)Maximize profits of the selling division.
C)Allow top management to become actively involved when calculating the proper dollar amounts.
D)Establish incentives for autonomous division managers to make decisions that are in the overall organization's best interests (i.e., goal congruence).
E)Minimize opportunity costs.

Question 56

Hayes Division, which is located in a remote area in Northern Ontario, has been stagnant over the past five years, neither growing nor contracting in size and profitability. Investments in new property, plant, and equipment have been minimal. Would the division's use of total assets (valued at net book value) when measuring ROI result in (1) using numbers that are consistent with those on the balance sheet and (2) a rising ROI over time? $\begin{array} { | l | c | c | } \hline & \begin{array} { c } \text { Consistent with Numbers } \\\text { on the Balance Sheet? }\end{array} & \begin{array} { c } \text { Produce a Rising Return on } \\\text { Investment Over Time? }\end{array} \\\hline 1 & \text { Yes } & \text { Yes } \\\hline 2 & \text { Yes } & \text { No } \\\hline 3 & \text { No } & \text { Yes } \\\hline 4 & \text { No } & \text { No } \\\hline 5 & \text { Yes } & \text { Need more information to judge } \\\hline\end{array}$

A)1
B)2
C)3
D)4
E)5

Question 57

A division's return on investment may be improved by increasing:

A)cost of goods sold and expenses.
B)sales margin and cost of capital.
C)sales revenue and cost of capital.
D)capital turnover or sales margin.
E)capital turnover or cost of capital.

Question 58

Laissez Faire has two divisions: the Cologne Division and the Bottle Division. The Bottle Division produces containers that can be used by the Cologne Division. The Bottle Division's variable manufacturing cost is $2, shipping cost is $0.10, and the external sales price is $3. No shipping costs are incurred on sales to the Cologne Division, and the Cologne Division can purchase similar containers in the external market for $2.60. Assume the Bottle Division has no excess capacity. Using the general rule, the transfer price from the Bottle Division to the Cologne Division would be:

A)$2.00.
B)$2.10.
C)$2.60.
D)$2.90.
E)$3.00.

Question 59

Lottery Company has two divisions, one located in Vancouver and the other located in Regina. Vancouver sells selected goods to Regina for use in various end products. Assuming that the transfer prices set by Vancouver do not influence the decisions made by the two divisions, which of the following correctly describes the impact of the transfer prices on divisional profits and overall company profit? $\begin{array}{|c|c|c|c|}\hline&\text { Vancouver Profit } & \text { Regina Profit } & \text { Lottery Company Profit } \\\hline1& \text { Affected } & \text { Affected } & \text { Affected } \\\hline 2&\text { Affected } & \text { Affected } & \text { Not affected } \\\hline 3&\text { Affected } & \text { Not affected } & \text { Affected } \\\hline 4&\text { Not affected } & \text { Not affected } & \text { Affected } \\\hline5& \text { Not affected } & \text { Not affected } & \text { Not affected }\\\hline\end{array}$

A)1
B)2
C)3
D)4
E)5

Question 60

Laissez Faire has two divisions: the Cologne Division and the Bottle Division. The Bottle Division produces containers that can be used by the Cologne Division. The Bottle Division's variable manufacturing cost is $2, shipping cost is $0.10, and the external sales price is $3. No shipping costs are incurred on sales to the Cologne Division, and the Cologne Division can purchase similar containers in the external market for $2.60. The maximum amount the Cologne Division would be willing to pay for each bottle transferred would be:

A)$2.00.
B)$2.10.
C)$2.60.
D)$2.90.
E)$3.00.

Question 61

The following data pertain to Coronation Computer Sales for 2012: Required:
A. Calculate the company's sales margin, capital turnover, and ROI for 2012.
B. If the sales and average invested capital remain the same, to what level would total costs and expenses have to be reduced in 2013 to achieve a 10% ROI?
C. Assume that costs and expenses are reduced, as calculated in requirement "B." Calculate the firm's new sales margin.
D. Suggest two possible actions that will improve the company's capital turnover.

Question 62

Major Scale Corporation's Gauge Division manufactures and sells product no. 1256, which is used in home bathroom scales. Per-unit variable manufacturing and selling costs amount to $33 and $7, respectively. The Division can sell this item to external domestic customers for $60 or, alternatively, transfer the product to the company's Assembly Division. Assembly is currently purchasing a similar unit from Vietnam for $52. Assume use of the general transfer-pricing rule.
Required:
A. What is the most that the Assembly Division would be willing to pay the Gauge Division for one unit?
B. If Gauge had excess capacity, what transfer price would the Division's management set?
C. If Gauge had no excess capacity, what transfer price would the Division's management set?
D. Repeat part "C," assuming that Gauge was able to reduce the variable cost of internal transfers by $9 per unit.

Question 63

Wireless Incorporated provides a variety of telecommunications services to residential and commercial customers from its massive campus-like headquarters in suburban Orlando. For a number of years the firm's maintenance group has been organized as a cost centre, rendering services free of charge to the company's user departments (sales, billing, accounting, marketing, research, and so forth). Requests for maintenance have grown considerably, and demand is approaching the point where quality and timeliness of services provided are becoming an issue. As a result, management is studying whether the maintenance operation should be converted from a cost centre to a profit centre, with users to be billed for services performed.
Required:
A. Differentiate between a cost centre and a profit centre. How is each of these centres evaluated?
B. What will likely happen to the number of user service requests if the company makes the switch to a profit-centre form of organization? Why?
C. Assume that a user department has requested a particular service, one that is time consuming and costly to perform. The maintenance group's actual cost incurred in providing this service is $17,800, and the user has agreed to pay $20,800 if the switch to a profit centre is made. If this case is fairly typical within the firm, which of the two forms of organization (cost centre or profit centre) will result in a more responsive, service-oriented maintenance group for Wireless? Why?

Question 64

Gamma Division of Vaughan Corporation produces electric motors, 20% of which are sold to Vaughan's Omega Division and 80% to outside customers. Vaughan treats its divisions as profit centres and allows division managers to choose whether to sell to or buy from internal divisions. Corporate policy requires that all interdivisional sales and purchases be transferred at variable cost. Gamma Division's estimated sales and standard cost data for the year ended May 31, based on a capacity of 60,000 units, are as follows: Gamma can sell the 12,000 units shown above to an outside customer at $80 per unit. Omega can purchase the units it needs from an outside supplier for $92 each.
Required:
A. Assuming that Gamma desires to maximize operating income, should it take on the new customer and discontinue sales to Omega? Why? (Note: Answer this question from Gamma's perspective.)
B. Assume that Vaughan allows division managers to negotiate transfer prices. The managers agreed on a tentative price of $80 per unit, to be reduced by an equal sharing of the additional Gamma income that results from the sale to Omega of 12,000 motors at $80 per unit. On the basis of this information, compute the company's new transfer price.

Question 65

The following data pertain to the Oxnard Division of Kemp Company: The Company uses responsibility accounting concepts when evaluating performance, and Oxnard's division manager is contemplating the following three investments. He can invest up to $400,000. Required:
A. Calculate the ROIs of the three investments.
B. What is the division manager's current ROI, computed by using responsibility accounting concepts?
C. Which of the three investments would be selected if the manager's focus is on Oxnard's divisional performance? Why?
D. If Kemp has an imputed interest charge of 22%, compute the residual income of investment no. 3. Is this investment attractive from Oxnard's perspective? From Kemp's perspective? Why?

Question 66

The following data pertain to Mason's Creek Winery:
Required:
Calculate Mason's Creek Winery's sales margin, capital turnover, and ROI

Question 67

Sonoma Corporation is a multi-divisional company whose managers have been delegated full profit responsibility and complete autonomy to accept or reject transfers from other divisions. Division X produces 2,000 units of a subassembly that has a ready market. One of these subassemblies is currently used by Division Y for each final product manufactured, the latter of which is sold to outsiders for $1,600. Y's sales during the current period amounted to 2,000 completed units. Division X charges Division Y the $1,100 market price for the subassembly; variable costs are $850 and $600 for Divisions X and Y, respectively.
The manager of Division Y feels that X should transfer the subassembly at a lower price because Y is currently unable to make a profit.
Required:
A. Calculate the contribution margins (total dollars and per unit) of Divisions X and Y, as well as the company as a whole, if transfers are made at market price.
B. Assume that conditions have changed and X can sell only 1,000 units in the market at $900 per unit. From the company's perspective, should X transfer all 2,000 units to Y or sell 1,000 in the market and transfer the remainder? Note: Y's sales would decrease to 1,000 units if the latter alternative is pursued.

Question 68

The following selected data relate to the Cape Breton Division of Eastern Enterprises Inc. (EEI): Required:
A. Compute the following for the Cape Breton Division:
1. Segment contribution margin.
2. Controllable profit margin.
3. Segment profit margin.
4. Which of the three preceding measures should be used when evaluating the Cape Breton Division as an investment of EEI's resources? Why?
5. Assume that management made the decision to prepare a segmented income statement that reflected Cape Breton's five operating departments. Would all $1,220,000 of the controllable fixed costs be easily traced to the departments? Briefly explain.
6. Which of the five-dollar amounts presented in the body of the problem would be used in computing the income before taxes of Eastern Enterprises Inc.?

Question 69

Return on investment (ROI) and residual income (RI) are popular measures of divisional performance. Like any measure, there are disadvantages or weaknesses that are an inherent part of these tools. Briefly discuss a major weakness associated with each tool.

Question 70

Consider the following situation:
The marketing manager of Gilroy Incorporated accepted a rush order for a nonstock item from a valued customer. The manager filed the necessary paperwork with the production department, and a production manager did the same with purchasing for needed raw materials. Unfortunately, a purchasing clerk temporarily lost the paperwork; by the time it was found, it was too late to order from Gilroy's regular supplier. A new supplier was located that quoted a very attractive price.
The materials soon arrived and were found to be of poor quality, thus giving rise to a favourable materials price variance, an unfavourable materials quantity variance, and an unfavourable labour efficiency variance. These latter two variances, based on normal practice, appeared on the production manager's performance report for the period just ended.
Required:
A. Given that the company uses a responsibility accounting system, should the production manager be penalized for poor performance? Briefly discuss, keeping in mind that a production manager is generally in a very good position to control material usage and labour efficiency.
B. Should anything be done to correct the situation? If "yes," briefly explain.

Question 71

Kasten Incorporated operates a chain of retail stores throughout the Northwest that specializes in the sale of sports equipment. The following costs relate to Store No. 19 located in Burnaby, British Columbia:
1. Salary of store manager: $58,000
2. Allocated corporate overhead: $55,000
3. Cost of goods sold: $2,560,000
4. Landscaping and grounds costs (yearly contract): $6,800
5. Hourly wages of sales clerks: $343,000
6. Local advertising (negotiated by store manager): $76,000
7. Property taxes: $25,800
8. Sales commissions: $221,000
Required:
Which of the preceding costs would be used in computing:
A. Store No. 19's segment contribution margin?
B. Store No. 19's controllable profit margin?
C. Store No. 19's segment profit margin?
D. The net income of Kasten, Inc.?

Question 72

Branson Corporation manufactures decorative, sculpted accessories that are sold by interior decorators and home furnishing stores. The following situation concerns two Branson employees: Deborah Philbun, head of the company's Billing Department, and Gary Bitner, the firm's general manager.
Philbun's Billing Department makes heavy use of hourly employees and is evaluated as a cost centre. Understanding the need for prompt collection of receivables, Philbun strives to run a first-class operation. Philbun also understands the need to contribute in a big way to Branson's financial performance so she continually strives to minimize Billing Department expenses.
Unfortunately, Philbun experienced a heated discussion with Bitner several weeks ago, the subject being the shoddy operation that she is running. Bitner complained loudly about the lack of timely billings to customers and the general lack of attention to detail, as many complaints have surfaced about erroneous invoices and customer statements.
Required:
A. What is meant by the term "responsibility accounting?"
B. What measure(s) of performance would companies normally use to evaluate a cost-centre manager?
C. Does Bitner have a valid reason to be upset with Philbun? Given the nature of the Billing Department, did Deborah err in her quest to minimize expenses? Explain.
D. Is it likely that the Billing Department could be evaluated as a profit centre? Why?

Question 73

Consider the following data of Springwater Corporation's Western Division: Required:
A. Calculate Western's capital turnover
B. Calculate Western's average invested capital.
C. Calculate Western's income.
D. Calculate residual income.

Question 74

Return on investment (ROI) is a very popular tool to evaluate performance. The measurement of ROI is dependent, in part, on whether fixed assets are valued at acquisition cost or net book value.
List several advantages of acquisition cost and net book value as ways to value long-lived assets.

Question 75

Fog City Retail operates a retail store in Mississauga, Oakville, and Burlington. The following information relates to the Mississauga facility:
▪ The store sold 65,000 units at $18.00 each, after having purchased the units from various suppliers for $12.50. Mississauga salespeople are paid a 5% commission based on gross sales dollars.
▪ Mississauga's sales manager oversees the placement of local advertising contracts, which totalled $54,000 for the year. Local property taxes amounted to $14,500.
▪ The sales manager's $65,000 salary is set by Mississauga's store manager. In contrast, the store manager's $134,000 salary is determined by Fog City's vice president.
▪ Mississauga incurred $6,800 of other noncontrollable costs along with $10,000 of income tax expense.
▪ Nontraceable (common) corporate overhead totalled $68,000.
▪ Fog City's corporate headquarters is located in Burlington, and the company uses responsibility accounting to evaluate performance.
Required:
Prepare a segmented income statement for the Mississauga store, being sure to disclose the segment contribution margin, the segment profit margin, and net income.

Question 76

Excel Corporation has three divisions to service geographic areas across Canada: Vancouver, Montreal, and Toronto. Data for the company and for these divisions follow (in '000s).
Variable costs as a percentage of service revenue are: Vancouver, 16.67%; Montreal, 9%; and Toronto, 60%.
Required:
A. Complete the segmented income statement for Excel Corporation.
B. Evaluate the three segment managers for consideration of a pay raise. Base the managers' performance on an appropriate measure, and rank their performance with respect to absolute dollars and as a percentage of service revenue. What causes any difference in rankings between the two approaches?

Question 77

Division A transfers a profitable subassembly to Division B, where it is assembled into a final product. A is located in a European country that has a high tax rate; B is located in an Asian country that has a low tax rate. Ideally, (1) what type of before-tax income should each division report from the transfer and (2) what type of transfer price should Division A set for the subassembly? $\begin{array} { | l | l | l | l | l | l | } \hline &\text { Division A } &&\text { Division B }&&\text { Transfer Price Set } \\& \text { Income }&&\text { Income }&&\text { by A }\\\hline 1 & \text { Low } & & \text { Low } & & \text { Low } \\\hline 2 & \text { Low } & & \text { High } & & \text { Low } \\\hline 3 & \text { Low } & & \text { High } & & \text { High } \\\hline 4 & \text { High } & & \text { Low } & & \text { High } \\\hline 5 & \text { High } & & \text { High } & & \text { Low } \\\hline\end{array}$

A)1
B)2
C)3
D)4
E)5

Question 78

Midland Division, which is part of Courtyard Enterprises, recently reported a sales margin of 30%, ROI of 21%, and residual income of $220,000. Courtyard uses an imputed interest rate of 10%.
Required:
A. Briefly define sales margin, capital turnover, and return on investment.
B. Compute Midland's capital turnover and invested capital.
C. Ignoring your work in requirement "B," assume that invested capital amounted to $2,500,000. On the basis of this information, calculate income and sales revenue.

Question 79

Deborah Lewis, general manager of the Northwest Division of Berkshire Enterprises, has significant authority over pricing decisions as well as programs that involve cost reduction/control. The data that follow relate to upcoming divisional operations:
Average invested capital: $15,000,000
Annual fixed costs: $3,900,000
Variable cost per unit: $80
Number of units expected to be sold: 120,000
Required:
A. Top management will promote Deborah if she can earn a 14% return on investment for the year. What unit selling price should she establish to get her promotion?
B. Independent of part "A," assume the unit selling price is $132 and that Berkshire has a 16% imputed interest charge. Top management will promote Deborah to corporate headquarters if her division can generate $200,000 of residual income. If Deborah desires to move to corporate, what must the division do to the amount of annual fixed costs incurred? Show your calculations.

Question 80

Jeeves St. Laurent is an upscale men's clothing store that operates throughout British Columbia. The company, which has three divisions (Kelowna, Victoria, and Vancouver), reported the following information for the year just ended (in thousands): Jeeves St. Laurent also reported $800 of common fixed expenses that top management wants to allocate to the divisions on the basis of sales revenue. As the company's CEO notes, "Each division helped to incur a portion of these costs and, as a result, each should absorb its fair share." The firm has adopted various responsibility accounting procedures to evaluate the division personnel.
Required:
A. Compute the company's total sales revenue.
B. Calculate the amount of variable operating expense incurred by the Victoria Division.
C. Calculate the fixed costs controllable by Kelowna's management.
D. Calculate the fixed costs traceable to the Vancouver Division but controllable by others.
E. Jeeves St. Laurent desires to promote a division manager to the corporate office to oversee selected operations. In determining which individual to promote, should Jeeves St. Laurent's top management focus on the profit margin controllable by the division manager or the overall divisional profit margin? Briefly explain.