Deck 14: Management Control in Decentralized Organizations

Question 1

Use the following information of the Toro division of Hondo Corporation to answer the next question(s):
Total divisional assets are $800,000. The firm's minimum required rate of return is 10%.
Decentralization is most successful when

A) segment autonomy does not exist.
B) established in nonprofit organizations.
C) there is frequent transferring of products between segments.
D) an organization's segments are relatively independent of one another.

Answer 1

D

Question 2

In measuring the performance of a division manager, stockholders' equity should not be used as the amount of invested capital.

Answer 2

True

Question 3

To minimize transfer-pricing problems, organizations will use a variable cost-based transfer price for all their segments.

Answer 3

False

Question 4

Use the following information of the Toro division of Hondo Corporation to answer the next question(s):
Total divisional assets are $800,000. The firm's minimum required rate of return is 10%.
Return on investment for the Toro division is

A) 5.34%.
B) 10%.
C) 12.5%.
D) 18.75%.

Question 5

Incentives do not enhance managerial effort toward goal congruence.

Question 6

Transfer prices are the amounts charged by one segment of an organization for a product or service that it supplies to another segment of the same organization.

Question 7

Multinational companies use transfer prices to minimize world-wide income taxes and import duties.

Question 8

Use the following information of the Toro division of Hondo Corporation to answer the next question(s):
Total divisional assets are $800,000. The firm's minimum required rate of return is 10%.
The decision-making power of segment managers is called

A) goal congruence.
B) segment autonomy.
C) managerial effort.
D) segment superiority.

Question 9

Profit centres can exist only in a decentralized organization.

Question 10

If there is a competitive market for the product or service being transferred internally, using the cost-based price as a transfer price will generally lead to the desired goal congruence and managerial effort.

Question 11

Dysfunctional behaviour is action taken in congruence with organizational goals.

Question 12

The income percentage of revenue is determined by multiplying return on investment by the capital turnover.

Question 13

Which of the following is NOT a benefit of decentralization?

A) Lower-level managers have the best information concerning local conditions and therefore may be able to make better decisions than their superiors.
B) Managers acquire decision-making ability and other management skills that help them move upward in the organization, assuring continuity of leadership.
C) Managers enjoy higher status from being independent and thus are better motivated.
D) Managers save time dealing with managers from other segments regarding transfer prices.

Question 14

Use the following information of the Toro division of Hondo Corporation to answer the next question(s):
Total divisional assets are $800,000. The firm's minimum required rate of return is 10%.
Residual income for the Toro division is

A) $50,000.
B) $70,000.
C) $150,000.
D) $170,000.

Question 15

Return on investment is a better test of profitability than just the amount of income generated by the investment.

Question 16

Decentralization is the delegation of freedom to make decisions.

Question 17

In designing accounting control systems, top managers must consider the system's impact on behaviour desired by the organization.

Question 18

In measuring income, either the net book value or the gross book value can be used.

Question 19

Decentralization is most successful when an organization's segments are relatively independent of one another.

Question 20

According to agency theory, employment contracts will trade off the following three factors: risk, incentive and the cost of measuring performance.

Question 21

Good, Inc.'s records reveal the following:
The variable cost of Division B will be incurred whether it buys from Division A or from an outside supplier.
If Division A is NOT at full capacity, the lowest price at which it would be willing to sell to Division B would be

A) $24.
B) $18.
C) $12.
D) $38.

Question 22

Any action taken in conflict with organizational goals is called

A) congruent behaviour.
B) managerial effort.
C) dysfunctional behaviour.
D) negotiating.

Question 23

Transfer-pricing systems do NOT exist to

A) communicate data that will lead to goal-congruent decisions.
B) guide managers to make the best possible decision for their segment.
C) evaluate segment performance.
D) motivate both the selling manager and the buying manager toward goal-congruent behaviour.

Question 24

Use the following information of the Toro division of Hondo Corporation to answer the next question(s):
Total divisional assets are $800,000. The firm's minimum required rate of return is 10%.
A transfer price exists when two segments of the same organization

A) sell a product to the same customer.
B) sell a service to each other.
C) sell a product in a foreign country.
D) sell the same service to competitors.

Question 25

The Pen and Pencil Divisions are part of the same company. Currently the Pencil Division buys a part ingredient from Pen for $96. The Pen Division wants to increase the price of the part it sells to Pencil by $24 to $120. The manager of Pencil has stated that it cannot afford to go that high, as it will decrease the division's profit to near zero. Pencil can buy the part from an outside supplier for $112. The cost data for the Pen Division is as follows:
If Pen ceases to produce the parts for Pencil, it will be able to avoid one-third of the fixed manufacturing overhead. The Pen Division has excess capacity but no alternative uses for its facilities.
What is the minimum transfer price that should be charged?

A) $120.00
B) $112.00
C) $97.20
D) $94.00

Question 26

Assuming a company uses a cost-based pricing system for transfer pricing, which of the following is not a possible definition of cost?

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

Question 27

Good, Inc.'s records reveal the following:
The variable cost of Division B will be incurred whether it buys from Division A or from an outside supplier.
The highest price that Division B would want to pay Division A for the components would be

A) $12.
B) $24.
C) $18.
D) $38.

Question 28

Buchmiller Company's records reveal the following:
The variable costs of Division Y will be incurred whether it buys from Division X or from an outside supplier.
If Division X wants to transfer the parts to Division Y for $54, the manager of Division Y would

A) not want to buy from Division X, as the same product could be purchased at the market price of $50.
B) buy from Division X, as this would be in the best interest of the company as a whole.
C) buy the part from Division X as long as Division X could supply a large enough quantity to make it profitable to Division Y.
D) probably ask Division X's manager to split the difference between the $54 and the market price of $50 to arrive at a transfer price of $52.

Question 29

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

A) $70.
B) $34.
C) $16.
D) $50.

Question 30

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

A) $50.
B) $34.
C) $16.
D) $44.

Question 31

Good, Inc.'s records reveal the following:
The variable cost of Division B will be incurred whether it buys from Division A or from an outside supplier.
If Division A is working at full capacity, the lowest price it would be willing to accept from Division B would be

A) $12.
B) $18.
C) $24.
D) $30.

Question 32

The use of which cost is recommended for transfer-pricing purposes?

A) Standard cost
B) Actual cost
C) Fixed cost
D) Sunk cost

Question 33

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

A) $34.
B) $16.
C) $50.
D) $44.

Question 34

The Pen and Pencil Divisions are part of the same company. Currently the Pencil Division buys a part ingredient from Pen for $96. The Pen Division wants to increase the price of the part it sells to Pencil by $24 to $120. The manager of Pencil has stated that it cannot afford to go that high, as it will decrease the division's profit to near zero. Pencil can buy the part from an outside supplier for $112. The cost data for the Pen Division is as follows:
If Pen ceases to produce the parts for Pencil, it will be able to avoid one-third of the fixed manufacturing overhead. The Pen Division has excess capacity but no alternative uses for its facilities.
What is the maximum transfer price that should be charged?

A) $120.00
B) $112.00
C) $97.20
D) $103.60

Question 35

The formal and informal performance-based rewards that enhance managerial effort toward organizational goals are referred to as

A) feedback.
B) evaluations.
C) incentives.
D) risks.

Question 36

The Pen and Pencil Divisions are part of the same company. Currently the Pencil Division buys a part ingredient from Pen for $96. The Pen Division wants to increase the price of the part it sells to Pencil by $24 to $120. The manager of Pencil has stated that it cannot afford to go that high, as it will decrease the division's profit to near zero. Pencil can buy the part from an outside supplier for $112. The cost data for the Pen Division is as follows:
If Pen ceases to produce the parts for Pencil, it will be able to avoid one-third of the fixed manufacturing overhead. The Pen Division has excess capacity but no alternative uses for its facilities.
From the standpoint of the company as a whole, should Pencil continue to buy from Pen or start to buy from the outside supplier?

A) Buy from Pen Division, because the company's profit would be $14.80 per unit larger.
B) Buy from Pen Division, because the company's profit would be $8.00 per unit larger.
C) Buy from an outside supplier.
D) None of the above.

Question 37

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

A) $12.
B) $18.
C) $30.
D) $24.

Question 38

Buchmiller Company's records reveal the following:
The variable costs of Division Y will be incurred whether it buys from Division X or from an outside supplier.
If Division X is working at full capacity, the lowest price it would be willing to accept from Division Y would be

A) $34.
B) $50.
C) $16.
D) $44.

Question 39

Good, Inc.'s records reveal the following:
The variable cost of Division B will be incurred whether it buys from Division A or from an outside supplier.
If Division A wants to transfer the components to Division B for $30 each, the manager of Division B would

A) not want to buy from Division A, as the same component could be purchased at the market price of $24.
B) buy from Division A, as this would be in the best interest of the company as a whole.
C) buy from Division A as long as Division A could supply a large enough quantity to make it profitable to Division B.
D) probably ask Division A's manager to split the difference between the $30 and the market price of $24 to arrive at a transfer price of $27.

Question 40

Which of the following is NOT a method of establishing a transfer price?

A) Full cost-based pricing less a profit markup
B) Market-based pricing
C) Negotiated pricing
D) Variable cost-based pricing

Question 41

The following information is available for the Peppercorn Company:

Residual income is defined as

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

Question 42

The following information is available for the Peppercorn Company:

A measure of income or profit divided by the investment required to obtain that income or profit is called

A) return on sales.
B) capital turnover.
C) return on investment.
D) residual income.

Question 43

The following information is available for the Peppercorn Company:

Which of the following changes would increase return on investment?

A) An increase in expenses and a decrease in sales at the same time
B) An increase in assets
C) A decrease in sales revenue
D) A decrease in expenses

Question 44

The following information is available for the Peppercorn Company:

One way to determine ROI is to multiply income percentage of revenue by

A) income percentage of revenue.
B) capital turnover.
C) residual income.
D) cost of capital.

Question 45

The following information is available for the Peppercorn Company:

What is the income percentage of revenue?

A) 10.00 percent
B) 6.25 percent
C) 1.00 percent
D) None of the above.

Question 46

The following information is available for the Berger Company:

What is the Net income?

A) $2,750,000
B) $1,250,000
C) $125,000
D) $400,000

Question 47

The Ink and Paper Divisions are part of the same company. Currently the Paper Division buys a part ingredient from Ink for $192. The Ink Division wants to increase the price of the part it sells to Paper by $48 to $240. The manager of Paper has stated that it cannot afford to go that high, as it will decrease the division's profit to near zero. Paper can buy the part from an outside supplier for $224. The cost data for the Ink Division is as follows:
If Ink ceases to produce the parts for Paper, it will be able to avoid one-third of the fixed manufacturing overhead. The Ink Division has excess capacity but no alternative uses for its facilities.
What is the minimum transfer price that should be charged?

A) $240.00
B) $224.00
C) $194.40
D) $188.00

Question 48

The Ink and Paper Divisions are part of the same company. Currently the Paper Division buys a part ingredient from Ink for $192. The Ink Division wants to increase the price of the part it sells to Paper by $48 to $240. The manager of Paper has stated that it cannot afford to go that high, as it will decrease the division's profit to near zero. Paper can buy the part from an outside supplier for $224. The cost data for the Ink Division is as follows:
If Ink ceases to produce the parts for Paper, it will be able to avoid one-third of the fixed manufacturing overhead. The Ink Division has excess capacity but no alternative uses for its facilities.
From the standpoint of the company as a whole, should Paper continue to buy from Ink or start to buy from the outside supplier?

A) Buy from Ink Division, because the company's profit would be $29.60 per unit larger.
B) Buy from Ink Division, because the company's profit would be $16.00 per unit larger.
C) Buy from an outside supplier.
D) None of the above.

Question 49

The Ink and Paper Divisions are part of the same company. Currently the Paper Division buys a part ingredient from Ink for $192. The Ink Division wants to increase the price of the part it sells to Paper by $48 to $240. The manager of Paper has stated that it cannot afford to go that high, as it will decrease the division's profit to near zero. Paper can buy the part from an outside supplier for $224. The cost data for the Ink Division is as follows:
If Ink ceases to produce the parts for Paper, it will be able to avoid one-third of the fixed manufacturing overhead. The Ink Division has excess capacity but no alternative uses for its facilities.
According to agency theory, employment contracts will trade off the following three factors:

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

Question 50

The following information is available for the Peppercorn Company:

What is the capital turnover?

A) 1.600
B) 0.100
C) 0.625
D) None of the above.

Question 51

The following information pertains to Jordan Company:

The return on investment is

A) 10 percent.
B) 50 percent.
C) 20 percent.
D) 12 percent.

Question 52

The following information pertains to Jordan Company:

The income percentage of revenue is

A) 100 percent.
B) 10 percent.
C) 500 percent.
D) 20 percent.

Question 53

The following information is available for the Peppercorn Company:

An improvement in either capital turnover or income percentage of revenue , without changing the other, will also improve the

A) residual income.
B) cost of capital.
C) net book value.
D) rate of return on invested capital.

Question 54

The Ink and Paper Divisions are part of the same company. Currently the Paper Division buys a part ingredient from Ink for $192. The Ink Division wants to increase the price of the part it sells to Paper by $48 to $240. The manager of Paper has stated that it cannot afford to go that high, as it will decrease the division's profit to near zero. Paper can buy the part from an outside supplier for $224. The cost data for the Ink Division is as follows:
If Ink ceases to produce the parts for Paper, it will be able to avoid one-third of the fixed manufacturing overhead. The Ink Division has excess capacity but no alternative uses for its facilities.
What is the maximum transfer price that should be charged?

A) $240.00
B) $224.00
C) $194.40
D) $207.20

Question 55

The following information is available for the Peppercorn Company:

The result of the calculation, which divides income by revenue is called

A) income percentage of revenue.
B) residual income.
C) capital turnover.
D) return on investment.

Question 56

The following information pertains to Jordan Company:

The capital turnover is

A) 2.
B) 5.
C) 10.
D) 1.

Question 57

The following information pertains to Jordan Company:

The residual income is

A) $200,000.
B) $120,000.
C) $ 80,000.
D) $240,000.

Question 58

The following information is available for the Berger Company:

What is the income percentage of revenue?

A) 10.000 percent
B) 3.125 percent
C) 1.000 percent
D) None of the above.

Question 59

The following information is available for the Peppercorn Company:

What is the net income?

A) $375,000
B) $625,000
C) $62,500
D) $200,000

Question 60

The following information is available for the Berger Company:

What is the capital turnover?

A) 3.2000
B) 0.1000
C) 0.3125
D) None of the above.

Question 61

The following information pertains to Baltic Company:

If invested capital is defined as stockholders' equity, the capital turnover is

A) 0.44.
B) 2.29.
C) 0.57.
D) 1.75.

Question 62

The following information pertains to Wolfe Company

If invested capital is defined as total assets minus current liabilities, a project earning an ROI of 30 percent should be

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

Question 63

The following information pertains to Wolfe Company

If invested capital is defined as total assets, a project earning an ROI of 12 percent should be

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

Question 64

The following information pertains to Wolfe Company

If invested capital is defined as total assets, the capital turnover is

A) 0.625.
B) 0.160.
C) 0.400.
D) 1.600.

Question 65

The following information pertains to Baltic Company:

If invested capital is defined as stockholders' equity, a project earning an ROI of 10 percent should be

A) accepted.
B) rejected.
C) accepted if the desired rate of return is less than 10 percent.
D) rejected if the cost of capital is greater than 10 percent.

Question 66

The delegation of freedom to make decisions.

Question 67

The following information pertains to Wolfe Company

The original cost of an asset less any accumulated depreciated is referred to as

A) net book value.
B) a net asset.
C) gross book value.
D) current cost.

Question 68

The asset section of the January 1, 20X7 balance sheet of Murphy Company includes a machine, which was acquired on January 1, 20X1. The machine's original cost was $1,000,000, and the estimated life was determined to be 10 years. The estimated residual value was zero, and the straight-line method of depreciation was chosen.
If operating income BEFORE amortization is $280,000, the rate of return on gross book value for 20X7 is

A) 18 percent.
B) 28 percent.
C) 45 percent.
D) 70 percent.

Question 69

The following information pertains to Baltic Company:

If invested capital is defined as stockholders' equity, the residual income at an imputed interest rate of 15 percent is

A) $118,000.
B) $160,000.
C) $24,000.
D) $42,000.

Question 70

The decision-making power of segment managers.

Question 71

The following information pertains to Wolfe Company

If invested capital is defined as total assets minus current liabilities, the residual income at an imputed interest rate of 9 percent is

A) $65,600.
B) $80,000.
C) $18,000.
D) $14,400.

Question 72

The following information pertains to Wolfe Company

Which of the following definitions of invested capital is NOT recommended for measuring the performance of division managers?

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

Question 73

The following information pertains to Wolfe Company

The income percentage of revenue is

A) 75 percent.
B) 25 percent.
C) 200 percent.
D) 40 percent.

Question 74

The following information pertains to Wolfe Company

If invested capital is defined as total assets, the return on investment is

A) 160 percent.
B) 25 percent.
C) 57 percent.
D) 40 percent.

Question 75

The following information pertains to Wolfe Company

If invested capital is defined as total assets, and the imputed interest rate is 8 percent, the residual income is

A) $16,000.
B) $64,000.
C) $80,000.
D) $ 6,400.

Question 76

The following information pertains to Baltic Company:

If invested capital is defined as stockholders' equity, the return on investment is

A) 175 percent.
B) 57 percent.
C) 229 percent.
D) 44 percent.

Question 77

The following information pertains to Wolfe Company

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

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

Question 78

The asset section of the January 1, 20X7 balance sheet of Murphy Company includes a machine, which was acquired on January 1, 20X1. The machine's original cost was $1,000,000, and the estimated life was determined to be 10 years. The estimated residual value was zero, and the straight-line method of depreciation was chosen.
The book value of the machine as of January 1, 20X7 is

A) $1,000,000.
B) $900,000.
C) $500,000.
D) $400,000.

Question 79

The following information pertains to Wolfe Company

Which of the following is NOT a possible definition of invested capital?

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

Question 80

The asset section of the January 1, 20X7 balance sheet of Murphy Company includes a machine, which was acquired on January 1, 20X1. The machine's original cost was $1,000,000, and the estimated life was determined to be 10 years. The estimated residual value was zero, and the straight-line method of depreciation was chosen.
If operating income AFTER amortization is $160,000, the rate of return on average net book value for 19X1 is

A) 6.3 percent.
B) 32.0 percent.
C) 16.8 percent.
D) 16.0 percent.