Question 1

A revenue center manager is responsible for more functions than is a profit center manager.Revenue center managers are responsible for revenues,while profit center managers are responsible for both revenues and costs.

Accepted Answer

A) True 
 B)False

Question 2

Investment center managers have control over the investment of assets.Investment center managers are responsible for generating a profit and investing assets.

Accepted Answer

A) True 
 B)False

Question 3

Spice Company has two divisions,Parsley and Sage.Parsley produces a unit that Sage could use in its production.Sage currently is purchasing 50,000 units from an outside supplier for $50.Parsley is operating at less than full capacity and has variable costs of $27 per unit.The full cost to manufacture the unit is $38.Parsley currently sells 450,000 units at a selling price of $54.If an internal transfer is made,variable shipping and administrative costs of $2 per unit could be avoided.What would be the minimum transfer price?

Accepted Answer

A) $25 
B) $27 
C) $36 
D) $52

Question 4

Residual income is a leading indicator of financial performance.Residual income is a lagging indicator of financial performance.

Accepted Answer

A) True 
 B)False

Question 5

Spring Corp.has two divisions,Daffodil and Tulip.Daffodil produces a gadget that Tulip could use in its production.Tulip currently purchases 100,000 gadgets for $12.50 on the open market.Daffodil's variable costs are $6 per widget while the full cost is $9.35.Daffodil sells gadgets for $13 each.If Daffodil is operating at less than full capacity,what would be the minimum transfer price Daffodil would accept for an internal transfer?

Accepted Answer

A) $6.00 
B) $9.35 
C) $12.50 
D) $13.00

Question 6

Swan Company has two divisions,Hill and Paradise.Hill produces a unit that Paradise could use in its production.Paradise currently is purchasing 5,000 units from an outside supplier for $56.Hill is operating at less than full capacity and has variable costs of $30.80 per unit.The full cost to manufacture the unit is $43.40.Hill currently sells 450,000 units at a selling price of $61.60.How much will Paradise save by not purchasing from outside if a transfer price of $42 is agreed upon?

Accepted Answer

A) $70,000 
B) $56,000 
C) $7,000 more cost 
D) $28,000

Question 7

Devon Inc.has a profit margin of 12% and an investment turnover of 2.5.Sales revenue is $600,000.What is the amount of average invested assets?

Accepted Answer

A) $240,000 
B) $1,500,000 
C) $50,000 
D) $72,000

Question 8

Indigo Corp.has an ROI of 15% and a residual income of $10,000.If operating income equals $30,000,what is the hurdle rate?

Accepted Answer

A) 15% 
B) 10% 
C) 33.3% 
D) 18.3%

Question 9

Almond,Inc.uses a balanced scorecard.One of the measures on the scorecard is the average education level of the firm's managers.Which balanced scorecard perspective would this measure most likely fit into?

Accepted Answer

A) Customer perspective 
B) Learning and growth perspective 
C) Internal business perspective 
D) Financial perspective

Question 10

Evergreen Corp.has two divisions,Fern and Bark.Fern produces a widget that Bark could use in the production of units that cost $175 in variable costs,plus the cost of the widget,to manufacture.Fern's variable costs are $60 per widget,and fixed manufacturing costs are applied at a rate of $36 per widget.Widgets sell on the open market for $105 each.Evergreen's policy is that internal transfers will be made at full cost plus 20%.If Bark purchases the widgets from Fern,what will be the transfer price?

Accepted Answer

A) $72.00 
B) $115.20 
C) $126.00 
D) $210.00

Question 11

In transfer pricing,the manager of the buying division is motivated to pay the highest price possible.The manager of the buying division will want to pay the lowest price possible.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements follows from the controllability principle?

Accepted Answer

A) A profit center manager should be evaluated based on residual income,not return on investment. 
B) An investment center manager should be evaluated based on return on investment,not residual income. 
C) A profit center manager should be evaluated based on segment margin,not profit margin. 
D) A cost center manager should be evaluated on costs and revenues,not just costs.

Question 13

The transfer pricing method that uses either the variable cost or the full cost as the basis for setting the transfer price is the

Accepted Answer

A) market price method. 
B) cost-based method. 
C) negotiation. 
D) balanced scorecard methoD.The cost-based method uses cost as a basis for setting the transfer price.

Question 14

Which of the following responsibility centers will use a segmented income statement as an evaluation tool?

Accepted Answer

A) cost center 
B) revenue center 
C) profit center 
D) balanced center

Question 15

When negotiating a transfer price,the highest price the buyer will be willing to pay is the _____________,while the lowest price the seller will be willing to accept is the _______________.

Accepted Answer

A) market price…full cost 
B) full cost…variable cost 
C) market price…variable cost 
D) variable cost…market price

Question 16

Palm Inc.has a profit margin of 15% and an investment turnover of 2.Sales revenue is $800,000.What is the operating income?

Accepted Answer

A) $240,000 
B) $60,000 
C) $120,000 
D) $400,000

Question 17

A legal services department would be an example of a cost center.Cost center managers have the authority to incur costs to support their areas of responsibility;corporate support functions such as legal services would fall under this category.

Accepted Answer

A) True 
 B)False

Question 18

Residual income is the difference between operating profit and the minimum profit the organization must earn to cover the ROI.Residual income is the difference between operating profit and the minimum profit the organization must earn to cover the hurdle rate.

Accepted Answer

A) True 
 B)False

Question 19

Colonial has an ROI of 18% based on revenues of $300,000.The investment turnover is 1.5 and residual income is $20,000.What is the hurdle rate?

Accepted Answer

A) 18% 
B) 12% 
C) 8% 
D) 15%

Question 20

Tiffany Company has two divisions,Gold and Silver.Gold produces a unit that Silver could use in its production.Silver currently is purchasing 50,000 units from an outside supplier for $25.Gold is operating at less than full capacity and has variable costs of $13.50 per unit.The full cost to manufacture the unit is $20.Gold currently sells 450,000 units at a selling price of $27.If an internal transfer is made,variable shipping and administrative costs of $1 per unit could be avoided.If the internal transfer is made,what would be the impact on Tiffany Company's overall profits?

Accepted Answer

A) $625,000 increase 
B) $1,125,000 increase 
C) $225,000 decrease 
D) No change in profits

Exam 10: Decentralized Performance Evaluation

A revenue center manager is responsible for more functions than is a profit center manager.Revenue center managers are responsible for revenues,while profit center managers are responsible for both revenues and costs.

Investment center managers have control over the investment of assets.Investment center managers are responsible for generating a profit and investing assets.

Residual income is a leading indicator of financial performance.Residual income is a lagging indicator of financial performance.

Devon Inc.has a profit margin of 12% and an investment turnover of 2.5.Sales revenue is $600,000.What is the amount of average invested assets?

Indigo Corp.has an ROI of 15% and a residual income of $10,000.If operating income equals $30,000,what is the hurdle rate?

Almond,Inc.uses a balanced scorecard.One of the measures on the scorecard is the average education level of the firm's managers.Which balanced scorecard perspective would this measure most likely fit into?

In transfer pricing,the manager of the buying division is motivated to pay the highest price possible.The manager of the buying division will want to pay the lowest price possible.

Which of the following statements follows from the controllability principle?

The transfer pricing method that uses either the variable cost or the full cost as the basis for setting the transfer price is the

Which of the following responsibility centers will use a segmented income statement as an evaluation tool?

When negotiating a transfer price,the highest price the buyer will be willing to pay is the _,while the lowest price the seller will be willing to accept is the ___.

Palm Inc.has a profit margin of 15% and an investment turnover of 2.Sales revenue is $800,000.What is the operating income?

A legal services department would be an example of a cost center.Cost center managers have the authority to incur costs to support their areas of responsibility;corporate support functions such as legal services would fall under this category.

Residual income is the difference between operating profit and the minimum profit the organization must earn to cover the ROI.Residual income is the difference between operating profit and the minimum profit the organization must earn to cover the hurdle rate.

Colonial has an ROI of 18% based on revenues of $300,000.The investment turnover is 1.5 and residual income is $20,000.What is the hurdle rate?