Question 1

The following data pertains to the Electronics Division of the Maxwell & Ashley Company: $$\begin{array} { l r } 
\text { Sales } & \$ 1,000,000 \
\text { Invested capital } & \$ 700,000 \
\text { Noninterest-bearing current liabilities } & \$ 80,000 \
\text { Net operating profit after taxes } & \$ 82,000 \
\text { Minimum required rate of return } & 9 \% \
\text { Cost of capital } & 7 \%
\end{array}$$ How much is residual income for the Electronics Division?

Accepted Answer

A)  $19,000 
B)  $33,000 
C)  $26,200 
D)  $38,600

Question 2

Last year, Green Thumb's Residential Division reported sales of $950,000, interest expense of $100,000, and net income of $126,000. The company's tax rate is 30 percent, and it has an 8 percent cost of capital and a 9 percent required rate of return. Residential Division has noninterest-bearing current liabilities that total $75,000 and it has total assets of $820,000. How much is the Residential Division's residual income/(loss)?

Accepted Answer

A)  $136,400 
B)  $128,950 
C)  $96,400 
D)  ($3,600)

Question 3

The following information is reported for the current year for North Atlantic Division of XT Enterprises: $$\begin{array} { l r } 
\text { Sales } & \$ 3,800,000 \
\text { Interest expense } & \$ 250,000 \
\text { Net income } & \$ 500,000 \
\text { Total assets } & \$ 5,000,000 \
\text { Noninterest-bearing current liabilities } & \$ 400,000 \
\text { Cost of capital } & 8 \% \
\text { Required rate of return } & 14 \% \
\text { Tax rate } & 30 \%
\end{array}$$ As it relates to investment center evaluation, how much is the division's profit margin, rounded to the nearest whole percentage?

Accepted Answer

A)  18% 
B)  13% 
C)  10% 
D)  11%

Question 4

The Pastry Division of Dream Bread has invested capital of $1,300,000. During the past year, the Pastry Division reported sales of $1,200,000 and earned $400,000 of NOPAT. How much profit did the Pastry Division generate on each revenue dollar earned by the division?

Accepted Answer

A)  92.3% 
B)  16.0% 
C)  33.3% 
D)  30.8%

Question 5

Economic value added is calculated as the return on investment adjusted for accounting distortions.

Accepted Answer

A) True 
 B)False

Question 6

The 2014 income statement for the Clothing Division of Tom Ron Surf Company is as follows: $\begin{array}{lr}
\text { Sales } & \$ 445,000 \
\text { Operating expenses } & 270,000 \
\text { Net operating income } & 175,000 \
\text { Interest expense } & 35,000 \
\text { Earnings before taxes } & 140,000 \
\text { Income tax expense }(30 \%) & 42,000 \
\text { Net income } & \$ 98,000
\end{array}$ How much is net operating profit after taxes?

Accepted Answer

A)  $108,500 
B)  $133,000 
C)  $73,500 
D)  $122,500

Question 7

The manager of the Beach Division of Treat Time is evaluating the acquisition of a new mobile ice cream server. The budgeted operating income of the Beach Division is currently $2,940,000 with total assets of $28,600,000 and noninterest-bearing current liabilities of $600,000. The proposed investment would add $18,000 to operating income and would require an additional investment of $120,000. The targeted rate of return for the Beach Division is 9 percent. Ignoring taxes, how much is the return on investment of the Beach Division if the ice cream server is purchased?

Accepted Answer

A)  10.52% 
B)  15.00% 
C)  10.56% 
D)  12.75%

Question 8

The Pastry Division of Dream Bread has invested capital of $1,300,000. During the past year, the Pastry Division reported sales of $1,200,000 and earned $400,000 of NOPAT. How much return did the Pastry Division generate on each dollar of assets invested in the division?

Accepted Answer

A)  8.5% 
B)  3.25% 
C)  27.63% 
D)  30.77%

Question 9

Sorenson Products has two divisions: a kitchen wares division that manufactures ceramic dishes and a ceramic resin division that manufactures the resin used in creating ceramic products. All ceramic used by the kitchen wares division is supplied by the ceramic resin division, which also supplies resin to outside companies. What is the best transfer price for the resin, assuming that the resin division is operating at only 70 percent of capacity?

Accepted Answer

A)  An amount that equates to the variable costs plus the contribution margin of the resin 
B)  An amount that equates to the market price of the resin 
C)  An amount that equates to the incremental cost of the resin 
D)  An amount that equates to the full cost of the resin

Question 10

When an efficient market exists, the variable cost will generally be the best transfer price.

Accepted Answer

A) True 
 B)False

Question 11

The four dimensions of performance that are considered in a balanced scorecard are financial, customer, internal processes, and strategy.

Accepted Answer

A) True 
 B)False

Question 12

When making a decision that involves a product transferred from another subunit of the company, the manager of the selling division should choose the alternative that

Accepted Answer

A)  maximizes the profit of his subunit. 
B)  requires a negotiated transfer price. 
C)  minimizes the goods needed from another subunit of the company. 
D)  maximizes profit for the company as a whole.

Question 13

Align Division is one of the divisions of DynaCore. Align's invested capital is $420,000. Last year, Align generated NOPAT of $64,260 on sales of $756,000. Which one of the following correctly calculates Align Division's return on investment using the two components of return on investment?

Accepted Answer

A)  $64,260 ÷ $756,000 
B)  11.76% × 0.56 
C)  $4,260 ÷ $756,000 
D)  8.5% × 1.80

Question 14

Lack of goal incongruence is a problem in decentralized organizations.

Accepted Answer

A) True 
 B)False

Question 15

Goal congruence refers to the match between

Accepted Answer

A)  locations of manufacturing plants and customers. 
B)  goals based on profits and those based on return on investment. 
C)  number of units produced and number of units sold. 
D)  goals of the individual managers and those of the company as a whole.

Question 16

Standard Media has a required rate of return of 5 percent, a cost of capital of 4 percent, and an income tax rate of 30 percent. The following information about its two divisions has been provided by management: $\begin{array}{lrr}&\text { Audio Division }&\text { Video Division }\\hline
\text { NOPAT } & \$ 1,400,000 & \$ 2,000,000 \
\text { Sales } & \$ 10,000,000 & \$ 12,500,000 \
\text { Invested capital } & \$ 15,000,000 & \$ 17,500,000
\end{array}$ How much is the ROI of the Audio Division?

Accepted Answer

A)  9.33% 
B)  66.67% 
C)  14.00% 
D)  16.00%

Question 17

If a company uses responsibility accounting, a shift supervisor in the Austin production plant should be held responsible for

Accepted Answer

A)  all costs associated with the Austin plant. 
B)  direct costs incurred on the supervisor's shift. 
C)  a share of all of the company's costs. 
D)  direct material, direct labor, and all manufacturing overhead incurred on the supervisor's shift.

Question 18

Leon Division had interest expense of $94,400. Its income tax rate was 32%. Leon Division generated net income totaling $784,400. With $2,400,000 of assets invested in Leon Division, for how much profit is the Leon Division manager responsible?

Accepted Answer

A)  $631,192 
B)  $819,608 
C)  $848,592 
D)  $725,208

Question 19

Tomlinson Tech has a cost of capital of 8 percent, a required rate of return of 9.5 percent, and an income tax rate of 30 percent. The Consumer Division of Tomlinson Tech has assets totaling $2,800,000 and current liabilities at $180,000 with $40,000 of this amount being interest-bearing. Sales for the year totaled $1,900,000 and interest expense totaled $20,000. Net income was $166,500 for the year. How much is the Consumer Division's residual income/(loss)?

Accepted Answer

A)  ($32,300) 
B)  ($72,200) 
C)  ($46,300) 
D)  None of these answer choices are correct.

Question 20

Using NOPAT as 'income' in the residual income model is appropriate because managers do not control the choice of using debt versus equity financing for the assets invested in their division.

Accepted Answer

A) True 
 B)False

Exam 12: Decentralization and Performance Evaluation

The Pastry Division of Dream Bread has invested capital of $1,300,000. During the past year, the Pastry Division reported sales of $1,200,000 and earned $400,000 of NOPAT. How much profit did the Pastry Division generate on each revenue dollar earned by the division?

Economic value added is calculated as the return on investment adjusted for accounting distortions.

The Pastry Division of Dream Bread has invested capital of $1,300,000. During the past year, the Pastry Division reported sales of $1,200,000 and earned $400,000 of NOPAT. How much return did the Pastry Division generate on each dollar of assets invested in the division?

When an efficient market exists, the variable cost will generally be the best transfer price.

The four dimensions of performance that are considered in a balanced scorecard are financial, customer, internal processes, and strategy.

When making a decision that involves a product transferred from another subunit of the company, the manager of the selling division should choose the alternative that

Align Division is one of the divisions of DynaCore. Align's invested capital is $420,000. Last year, Align generated NOPAT of $64,260 on sales of $756,000. Which one of the following correctly calculates Align Division's return on investment using the two components of return on investment?

Lack of goal incongruence is a problem in decentralized organizations.

Goal congruence refers to the match between

If a company uses responsibility accounting, a shift supervisor in the Austin production plant should be held responsible for

Leon Division had interest expense of $94,400. Its income tax rate was 32%. Leon Division generated net income totaling $784,400. With $2,400,000 of assets invested in Leon Division, for how much profit is the Leon Division manager responsible?

Using NOPAT as 'income' in the residual income model is appropriate because managers do not control the choice of using debt versus equity financing for the assets invested in their division.