Question 1

Basically,EVA is residual income with the cost of capital equal to the minimum rate of return for the firm.

Accepted Answer

A) True 
 B)False

Question 2

The following information pertains to the three divisions of Borraw Company:
 $\begin{array}{lrr} 
& \text { Division A } & \text { Division B } \
\text { Sales } & ? & 1,250,000 \
\text { Net operating income } & \$ 25,000 & \$ 75,000\\text { Average operating assets } & ? & ? \
\text { Return on investment } & 20 \% & 15 \% \
\text { Margin } & 0.05 & ? \
\text { Turnover } & ? & ? \
\text { Target ROI } & 12 \% & 10 \%
\end{array}$
-Refer to the Figure.What are the average operating assets for Division B?

Accepted Answer

A) $5,000 
B) $25,000 
C) $125,000 
D) $208,333

Question 3

The following information pertains to the three divisions of Zorro Company: What is the residual income for Division A?
$\begin{array}{lrrr} 
& \text { Division A } & \text { Division B } & \text { Division C } \
\text { Sales } & ? & ? & 1,250,000 \
\text { Net operating income } & \$ 40,000 & \$ 25,000 & \$ 75,000\
\text { Average operating assets } & 400,000 & ? & ? \
\text { Return on investment } & ? & 20 \% & 15 \% \
\text { Margin } & 0.10 & 0.05 & ? \
\text { Tumover } & 1.2 & ? & ? \
\text { Target ROI } & 14 \% & 12 \% & 10 \%
\end{array}$

Accepted Answer

A) ($36,000) 
B) ($16,000) 
C) $36,000 
D) $45,000

Question 4

Division A produces a component and wants to sell it to Division B.Which of the following best describes the relationship of the transfer price to Division A and Division B?

Accepted Answer

A) revenue to Division A and a cost to Division B 
B) revenue to Division B and a cost to Division A 
C) revenue to Division A and no effect on Division B 
D) a cost to Division B and no effect on Division A

Question 5

Suppose the International Division of National Products Company had a turnover ratio of 5.2 and a margin of 0.10.What would be the return on investment?

Accepted Answer

A) 23.8% 
B) 42.0% 
C) 38.0% 
D) 420.0%

Question 6

Alpha Division had the following information: Suppose the asset base is decreased by $200,000,with no other changes.What would be the return on investment of Alpha Division?
$$\begin{array} { l r } 
\text { Asset base in Alpha Division } & \$ 800,000 \
\text { Net income in Alpha Division } & \$ 100,000 \
\text { Cost of capital } & 12 \% \
\text { Target ROI } & 15 \% \
\text { Margin for Alpha Division } & 20 \%
\end{array}$$

Accepted Answer

A) 16.7% 
B) 62.5% 
C) 100.0% 
D) 600.0%

Question 7

Giga-Stuff, Inc. has a number of divisions. One division, Sophistosand, makes component X, which is used in the manufacture of DVD players. Another division, Videostuff, makes DVD players and needs 60,000 units of component X per year. Sophistosand incurs the following costs for one unit of component X:
Sophistosand has the capacity to make 400,000 units of component X per year but, due to a soft market, plans to produce and sell only 320,000 units next year. Videostuff currently buys component X from an outside supplier for $2.50 each (the same price that Sophistosand receives).
 $$\begin{array} { l r } 
\text { Direct materials } & \$ 0.30 \
\text { Direct labour } & 0.15 \
\text { Variable overhead } & 0.70 \
\text { Fixed overhead } & 1.00 \
\text { Total } & \$ 2.15
\end{array}$$
-Refer to the Figure.Assume that Sophistosand and Videostuff have agreed on a transfer price of $2.20.What are the total cost savings for Videostuff?

Accepted Answer

A) $18,000 
B) $63,000 
C) $69,000 
D) $81,000

Question 8

Return on investment (ROI)is the most common measure of performance for a revenue centre.

Accepted Answer

A) True 
 B)False

Question 9

What is the term for the strategic management system that translates an organization's mission and strategy into operational objectives and performance measures?

Accepted Answer

A) activity-based management 
B) responsibility accounting 
C) strategic accounting 
D) Balanced Scorecard

Question 10

How is residual income calculated?

Accepted Answer

A) operating income − (ROI × average operating assets) 
B) operating income/(ROI × average operating assets) 
C) operating income/(minimum rate of return × average operating assets) 
D) operating income − (minimum rate of return × average operating assets)

Question 11

Why is decentralization frequently chosen by companies?

Accepted Answer

A) It allows higher management to make all decisions. 
B) It allows higher management to gather local information to make better decisions. 
C) It protects segments of the company from competitive pressures. 
D) It allows for training and motivation of local managers.

Question 12

The selling division is forced to transfer a product internally when a cost-based transfer pricing policy is set by top management.

Accepted Answer

A) True 
 B)False

Question 13

Suppose the operating asset turnover increased by 75% and the margin increased by 50%.What would be the percentage increase in the ROI?

Accepted Answer

A) 25.0% 
B) 75.0% 
C) 100.0% 
D) 162.5%

Question 14

Using return on investment to calculate residual income,the dollar cost of capital employed is the actual percentage cost of capital multiplied by the total capital.

Accepted Answer

A) True 
 B)False

Question 15

The Wood Parts Division of Alpha Company sells all of its output to the Finishing Division of the company.The only product of the Wood Parts Division is chair legs that are used by the Finishing Division.The retail price of the legs is $20 per leg.Each chair completed by the Finishing Division requires four legs.Production quantity and cost data are as follows:
Required: Compute the transfer price for a chair leg using:
 $\begin{array}{lr}
\text { Number of chair legs produced each year } & 30,000 \
\text { Direct materials } & \$ 135,000 \
\text { Direct labour } & \$ 90,000 \
\text { Factory overhead (25\% is variable) } & \$ 90,000
\end{array}$ A. Market price
B. Variable product costs plus a fixed fee of $20 \%$
C. Full cost plus $20 \%$ markup
D. Variable costs

Accepted Answer

The answer of The Wood Parts Division of Alpha Company...

Question 16

Last year,Western Division had a ROI of 15%.The manager of the Western Division is considering an additional investment for the coming year.What step will the manager likely choose to take?

Accepted Answer

A) accept the investment as long as it provides positive operating income 
B) accept the investment as long as its ROI is positive 
C) reject the investment if it returns more than 15% ROI 
D) reject the investment if it returns less than 15% ROI

Question 17

What is the term for the number of units of output that can be produced in a given period of time?

Accepted Answer

A) cycle time 
B) unit process time 
C) responsiveness 
D) velocity

Question 18

What is the variable set by top management when calculating residual income?

Accepted Answer

A) the average operating assets 
B) the operating income 
C) the hurdle rate 
D) the actual operating assets

Question 19

Decreasing inventories leads to a reduction in return on investment (ROI).

Accepted Answer

A) True 
 B)False

Question 20

Residual income is sometimes used to overcome the tendency of ROI to discourage investments that are profitable for the company but that lower the division's ROI.

Accepted Answer

A) True 
 B)False

Exam 12: Performance Evaluation and Decentralization

Basically,EVA is residual income with the cost of capital equal to the minimum rate of return for the firm.

Division A produces a component and wants to sell it to Division B.Which of the following best describes the relationship of the transfer price to Division A and Division B?

Suppose the International Division of National Products Company had a turnover ratio of 5.2 and a margin of 0.10.What would be the return on investment?

Return on investment (ROI)is the most common measure of performance for a revenue centre.

What is the term for the strategic management system that translates an organization's mission and strategy into operational objectives and performance measures?

How is residual income calculated?

Why is decentralization frequently chosen by companies?

The selling division is forced to transfer a product internally when a cost-based transfer pricing policy is set by top management.

Suppose the operating asset turnover increased by 75% and the margin increased by 50%.What would be the percentage increase in the ROI?

Using return on investment to calculate residual income,the dollar cost of capital employed is the actual percentage cost of capital multiplied by the total capital.

Last year,Western Division had a ROI of 15%.The manager of the Western Division is considering an additional investment for the coming year.What step will the manager likely choose to take?

What is the term for the number of units of output that can be produced in a given period of time?

What is the variable set by top management when calculating residual income?

Decreasing inventories leads to a reduction in return on investment (ROI).

Residual income is sometimes used to overcome the tendency of ROI to discourage investments that are profitable for the company but that lower the division's ROI.