Question 1

The ratio of sales to investment is termed the rate of return on investment.

Accepted Answer

A) True 
 B)False

Question 2

The DuPont formula uses financial information to measure the performance of a business.

Accepted Answer

A) True 
 B)False

Question 3

Mandolin Company has two divisions. Division A is interested in purchasing 10,000 units from Division B. Capacity is available for Division B to produce these units. The per unit market price is $30 per unit, with a variable cost of $17. The manager of Division A has offered to purchase the units at $15 per unit. In an effort to make this transfer price beneficial for the company as a whole, what is the range of prices that should be used during negotiations between the two divisions?

Accepted Answer

A)  $15 to $30 
B)  $15 to $17 
C)  over $30 
D)  $17 to $30

Question 4

The Everest Company has income from operations of $80,000, invested assets of $500,000, and sales of $1,050,000. What is the investment turnover?

Accepted Answer

A)  1.8 
B)  2.1 
C)  .48 
D)  13.13

Question 5

Several items are missing from the following table of rate of return on investment and residual income. Determine the missing items, identifying each item by the appropriate letter.

Accepted Answer

The answer of Several items are missing from the following...

Question 6

The minimum amount of desired divisional income from operations is set by top management by establishing a minimum rate of return considered acceptable for invested assets.

Accepted Answer

A) True 
 B)False

Question 7

A factor in determining the rate of return on investment--the ratio of income from operations to sales--is called:

Accepted Answer

A)  profit margin 
B)  indirect expenses 
C)  investment turnover 
D)  cost

Question 8

The primary accounting tool for controlling and reporting for cost centers is a budget.

Accepted Answer

A) True 
 B)False

Question 9

The primary disadvantage of decentralized operations is that decisions made by one manager may affect other managers in such a way that the profitability of the entire company may suffer.

Accepted Answer

A) True 
 B)False

Question 10

The rates at which services are charged to each division are called service department charge rates.

Accepted Answer

A) True 
 B)False

Question 11

Chicks Corporation had $1,100,000 in invested assets, sales of $1,210,000, income from operations amounting to $302,500, and a desired minimum rate of return of 15%. The investment turnover for Chicks is:

Accepted Answer

A)  1.3 
B)  1.5 
C)  1.0 
D)  1.1

Question 12

The manager of a profit center does not make decisions concerning the fixed assets invested in the center.

Accepted Answer

A) True 
 B)False

Question 13

What is the term used to describe expenses that are incurred for the benefit of a specific department?

Accepted Answer

A)  Indirect expenses 
B)  Margin expenses 
C)  Departmental expenses 
D)  Direct expenses

Question 14

All of the following are advantages of decentralization except:

Accepted Answer

A)  Managers make better decisions when closer to the operation of the company. 
B)  Expertise in all areas of the business is difficult, decentralization makes it better to delegate certain responsibilities. 
C)  Each decentralized operation purchases their own assets and pays for operating costs. 
D)  Decentralized managers can respond quickly to customer satisfaction and quality service.

Question 15

Materials used by Jefferson Company in producing Division C's product are currently purchased from outside suppliers at a cost of $10 per unit. However, the same materials are available from Division A. Division A has unused capacity and can produce the materials needed by Division C at a variable cost of $8.50 per unit. A transfer price of $9.50 per unit is negotiated and 25,000 units of material are transferred, with no reduction in Division A's current sales.
How much would Jefferson's total income from operations increase?

Accepted Answer

A)  $37,500 
B)  $100,000 
C)  $62,500 
D)  $150,000

Question 16

The major advantage of residual income as a performance measure is that it gives consideration to not only a minimum rate of return on investment but also the total magnitude of income from operations earned by each division.

Accepted Answer

A) True 
 B)False

Question 17

The following financial information was summarized from the accounting records of Train Corporation for the current year ended December 31:  The gross profit for the Locomotive Division is:

Accepted Answer

A)  $57,960 
B)  $14,790 
C)  $27,240 
D)  $47,280

Question 18

If income from operations for a division is $30,000, sales are $263,750, and invested assets are $187,500, the investment turnover is 1.3.

Accepted Answer

A) True 
 B)False

Question 19

Using the data from the Ace Guitar Company, determine the divisional income from operations for the A and B regions.

Accepted Answer

The answer of Using the data from the Ace Guitar...

Question 20

Which one of the following is NOT a measure that management can use in evaluating and controlling investment center performance?

Accepted Answer

A)  Rate of return on investment 
B)  Negotiated price 
C)  Residual income 
D)  Income from operations

Exam 8: Performance Evaluation for Decentralized Operations

The ratio of sales to investment is termed the rate of return on investment.

The DuPont formula uses financial information to measure the performance of a business.

The Everest Company has income from operations of $80,000, invested assets of $500,000, and sales of $1,050,000. What is the investment turnover?

Several items are missing from the following table of rate of return on investment and residual income. Determine the missing items, identifying each item by the appropriate letter.

The minimum amount of desired divisional income from operations is set by top management by establishing a minimum rate of return considered acceptable for invested assets.

A factor in determining the rate of return on investment--the ratio of income from operations to sales--is called:

The primary accounting tool for controlling and reporting for cost centers is a budget.

The primary disadvantage of decentralized operations is that decisions made by one manager may affect other managers in such a way that the profitability of the entire company may suffer.

The rates at which services are charged to each division are called service department charge rates.

Chicks Corporation had $1,100,000 in invested assets, sales of $1,210,000, income from operations amounting to $302,500, and a desired minimum rate of return of 15%. The investment turnover for Chicks is:

The manager of a profit center does not make decisions concerning the fixed assets invested in the center.

What is the term used to describe expenses that are incurred for the benefit of a specific department?

All of the following are advantages of decentralization except:

The major advantage of residual income as a performance measure is that it gives consideration to not only a minimum rate of return on investment but also the total magnitude of income from operations earned by each division.

The following financial information was summarized from the accounting records of Train Corporation for the current year ended December 31: The gross profit for the Locomotive Division is:

If income from operations for a division is $30,000, sales are $263,750, and invested assets are $187,500, the investment turnover is 1.3.

Using the data from the Ace Guitar Company, determine the divisional income from operations for the A and B regions.

Which one of the following is NOT a measure that management can use in evaluating and controlling investment center performance?