Question 1

Choices about decision-making authority and about organizational structure are often related.

Accepted Answer

A) True 
 B)False

Question 2

Bellingham Division has a required rate of return by corporate headquarters of 20%. The weighted average cost of capital is 12%. You are given the following information for Bellingham's operations for a two-year period: 2005 2004
Current assets $ 50,000 $ 60,000
Long-term assets 200,000 204,000
Accumulated amortization 60,000 44,000
Current liabilities 40,000 20,000
Long-term debt 100,000 140,000
Operating income for the year 19,000 21,000
Tax rate 40% 40%
The average investment to be used in the EVA computation for 2005 was:

Accepted Answer

A) $257,000 
B) $227,000 
C) $279,000 
D) $175,000

Question 3

For 2005, Aberdeen's return on sales was 10% and its investment turnover was 2.0. Return on investment for 2005 was:

Accepted Answer

A) 5% 
B) 10% 
C) 12% 
D) 20%

Question 4

Decision-making based on general knowledge is more likely to occur in this type of organization:

Accepted Answer

A) Centralized 
B) Decentralized 
C) Effective 
D) Ineffective

Question 5

A transfer price is required only when goods or services are transferred between cost centres in the same organization.

Accepted Answer

A) True 
 B)False

Question 6

Responsibility accounting includes:
I. Monitoring primarily for mistakes
II. Assigning authority to subunit managers
III. Measuring the performance of subunit managers

Accepted Answer

A) I and II only 
B) I and III only 
C) II and III only 
D) I, II, and III

Question 7

If manufacturing departments are only responsible for production decisions, they are considered cost centres.

Accepted Answer

A) True 
 B)False

Question 8

Return on investment is typically calculated as net income divided by total sales.

Accepted Answer

A) True 
 B)False

Question 9

The Machining Division has a capacity of 2,000 units. Its sales and cost data are: Selling price per unit $100
Variable manufacturing costs per unit $25
Variable administrative costs per unit $5
Total fixed manufacturing overhead $20,000
Total fixed administrative costs $5,000
Return on Investment is:

Accepted Answer

A) The same as residual income 
B) Net operating income divided by average operating assets 
C) A nonfinancial measure of performance 
D) Net operating income minus average operating assets X cost of capital

Question 10

The manager in a profit centre is responsible for:

Accepted Answer

A) Investments 
B) Only revenues 
C) Only the costs of production or services 
D) Both costs and revenues

Question 11

Teresa's Taco Co. had the following results during the most recent year: Sales $500,000; Residual income $5,000; investment turnover 2.5; and a required rate of return of 15%. The operating (pretax)income was:

Accepted Answer

A) $30,500 
B) $192,500 
C) $35,000 
D) $16,250

Question 12

Budgets can be used to evaluate managerial performance in:
I. Cost centres
II. Profit centres
III. Investment centres

Accepted Answer

A) II only 
B) I and II only 
C) II and III only 
D) I, II, and III

Question 13

Why should executive compensation in public companies be set by an independent compensation committee of the board of directors?

Accepted Answer

The answer of Why should executive compensation in public companies...

Question 14

The Eastern Division of WDY Corporation reported net income of $2,500, operating income of $4,000, average equity of $24,000, and average operating assets of $30,000 in a recent accounting period. If Eastern's required rate of return is 12%, its residual income was

Accepted Answer

A) 380 
B) $(380) 
C) $400 
D) $1,100

Question 15

Residual income is calculated as:

Accepted Answer

A) Operating income - (required rate of return × average operating assets) 
B) Net income - (required rate of return × average operating assets) 
C) Operating income - (required rate of return × average equity) 
D) Net income - (required rate of return × average equity)

Question 16

To protect shareholders from excessive compensation practices, executive compensation packages are best set by:

Accepted Answer

A) The board of directors 
B) A committee of primarily outside members of the board of directors 
C) A committee of top management employees 
D) The external auditors

Question 17

Managers often make choices about the location of decision-making responsibility. What is the relationship between the type of knowledge that is important in the organization and the location of decision-making authority?

Accepted Answer

The answer of Managers often make choices about the location...

Question 18

A corporate accounting department would most often be considered a:

Accepted Answer

A) Cost centre, because it is typically a high cost operation 
B) Cost centre, because its costs can be controlled by upper management 
C) Revenue centre, if accountants have input in pricing decisions 
D) Cost centre, because it is a support service

Question 19

Following is information for the Krishnan Company's three business divisions:
Division A Division B Division C
Pretax operating income $800,000 $400,000 $600,000
Current assets 80,000 60,000 80,000
Long-term assets 3,200,000 2,600,000 1,600,000
Current liabilities 400,000 200,000 300,000
Krishnan's tax rate for the divisions is 30%, and its after-tax weighted-average cost of capital (WACC)for each segment is 12%. The WACC is also used as a required rate of return.
a)Determine the division with the highest ROI. Show your calculations.
b)Determine the division with the highest residual income. Show your calculations.
c)Determine the segment with the highest EVA. Show your calculations.
d)Compare and contrast these three performance measures and their influence on managers.
e)Why is it better to use multiple measures for evaluating manager performance rather than a single measure such as ROI or EVA?

Accepted Answer

The answer of Following is information for the Krishnan Company's...

Question 20

Delta Division had the following results for the year just ended:
Sales $375,000
Variable costs 225,000
Fixed costs 120,000
Total operational assets 150,000
Delta is considering a new product line that would involve the following:
Sales $75,000
Variable costs 45,000
Fixed costs 23,250
Total operational assets 37,500
Delta's parent company, Omega, Inc., has a company-wide ROI of 14% and pays bonuses based on divisional ROI.
a)Determine the effect on Delta's ROI if it introduces the new product line. Would Delta's managers be encouraged to introduce the new product line?
b)Determine the effect on Omega's ROI if Delta introduces the new product line. Would the top managers of Omega want to introduce the new product line?
c)Assume a required rate of return of 10% on operational assets invested in each division. Determine the effect on Delta's residual income if it introduces the new product. Would Delta's managers be encouraged to introduce the new product line?

Accepted Answer

The answer of Delta Division had the following results for...

Exam 16: Performance Evaluation and Compensation

Choices about decision-making authority and about organizational structure are often related.

For 2005, Aberdeen's return on sales was 10% and its investment turnover was 2.0. Return on investment for 2005 was:

Decision-making based on general knowledge is more likely to occur in this type of organization:

A transfer price is required only when goods or services are transferred between cost centres in the same organization.

Responsibility accounting includes: I. Monitoring primarily for mistakes II. Assigning authority to subunit managers III. Measuring the performance of subunit managers

If manufacturing departments are only responsible for production decisions, they are considered cost centres.

Return on investment is typically calculated as net income divided by total sales.

The manager in a profit centre is responsible for:

Teresa's Taco Co. had the following results during the most recent year: Sales $500,000; Residual income $5,000; investment turnover 2.5; and a required rate of return of 15%. The operating (pretax) income was:

Budgets can be used to evaluate managerial performance in: I. Cost centres II. Profit centres III. Investment centres

Why should executive compensation in public companies be set by an independent compensation committee of the board of directors?

The Eastern Division of WDY Corporation reported net income of $2,500, operating income of $4,000, average equity of $24,000, and average operating assets of $30,000 in a recent accounting period. If Eastern's required rate of return is 12%, its residual income was

Residual income is calculated as:

To protect shareholders from excessive compensation practices, executive compensation packages are best set by:

Managers often make choices about the location of decision-making responsibility. What is the relationship between the type of knowledge that is important in the organization and the location of decision-making authority?

A corporate accounting department would most often be considered a: