Question 1

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
Residual income is:

Accepted Answer

A) The same as return on investment 
B) A nonfinancial measure of performance 
C) Net operating income minus a required rate of return X average operating assets 
D) Sales divided by net operating income

Question 2

Specific knowledge is:

Accepted Answer

A) Not necessary in today's business operations 
B) Not very costly to transfer 
C) The same as general knowledge 
D) Detailed technical knowledge about specific processes

Question 3

Investment centre managers are held responsible only for their costs.

Accepted Answer

A) True 
 B)False

Question 4

The location of decision authority in an organization depends on:

Accepted Answer

A) The size of the organization 
B) Whether specific or general knowledge is most important in successful decision-making 
C) Whether the organization is for-profit or not-for-profit 
D) Whether the organization uses a lot of technology

Question 5

Efficiency measures, such as number of new products developed, may be more useful than financial measures in:

Accepted Answer

A) Profit centres 
B) Discretionary cost centres 
C) Revenue centres 
D) Investment centres

Question 6

A segment with an ROI of 30% has an income of $84,000. The company's required rate of return on segment investments is 18%. The segment's residual income is:

Accepted Answer

A) $50,400 
B) $25,200 
C) $26,712 
D) $33,600

Question 7

Indicate whether each of the following is more descriptive of centralized (C)or decentralized (D)decision-making.
____ 1. Decision-makers may not fully understand organizational goals and strategies
____ 2. Decisions are more easily made for the benefit of the overall organization
____ 3. Decisions are made by individuals with the greatest knowledge
____ 4. Good for organizations with stable and less complex operations
____ 5. Lack of coordination among subunits may lead to duplication in efforts
____ 6. Although less monitoring of decisions is usually needed, more monitoring of employee effort is necessary.
____ 7. Managers are motivated more often through incentive contracting rather than by monitoring
____ 8. Poor quality decisions due to lack of information
____ 9. More timely decision-making
____ 10. Upper management can focus on organizational strategies

Accepted Answer

The answer of Indicate whether each of the following is...

Question 8

Compensation contracts can be based on accounting and / or non-accounting measurements.

Accepted Answer

A) True 
 B)False

Question 9

St. John's Division has a required rate of return of 15%. The weighted average cost of capital is 10%. Information for St. John's Divisions operations over the past 2 years follows: 20x5 20x4
Current assets $120,000 $100,000
Property, plant and equipment (cost)300,000 280,000
Accumulated amortization 80,000 60,000
Current liabilities 90,000 70,000
Long-term debt 85,000 80,000
Pretax operating income 52,800 48,900
Income tax rate 30% 30%
What was the St. John's Division EVA for 20x5?

Accepted Answer

A) $3,960 
B) $11,960 
C) $20,460 
D) $27,800

Question 10

A business segment that has responsibility for both revenues and expenses is called a(n)

Accepted Answer

A) Administrative centre 
B) Investment centre 
C) Profit centre 
D) Revenue centre

Question 11

For 2006, Aberdeen's return on investment was 26% and its investment turnover was 2.0. Return on sales for 2006 was:

Accepted Answer

A) 10% 
B) 13% 
C) 24% 
D) 26%

Question 12

Among the responsibility centres listed, which type of responsibility centre is most likely to use growth in sales as a performance measure?

Accepted Answer

A) Cost 
B) Profit 
C) Revenue 
D) Investment

Question 13

The manager in a cost 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 14

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 residual income for 2005 was:

Accepted Answer

A) ($21,000) 
B) ($22,000) 
C) ($14,000) 
D) $1,000

Question 15

(CMA)The segment operating margin less imputed (estimated)interest on the assets used by the investment centre is known as:

Accepted Answer

A) Return on investment 
B) Residual income 
C) Operating income 
D) Return on assets

Question 16

Compare and contrast return on investment, residual income, and economic value added. Which method is best for evaluating investment centre managers? Explain your reasoning.

Accepted Answer

The answer of Compare and contrast return on investment, residual...

Question 17

Residual income measures a company's profits given a required rate of return.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following best describes "general knowledge" in a decision-making context?

Accepted Answer

A) Detailed information about manufacturing processes 
B) Customer lists and preferences kept by individual departments in retail sales 
C) Knowledge that is easily transferred between employees 
D) Knowledge that can be obtained only outside the organization

Question 19

St. John's Division has a required rate of return of 15%. The weighted average cost of capital is 10%. Information for St. John's Divisions operations over the past 2 years follows: 20x5 20x4
Current assets $120,000 $100,000
Property, plant and equipment (cost)300,000 280,000
Accumulated amortization 80,000 60,000
Current liabilities 90,000 70,000
Long-term debt 85,000 80,000
Pretax operating income 52,800 48,900
Income tax rate 30% 30%
What was the St. John's Division ROI for 20x5 (rounded to nearest 0.1%)?

Accepted Answer

A) 11.2% 
B) 13.2% 
C) 15.5% 
D) 16.0%

Question 20

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 return on sales was:

Accepted Answer

A) 7% 
B) 6)1% 
C) 38.5% 
D) 3)25%

Exam 16: Performance Evaluation and Compensation

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 Residual income is:

Specific knowledge is:

Investment centre managers are held responsible only for their costs.

The location of decision authority in an organization depends on:

Efficiency measures, such as number of new products developed, may be more useful than financial measures in:

A segment with an ROI of 30% has an income of $84,000. The company's required rate of return on segment investments is 18%. The segment's residual income is:

Compensation contracts can be based on accounting and / or non-accounting measurements.

A business segment that has responsibility for both revenues and expenses is called a(n)

For 2006, Aberdeen's return on investment was 26% and its investment turnover was 2.0. Return on sales for 2006 was:

Among the responsibility centres listed, which type of responsibility centre is most likely to use growth in sales as a performance measure?

The manager in a cost centre is responsible for:

(CMA) The segment operating margin less imputed (estimated) interest on the assets used by the investment centre is known as:

Compare and contrast return on investment, residual income, and economic value added. Which method is best for evaluating investment centre managers? Explain your reasoning.

Residual income measures a company's profits given a required rate of return.

Which of the following best describes "general knowledge" in a decision-making context?

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 return on sales was: