Deck 11: Performance Evaluation and Decentralization

Question 1

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

Answer 1

False

Question 2

In a decentralized company, central management is able to focus on strategic planning and decision making.

Answer 2

True

Question 3

Turnover is the most common measure of performance for an investment center.

Answer 3

False

Question 4

The net income reduced by the total annual cost of capital is equal to the economic value added.

Question 5

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.

Question 6

The direct comparison of the performance of two different investment centers is difficult using residual income because residual income is an absolute measure.

Question 7

Economic value added (EVA) is similar to ROI in that it links net income to capital employed.

Question 8

Turnover is the ratio of sales to average operating assets.

Question 9

Decentralization is usually achieved by creating units called divisions.

Question 10

Residual income is the difference between operating income and the product of the hurdle rate and the company's average operating assets.

Question 11

The use of residual income encourages managers to accept any project that earns above the minimum rate.

Question 12

Return on investment (ROI) can be calculated by multiplying margin times turnover.

Question 13

In calculating residual income, the minimum rate of return is set by top management and is the same as the hurdle rate used for return on investment.

Question 14

Basically, EVA is residual income with the cost of capital equal to the actual cost of capital for the firm (as opposed to some minimum rate of return desired by the company for other reasons).

Question 15

The practice of delegating decision-making authority to lower levels of management in a company is called centralization.

Question 16

Unlike ROI, residual income does not encourage a short-run orientation.

Question 17

In a decentralized company, overall profit margins can mask inefficiencies within the various subdivisions.

Question 18

A key feature of economic value added (EVA) is that it emphasizes after-tax operating income and the actual cost of capital.

Question 19

A production department within the factory, such as assembly, is an example of a profit center.

Question 20

Economic value added is just a specific way of calculating residual income.

Question 21

Transfer pricing is a complex issue.

Question 22

A ____________________ is a segment of the business whose manager is accountable for specific sets of activities.

Question 23

Several transfer pricing policies are used in practice.These transfer pricing policies include market price, cost-based transfer prices, and negotiated transfer prices.

Question 24

In _______________ decision making, decisions are made at the very top level, and lower-level managers are charged with implementing these decisions.

Question 25

In negotiated transfer pricing, the selling division sets the ceiling (maximum possible transfer price) for the bargaining range.

Question 26

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

Question 27

A transfer price is the price charged for a component by the selling division to the buying division of the same company.

Question 28

A(n) ________________ is when a manager is responsible only for sales.

Question 29

The selling division would never agree to a transfer price below its full manufacturing cost.

Question 30

When the selling division can sell and the buying division can buy externally at the market price, the company as a whole will be in the same position whether or not a market price transfer takes place internally.

Question 31

In negotiated transfer pricing, the buying division sets the ceiling (maximum possible transfer price) for the bargaining range.

Question 32

Decentralization usually is achieved by creating units called ___________.

Question 33

An ______________________ is when a manager is responsible for revenues, costs and investments.

Question 34

If there is a competitive outside market for the transferred product, then the best transfer price is the cost-based transfer price.

Question 35

When a manager is responsible for only costs it is known as a(n) _______________.

Question 36

In terms of operating income for the company as a whole, the transfer price set by the buying and selling divisions nets out.

Question 37

The price charged for the transferred good affects the costs of the buying division and the revenues of the selling division.

Question 38

________________ decision making allows managers at lower levels to make and implement key decisions pertaining to their areas of responsibility.

Question 39

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

Question 40

When a product is transferred at market price, the transfer will optimize both divisional and company-wide profits.

Question 41

A responsibility center in which a manager is responsible only for costs is a(n)

A) investment center.
B) revenue center.
C) profit center.
D) cost center.
E) center not presented here.

Question 42

______________________ occurs whenever managers receive information about the effectiveness of strategy implementation as well as the validity of the assumptions underlying the strategy.

Question 43

________________ is the difference between realization and sacrifice, where realization is what the customer receives and sacrifice is what is given up in return.

Question 44

_________________ is found by dividing sales by average operating assets.

Question 45

If there is a competitive outside market for the transferred product, then the best transfer price is the _____________.

Question 46

The difference between operating income and the minimum dollar return required on a company's operating assets is the _______________.

Question 47

A responsibility center in which a manager is responsible for both revenues and costs is a(n)

A) cost center.
B) revenue center.
C) profit center.
D) investment center
E) None of these.

Question 48

Which of the following is true of revenue centers?

A) These are responsibility centers wherein managers are responsible for costs and quantity sold.
B) These are responsibility centers wherein managers are responsible for price and quantity sold.
C) These are responsibility centers wherein managers are responsible for revenues.
D) These are responsibility centers wherein managers are responsible for investments.
E) None of these

Question 49

Which of the following results from decentralization?

A) It results in better local decision-making by central management as they are in contact with immediate operating conditions.
B) It results in better implementation of decisions as central management is charged with both making and implementing decisions.
C) It results in the usage of a firm's resources to maximize firm value by the lower-level managers.
D) It results in enhanced competition as segments are protected from dealing with market forces.
E) All of these.

Question 50

_____________________ refers to earnings before non-operating revenue, expenses, interest and taxes.

Question 51

​Which of the following is true of a decentralized company?

A) In a decentralized company, lower-level managers are responsible only for implementing decisions.
B) In a decentralized company, overall profit margins can mask inefficiencies within various subdivisions.
C) In a decentralized company, the owner makes all important operating and strategic decisions.
D) Managers in a decentralized company make and implement fewer decisions than do managers in a centralized firm.
E) Local managers in a decentralized company can make better decisions using local information.

Question 52

___________________ is after-tax operating income minus the dollar cost of capital employed.

Question 53

Typically, investment centers are evaluated on the basis of __________________.

Question 54

A responsibility center in which a manager is responsible for revenues, cost, and investment is a(n)

A) cost center.
B) revenue center.
C) profit center.
D) investment center.
E) None of these.

Question 55

_________________ emphasizes only effectiveness of implementation.

Question 56

A _________________ is the price charged for a component by the selling division to the buying division of the same company.

Question 57

_____________ is the ratio of operating income to sales.

Question 58

Divisions in a decentralized company can be created along which of the following lines?

A) geographical
B) types of goods or services produced
C) type of responsibility given to divisional manager
D) All of these answers are correct.
E) None of these answers are correct.

Question 59

The ________________ is a strategic management system that defines a strategic-based responsibility accounting system.

Question 60

_______________ indicate the minimum ROI necessary to accept an investment.

Question 61

Which of the following is true of decentralization?

A) Under decentralization, lower-level managers are responsible only for implementing decisions.
B) Decentralization allows higher management to make better decisions by using local information.
C) It protects segments of a company from competitive pressures.
D) It is usually achieved by creating units called divisions.
E) Decentralization allows only the CEO of a company to make all important decisions.

Question 62

If the operating asset turnover increased by 50% and the margin increased by 50%, the ROI would increase by

A) 50%.
B) 25%.
C) 100%.
D) 125%.

Question 63

​Which of the following formulas measures turnover?

A) After-tax Operating Income / Total Capital Employed
B) Average Operating Assets / Residual Income
C) (Beginning Operating Assets + Ending Operating Assets) / Total Capital Employed
D) Sales / Average Operating Assets
E) Total Capital Employed / Operating Income

Question 64

Which of the following is a disadvantage of a focus on return on investment?

A) It can encourage managers to focus on cost cutting efforts.
B) It can produce a narrow focus on divisional profitability at the expense of profitability for the overall firm.
C) It can encourage managers to cut inventories and reduce overall investment.
D) It can encourage managers to focus on the long run at the expense of the short run.
E) It can accomplish all of these disadvantages.

Question 65

Which of the following ratios is equal to margin?

A) Operating Income / Sales
B) After-tax Operating Income / Total Capital Employed
C) Operating Income / Average Operating Assets
D) Residual Income / Sales
E) Total Capital Employed / Operating Income

Question 66

Alpha Division had the following information: If the asset base is decreased by $120,000, with no other changes, what will Alpha Division's return on investment be? (Note: Round answer to two decimal places.)

A) 10.50%
B) 15.79%
C) 18.50%
D) 12.55%

Question 67

Which of the following is not an advantage of ROI?

A) It encourages managers of departments with high ROIs to invest in average ROI projects.
B) It encourages managers to pay careful attention to the relationships among sales, expenses, and investment.
C) It encourages cost efficiency.
D) It discourages excessive investment in operating assets.

Question 68

A positive result that stems from the use of return on investment (ROI) is that it encourages managers to focus on

A) the relationship among sales, expenses, and investment.
B) cost efficiency.
C) operating asset efficiency.
D) the efficient use of resources in generating income.
E) All of these.

Question 69

Which of the following is not a disadvantage of the ROI performance measure?

A) It encourages managers to focus on the long run rather than the short run.
B) It discourages managers from investing in projects that would decrease divisional ROI but increase the profitability of the company as a whole.
C) It encourages myopic behavior.
D) All of these are disadvantages of the ROI measure.

Question 70

The decision-making approach that allows managers at lower levels to make and implement key decisions pertaining to their areas of responsibility is

A) responsibility accounting.
B) controllable accounting.
C) decentralization.
D) optimal strategic accounting.
E) None of these.

Question 71

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

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.
E) Reject the investment if it returns an ROI equal to 15%.

Question 72

The manager of a division is displeased with the ROI of the division.One step that would increase ROI (holding everything else constant) is

A) increasing investment.
B) increasing sales.
C) increasing costs.
D) decreasing operating income.
E) None of these.

Question 73

If the operating asset turnover ratio increased by 30% and the margin increased by 20%, the divisional ROI

A) would increase by 56%.
B) would decrease by 60%.
C) would increase by 20%.
D) cannot be determined.

Question 74

The National Division of Excellent Products Company had a turnover ratio of 4.50 and a margin of 0.15.Which of the following is the return on investment (ROI)? (Note: Round answer to two decimal places.)

A) 73.80%
B) 42.00%
C) 67.50%
D) 23.80%

Question 75

If the margin of 0.30 stayed the same and the turnover ratio of 5.0 increased by 10%, the ROI would

A) increase by 10%.
B) decrease by 10%.
C) increase by 15%.
D) remain the same.

Question 76

A segment of Mega Inc., manufactures and sells blankets.The various models of blankets are produced in a single factory using stable technology.They are sold by the sales department, also located in the factory.The segment is most probably accounted for as a(n)

A) cost center.
B) revenue center.
C) profit center.
D) investment center.
E) None of these.

Question 77

Forward Company had operating income of $75,000, sales of $220,000, and a turnover ratio of 0.55.What is Forward's return on investment (ROI)? (Note: Round answer to two decimal places.)

A) 32.50%
B) 50.60%
C) 18.75%
D) 64.60%
E) Forward's ROI cannot be determined from this information.

Question 78

Planet Company had operating income of $12,000, average operating assets of $125,000, and sales of $45,000.What is Planet's return on investment (ROI)? (Note: Round answer to two decimal places.)

A) 9.60%
B) 20.60%
C) 25.50%
D) 5.80%
E) 4.50%

Question 79

JetSky Airways has three divisions, the Western Division, the Eastern Division, and the Northern Division.The manager of the Western Division had wanted to purchase replacement airplanes for the division.However, he decided against it because, although revenues would increase and the new planes would be less expensive to operate, the initial cost of the planes was quite large.The Western Division is most probably accounted for as a(n)

A) cost center.
B) investment center.
C) profit center.
D) revenue center.
E) None of these.

Question 80

Which of the following formulas calculates the return on investment (ROI)?

A) Operating Income / Average Operating Assets
B) After-tax Operating Income / Total Capital Employed
C) Operating Income / Minimum Expected Return
D) Residual Income / Sales
E) Total Capital Employed / Operating Income