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Exam 14: Performance Evaluation for Decentralized Operations

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Question 1

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The excess of divisional income from operations over a minimum acceptable divisional income from operations is termed:

A) profit margin.
B) residual income.
C) rate of return on investment.
D) gross profit.

E) None of the above
F) C) and D)

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Question 2

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If Division Q's income from operations was $60,000 and invested assets amounted to $400,000, the rate of return on investment calculated would be 15%.

A) True
B) False

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Question 3

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The objective of transfer pricing is to encourage each division's manager to transfer goods and services in such a manner that will increase the overall company income.

Assume that divisional income from operations amounts to $187,000 and top management has established 12% as the minimum rate of return on divisional assets totaling $1,000,000. The residual income for the division is:

A responsibility center in which the authority and responsibility for costs and revenues is vested on the department manager is termed an investment center.

The profit margin for Division E is 28% and the investment turnover is 3.0. What is the rate of return on investment for Division E?

What additional information is needed to find the rate of return on investment if income from operations is known?

Under the cost price approach, the transfer price is the price at which the product or service transferred could be sold to outside buyers.

The major shortcoming of using income from operations as an investment center performance measure is that, it ignores the amount of assets invested in each center.

Blancher Corporation had $495,000 in invested assets, sales of $660,000, income from operations amounting to $99,000, and a desired minimum rate of return of 15%. The profit margin for Blancher is:

Operating expenses directly traceable to or incurred for the sole benefit of a specific department and usually subject to the control of the department manager are termed:

If income from operations for a division is $6,000, invested assets are $25,000, and sales are $30,000, the profit margin calculated would be 24%.

The manager of the furniture department of a leading retailer does not have control on salaries of the department personnel.

Property tax expense for a department store's store equipment is an example of a direct expense.

The process of measuring and reporting operating data by areas of responsibility is termed responsibility accounting.

The minimum amount of desired divisional income from operations is set by top management by establishing a maximum rate of return that is expected from the invested assets.

Income from operations for Division B is $150,000, total service department charges are $400,000, and operating expenses are $2,266,000. What are the revenues for Division B?

Which type of organization would be most effective for a small owner/manager-operated business?

Materials used by Ford Company in producing Division A's product are currently purchased from outside suppliers at a cost of $30 per unit. However, the same materials are available from Division B. Division B has unused capacity and can produce the materials needed by Division A at a variable cost of $20 per unit. (a)If a tranfer price of $\$ 25$ per unit is established and 60,000 units of material are transferred with no reductions in Division $B^{\prime}$ s curent sales, how much wou'd Ford Company's tot al income from operations increase? (b)How much would the income from operations of Division A increase? (c)How much would the income from operations of Division B increase? (d)If the negotiated price approach is used, what would be the range of accept able tranffer prices?

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