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Exam 12: Performance Evaluation and Decentralization

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Question 61

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Corrugated, Inc.Corrugated, Inc. has many divisions that are evaluated on the basis of ROI. One division, the Box Division, makes boxes. The Candy Division makes candy and needs 50,000 boxes per year. The Box Division incurs the following costs for one box: $\begin{array} { l c } \text { Direct materials } & \$ 0.20 \\\text { Direct labour } & 0.70 \\\text { Variable overhead } & 0.10 \\\text { Fixed overhead } & \underline { 0.23 } \\\text { Total } & \underline { \$ 1.23 }\end{array}$ The Box Division has capacity to make 500,000 boxes per year. The Candy Division currently buys its boxes from an outside supplier for $1.40 each (the same price that the Box Division receives) . -Refer to Corrugated, Inc. Assume the company mandates that any transfers take place at full manufacturing cost. What would be the transfer price if the Box Division transferred boxes to the Candy Division?

A) $0.90
B) $1.00
C) $1.23
D) $1.40

E) C) and D)
F) A) and B)

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Question 62

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Gamma Division The manager of Gamma Division projects the following for next year: $\begin{array} { l l } \text { Sales } & \$ 100,000 \\\text { Operating income } & \$ 30,000 \\\text { Operating assets } & \$ 200,000\end{array}$ The manager can invest in an additional project that would require $30,000 investment in additional assets and would generate $4,200 of additional income. The company's minimum rate of return is 12%. -Refer to Gamma Division. What is the residual income without the additional investment?

A) $4,200
B) $6,000
C) $6,600
D) $24,000

E) A) and D)
F) B) and D)

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Question 63

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When using economic value added (EVA) to calculate residual income, what is the formula for the cost of capital employed?

Ding Company had operating income of $140,000, sales of $437,500, and turnover of 0.5. What is Ding's ROI?

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

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

Suppose the margin of 0.2 stayed the same and the turnover ratio of 4.0 increased by 10%. What would be the effect on the ROI?

What is the variable set by top management when calculating residual income?

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

Division A produces a component and wants to sell it to Division B. Which of the following best describes the relationship of the transfer price to Division A and Division B?

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

Black Sea Company has two divisions, the Old Division and the New Division. Last year, the Old Division earned operating income of $66,000 using average operating assets of $550,000. Last year, the New Division earned $260,000 of operating income using average operating assets of $2,000,000. Minimum required rate of return for Black Sea is 9%. Required: A. For the Old Division, residual income is __________________. B. For the New Division, residual income is __________________. Now assume that the minimum required rate of return for Black Sea is 12%. C. For the Old Division, residual income is __________________. D. For the New Division, residual income is __________________.

Condor Company Condor Company provided the following information for last year: $\begin{array}{ll}\text { Operating income } & \$ 60,000 \\\text { Sales } & \$ 240,000 \\\text { Beginning operating assets } & \$ 440,000 \\\text { Ending operating assets } & \$ 450,000\end{array}$ -Refer to Condor Company. What was the company's margin?

Alpha Division Alpha Division had the following information: $\begin{array} { l l } \text { Asset base in Alpha Division } & \$ 800,000 \\\text { Net income in Alpha Division } & \$ 100,000 \\\text { Cost of capital } & 12 \% \\\text { Target ROI } & 15 \% \\\text { Margin for Alpha Division } & 20 \%\end{array}$ -Refer to Alpha Division. Suppose the asset base is decreased by $200,000, with no other changes. What would be the return on investment?

Suppose the operating asset turnover increased by 75% and the margin increased by 50%. What would be the percentage increase in the ROI?

In which of the following responsibility centres is a manager responsible only for sales?

SkyJet 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. What centre is most probably used to account for the Western Division?

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

In which of the following responsibility centres is a manager responsible for both revenues and costs?

Economic value added (EVA) can be calculated by multiplying margin by turnover.