Chapter 12—Performance Evaluation and Decentralization TRUE/FA!E
1. The practice of delegating decision-making authority to lower levels of management in a company company is called centralization. ANS: The practice of delegating decision-making authority to lower levels of management in a company is called decentralization. !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-1 NAT NAT: &*S!+%,: Analytic Analytic STA: STA: A#!A: A#!A: &&-#ndustry &&-#ndustry #/A: #/A: !erformance /easurement A&S!: A!-)0-/anagerial A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: 2nowledge N%T: 1 min. ). #n a decentralized company5 company5 overall overall profit profit margins margins can mask inefficiencies inefficiencies within within the the various su6divisions. ANS: !TS: 1 "#: "ifficulty: $asy %&': (%: 1) 1)-1 NAT: &*S!+%,: An Analytic STA: STA: A#!A: A#!A: &&-#ndustry &&-#ndustry #/A: #/A: !erformance /easurement A&S!: A!-)0-/anagerial A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: 2nowledge N%T: 1 min. 7. "ecentral "ecentralizati ization on is usually usually achieved achieved 6y creating creating units units called called divisions divisions.. ANS: T !TS: 1 "#: "ifficulty: $asy %&': (%: 1) 1)-1 NAT: &*S!+%,: An Analytic STA: STA: A#!A: A#!A: &&-#ndustry &&-#ndustry #/A: #/A: !erformance /easurement A&S!: A!-)0-/anagerial A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: 2nowledge N%T: 1 min. 8. A production department department within the factory5 factory5 such as assem6ly5 assem6ly5 is an e9ample e9ample of a profit profit center. ANS: !TS: %&': (%: 1) 1)-1 NAT: STA: STA: A#!A: A#!A: &&-#ndustry &&-#ndustry +esponsi6ility 2$3:
1 "#: "ifficulty: $asy &*S!+%,: An Analytic #/A: #/A: !erformance /easurement A&S!: A!-7-&udgeting A!-7-&udgeting and &loom4s: 2nowledge N%T: 1 min.
0. #n a decentralized decentralized company5 company5 central management is a6le to focus on strategic planning planning and decision making. ANS: T !TS: %&': (%: 1) 1)-1 NAT: STA: STA: A#!A: A#!A: &&-#ndustry &&-#ndustry unctions 2$3:
1 "#: "ifficulty: $asy &*S!+%,: An Analytic #/A: #/A: !erformance /easurement A&S!: A!-)-/anagement A!-)-/anagement &loom4s: omprehension N%T: 1 min.
. Turnove Turnoverr is the most most common common measure measure of performance performance for an investm investment ent center. center. ANS:
+eturn on investment ;+%#< is the most common measure of performance for an investment center. center. !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-) NAT NAT: &*S!+%,: Analytic Analytic STA: STA: A#!A: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A&S!: A!-77-#ncremental A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: 1 min. =. +eturn +eturn on investment investment ;+%#< can 6e calcula calculated ted 6y multiply multiplying ing margin margin times turnove turnover. r. ANS: T !TS: 1 "#: "ifficulty: $asy %&': (%: 1) 1)-) NAT: &*S!+%,: An Analytic STA: STA: A#!A: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A&S!: A!-77-#ncremental A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: 1 min. >. Turnove Turnoverr is the ratio ratio of of sales to to average average operatin operating g assets. assets. ANS: T !TS: 1 "#: "ifficulty: $asy %&': (%: 1) 1)-) NAT: &*S!+%,: An Analytic STA: STA: A#!A: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A&S!: A!-77-#ncremental A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: 1 min. ?. "ecreasing "ecreasing inven inventorie toriess leads to to a reduction reduction in return return on investmen investmentt ;+%#<. ANS: !TS: 1 "#: "ifficulty: $asy %&': (%: 1) 1)-) NAT: &*S!+%,: An Analytic STA: STA: A#!A: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A&S!: A!-77-#ncremental A!-77-#ncremental analysis 2$3: &loom4s: omprehension N%T: 1 min. 1@. +esidual income income is sometimes sometimes used to overcome overcome the tendency tendency of +%# to discourage discourage investments that are profita6le for the company5 company5 6ut that lower the division4s +%#. ANS: T !TS: 1 "#: "ifficulty: $asy %&': (%: 1) 1)-7 NAT: &*S!+%,: An Analytic STA: STA: A#!A: A#!A: N-"ecision N-"ecision /odeling /odeling #/A: !erformance /easurement A&S!: A!-77#ncrem #ncrement ental al analy analysis sis 2$3: 2$3: &loom4 &loom4s: s: omp ompreh rehens ension ion N%T: 1 min. 11. 11. *nlike *nlike +%#5 +%#5 resid residual ual inco income me does does not encourage encourage a short-run orientation. ANS: !TS: 1 "#: "ifficulty: $asy %&': (%: 1) 1)-7 NAT: &*S!+%,: An Analytic STA: STA: A#!A: A#!A: N-"ecision /odeling #/A: Strategic !lanning A&S!: A!-77-#ncremental A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: 1 min. 1). $conomic value added ;$A ;$A< is similar to +%# in that that it links net income to capital employed. employed. ANS: T !TS: 1 "#: "ifficulty: $asy %&': (%: 1) 1)-7 NAT: &*S!+%,: An Analytic STA: STA: A#!A: A#!A: N-"ecision /odeling #/A: Strategic !lanning A&S!: A!-77-#ncremental A!-77-#ncremental analysis 2$3: &loom4s: omprehension N%T: 1 min. 17. A key feature of economic economic value added added ;$A ;$A< is that it emphasizes after-ta9 after-ta9 operating income and the the actual cost of capital.
+eturn on investment ;+%#< is the most common measure of performance for an investment center. center. !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-) NAT NAT: &*S!+%,: Analytic Analytic STA: STA: A#!A: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A&S!: A!-77-#ncremental A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: 1 min. =. +eturn +eturn on investment investment ;+%#< can 6e calcula calculated ted 6y multiply multiplying ing margin margin times turnove turnover. r. ANS: T !TS: 1 "#: "ifficulty: $asy %&': (%: 1) 1)-) NAT: &*S!+%,: An Analytic STA: STA: A#!A: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A&S!: A!-77-#ncremental A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: 1 min. >. Turnove Turnoverr is the ratio ratio of of sales to to average average operatin operating g assets. assets. ANS: T !TS: 1 "#: "ifficulty: $asy %&': (%: 1) 1)-) NAT: &*S!+%,: An Analytic STA: STA: A#!A: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A&S!: A!-77-#ncremental A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: 1 min. ?. "ecreasing "ecreasing inven inventorie toriess leads to to a reduction reduction in return return on investmen investmentt ;+%#<. ANS: !TS: 1 "#: "ifficulty: $asy %&': (%: 1) 1)-) NAT: &*S!+%,: An Analytic STA: STA: A#!A: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A&S!: A!-77-#ncremental A!-77-#ncremental analysis 2$3: &loom4s: omprehension N%T: 1 min. 1@. +esidual income income is sometimes sometimes used to overcome overcome the tendency tendency of +%# to discourage discourage investments that are profita6le for the company5 company5 6ut that lower the division4s +%#. ANS: T !TS: 1 "#: "ifficulty: $asy %&': (%: 1) 1)-7 NAT: &*S!+%,: An Analytic STA: STA: A#!A: A#!A: N-"ecision N-"ecision /odeling /odeling #/A: !erformance /easurement A&S!: A!-77#ncrem #ncrement ental al analy analysis sis 2$3: 2$3: &loom4 &loom4s: s: omp ompreh rehens ension ion N%T: 1 min. 11. 11. *nlike *nlike +%#5 +%#5 resid residual ual inco income me does does not encourage encourage a short-run orientation. ANS: !TS: 1 "#: "ifficulty: $asy %&': (%: 1) 1)-7 NAT: &*S!+%,: An Analytic STA: STA: A#!A: A#!A: N-"ecision /odeling #/A: Strategic !lanning A&S!: A!-77-#ncremental A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: 1 min. 1). $conomic value added ;$A ;$A< is similar to +%# in that that it links net income to capital employed. employed. ANS: T !TS: 1 "#: "ifficulty: $asy %&': (%: 1) 1)-7 NAT: &*S!+%,: An Analytic STA: STA: A#!A: A#!A: N-"ecision /odeling #/A: Strategic !lanning A&S!: A!-77-#ncremental A!-77-#ncremental analysis 2$3: &loom4s: omprehension N%T: 1 min. 17. A key feature of economic economic value added added ;$A ;$A< is that it emphasizes after-ta9 after-ta9 operating income and the the actual cost of capital.
ANS: T !TS: 1 "#: "ifficulty: $asy %&': (%: 1) 1)-7 NAT: &*S!+%,: An Analytic STA: STA: A#!A: A#!A: N-"ecision /odeling #/A: Strategic !lanning A&S!: A!-77-#ncremental A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: 1 min. 18. +esidual income income is the the difference 6etween operating operating income and the product of the hurdle rate and the the company4s average operating assets. ANS: T +esidual income is the difference 6etween operating income and the minimum dollar return reBuired on a company4s co mpany4s operating assets: +# C operating income − ;minimum rate of return Dhurdle rateE × average operating assets< !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-7 NAT NAT: &*S!+%,: Analytic Analytic STA: STA: A#!A: A#!A: N-"ecision /odeling #/A: Strategic !lanning A&S!: A!-77-#ncremental A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: 1 min. 10. #n calculating calculating residual income5 the minimum rate of return is set 6y top management management and is the same as as the hurdle rate used for return on investment. ANS: T !TS: 1 "#: "ifficulty: $asy %&': (%: 1) 1)-7 NAT: &*S!+%,: An Analytic STA: STA: A#!A: A#!A: N-"ecision /odeling #/A: Strategic !lanning A&S!: A!-77-#ncremental A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: 1 min. 1. The use of residual income encourages encourages managers to accept any proFect that earns a6ove the minimum rate. ANS: T !TS: 1 "#: "ifficulty: $asy %&': (%: 1) 1)-7 NAT: &*S!+%,: An Analytic STA: STA: A#!A: A#!A: N-"ecision /odeling #/A: Strategic !lanning A&S!: A!-77-#ncremental A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: 1 min. 1=. The direct comparison of of the performance performance of two two different investment centers centers is difficult using residual residual income 6ecause residual income is an a6solute measure. ANS: T Another pro6lem with residual income is that5 unlike +%#5 it is an a6solute measure of profita6ility. Thus5 direct comparison of the performance of two different investment centers 6ecomes difficult5 since the level of investment may differ. !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-7 NAT NAT: &*S!+%,: Analytic Analytic STA: STA: A#!A: A#!A: N-"ecision /odeling #/A: Strategic !lanning A&S!: A!-77-#ncremental A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: 1 min. 1>. $conomic $conomic value value added added is Fust a specifi specificc way of calculati calculating ng residual residual income. income. ANS: T A specific way of calculating residual income is economic value added. !TS: 1
"#:
"ifficulty: $asy
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NAT NAT: &*S!+%,: Analytic Analytic STA: STA: A#!A: A#!A: N-"ecision /odeling #/A: Strategic !lanning A&S!: A!-77-#ncremental A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: 1 min. 1?. The net income income reduced 6y the total annual annual cost of of capital is eBual to the economic value added. ANS: T $conomic value added ;$A< ;$A< is net income ;operating income minus ta9es< minus the total annual cost of capital. !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-7 NAT NAT: &*S!+%,: Analytic Analytic STA: STA: A#!A: A#!A: N-"ecision /odeling #/A: Strategic !lanning A&S!: A!-77-#ncremental A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: 1 min. )@. &asically5 &asically5 $A $A is residual income income with the the cost of capital capital eBual to the actual cost of capital for the the firm ;as opposed to some minimum rate of return desired 6y the company for other reasons<. ANS: T !TS: 1 "#: "ifficulty: $asy %&': (%: 1) 1)-7 NAT: &*S!+%,: An Analytic STA: STA: A#!A: A#!A: N-"ecision /odeling #/A: Strategic !lanning A&S!: A!-77-#ncremental A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: 1 min. )1. *sing $A $A to calculate residual residual income5 the the dollar cost of capital employed employed is the actual percentage cost of capital multiplied 6y the total capital employed. ANS: T $A $A is after-ta9 operating income minus the dollar cost of capital employed. The dollar cost of capital employed is the actual percentage cost of capital multiplied 6y the total capital employed. !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-7 NAT NAT: &*S!+%,: Analytic Analytic STA: STA: A#!A: A#!A: N-"ecision /odeling #/A: Strategic !lanning A&S!: A!-77-#ncremental A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: 1 min. )). #n terms of of operating income for the company as a whole5 whole5 the transfer transfer price set set 6y the the 6uying and selling divisions nets out. ANS: T !TS: 1 "#: "ifficulty: $asy %&': (%: 1) 1)-8 NAT: &*S!+%,: An Analytic STA: STA: A#!A: A#!A: N-/easurement N-/easurement #/A: #/A: !erformance /easurement A&S!: A!-77-#ncremental A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: 1 min. )7. #f there is a competitive competitive outside market for the the transferred product5 then then the 6est 6est transfer price is the the cost-6ased transfer price. ANS: #f there is a competitive outside market for the transferred product5 then the 6est transfer price is the market price. !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-8 NAT NAT: &*S!+%,: Analytic Analytic STA: STA: A#!A: A#!A: N-/easurement N-/easurement #/A: #/A: !erformance /easurement A&S!: A!-77-#ncremental A!-77-#ncremental analysis 2$3: &loom4s: omprehension N%T: 1 min.
)8. #n negotiated transfer pricing5 the 6uying division sets the ceiling ;ma9imum possi6le transfer price< for the 6argaining range. ANS: T !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-77-#ncremental analysis 2$3: &loom4s: omprehension N%T: 1 min. )0. #n negotiated transfer pricing5 the selling division sets the ceiling ;ma9imum possi6le transfer price< for the 6argaining range. ANS: !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: 1 min. ). The selling division would never agree to a transfer price 6elow its full manufacturing cost. ANS: !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: 1 min. )=. A transfer price is the price charged for a component 6y the selling division to the 6uying division of the same company. ANS: T !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: 1 min. )>. The price charged for the transferred good affects the costs of the 6uying division and the revenues of the selling division. ANS: T !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: 1 min. )?. Transfer pricing is a comple9 issue. ANS: T !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: &&-#ndustry #/A: !erformance /easurement A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: 2nowledge N%T: 1 min. 7@. Ghen the selling division can sell and the 6uying division can 6uy e9ternally at the market price5 the company as a whole will 6e in the same position whether or not a market price transfer takes place internally. ANS: T %&': (%: 1)-8
!TS: 1 "#: "ifficulty: $asy NAT: &*S!+%,: Analytic
STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-77-#ncremental analysis 2$3: &loom4s: omprehension N%T: 1 min. 71. Several transfer pricing policies are used in practice. These transfer pricing policies include market price5 cost-6ased transfer prices5 and negotiated transfer prices. ANS: T !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: &&-#ndustry #/A: !erformance /easurement A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: 2nowledge N%T: 1 min. 7). The selling division is forced to transfer a product internally when a cost-6ased transfer pricing policy is set 6y top management. ANS: However5 neither division is forced to transfer the product internally. The transfer pricing policy only reBuires that if the product is transferred5 it must 6e at cost. !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-77-#ncremental analysis 2$3: &loom4s: omprehension N%T: 1 min. 77. Ghen a product is transferred at market price5 the transfer will optimize 6oth divisional and companywide profits. ANS: T #f there is a competitive outside market for the transferred product5 then the 6est transfer price is the market price. #n such a case5 divisional managers4 actions will simultaneously optimize divisional profits and firmwide profits. !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-77-#ncremental analysis 2$3: &loom4s: omprehension N%T: 1 min. "ATC#$%&
Select the term from below to match with the correct statement. a. centralization 6. revenue center c. profit center d. cost center e. investment center f. decentralization
1. A;n< IIIIIIIIIII is a responsi6ility center in which a manager is responsi6le only for costs. ). A;n< IIIIIIIIIII is a responsi6ility center in which a manager is responsi6le only for sales5 or revenues. 7. A;n< IIIIIIIIIII is a responsi6ility center in which a manager is responsi6le for revenues5 costs5 and investments. 8. The manager of a;n< IIIIIIIIIII is evaluated on the 6asis of income.
0. The practice of delegating decision-making authority to lower levels is IIIIIIIIII. 1. ANS: " !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-1 NAT: &*S!+%,: Analytic STA: A#!A: &&-#ndustry #/A: !erformance /easurement A&S!: A!-7-&udgeting and +esponsi6ility 2$3: &loom4s: 2nowledge N%T: 1 min. ). ANS: & !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-1 NAT: &*S!+%,: Analytic STA: A#!A: &&-#ndustry #/A: !erformance /easurement A&S!: A!-7-&udgeting and +esponsi6ility 2$3: &loom4s: 2nowledge N%T: 1 min. 7. ANS: $ !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-1 NAT: &*S!+%,: Analytic STA: A#!A: &&-#ndustry #/A: !erformance /easurement A&S!: A!-7-&udgeting and +esponsi6ility 2$3: &loom4s: 2nowledge N%T: 1 min. 8. ANS: !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-1 NAT: &*S!+%,: Analytic STA: A#!A: &&-#ndustry #/A: !erformance /easurement A&S!: A!-7-&udgeting and +esponsi6ility 2$3: &loom4s: 2nowledge N%T: 1 min. 0. ANS: !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-1 NAT: &*S!+%,: Analytic STA: A#!A: &&-#ndustry #/A: !erformance /easurement A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: 2nowledge N%T: 1 min. Select the appropriate definition for each of the items listed below. a. Turnover 6. /argin c. +%# d. +esidual income
. =. >. ?.
The most common measure of performance for an investment center. The ratio of operating income to sales. The ratio of sales to average operating assets. The dollar difference 6etween operating income and minimum reBuired return on a companyJs operating assets.
. ANS: !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: 1 min. =. ANS: & !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: 1 min. >. ANS: A !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: 1 min. ?. ANS: " !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-7 NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: 1 min.
C'"PET$'%
1. #n IIIIIIIIIIIIIII decision making5 decisions are made at the very top level5 and lower-level managers are charged with implementing these decisions. ANS: centralized !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-1 NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-)-/anagement unctions 2$3: &loom4s: 2nowledge N%T: ) min. ). IIIIIIIIIIIIIIII decision making allows managers at lower levels to make and implement key decisions pertaining to their areas of responsi6ility. ANS: "ecentralized !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-1 NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-)-/anagement unctions 2$3: &loom4s: 2nowledge N%T: ) min. 7. "ecentralization usually is achieved 6y creating units called IIIIIIIIIII. ANS: divisions !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-1 NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: 2nowledge N%T: ) min. 8. A IIIIIIIIIIIIIIIIIIII is a segment of the 6usiness whose manager is accounta6le for specific sets of activities. ANS: responsi6ility center !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-1 NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-7-&udgeting and +esponsi6ility 2$3: &loom4s: 2nowledge N%T: ) min. 0. Ghen a manager is responsi6le for only costs it is known as a;n< IIIIIIIIIIIIIII. ANS: cost center !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-1 NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-7-&udgeting and +esponsi6ility 2$3: &loom4s: 2nowledge N%T: ) min. . A;n< IIIIIIIIIIIIIIII is when a manager is responsi6le only for sales.
ANS: revenue center !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-1 NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-7-&udgeting and +esponsi6ility 2$3: &loom4s: 2nowledge N%T: ) min. =. An IIIIIIIIIIIIIIIIIIIIII is when a manager is responsi6le for revenues5 costs and investments. ANS: investment center !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-1 NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-7-&udgeting and +esponsi6ility 2$3: &loom4s: 2nowledge N%T: ) min. >. Typically5 investment centers are evaluated on the 6asis of IIIIIIIIIIIIIIIIII. ANS: return on investment !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: ) min. ?. IIIIIIIIIIIIIIIIIIIII refers to earnings 6efore interest and ta9es. ANS: %perating income !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: ) min. 1@. IIIIIIIIIIIII is the ratio of operating income to sales. ANS: /argin !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: ) min. 11. IIIIIIIIIIIIIIIII is found 6y dividing sales 6y average operating assets. ANS: Turnover !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: ) min. 1). IIIIIIIIIIIIIII indicate the minimum +%# necessary to accept an investment.
ANS: Hurdle rate !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: ) min. 17. The difference 6etween operating income and the minimum dollar return reBuired on a companyJs operating assets is the IIIIIIIIIIIIIII. ANS: residual income !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-7 NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: ) min. 18. IIIIIIIIIIIIIIIIIII is after ta9 operating income minus the dollar cost of capital employed. ANS: $conomic value added !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-7 NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: ) min. 10. A IIIIIIIIIIIIIIIII is the price charged for a component 6y the selling division to the 6uying division of the same company. ANS: transfer price !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: "ecision Analysis A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: 2nowledge N%T: ) min. 1. #f there is a competitive outside market for the transferred product5 then the 6est transfer price is the IIIIIIIIIIIII. ANS: market price !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: "ecision Analysis A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: 2nowledge N%T: ) min. 1=. The IIIIIIIIIIIIIIII is a strategic management system that defines a strategic-6ased responsi6ility accounting system. ANS: &alanced Scorecard
!TS: 1 "#: "ifficulty: $asy %&': (%: 1)-0 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: Strategic !lanning A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: 2nowledge N%T: ) min. 1>. IIIIIIIIIIIIIIIIIIIIII occurs whenever managers receive information a6out the effectiveness of strategy implementation as well as the validity of the assumptions underlying the strategy. ANS: "ou6le-loop feed6ack !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-0 NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: !erformance /easurement A&S!: A!-)0/anagerial haracteristicsTerminology 2$3: &loom4s: 2nowledge N%T: ) min. 1?. IIIIIIIIIIIIIIIII emphasizes only effectiveness of implementation. ANS: Single-loop feed6ack !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-0 NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: !erformance /easurement A&S!: A!-)0/anagerial haracteristicsTerminology 2$3: &loom4s: 2nowledge N%T: ) min. )@. IIIIIIIIIIIIIIII is the difference 6etween realization and sacrifice5 where realization is what the customer receives and sacrifices is what is given up in return. ANS: ustomer value !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-0 NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: !erformance /easurement A&S!: A!-)0/anagerial haracteristicsTerminology 2$3: &loom4s: 2nowledge N%T: ) min. "UT$PE C#'$CE
1. The practice of delegating decision-making authority to the lower levels of management in a company is a. centralization. 6. decentralization. c. performance evaluation. d. authorization. e. hierarchy flattening. ANS: & !TS: %&': (%: 1)-1 NAT: STA: A#!A: N-"ecision /anagement unctions N%T: ) min.
1 "#: "ifficulty: /oderate &*S!+%,: Analytic /odeling #/A: !erformance /easurement A&S!: A!-)2$3: &loom4s: 2nowledge
). Ghich of the following is a reason for decentralizationK a. $ase of gathering and using local information. 6. ocusing of central management. c. Training and motivating segment managers. d. $9posing segments to market forces. e. All of these. ANS: $ !TS: %&': (%: 1)-1 NAT: STA: A#!A: N-"ecision /anagement unctions N%T: ) min.
1 "#: "ifficulty: $asy &*S!+%,: Analytic /odeling #/A: !erformance /easurement A&S!: A!-)2$3: &loom4s: omprehension
7. "ivisions in a decentralized company can 6e created along which of the following linesK a. geographical 6. types of goods or services produced c. type of responsi6ility given to divisional manager d. two or more of the other answers are correct e. None of these. ANS: " !TS: %&': (%: 1)-1 NAT: STA: A#!A: N-"ecision /anagement unctions N%T: ) min.
1 "#: "ifficulty: $asy &*S!+%,: Analytic /odeling #/A: !erformance /easurement A&S!: A!-)2$3: &loom4s: omprehension
8. A responsi6ility center in which a manager is responsi6le only for costs is a;n< a. investment center. 6. revenue center. c. profit center. d. cost center. e. center not presented here. ANS: " !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-1 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-7-&udgeting and +esponsi6ility 2$3: &loom4s: 2nowledge N%T: ) min. 0. A responsi6ility center in which a manager is responsi6le only for sales is a;n< a. cost center. 6. revenue center. c. profit center. d. investment center. e. None of these. ANS: & !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-1 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-7-&udgeting and +esponsi6ility 2$3: &loom4s: 2nowledge N%T: ) min. . A responsi6ility center in which a manager is responsi6le for 6oth revenues and costs is a;n< a. cost center. 6. revenue center. c. profit center.
d. investment center e. None of these. ANS: !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-1 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-7-&udgeting and +esponsi6ility 2$3: &loom4s: 2nowledge N%T: ) min. =. A responsi6ility center in which a manager is responsi6le for revenues5 cost5 and investment is a;n< a. cost center. 6. revenue center. c. profit center. d. investment center. e. None of these. ANS: " !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-1 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-7-&udgeting and +esponsi6ility 2$3: &loom4s: 2nowledge N%T: ) min. >. The decision-making approach that allows managers at lower levels to make and implement key decisions pertaining to their areas of responsi6ility is a. responsi6ility accounting. 6. controlla6le accounting. c. decentralization. d. optimal strategic accounting. e. None of these. ANS: !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-1 NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-)-/anagement unctions 2$3: &loom4s: 2nowledge N%T: ) min. ?. "ecentralization is freBuently chosen 6y companies 6ecause it a. allows higher management to make all decisions. 6. allows higher management to gather local information to make 6etter decisions. c. protects segments of the company from competitive pressures. d. allows for training and motivation of local managers. e. allows the $% to make all important decisions. ANS: " !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-1 NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: !erformance /easurement A&S!: A!-)0/anagerial haracteristicsTerminology 2$3: &loom4s: omprehension N%T: ) min. 1@. A segment of /ega #nc.5 manufactures and sells 6lankets. The various models of 6lankets are produced in a single factory using sta6le technology. They are sold 6y the sales department5 also located in the factory. The segment is most pro6a6ly accounted for as a;n< a. cost center. 6. revenue center. c. profit center. d. investment center. e. None of these.
ANS: !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-1 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-7-&udgeting and +esponsi6ility 2$3: &loom4s: omprehension N%T: 7 min. 11. 'etSky Airways has three divisions5 the Gestern "ivision5 the $astern "ivision5 and the Northern "ivision. The manager of the Gestern "ivision had wanted to purchase replacement airplanes for the division. However5 he decided against it 6ecause5 although revenues would increase and the new planes would 6e less e9pensive to operate5 the initial cost of the planes was Buite large. The Gestern "ivision is most pro6a6ly accounted for as a;n< a. cost center. 6. investment center. c. profit center. d. revenue center. e. None of these. ANS: & !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-1 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-7-&udgeting and +esponsi6ility 2$3: &loom4s: omprehension N%T: 7 min. 1). +eturn on investment ;+%#< is calculated as a. operating incomeaverage operating assets. 6. average operating assetsoperating income. c. ;6eginning operating assets L ending operating assets<). d. salesaverage operating assets. e. operating incomesales. ANS: A !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: ) min. 17. /argin is calculated as a. operating incomesales. 6. average operating assetsoperating income. c. ;6eginning operating assets L ending operating assets<). d. salesaverage operating assets. e. operating incomeaverage operating assets operating incomesales. ANS: A !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: ) min. 18. Turnover is calculated as a. operating incomeaverage operating assets. 6. average operating assetsoperating income. c. ;6eginning operating assets L ending operating assets<). d. salesaverage operating assets. e. operating incomesales. ANS: " !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental
analysis
2$3: &loom4s: 2nowledge
N%T: ) min.
10. A positive result that stems from the use of return on investment ;+%#< is that it encourages managers to focus on a. the relationship among sales5 e9penses5 and investment. 6. cost efficiency. c. operating asset efficiency. d. the efficient use of resources in generating income. e. All of these. ANS: $ !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: omprehension N%T: ) min. 1. "ivision A had +%# of 10M last year. The manager of "ivision A is considering an additional investment for the coming year. Ghat step will the manager likely choose to takeK a. Accept the investment as long as it provides positive operating income. 6. Accept the investment as long as its +%# is positive. c. +eFect the investment if it returns more than 10M +%#. d. +eFect the investment if it returns less than 10M +%#. e. +eFect the investment if it returns an +%# eBual to 10M. ANS: " !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: omprehension N%T: 7 min. 1=. The manager of a division is displeased with the +%# of the division. %ne step that would increase +%# ;holding everything else constant< is a. increasing investment. 6. increasing sales. c. increasing costs. d. decreasing operating income. e. None of these. ANS: & !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: omprehension N%T: 7 min. 1>. Ghich of the following is a disadvantage of a focus on return on investmentK a. #t can encourage managers to focus on cost cutting efforts. 6. #t can produce a narrow focus on divisional profita6ility at the e9pense of profita6ility for the overall firm. c. #t can encourage managers to cut inventories and reduce overall investment. d. #t can encourage managers to focus on the long run at the e9pense of the short run. e. #t can accomplish all of these disadvantages. ANS: & !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: omprehension N%T: 7 min.
1?. astor ompany had income of 1@5@@@5 average assets of 1@@5@@@ and sales of 8@5@@@. Ghat is astor4s +%#K a. 1@M 6. )@M c. )0M d. @.8M e. 8@M ANS: A +%# C 1@5@@@1@@5@@@ C @.1 or 1@M !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: Application N%T: ) min. )@. Shandling ompany had operating income of =@5@@@5 sales of )1>5=0@5 and turnover of @.0. Ghat is Shandling4s +%#K a. 7)M 6. 0@M c. 1M d. 8M e. annot 6e determined from this information. ANS: +%# C margin × turnover C ;=@5@@@)1>5=0@< × @.0 C @.1 or 1M !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: Application N%T: ) min. )1. &eta "ivision had the following information: Asset 6ase in &eta "ivision %perating income in &eta "ivision ost of capital Target +%# /argin for &eta "ivision
8@@5@@@ 0@5@@@ 1)M 10M )@M
#f the asset 6ase is decreased 6y 1@@5@@@5 with no other changes5 the return on investment of &eta "ivision will 6e a. 1@@.@M. 6. 1.=M. c. @@.@M. d. ).0M. ANS: & S*!!%+T#N, A(*(AT#%NS: 0@5@@@;8@@5@@@ − 1@@5@@@< C 1.=M !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental
analysis
2$3: &loom4s: Application
N%T: 7 min.
)). #f the National "ivision of American !roducts ompany had a turnover ratio of 8.) and a margin of @.1@5 the return on investment would 6e a. )7.>M. 6. 8)@.@M. c. 8).@M. d. )7>.@M. ANS: S*!!%+T#N, A(*(AT#%NS: 8.) × @.1@ C .8) or 8)M !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: Application N%T: 7 min. )7. #f the margin of @.7 stayed the same and the turnover ratio of 0.@ increased 6y 1@M5 the +%# would a. increase 6y 1@M. 6. decrease 6y 1@M. c. increase 6y 10M. d. remain the same. ANS: A S*!!%+T#N, A(*(AT#%NS: D;@.7@ × 0.0< − 1.0E1.0 C 1@M increase !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: Application N%T: 7 min. )8. #f the operating asset turnover ratio increased 6y 7@M and the margin increased 6y )@M5 the divisional +%# a. would increase 6y 0M. 6. would decrease 6y @M. c. would increase 6y )@M. d. cannot 6e determined. ANS: A S*!!%+T#N, A(*(AT#%NS: 1.7@ × 1.)@ C 1.0 or a 0M increase !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: Application N%T: 7 min. )0. #f the operating asset turnover increased 6y 0@M and the margin increased 6y 0@M5 the +%# would increase 6y a. 0@M. 6. )0M. c. 1@@M.
d. 1)0M. ANS: " S*!!%+T#N, A(*(AT#%NS: 1.0@ × 1.0@ C ).)0 or 1)0M increase !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: Application N%T: 7 min. ). Ghich of the following is not an advantage of +%#K a. #t encourages managers of departments with high +%#s to invest in average +%# proFects. 6. #t encourages managers to pay careful attention to the relationships among sales5 e9penses5 and investment. c. #t encourages cost efficiency. d. #t discourages e9cessive investment in operating assets. ANS: A !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: omprehension N%T: ) min. )=. Ghich of the following is not a disadvantage of the +%# performance measureK a. #t encourages managers to focus on the long run rather than the short run. 6. #t discourages managers from investing in proFects that would decrease divisional +%# 6ut increase the profita6ility of the company as a whole. c. #t encourages myopic 6ehavior. d. All of these are disadvantages of the +%# measure. ANS: A !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: omprehension N%T: ) min. Fi(ure 12)1* "empsey ompany provided the following information for last year:
%perating income Sales &eginning operating assets $nding operating assets
>5@@@ ))05@@@ 7?@5@@@ 8)@5@@@
)>. +efer to igure 1)-1. alculate "empsey4s margin for last year5 rounding to two decimal places. a. ).@ 6. @.) c. @.7> d. @.0@ e. @.70 ANS: /argin C >5@@@))05@@@ C @.7> !TS: 1
"#:
"ifficulty: $asy
%&': (%: 1)-)
NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: Application N%T: ) min. )?. +efer to igure 1)-1. "empsey4s turnover ratio for last year was a. ).@. 6. @.8. c. @.0. d. @.7). e. @.1@. ANS: Turnover C ))05@@@;;8)@5@@@ L 7?@5@@@<)< C @.0 !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: Application N%T: ) min. 7@. +efer to igure 1)-1. "empsey4s return on investment for last year was a. ).@. 6. @.)1. c. @.7). d. @.0@. e. @.10. ANS: & +%# C >5@@@;;8)@5@@@ L 7?@5@@@<)< C @.)1 !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: Application N%T: ) min. Fi(ure 12)+* The following information pertains to the three divisions of 3ang ompany:
Sales Net operating income Average operating assets +eturn on investment /argin Turnover Target +%#
"ivision A "ivision & K K 8>5@@@ 81>5@@@ 8)@5@@@ K K 10M @.) @.@10 ).1 K 1=M 18M
"ivision 157805@@@ >)5@@@ K )@M K K >M
71. +efer to igure 1)-0. Ghat are the average operating assets for "ivision K a. ?05@@@ 6. 81@5@@@ c. >)5@@@ d. 8)@5@@@ ANS: &
>)5@@@@.)@ C 81@5@@@ !TS: NAT: STA: 2$3:
1 "#: "ifficulty: /oderate %&': (%: 1)-) &*S!+%,: Analytic A#!A: N-/easurement #/A: Strategic !lanning A&S!: A!-77-#ncremental analysis &loom4s: Application N%T: 7 min.
7). +efer to igure 1)-0. Ghat is the turnover for "ivision K a. 7.)> 6. @.)@ c. .=@ d. 1.0@@ ANS: A Average operating assets Turnover !TS: NAT: STA: 2$3:
>)5@@@@.)@ C 81@5@@@ 157805@@@81@5@@@ C 7.)> times
1 "#: "ifficulty: /oderate %&': (%: 1)-) &*S!+%,: Analytic A#!A: N-/easurement #/A: Strategic !lanning A&S!: A!-77-#ncremental analysis &loom4s: Application N%T: 7 min.
77. +efer to igure 1)-0. Ghat are the sales for "ivision &K a. 1>5@@@ 6. 15)0@5@@@ c. 15)@@5@@@ d. )@>5777 ANS: 1>5@@@@.@10 C 15)@@5@@@ !TS: NAT: STA: 2$3:
1 "#: "ifficulty: /oderate %&': (%: 1)-) &*S!+%,: Analytic A#!A: N-/easurement #/A: Strategic !lanning A&S!: A!-77-#ncremental analysis &loom4s: Application N%T: 7 min.
78. +efer to igure 1)-0. Ghat are the average operating assets for "ivision &K a. 1)05@@@ 6. 1)@5@@@ c. 1>5@@@ d. 8)@5@@@ ANS: & 1>5@@@@.10 C 1)@5@@@ !TS: NAT: STA: 2$3:
1 "#: "ifficulty: /oderate %&': (%: 1)-) &*S!+%,: Analytic A#!A: N-/easurement #/A: Strategic !lanning A&S!: A!-77-#ncremental analysis &loom4s: Application N%T: ) min.
Fi(ure 12)2* The manager of Stock "ivision proFects the following for ne9t year:
Sales
1>05@@@
%perating income %perating assets
@5@@@ 7=05@@@
The manager can invest in an additional proFect that would reBuire 8@5@@@ investment in additional assets and would generate 5@@@ of additional income. The company4s minimum rate of return is 18M. 70. +efer to igure 1)-). Ghat is the residual income for Stock "ivision without the additional investmentK a. 8@5@@@ 6. 5@@@ c. 5@@ d. 5)@@ e. =50@@ ANS: $ +esidual income C @5@@@ - ;@.18<;7=05@@@< C =50@@ !TS: NAT: STA: 2$3:
1 "#: "ifficulty: $asy %&': (%: 1)-7 &*S!+%,: Analytic A#!A: N-/easurement #/A: Strategic !lanning A&S!: A!-77-#ncremental analysis &loom4s: Application N%T: ) min.
7. +efer to igure 1)-). Ghat is the residual income for Stock "ivision with the additional proFectK a. 8@5@@@ 6. 5@@@ c. =5?@@ d. 85)@@ e. )05@@ ANS: +esidual income C ;@5@@@ L 5@@@< - ;@.18<;7=05@@@ L 8@5@@@< C =5?@@ !TS: NAT: STA: 2$3:
1 "#: "ifficulty: /oderate %&': (%: 1)-7 &*S!+%,: Analytic A#!A: N-/easurement #/A: Strategic !lanning A&S!: A!-77-#ncremental analysis &loom4s: Application N%T: ) min.
7=. +efer to igure 1)-). Ghich of the following statements is true K a. #f the manager invests in the additional proFect5 +%# of the division will decrease. 6. The residual income of the proFect is less than the residual income of the division without the proFectO therefore the proFect will 6e reFected. c. Average investment for Stock "ivision will decrease if the proFect is accepted for investment. d. #f the manager invests in the additional proFect5 residual income of the division will increase. e. None of these. ANS: %&': STA: 2$3:
" !TS: 1 "#: "ifficulty: /oderate (%: 1)-) (%: 1)-7 NAT: &*S!+%,: Analytic A#!A: N-/easurement #/A: Strategic !lanning A&S!: A!-77-#ncremental analysis &loom4s: omprehension N%T: 7 min.
7>. +esidual income is calculated as
a. 6. c. d. e.
operating income − ;+%# × average operating assets<. operating income;+%# × average operating assets<. operating income;minimum rate of return × average operating assets<. operating income − ;minimum rate of return × average operating assets<. ;minimum rate of return × average operating assets<operating income.
ANS: " !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-7 NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: Strategic !lanning A&S!: A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: ) min. 7?. The performance measure that uses after-ta9 operating income and the actual cost of capital employed is a. return on investment ;+%#<. 6. residual income. c. economic value added ;$A<. d. margin. e. turnover. ANS: !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-7 NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: Strategic !lanning A&S!: A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: ) min. 8@. Ghich of the following is an a6solute dollar measure rather than a percentageK a. average operating assets. 6. operating income. c. residual income. d. economic value added ;$A<. e. All of these. ANS: $ !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-7 NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: Strategic !lanning A&S!: A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: ) min. 81. $conomic alue Added is residual income with the cost of capital eBual to the firm4s a. 6udgeted cost of capital. 6. average cost of capital. c. standard cost of capital. d. actual cost of capital. ANS: " &asically5 $A is residual income with the cost of capital eBual to the actual cost of capital for the firm ;as opposed to some minimum rate of return desired 6y the company for other reasons<. !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-7 NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: Strategic !lanning A&S!: A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: ) min. 8). #n calculating residual income5 the varia6le set 6y top management is called the a. average operating assets. 6. operating income.
c. hurdle rate. d. actual operating assets. ANS: The minimum rate of return is set 6y the company and is the same as the hurdle rate mentioned in the section on +%#. !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-7 NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: Strategic !lanning A&S!: A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: ) min. 87. The calculation of $conomic alue Added is a. margin minus total annual cost of capital. 6. operating income minus average cost of capital. c. operating income minus total annual cost of capital. d. operating income minus ta9es and the total annual cost of capital. ANS: " $conomic value added ;$A< is net income ;operating income minus ta9es< minus the total annual cost of capital. !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-7 NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: Strategic !lanning A&S!: A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: ) min. 88. *sing $conomic alue Added ;$A< to calculate residual income5 the cost of capital employed is a. the standard percentage cost of capital multiplied 6y the average capital employed. 6. the actual percentage cost of capital multiplied 6y the average capital employed. c. the standard percentage cost of capital multiplied 6y the total capital employed. d. the actual percentage cost of capital multiplied 6y the total capital employed. ANS: " $A is after-ta9 operating income minus the dollar cost of capital employed. The dollar cost of capital employed is the actual percentage cost of capital multiplied 6y the total capital employed. !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-7 NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: Strategic !lanning A&S!: A!-77-#ncremental analysis 2$3: &loom4s: 2nowledge N%T: ) min. 80. The following information pertains to the three divisions of /arlow ompany:
Sales Net operating income Average operating assets +eturn on investment /argin Turnover Target +%#
"ivision P K 75@@@ 7@@5@@@ K @.1@ 1.) 10M
Ghat is the residual income for "ivision PK a. 75@@@
"ivision 3 K )05@@@ K )@M @.@0 K 1)M
"ivision Q 15)0@5@@@ =05@@@ K 10M K K 1@M
6. 805@@@ c. ;?5@@@< d. ;75@@@< ANS: S*!!%+T#N, A(*(AT#%NS: 75@@@ − ;7@@5@@@ × @.10< C ;?5@@@< !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-7 NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: Strategic !lanning A&S!: A!-77-#ncremental analysis 2$3: &loom4s: Application N%T: ) min. 8. The Auto "ivision of &ig "epartment Store had a net operating income of 0@5@@@5 a net asset 6ase of 85@@@5@@@5 and a reBuired rate of return of 1)M. Sales for the period totaled 75@@@5@@@. The residual income for the period is a. 8>@5@@@. 6. 7@5@@@. c. 1)@5@@@. d. >@5@@@. ANS: " S*!!%+T#N, A(*(AT#%NS: 0@5@@@ − ;85@@@5@@@ × @.1)< C >@5@@@ !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-7 NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: Strategic !lanning A&S!: A!-77-#ncremental analysis 2$3: &loom4s: Application N%T: 7 min. 8=. A price charged for a component 6y the selling division to the 6uying division of the same company is called a;n< a. transfer price. 6. economic value added. c. market price. d. cost-6ased price. e. None of these. ANS: A !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: 2nowledge N%T: ) min. 8>. The level of the transfer price can affect the overall company 6ecause a. the higher the transfer price5 the higher the operating income. 6. it may impact on the ta9es paid 6y the multinational company. c. the lower the transfer price5 the lower the total costs. d. internal transfers are always costly to the firm. e. the transfer price may 6e higher than the cost-6ased price. ANS: & !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: 2nowledge
N%T: ) min. 8?. #f there is a competitive outside market for the transferred product5 then the 6est transfer price is the a. cost-6ased price. 6. negotiated price. c. market price. d. price set 6y central management. e. None of these. ANS: !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: 2nowledge N%T: ) min. 0@. #f the selling division is operating at less than full capacity5 the floor of the 6argaining range would most pro6a6ly set at a. market price. 6. full manufacturing cost. c. average price of all products sold 6y the selling division. d. manufacturing cost plus some percentage for profit. e. varia6le cost of manufacturing. ANS: $ !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: omprehension N%T: ) min. 01. The $ngine "ivision provides engines for the Tractor "ivision of a company. The standard unit costs for $ngine "ivision are: "irect materials "irect la6or aria6le overhead i9ed overhead /arket price per unit
@@ 15)@@ 7@@ 10@ )5=7@
Ghat is the transfer price 6ased on full cost plus a markup of 7@MK a. )5?)0 6. 0>0 c. )5=@ d. )5=7@ ANS: A S*!!%+T#N, A(*(AT#%NS: ;@@ L 15)@@ L 7@@ L 10@< × 1.7@ C )5?)0 !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: Application N%T: 7 min. 0). Several transfer pricing policies are used in practice. These transfer pricing policies include
a. 6. c. d.
transfer at market price. transfer at negotiated price. transfer at cost. All of these.
ANS: " Several transfer pricing policies are used in practice. These transfer pricing policies include market price5 cost-6ased transfer prices5 and negotiated transfer prices. !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: 2nowledge N%T: ) min. 07. "ivision A produces a component and wants to sell it to "ivision &. The transfer price is a. revenue to "ivision 4A4 and a cost to "ivision &. 6. revenue to "ivision 4&4 and a cost to "ivision A. c. revenue to "ivision 4A4 and no effect on "ivision &. d. a cost to "ivision 4&4 and no effect on "ivision A. ANS: A !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: Application N%T: ) min. 08. The $ngine "ivision provides engines for the Tractor "ivision of a company. The standard unit costs for $ngine "ivision are: "irect materials "irect la6or aria6le overhead i9ed overhead /arket price per unit
@@ 15)@@ 7@@ 10@ )5=7@
The engine department has e9cess capacity. Ghat is the 6est transfer price to avoid transfer price pro6lemsK a. 1570@ 6. 7@@ c. ?@@ d. )51@@ ANS: " S*!!%+T#N, A(*(AT#%NS: ;@@ L 15)@@ L 7@@< C )51@@ !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: Application N%T: 7 min. 00. !autner ompany had the following historical accounting data per unit:
"irect materials "irect la6or aria6le overhead i9ed overhead aria6le selling e9penses i9ed selling e9penses
@ 7@ 10 )8 80 ?
The units are normally transferred internally from "ivision A to "ivision &. The units also may 6e sold e9ternally for )1@ per unit. The minimum profit level accepted 6y the company is a markup of 7@M. There were no 6eginning or ending inventories. Ghat would 6e the transfer price if "ivision P uses full cost plus markupK a. 1=.=@ 6. 1?>.?@ c. 17.0@ d. 1)?.@@ ANS: A S*!!%+T#N, A(*(AT#%NS: ;@ L 7@ L 10 L )8< × 1.7@ C 1=.=@ !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: Application N%T: 8 min. Fi(ure 12),* ,rey #nc. has many divisions that are evaluated on the 6asis of +%#. %ne division5 entra5 makes 6o9es. A second division5 /antra5 makes chocolates and needs >@5@@@ 6o9es per year. entra incurs the following costs for one 6o9:
"irect materials "irect la6or aria6le overhead i9ed overhead Total
@.70 @.@ @.8@ @.17 1.8>
entra has capacity to make =@@5@@@ 6o9es per year. /antra currently 6uys its 6o9es from an outside supplier for 1.>@ each ;the same price that entra receives<. 0. +efer to igure 1)-7. Assume that ,rey #nc. mandates that any transfers take place at full manufacturing cost. Ghat would 6e the transfer price if entra transferred 6o9es to /antraK a. 1.70 6. 1.8> c. 1.@@ d. annot 6e determined from the information given. e. @.?@ ANS: & The cost-6ased transfer price is 1.8>. !TS: 1
"#:
"ifficulty: $asy
%&': (%: 1)-8
NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-77-#ncremental analysis 2$3: &loom4s: Application N%T: 0 min. 0=. +efer to igure 1)-7. Assume that ,rey #nc. allows division managers to negotiate transfer price. entra is producing @@5@@@ 6o9es. #f entra and /antra agree to transfer 6o9es5 what is the ceiling of the 6argaining range and which division sets itK a. 1.8>O entra 6. 1.70O entra c. 1.>@O /antra d. 1.70O /antra e. 1.>@O entra ANS: As the 6uyer5 /antra sets the ceiling of the 6argaining range. #t would 6e set at market price of 1.>@. !TS: NAT: STA: 2$3:
1 "#: "ifficulty: $asy %&': (%: 1)-8 &*S!+%,: Analytic A#!A: N-/easurement #/A: Strategic !lanning A&S!: A!-77-#ncremental analysis &loom4s: Application N%T: 0 min.
0>. +efer to igure 1)-7. Assume that ,rey #nc. allows division managers to negotiate transfer price. entra is producing @@5@@@ 6o9es. #f entra and /antra agree to transfer 6o9es5 what is the floor of the 6argaining range and which division sets itK a. 1.>@O entra 6. 1.8>O entra c. 1.8>O /antra d. 1.70O /antra e. 1.70O entra ANS: $ As the seller5 entra sets the floor of the 6argaining range. &ecause entra has e9cess capacity5 it would set the minimum transfer price at 1.70 ;@.70 L @.@ L @.8@<. !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-77-#ncremental analysis 2$3: &loom4s: Application N%T: 0 min. 0?. +efer to igure 1)-7. Assume that ,rey #nc. allows division managers to negotiate transfer price. entra is producing =@@5@@@ 6o9es. #f entra and /antra agree to transfer 6o9es5 what is the floor of the 6argaining range and which division sets itK a. 1.>@O entra 6. 1.70O entra c. 1.8>O /antra d. 1.70O /antra e. 1.>@O /antra ANS: A As the seller5 entra sets the minimum ;floor< transfer price. Since entra is producing at capacity and can sell all that it produces at the market price5 the floor is 1.>@. !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-77-#ncremental
analysis
2$3: &loom4s: Application
N%T: 0 min.
Fi(ure 12)-* Ruinn #nc. has a num6er of divisions. %ne division5 Style5 makes zippers that are used in the manufacture of 6oots. Another division5 (eatherStuff5 makes 6oots that use the zippers and needs ?@5@@@ zippers per year. Style incurs the following costs for one zipper:
"irect materials "irect la6or aria6le overhead i9ed overhead Total
@.)7 @.)@ @.?0 1.7) ).=@
Ruinn has capacity to make ?0@5@@@ zippers per year5 6ut due to a soft market5 only plans to produce and sell )@5@@@ zippers ne9t year. (eatherStuff currently 6uys zippers from an outside supplier for 7.0@ each ;the same price that Style receives<. @. +efer to igure 1)-8. Assume that Ruinn allows negotiated transfer pricing. Ghat is the floor of the 6argaining range and which division sets itK a. 7.0@O Style 6. ).=@O (eatherStuff c. ).=@O Style d. 1.7>O (eatherStuff e. 1.7>O Style ANS: $ The floor is set 6y the selling division5 in this case5 Style. #t is set at varia6le cost 6ecause Style has e9cess capacity5 1.7>. !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-77-#ncremental analysis 2$3: &loom4s: Application N%T: 8 min. 1. +efer to igure 1)-8. Assume that Ruinn allows negotiated transfer pricing. Ghat is the ceiling of the 6argaining range and which division sets itK a. 7.0@O Style 6. 7.0@O (eatherStuff c. ).=@O Style d. ).=@O (eatherStuff e. 1.7>O Style ANS: & (eatherStuff5 as the 6uying division5 sets the ceiling at market price5 7.0@. !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-77-#ncremental analysis 2$3: &loom4s: Application N%T: 8 min. ). +efer to igure 1)-8. Assume that Style and (eatherStuff have agreed on a transfer price of 7.)0. Ghat are the total cost savings for (eatherStuffK a. ))50@@ 6. 7105@@@
c. )?)50@@ d. ?5@@@ e. >15@@@ ANS: A !revious cost to (eatherStuff C 7.0@ 9 ?@5@@@ C 7105@@@ ost to (eatherStuff at 7.)0 transfer price C 7.)0 9 ?@5@@@ C )?)50@@ Savings to (eatherStuff C 7105@@@ - )?)50@@ C ))50@@ !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-77-#ncremental analysis 2$3: &loom4s: Application N%T: 0 min. 7. +efer to igure 1)-8. Assume that Style and (eatherStuff have agreed on a transfer price of 7.)0. Ghat is the total 6enefit for StyleK a. )875@@@ 6. )?)50@@ c. 1>57@@ d. ?5@@@ e. >15@@@ ANS: +evenue from components transferred C 7.)0 9 ?@5@@@ C )?)50@@ ost to Style C 1.7> 9 ?@5@@@ C 1)85)@@ &enefit to Style C )?)50@@ - 1)85)@@ C 1>57@@ !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-77-#ncremental analysis 2$3: &loom4s: Application N%T: 0 min. 8. +efer to igure 1)-8. Assume that Style and (eatherStuff have agreed on a transfer price of 7.)0. Ghat is the total 6enefit for Ruinn5 #nc.K a. ))50@@ 6. )?)50@@ c. 175@@@ d. 1?5@@@ e. 1?@5>@@ ANS: $ Total 6enefit C ;7.0@ - 1.7>< 9 ?@5@@@ C 1?@5>@@ !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-77-#ncremental analysis 2$3: &loom4s: Application N%T: 0 min. 0. The strategic management system that translates an organization4s mission and strategy into operational o6Fectives and performance measures is a. activity-6ased management. 6. responsi6ility accounting. c. strategic accounting. d. cost information management.
e. &alanced Scorecard. ANS: $ !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-0 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: 2nowledge N%T: ) min. . The &alanced Scorecard perspective that descri6es the internal processes needed to provide value for customers and owners is the IIII perspective. a. customer 6. internal 6usiness process c. learning and growth d. financial e. None of these. ANS: & !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-0 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: 2nowledge N%T: ) min. =. The &alanced Scorecard perspective that descri6es the economic conseBuences of actions taken in the other three perspectives is the IIII perspective. a. customer 6. internal 6usiness process c. learning and growth d. financial e. None of these. ANS: " !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-0 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: 2nowledge N%T: ) min. >. The &alanced Scorecard perspective that defines the customer and market segments in which the 6usiness unit will compete is the IIII perspective. a. customer 6. internal 6usiness process c. learning and growth d. financial e. None of these. ANS: A !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-0 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: 2nowledge N%T: ) min. ?. The &alanced Scorecard perspective that defines the capa6ilities than an organization needs to create long-term growth and improvement is the IIII perspective. a. learning and growth 6. internal 6usiness process c. customer
d. financial e. None of these. ANS: A !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-0 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: 2nowledge N%T: ) min. =@. A testa6le strategy is defined as a a. set of linked o6Fectives aimed at an overall goal. 6. means of providing managers with information a6out the effectiveness of strategy implementation and the validity of the assumption underlying the strategy. c. means of specifying o6Fectives5 measures5 targets5 and initiatives for each perspective of the &alanced Scorecard. d. strategic management system that defines a strategic-6ased responsi6ility accounting system. e. None of these. ANS: A !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-0 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: 2nowledge N%T: ) min. =1. The difference 6etween realization and sacrifice defines a. target o6Fectives. 6. relia6ility. c. single-loop feed6ack. d. customer value. e. None of these. ANS: " !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-0 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: 2nowledge N%T: ) min. =). The process value chain consists of a. value5 operations5 and o6Fectives. 6. innovation5 satisfaction5 and value. c. innovation5 operations5 and post-sales service. d. design5 production5 and selling. e. design5 satisfaction5 and post-sales service. ANS: !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-0 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: 2nowledge N%T: ) min. =7. The num6er of units of output that can 6e produced in a given period of time is called a. cycle time. 6. unit process time. c. responsiveness.
d. cell conversion time. e. velocity. ANS: $ !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-0 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: 2nowledge N%T: ) min. =8. /$ ;manufacturing cycle efficiency< is calculated using the following formula: a. processing timenonprocessing time. 6. nonprocessing timeprocessing time. c. total timeprocessing time. d. processing timetotal time. e. total timenonprocessing time. ANS: " !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-0 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: 2nowledge N%T: ) min. =0. (ast night5 Shirley worked on her accounting homework for one and one half hours. "uring that time5 she completed pro6lems. Ghat is the cycle time for one pro6lemK a. 8 minutes 6. ?@ minutes c. 10 minutes d. 1@ minutes e. minutes ANS: ycle time C 1.0;@ minutes< pro6lems C ?@ C 10 minutes per pro6lem !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-0 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: Application N%T: 7 min. =. (ast night5 Shirley worked on her accounting homework for one and one half hours. "uring that time5 she completed pro6lems. Ghat is the velocity in pro6lems per hourK a. 8 per hour 6. @.= per hour c. per hour d. 1@ per hour e. 10 per hour ANS: A elocity C pro6lems1.0 hours C 8 pro6lems per hour !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-0 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: Application N%T: 7 min.
==. !orter ompany makes children4s 6oard games. %ne popular game reBuires the following amounts of time: processing − ) hoursO waiting − hoursO moving − 8 hours. The /anufacturing ycle $fficiency ;/$< for !orter ompany is a. 1.=M. 6. )@.@M. c. 1@@M. d. )0M. e. 77M. ANS: A /$ C !rocessing Time;!rocessing time L /ove time L #nspection Time L Gaiting Time< /$ C );) L L 8< C @.1= C 1.=M !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-0 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: Application N%T: 7 min. =>. A *tah hospital decided to streamline its surgical suite operation. #n order to speed things up5 the nurses in charge studied how much time patients actually spent in various activities. They found that on average5 a patient scheduled for an operation spent a6out 1 hours waiting5 and 1.0 hours in moving from la6 to 9-ray to the operating room. The average operation takes ?@ minutes. Ghat is the / $K a. 1@@M 6. @M c. 0@M d. 7=.0M e. )@M ANS: " /$ C !rocessing Time;!rocessing time L /ove time L #nspection Time L Gaiting Time< /$ C 1.0;1.0 L 1 L 1.0< C .7=0 C 7=.0M !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-0 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: Application N%T: 8 min. PR'.E"
1. !ollu9 ompany had the following income statement for last year: Sales (ess: ost of goods sold ,ross margin (ess: Selling administrative e9pense %perating income &eginning assets were 005@@@ and ending assets were 0?=5@@@.
7@5@@@ 1?05@@@ 105@@@ =>5@@ >58@@
;arry computations out to three decimal places.< A. &. . ".
Ghat are average operating assetsK Ghat is marginK Ghat is turnoverK Ghat is +%#K
ANS: A. &. . ".
Average operating assets C ;005@@@ L 0?=5@@@<) C 0>15@@@ /argin C >58@@7@5@@@ C @.)8 or )8M Turnover C 7@5@@@0>15@@@ C @.)@ +%# C >58@@0>15@@@ C @.18? or 18.?M
!TS: 1 "#: "ifficulty: $asy %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: Application N%T: 0 min. ). No6le ompany has two divisions5 the "omestic "ivision and the #nternational "ivision. (ast year5 the "omestic "ivision earned 7@5@@@ using average operating assets of 1588@5@@@. Sales for the "omestic "ivision were 75@@5@@@. (ast year5 the #nternational "ivision earned 0@5@@@ using average operating assets of )5>@@5@@@. Sales for the #nternational "ivision were =5@@@5@@@. A. &. .
or the "omestic "ivision5 margin is Turnover is and +%# is . or the #nternational "ivision5 margin is Turnover is and +%# is . #f these are the only two divisions of No6le ompany5 what is +%# for No6le ompanyK
ANS: A.
/argin C 7@5@@@75@@5@@@ C @.1 or 1@M Turnover C 75@@5@@@1588@5@@@ C ).0 +%# C @.1 × ).0 C @.)0 or )0M
&.
/argin C 0@5@@@=5@@@5@@@ C @.@> or >M Turnover C =5@@@5@@@)5>@@5@@@ C ).0 +%# C @.@> × ).0 C @.)@ or )@M
.
+%# C ;7@5@@@ L 0@5@@@<;1588@5@@@ L )5>@@5@@@< C @.)1= or )1.=M
!TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: Application N%T: 1@ min. 7. hase ompany had the following income statement for last year: Sales (ess: ost of goods sold ,ross margin (ess: Selling Admin. $9pense
1>@5@@@ ?=50@@ >)50@@ 7?57@@
%perating income
875)@@
&eginning assets were )=?50@@ and ending assets were )?50@@. A. &. . ".
Average operating assets were . /argin was . Turnover was . +eturn on investment was M.
ANS: A. &. . ".
Average operating assets C ;)=?50@@ L )?50@@<) C )>>5@@@ /argin C 875)@@1>@5@@@ C @.)8 or )8M Turnover C 1>@5@@@)>>5@@@ C @.)0 +%# C @.)8 × @.)0 C @.10 or 10M
!TS: 1 "#: "ifficulty: $asy %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: Application N%T: 0 min. 8. ,iven the following information for the +eardon "ivision: Asset 6ase Sales +evenues $9penses
0@@5@@@ =)05@@@ )50@@
Re0uired A. Ghat are the margin5 turnover5 and +%# for +eardon "ivisionK &. +eardon has an option to make an additional investment that would add 1@@5@@@ to the asset 6ase. #t would generate an additional 0@5@@@ in sales revenue and no additional e9penses. Ghat would 6e the effect on margin5 turnover and +%#K . Another option ;independent of alternative &< for +eardon is to run an advertising campaign that would reBuire additional advertising e9penses of 7=50@@5 6ut the 6est estimate is the campaign would generate an additional =05@@@ of revenue. Ghat would 6e the effect on margin5 turnover and +%#K
ANS:
Asset 6ase +evenue $9penses %perating #ncome ;+evenue − $9pense< /argin ;%perating #ncome+evenue< Turnover ;+evenueAsset &ase< +%# ;%perating #ncomeAsset &ase< !TS: 1
"#:
"ifficulty: hallenging
A. 0@@5@@@ =)05@@@ )50@@ )50@@
&. @@5@@@ ==05@@@ )50@@ 11)50@@
. 0@@5@@@ >@@5@@@ =@@5@@@ 1@@5@@@
@.@>)
@.180)
@.1)0@
1.80
1.)?1
1.
@.1)0
@.1>=0
@.)
%&': (%: 1)-)
NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: Application N%T: 1@ min. 0. !rovide the missing data in the following situations:
Sales %perating assets Net operating income /argin Turnover +eturn on investment
!hi "ivision ;A< ;&< 8@@5@@@ @.@> ;< 1M
"elta "ivision )0@5@@@ ;"< 1@5@@@ ;$< ;< 1@M
Theta "ivision ;,< >@@5@@@ 1885@@@ @.1) 1.0 ;H<
ANS: A.
8@@5@@@A C @.@>
A C 05@@@5@@@
&.
8@@5@@@& C @.1
& C )50@@5@@@
.
C 05@@@5@@@)50@@5@@@ C ).@
".
1@5@@@" C @.1@
$.
$ C 1@5@@@)0@5@@@ C .@8 or 8M
.
C )0@5@@@1@@5@@@ C ).0 times
,.
1885@@@, C @.1)
H.
@.1) × 1.0 C .1> or 1>M
" C 1@@5@@@
, C 15)@@5@@@
!TS: 1 "#: "ifficulty: hallenging %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: Application N%T: 1@ min. Fi(ure 12) /onfett /anufacturing earned operating income last year as shown in the following income statement:
Sales ost of goods sold ,ross margin Selling and administrative e9pense %perating income
)@5@@@ 715@@@ 7@85@@@ )1?5@@@ >05@@@
(ess: #ncome ta9es ;at 8@M<
785@@@
Net income
015@@@
At the 6eginning of the year5 the value of operating assets was )75@@@. At the end of the year5 the value of operating assets was 775@@@. /onfett /anufacturing reBuires a minimum rate of return of 10M. Total capital employed eBual 70@5@@@ and actual cost of capital is M.
. +efer to igure 1)-=. alculate the following: A. Average operating assets &. /argin . Turnover ". +eturn on investment ;arry computations out to two decimal places.< ANS: A. Average operating assets C &eginning assets L ending assets) ;)75@@@ L 775@@@<) C )??50@@ &. /argin C %perating incomeSales >05@@@)@5@@@ C .18 or 18M . Turnover C SalesAverage operating assets )@5@@@)??50@@ C ).@= ". +%# C /argin 9 Turnover .18 9 ).@= C @.)? !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-) NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-77-#ncremental analysis 2$3: &loom4s: Application N%T: 0 min. =. +efer to igure 1)-=. alculate the following: A. +esidual income &. $A ANS: A. +esidual income C operating income - ;minimum rate of return 9 average operating assets< >05@@@ - ;10M 9 )??50@@< C 8@5@=0 Average operating assets C ;&eginning assets L ending assets<) ;)75@@@ L 775@@@<) C )??50@@ &. $A C after-ta9 operating income - ;actual percentage cost of capital 9 total capital employed< 015@@@ - ;M 9 70@5@@@< C 7@5@@@
!TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-7 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-77-#ncremental analysis 2$3: &loom4s: Application N%T: 0 min. >. +ed $arth ompany has two divisions5 the %kla "ivision and the Homa "ivision. (ast year5 the %kla "ivision earned 5@@@ using average operating assets of 00@5@@@. (ast year5 the Homa "ivision earned )@5@@@ using average operating assets of )5@@@5@@@. /inimum reBuired rate of return for +ed $arth is ?M. A. &.
or the %kla "ivision5 residual income is . or the Homa "ivision5 residual income is .
Now assume that the minimum reBuired rate of return for +ed $arth is 1)M. . or the %kla "ivision5 residual income is . ". or the Homa "ivision5 residual income is . ANS: A. &. . ".
+esidual income C 5@@@ − ;@.@? × 00@5@@@< C 150@@ +esidual income C )@5@@@ − ;@.@? × )5@@@5@@@< C >@5@@@ +esidual income C 5@@@ − ;@.1) × 00@5@@@< C @ +esidual income C )@5@@@ − ;@.1) × )5@@@5@@@< C )@5@@@
!TS: 1 "#: "ifficulty: $asy %&': (%: 1)-7 NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: Application N%T: 0 min. ?. The Southern "ivision of 'enkins ompany had income of 8>57@@5 average assets of 7805@@@ and sales of )8150@@. The minimum rate of return for 'enkins ompany is 1)M. A. &. . ".
Ghat is margin for the Southern "ivisionK Ghat is turnover for the Southern "ivisionK Ghat is +%# for the Southern "ivisionK Ghat is residual income for the Southern "ivisionK
ANS: A. &. . ".
/argin C 8>57@@)8150@@ C @.) or )@M Turnover C )8150@@7805@@@ C @.= +%# C @.)@ × @.= C @.18 or 18M +esidual income C 8>57@@ − ;@.1) × 7805@@@< C 5?@@
!TS: 1 "#: "ifficulty: $asy %&': (%: 1)-) (%: 1)-7 NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: Application N%T: 0 min. 1@. "i9ie ompany has the following data for )@11:
Sales ontri6ution margin %perating income Average operating assets ost of capital
"ivision A 8@@5@@@ 1@5@@@ >@5@@@ 7)@5@@@ 10M
"ivision & 7@@5@@@ 1)05@@@ 7@5@@@ )@@5@@@ 10M
"i9ie ompany has a target +%# of )@M. Re0uired alculate the following amounts for each division: A. /argin ratio &. Turnover ratio . +%# ". +esidual income $. $A
ANS: "ivision A: A. /argin ratio C >@5@@@8@@5@@@ C .)@ or )@M &.
Turnover ratio C 8@@5@@@7)@5@@@ C 1.)0
.
+%# C @.)@ × 1.)0 C )0M
".
+esidual income C >@5@@@ − @.)@;7)@5@@@< C 15@@@
$.
$A C >@5@@@ − @.10;7)@5@@@< C 7)5@@@
"ivision &: A. /argin ratio C 7@5@@@7@@5@@@ C .1@ or 1@M &.
Turnover ratio C 7@@5@@@)@@5@@@ C 1.0@
.
+%# C @.1@ × 1.0@ C 10M
".
+esidual income C 7@5@@@ − @.)@;)@@5@@@< C ;1@5@@@<
$.
$A C 7@5@@@ − @.10;)@@5@@@< C @
!TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-) (%: 1)-7 NAT: &*S!+%,: Analytic STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: Application N%T: 1@ min. 11. !aige #nc. has a division that makes paint and another division that constructs su6division houses. The paint division incurs the following costs for one gallon of paint: "irect materials "irect la6or aria6le overhead i9ed overhead Total
1.1@ 1.80 @.?@ 1.10 8.@
The !aint "ivision can make 15@@@5@@@ gallons per year5 and is at capacity. The onstruction "ivision currently 6uys its paint from an outside supplier for 0.)@ per gallon ;the same price that the !aint "ivision receives<. A. &.
The ma9imum transfer price per gallon of paint is IIIIIIIIIIIIIIIIIIO this price is set 6y which of the two divisionsK The minimum transfer price per gallon of paint is IIIIIIIIIIIIIIIIIIO this price is set 6y which of the two divisionsK
ANS: A. &.
0.)@O construction division 0.)@O paint division
!TS: 1 "#: "ifficulty: $asy %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: Strategic !lanning A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: Application N%T: 0 min. 1). !aige #nc. has a division that makes paint and another division that constructs su6divisions. The paint division incurs the following costs for one gallon of paint: "irect materials "irect la6or aria6le overhead i9ed overhead Total
1.1@ 1.80 @.?@ 1.10 8.@
The !aint "ivision can make 15@@@5@@@ gallons per year5 and e9pects to produce >@@5@@@ gallons ne9t year. The onstruction "ivision currently 6uys )@@5@@@ gallons of paint from an outside supplier for 0.7@ per gallon ;the same price that the !aint "ivision receives<. A. &. .
The ma9imum transfer price per gallon of paint is . The minimum transfer price per gallon of paint is . Assume that the transfer takes place at 0 per gallonO calculate the amount 6y which each of the following will 6e 6etter off with the transfer than without it. !aint "ivision onstruction "ivision !aige #nc.5as a whole
ANS: A. &. .
0.7@ ;market price< 7.80 ;varia6le cost per gallon< !aint "ivision 6enefit C ;0.@@ − 7.80< × )@@5@@@ C 71@5@@@ onstruction "ivision 6enefit C ;0.7@ − 0.@@< × )@@5@@@ C @5@@@ &enefit to !aige #nc. C ;0.7@ − 7.80< × )@@5@@@ C 7=@5@@@
!TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: Strategic !lanning A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: Application
N%T: 1@ min. 17. !aige #nc. has a division that makes paint and another division that constructs su6divisions. The paint division incurs the following costs for one gallon of paint: "irect materials "irect la6or aria6le overhead i9ed overhead Total
1.1@ 1.80 @.?@ 1.10 8.@
The !aint "ivision can make 15@@@5@@@ gallons per year5 and e9pects to produce 15@@@5@@@ gallons ne9t year. The construction division currently 6uys )@@5@@@ gallons of paint from an outside supplier for 0.)@ per gallon ;the same price that the !aint "ivision receives<. A. &. .
The ma9imum transfer price per gallon of paint is . The minimum transfer price per gallon of paint is . "oes it matter whether or not the two divisions transferK
ANS: A. &. .
0.)@ ;market price< 0.)@ ;market price< No5 it doesn4t matter since the appropriate transfer price is eBual to the market price.
!TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: Strategic !lanning A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: Application N%T: 0 min. 18. The "ear "ivision of Qimmer ompany sells all of its output to the inishing "ivision of the company. The only product of the "ear "ivision is chair legs that are used 6y the inishing "ivision. The retail price of the legs is )@ per leg. $ach chair completed 6y the inishing "ivision reBuires four legs. !roduction Buantity and cost data for )@11 are as follows: hair legs "irect materials "irect la6or %verhead ;)0M is varia6le<
7@5@@@ 1705@@@ ?@5@@@ ?@5@@@
Re0uired ompute the transfer price for a chair leg using: A. market price. &. varia6le product costs plus a fi9ed fee of )@M. . full cost plus )@M markup. ". varia6le costs.
ANS: A.
)@
&.
1.)@ × D1705@@@ L ?@5@@@ L ;@.)0 × ?@5@@@
.
1.)@ × ;1705@@@ L ?@5@@@ L ?@5@@@<7@5@@@ C 1).@
".
D1705@@@ L ?@5@@@ L ;@.)0 × ?@5@@@.)0
!TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: Strategic !lanning A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: Application N%T: 0 min. Fi(ure 12)3 &ostonian #nc. has a num6er of divisions5 including "elta "ivision and (istenNow "ivision. The (istenNow "ivision owns and operates a line of /!7 players. $ach year the (istenNow "ivision purchases component AQ in order to manufacture the /!7 players. urrently it purchases this component from an outside supplier for .0@ per component. The manager of the "elta "ivision has approached the manager of the (istenNow "ivision a6out selling component AQ to the (istenNow "ivision. The full product cost of component AQ is 7.1@. The "elta "ivision can sell all of the components AQ it makes to outside companies for .0@. The (istenNow "ivision needs 1>5@@@ component AQs per yearO the "elta "ivision can make up to @5@@@ components per year.
10. +efer to igure 1)->. +eBuired: A. Ghich division sets the ma9imum transfer priceK Ghich division sets the minimum transfer priceK &. Suppose the company policy is that all transfer take place at full cost. Ghat is the transfer priceK ANS: A.
The ma9imum transfer price is set 6y the 6uying division5 in this case5 the (istenNow "ivision. The minimum transfer price is set 6y the selling division5 in this case5 the "elta " ivision. &.
ull cost transfer price C 7.1@ !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: "ecision Analysis A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: Application N%T: 0 min. 1. +efer to igure 1)->. Assume that the company policy is that all transfer prices are negotiated 6y the divisions involved. Re0uired A. Ghat is the ma9imum transfer priceK Ghich division sets itK &. Ghat is the minimum transfer priceK Ghich division sets itK . #f the transfer takes place5 what will 6e the transfer priceK
ANS:
A. The ma9imum transfer price5 set 6y the (istenNow "ivision5 is .0@. The (istenNow
"ivision would not pay any more than .0@ 6ecause that is the price it currently pays to outside suppliers. &. The minimum transfer price5 set 6y the "elta "ivision5 is .0@. This division is operating at capacity and can sell all that it makes to outside 6uyers for .0@. . #f the transfer takes place5 the transfer price will 6e .0@. !TS: 1 "#: "ifficulty: $asy %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: "ecision Analysis A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: Application N%T: 0 min. 1=. +efer to igure 1)->. Although the "elta "ivision has 6een operating at capacity ;@5@@@ components per year<5 it e9pects to produce and sell only 805@@@ components for .0@ each ne9t year. The "elta "ivision incurs varia6le costs of 1.0@ per component. The company policy is that all transfer prices are negotiated 6y the divisions involved. Re0uired A. Ghat is the ma9imum transfer priceK Ghich division sets itK &. Ghat is the minimum transfer priceK Ghich division sets itK . Suppose that the two divisions agree on a transfer price of 0.=0. Ghat is the change in operating income for the "elta "ivisionK or the (istenNow "ivisionK or &ostonian #nc. as a wholeK
ANS: A. The ma9imum transfer price5 set 6y the (istenNow "ivision5 is .0@.
&. The minimum transfer price5 set 6y the "elta "ivision5 is 1.0@. #n this case5 only varia6le costs of 1.0@ per component are relevant 6ecause the "elta "ivision has e9cess capacity. . &enefit to "elta "ivision: +evenue ;0.=0 × 1>5@@@< (ess: aria6le cost ;1.0@ × 1>5@@@< &enefit
1@750@@ )=5@@@ =50@@
&enefit to (istenNow "ivision: %utside supplier ;.0@ × 1>5@@@< Transfer price ;0.=0 × 1>5@@@< &enefit
11=5@@@ 1@750@@ 1750@@
ompany 6enefit C =50@@ L 1750@@ C ?@5@@@ !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-8 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: "ecision Analysis A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: Application
N%T: 0 min. 1>. $ach month5 the vacuum cleaner manufacturing cell has >@@ hours of time availa6le. "uring that time5 the cell could have manufactured up to )58@@ vacuumsO 6ut only 15@@ vacuums were actually manufactured. alculate the following: A. &. . ".
Theoretical cycle time in minutes. Theoretical velocity per hour. Actual cycle time in minutes. Actual velocity per hour.
ANS: A. &. . ".
Theoretical cycle time C >@@ ;@ minutes<)58@@ C )@ minutesvacuum Theoretical velocity C )58@@ vacuums>@@ hours C 7 vacuums per hour Actual cycle time C >@@ ;@ minutes<15@@ C 7@ minutesvacuum Actual velocity C1@@ vacuums>@@ hours C ) vacuums per hour
!TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-0 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: Strategic !lanning A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: Application N%T: 0 min. 1?. The pager manufacturing cell has 15)@@ hours of time availa6le per Buarter. The cell could make =5)@@ pagers 6ut only made 5@@@ during that time. alculate the following: A. &. . ". $.
Theoretical cycle time in minutes. Theoretical velocity per hour. Actual cycle time in minutes. Actual velocity per hour. /$ is M ;round your answer two digits<.
ANS: A. &. . ". $.
Theoretical cycle time C 15)@@;@ minutes<=5)@@ C 1@ minutespager Theoretical velocity per hour C ;@ minutes1 hour<;1@ minutespager< C pagers per hour Actual cycle time C 15)@@;@ minutes<5@@@ C 1) minutespager Actual velocity C ;@ minutes1 hour<;1) minutespager< C 0 pagers per hour /$ C 1@1) C @.>777 or >7.77M
!TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-0 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: Strategic !lanning A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: Application N%T: 0 min. Fi(ure 12)4* The irst National &ank has a mortgage loan office with conversion cost of =75?0@ per month. There are five employees who each work 1=@ hours per month. (ast month5 15@)@ loan applications were processed5 6ut the staff 6elieves that system improvements could lead to the processing of as many as 15=@@ per month.
)@. +efer to igure 1)-. alculate the following: A. &. . ".
Actual cycle time in minutes. Theoretical cycle time in minutes. Actual velocity per hour. Theoretical velocity per hour.
ANS: A. &. . ".
Actual cycle time C D0;1=@<;@
!TS: 1 "#: "ifficulty: hallenging %&': (%: 1)-0 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: Strategic !lanning A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: Application N%T: 0 min. )1. +efer to igure 1)-. alculate the following: A. &. . ".
onversion cost in minutes. Theoretical conversion cost per unit. Actual conversion cost per unit. How much more is the department spending per application than it should 6e if perfect efficiency could 6e attainedK
ANS: A. &. . ".
onversion cost C =75?0@D0;1=@<;@
!TS: 1 "#: "ifficulty: hallenging %&': (%: 1)-0 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: Strategic !lanning A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: Application N%T: 0 min. )). /arshal ompany has the following data for one of its manufacturing plants: /a9imum units produced in a Buarter C 8)05@@@ units Actual units produced in a Buarter C 70850@@ units !roductive hours in one Buarter C 70580@ hours Re0uired A. omputer the theoretical cycle time ;in minutes<.
&. omputer the actual cycle time ;in minutes<. . ompute the theoretical velocity in units per hour. ". ompute the actual velocity in units per hour. ANS: A. ;70580@ hours 9 @ minutes per hour<8)05@@@ units C 0.@@ minutes per unit &. ;70580@ hours 9 @ minutes per hour<70850@@ units C .@@ minutes per unit . @ minutes per hour0 minutes per unit C 1) units per hour ". @ minutes per hour minutes per unit C 1@ units per hour !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-0 NAT: &*S!+%,: Analytic STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-77-#ncremental analysis 2$3: &loom4s: Application N%T: 0 min. E!!A5 5ou decide
1. $9plain the differences 6etween centralized and decentralized decision making. Also list some of the reasons why a company would choose to decentralize. ANS: #n centralized decision making5 decisions are made at the ver y top level5 and lower level managers are charged with implementing these decisions. "ecentralized decision-making allows managers at lower levels to make and implement key decisions pertaining to their areas of responsi6ility. ompanies will choose to decentralize for several reasons. These reasons include the ease of gathering and using local information5 focusing of central management on items such as strategic planning and decision making5 training and motivating segment managers and enhanced competition5 e9posing segments to market forces. !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-1 NAT: &*S!+%,: ommunication STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-)-/anagement unctions 2$3: &loom4s: omprehension N%T: 0 min. ). Ghat are the advantages and disadvantages of return on investment ;+%#
Two disadvantages of +%# are: 1. #t can produce a narrow focus on divisional profita6ility at the e9pense of profita6ility for the overall firm. ). #t encourages managers to focus on the short run at the e9pense of the long run. !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-) NAT: &*S!+%,: ommunication STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: omprehension N%T: 0 min. 7. How is $A ;$conomic alue Added< different from standard residual income calculationsK ANS: The key features of $A are that it uses ;1< after-ta9 operating profit5 and ;)< the actual cost of capital. Standard residual income uses some minimum desired cost of capital. !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-7 NAT: &*S!+%,: ommunication STA: A#!A: N-"ecision /odeling #/A: "ecision Analysis A&S!: A!-77-#ncremental analysis 2$3: &loom4s: omprehension N%T: 0 min. 8. The ,lass "ivision of a company makes glass vases which have the following unit costs: "irect materials "irect la6or aria6le overhead i9ed overhead Selling commission
@.)@ @.70 @.10 1.7@ @.0@
The lorist "ivision of the company sells cut flowers and uses the glass vases. The lorist "ivision uses 1@5@@@ vases per year and currently 6uys them from an outside supplier for 8 each. The ,lass "ivision produces and sells 1@@5@@@ glass vases per year and sells them on the outside market for 8 each. ases sold outside incur the sales commissionO this commission would not 6e paid on internal transfers. The ,lass "ivision and the lorist "ivision managers Fust met and agreed on a transfer price of 7.=0 per vase. #s this a good idea for each divisionK $9plain. ANS: 3es5 this is a good deal for each division. The lorist "ivision saves @.)0 per vase ;8.@@ − 7.=0< 6y agreeing to the transfer. Ghile the ,lass "ivision is operating at capacity5 it will make more money 6y transferring internally since it will save the selling commission. The net price on outside sales is 7.0@ ;8.@@ − @.0@<5 6ut the transfer price is 7.=0. !TS: 1 "#: "ifficulty: /oderate %&': (%: 1)-8 NAT: &*S!+%,: ommunication STA: A#!A: N-/easurement #/A: !erformance /easurement A&S!: A!-)0-/anagerial haracteristicsTerminology 2$3: &loom4s: omprehension N%T: 0 min. 0. "escri6e the four perspectives of the &alanced Scorecard. ANS: The four perspectives of the &alanced Scorecard are:
