Introduction to Management Accounting, 16e, Global Edition (Horngren) Chapter 10 Management Control in Decentralized Organizations Organizations 10.1 Questions 1) The concentration of decision-making authority only at the highest levels of the organization is called ________. A) management by obective !) balanced scorecard ") decentralization #) centralization Ans$er% # #i&% 1 '(% 10-1 AA"!% *e+ective thinking skills skills 'earning (utcome% ,one ) All of the follo$ing are disadvantages of decentralization /"T for ________. A) 'ocal managers make decisions that are not in the organizations o rganizations best interests. !) 2anagers s3end time negotiating transfer 3rices for goods and services transferred bet$een divisions and segments. ") 'ocal managers du3licate services. #) 'ocal managers have more authority and greater levels of ob satisfaction. Ans$er% # #i&% '(% 10-1 AA"!% *e+ective thinking skills skills 'earning (utcome% ,one 4) 5hich of the follo$ing statements is ,(T a bene6t of decentralization7 A) 'o$er-level managers are able to make faster and be8er decisions on local decisions than higher-level managers. !) !y delegating decision-making authority to local managers9 higher-level managers free u3 time to deal $ith larger issues and fundamental strategy. ") 'ocal managers can develo3 management skills. #) 2anagers in decentralized units may s3end time negotiating transfer 3rices for goods transferred bet$een units. units. Ans$er% # #i&% '(% 10-1 AA"!% *e+ective thinking skills skills 'earning (utcome% ,one
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;) #ecentralization is more successful in organizations o rganizations $hen ________. A) multi3le segments buy from the same outside su33liers !) multi3le segments sell to the same customers ") there are freoal congruence !) egment autonomy ") 2anagerial e&ort #) egment contribution Ans$er% ! #i&% 1 '(% 10-1 AA"!% *e+ective thinking skills skills 'earning (utcome% ,one ?) #ecentralization may increase a 6rms costs because ________. A) lo$er level managers du3licate services that may be less e@3ensive if centralized !) information costs rise as to3 management needs additional re3orts to learn about decentralized units ") lo$er level managers managers may make decisions that are not in the best interests of the 6rm as a $hole #) all of the above Ans$er% # #i&% '(% 10-1 AA"!% *e+ective thinking skills skills 'earning (utcome% ,one ) The lo$er in the organization that authority is delegated9 the greater the decentralization. Ans$er% T*B #i&% '(% 10-1 AA"!% *e+ective thinking skills skills 'earning (utcome% ,one C) egment autonomy means that the activities of segment managers are directed by to3 managers. Ans$er% DA' #i&% 1 '(% 10-1 AA"!% *e+ective thinking skills skills 'earning (utcome% ,one
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;) #ecentralization is more successful in organizations o rganizations $hen ________. A) multi3le segments buy from the same outside su33liers !) multi3le segments sell to the same customers ") there are freoal congruence !) egment autonomy ") 2anagerial e&ort #) egment contribution Ans$er% ! #i&% 1 '(% 10-1 AA"!% *e+ective thinking skills skills 'earning (utcome% ,one ?) #ecentralization may increase a 6rms costs because ________. A) lo$er level managers du3licate services that may be less e@3ensive if centralized !) information costs rise as to3 management needs additional re3orts to learn about decentralized units ") lo$er level managers managers may make decisions that are not in the best interests of the 6rm as a $hole #) all of the above Ans$er% # #i&% '(% 10-1 AA"!% *e+ective thinking skills skills 'earning (utcome% ,one ) The lo$er in the organization that authority is delegated9 the greater the decentralization. Ans$er% T*B #i&% '(% 10-1 AA"!% *e+ective thinking skills skills 'earning (utcome% ,one C) egment autonomy means that the activities of segment managers are directed by to3 managers. Ans$er% DA' #i&% 1 '(% 10-1 AA"!% *e+ective thinking skills skills 'earning (utcome% ,one
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E) 5hen com3ared to a decentralized organization9 there are really no advantages to a centralized organization. Ans$er% DA' #i&% 1 '(% 10-1 AA"!% *e+ective thinking skills skills 'earning (utcome% ,one 10) ome level of decentralization in an organizational structure creates bene6ts for most organizations. Ans$er% T*B #i&% 1 '(% 10-1 AA"!% *e+ective thinking skills skills 'earning (utcome% ,one 11) Figher-level managers have the best information concerning local conditions. Ans$er% DA' #i&% 1 '(% 10-1 AA"!% *e+ective thinking skills skills 'earning (utcome% ,one 1) 'ocal managers in decentralized organizations tend to du3licate services that may be less e@3ensive if centralized. Ans$er% T*B #i&% 1 '(% 10-1 AA"!% *e+ective thinking skills skills 'earning (utcome% ,one 14) The costs of accumulating and 3rocessing information fre
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1=) #ecentralization is more 3o3ular in non3ro6t organizations than in 3ro6t-seeking organizations. Ans$er% DA' #i&% 1 '(% 10-1 AA"!% *e+ective thinking skills skills 'earning (utcome% ,one 1?) #ecentralization is most successful $hen an organizations segments are relatively inde3endent of one another. Ans$er% T*B #i&% '(% 10-1 AA"!% *e+ective thinking skills skills 'earning (utcome% ,one 1) Gf the segments in a 6rm buy from fro m the same outside su33liers all the time9 they are good candidates for decentralization. Ans$er% DA' #i&% 1 '(% 10-1 AA"!% *e+ective thinking skills skills 'earning (utcome% ,one 1C) A disadvantage of decentralization in organizations is higher overhead costs due to du3lication. Ans$er% T*B #i&% '(% 10-1 AA"!% *e+ective thinking skills skills 'earning (utcome% ,one 10. Questions 1) The management control system should be designed to achieve the best 3ossible alignment bet$een ________ and ________. A) cost centersH 3ro6t centers !) local managers decisionsH u33er managers bonuses ") em3loyee behaviorH agency theory #) local managers decisionsH the actions u33er management seeks Ans$er% # #i&% '(% 10- AA"!% *e+ective thinking skills skills 'earning (utcome% ,one
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) 5hich of the follo$ing statements about management control systems is DA'7 A) Gn designing management control systems9 to3 managers must consider t he systems im3act on the em3loyee behavior desired by the organization. !) The management control system should be designed to achieve the best 3ossible alignment bet$een managerial e&ort and goal congruence. ") The design of a management control system should consider the r es3onsibilities es3onsibilities of managers and the amount of autonomy they have. #) ro6t-center managers al$ays have more decentralized decision-making authority than cost-center managers. Ans$er% # #i&% '(% 10- AA"!% *e+ective thinking skills skills 'earning (utcome% ,one 4) ro6t-center managers al$ays have more decentralized decision-making authority than cost-center managers. Ans$er% DA' #i&% '(% 10- AA"!% *e+ective thinking skills skills 'earning (utcome% ,one ;) Gn designing management control systems9 to3 managers should consider the systems im3act on the behavior of em3loyees. em3loyees. Ans$er% T*B #i&% 1 '(% 10- AA"!% *e+ective thinking skills skills 'earning (utcome% ,one 10.4 Questions 1) 2anagers incentives for 3erformance are de6ned as the ________. A) relationshi3 bet$een cost and 3erceived bene6t !) relationshi3 bet$een goal congruence and managerial e&ort ") re$ards for managerial e&ort and actions #) in+uence of uncontrollable factors on a managers 3erformance Ans$er% " #i&% '(% 10-4 AA"!% *e+ective thinking skills skills 'earning (utcome% ,one
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) (rganizations should choose 3erformance metrics that im3rove the alignment of managerial incentives $ith ________. A) managerial e&ort !) organizational obectives ") ethical behavior #) agency theory Ans$er% ! #i&% 1 '(% 10-4 AA"!% *e+ective thinking skills 'earning (utcome% ,one 4) Gn agency theory9 risk to the manager is de6ned as ________. A) 3robability that a desired outcome $ill not be achieved !) 3ossibility that 3erformance $ill be measured inaccurately ") 3robability that an undesirable outcome $ill be achieved #) the in+uence of uncontrollable factors on a managers 3erformance Ans$er% # #i&% '(% 10-4 AA"!% *e+ective thinking skills 'earning (utcome% ,one ;) An ideal 3erformance metric $ould measure and re$ard the manager for ________ factors9 and neither re$ard nor 3unish the manager for ________ factors. A) allocatedH unallocated !) controllableH uncontrollable ") unallocatedH allocated #) uncontrollableH controllable Ans$er% ! #i&% 1 '(% 10-4 AA"!% *e+ective thinking skills 'earning (utcome% ,one =) 5hich of the follo$ing statements is DA' about 3erformance metrics7 A) The cost bene6t criterion leads com3anies to rely on im3erfect9 lo$-cost 3erformance metrics. !) The more a managers re$ard de3ends on a 3erformance metric9 the more incentive the manager has to take actions to ma@imize that measure. ") To3 management should de6ne the 3erformance metric to 3romote goal congruence and base enough re$ard on it to achieve managerial e&ort. #) The more uncontrollable factors a&ect a managers re$ard9 the less risk the manager bears. Ans$er% # #i&% '(% 10-4 AA"!% *e+ective thinking skills 'earning (utcome% ,one
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?) According to agency theory9 em3loyment contracts $ill balance three factors that include ________. A) cost-bene6t9 risk and uncontrollable factors !) goal congruence9 incentive and risk ") cost of measuring 3erformance9 cost-bene6t and risk #) incentive9 risk and cost of measuring 3erformance Ans$er% # #i&% 1 '(% 10-4 AA"!% *e+ective thinking skills 'earning (utcome% ,one ) Gncentives do not increase managerial e&ort to$ard goal congruence. Ans$er% DA' #i&% '(% 10-4 AA"!% *e+ective thinking skills 'earning (utcome% ,one C) erformance-based re$ards can be monetary or nonmonetary. Ans$er% T*B #i&% 1 '(% 10-4 AA"!% *e+ective thinking skills 'earning (utcome% ,one E) According to agency theory9 em3loyment contracts $ill balance three factors that include risk9 incentive and the cost of measuring 3erformance. Ans$er% T*B #i&% '(% 10-4 AA"!% *e+ective thinking skills 'earning (utcome% ,one 10) The greater the in+uence of noncontrollable factors on res3onsibility center results9 the more 3roblems there are in using the results to measure and re$ard a managers 3erformance. Ans$er% T*B #i&% '(% 10-4 AA"!% *e+ective thinking skills 'earning (utcome% ,one 11) "om3anies must 3ay managers more if the managers bear more risk9 assuming the managers are risk averse. Ans$er% T*B #i&% '(% 10-4 AA"!% *e+ective thinking skills 'earning (utcome% ,one "o3yright : 01; earson ducation
10.; Questions 1) Gn return on investment calculations9 $e should measure invested ca3ital ________ because ________. A) at the end of the 3eriodH it is easiest !) at the end of the 3eriodH income is measured at the end of the 3eriod ") at the beginning of the 3eriodH it is a lead indicator #) as an average for the 3eriod under revie$H income is measured over a 3eriod of time Ans$er% # #i&% 1 '(% 10-; AA"!% *e+ective thinking skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards ) Iulie "om3anys revenues for the year are J400 and average invested ca3ital for the year is J;0. @3enses are currently =0K of revenues. Iulie "om3anys current return on investment is ________. A) =0K !) ?.=K ") C0K #) 100K Ans$er% ! #i&% 1 '(% 10-; AA"!% Analytic skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards 4) 2aury "om3anys revenues are J400 for the year. Average invested ca3ital for the year is J;0. @3enses are currently C;K of revenues. Gf 2aury "om3any can reduce its e@3enses to 0K of revenues9 return on investment $ill be ________. A) 0K !) 4.=K ") 0K #) E4.=K Ans$er% ! #i&% 1 '(% 10-; AA"!% Analytic skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards
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;) terling "om3anys revenues are J400 for the year. Average invested ca3ital for the year is J;0. @3enses are currently 0K of revenues. Gf terling "om3any can reduce its average invested ca3ital by =K9 return on investment $ill be ________. A) 1C.=K !) =0.00K ") =.00K #) E4.=K Ans$er% ! #i&% 1 '(% 10-; AA"!% Analytic skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards =) The follo$ing information is available for the tanley "om3any% ales for year Average invested ca3ital for year *eturn on investment
J190009000 J419=00 0K
5hat is the o3erating income7 A) J?9=00 !) J1009000 ") J419=00 #) J?C9=00 Ans$er% A #i&% 1 '(% 10-; AA"!% Analytic skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards
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?) The follo$ing information is available for the Thom3son "om3any% ales for year Average invested ca3ital for year *eturn on investment
J190009000 J=009000 10K
5hat is the ca3ital turnover ratio7 A) 0.10 !) 0.4= ") 0.=0 #) .00 Ans$er% # #i&% 1 '(% 10-; AA"!% Analytic skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards ) The follo$ing information is available for the aul *yan "om3any% ales for year Average invested ca3ital for year *eturn on investment
J1=09000 J1=?9=0 10K
5hat is the return on sales7 A) 10.00K !) 10.;K ") ?.=0K #) 100.00K Ans$er% ! #i&% 1 '(% 10-; AA"!% Analytic skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards C) ________ is a measure of income divided by the investment re
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E) *eturn on investment can be com3uted as ________ times ________. A) residual incomeH ca3ital turnover !) return on assetsH asset turnover ") return on salesH ca3ital turnover #) net incomeH cost of ca3ital Ans$er% " #i&% 1 '(% 10-; AA"!% *e+ective thinking skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards 10) A decrease in either ca3ital turnover or return on sales9 $ithout changing the other9 $ill also ________ the ________. A) decreaseH gross book value of long-term assets !) decreaseH return on investment ") decreaseH cost of ca3ital #) decrease% net book value of long-term assets Ans$er% ! #i&% '(% 10-; AA"!% Analytic skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards 11) (3erating income divided by sales is ________. A) residual income !) ca3ital turnover ") return on investment #) return on sales Ans$er% # #i&% 1 '(% 10-; AA"!% *e+ective thinking skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards 1) *esidual income is de6ned as ________. A) sales less o3erating e@3enses !) o3erating income divided by revenue ") net o3erating 3ro6t after ta@ less a ca3ital charge #) net o3erating 3ro6t after ta@ Ans$er% " #i&% '(% 10-; AA"!% *e+ective thinking skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards 11 "o3yright : 01; earson ducation
14) The follo$ing information 3ertains to the Lertigo "om3any% Total assets Total current liabilities Total e@3enses Total liabilities Total revenues
J1=09000 J1109000 J09000 J11=9000 JC09000
*eturn on sales e
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1=) >onzalez "om3any re3orts the follo$ing information% ,et o3erating income after ta@es !efore-ta@ o3erating income Average invested ca3ital After-ta@ cost of ca3ital
J009000 J4009000 J=009000 10K
5hat is the residual income for >onzalez "om3any7 A) J409000 !) J=09000 ") J1=09000 #) J=09000 Ans$er% " #i&% '(% 10-; AA"!% Analytic skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards 1?) >arcia "om3any re3orts the follo$ing information% ,et o3erating income after ta@es !efore-ta@ o3erating income Average invested ca3ital After-ta@ cost of ca3ital
J1009000 J4009000 J=009000 10K
5hat is the residual income for >arcia "om3any7 A) J409000 !) J=09000 ") J=09000 #) J;=09000 Ans$er% ! #i&% '(% 10-; AA"!% Analytic skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards
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1) anchez "om3any re3orts the follo$ing information% ,et o3erating 3ro6t after ta@es Adusted net o3erating 3ro6t after ta@es Average invested ca3ital Adusted average invested ca3ital After-ta@ cost of ca3ital
J=009000 J?09000 J=009000 J009000 10K
The adusted 6gures re+ect adustments used by tern te$art M "om3any. 5hat is the LA for anchez "om3any7 A) J;409000 !) J;=09000 ") J?009000 #) J?09000 Ans$er% " #i&% '(% 10-; AA"!% Analytic skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards 1C) >okey "om3any re3orts the follo$ing information% ,et o3erating 3ro6t after ta@es Adusted net o3erating 3ro6t after ta@es Average invested ca3ital Adusted average invested ca3ital After-ta@ cost of ca3ital
J;009000 J=09000 J?009000 J009000 10K
The adusted 6gures re+ect adustments used by tern te$art M "om3any. 5hat is the LA for >okey "om3any7 A) J4409000 !) J4;09000 ") J=009000 #) J=109000 Ans$er% " #i&% '(% 10-; AA"!% Analytic skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards
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1E) 5hich of the follo$ing adustments to after-ta@ o3erating income is used to a33ro@imate cash income for LA7 A) e@3ensing research and develo3ment costs !) using 'GD( inventory method ") deducting after ta@ interest e@3ense #) using ta@es 3aid rather than ta@ e@3ense Ans$er% # #i&% '(% 10-; AA"!% *e+ective thinking skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards 0) Iuan "om3anys after-ta@ o3erating income $as JCC million. Average total assets $ere J=9E00 million and average total stockholders e
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) The follo$ing information 3ertains to anay "om3any% Total assets Total current liabilities Total e@3enses Total liabilities Total revenues
J=09000 J409000 J?09000 J;=9000 J1009000
Gnvested ca3ital is de6ned as total assets. 5hat is the ca3ital turnover7 A) 0.;0 !) 0.?4 ") 1.E #) .00 Ans$er% # #i&% '(% 10-; AA"!% Analytic skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards 4) The follo$ing information 3ertains to Num3eror "om3any% Average total assets Total current liabilities Total e@3enses Total liabilities Total revenues
J1009000 J409000 J?09000 J4=9000 JC09000
Gnvested ca3ital is de6ned as total assets. 5hat is the return on investment7 A) 0K !) ?0K ") 0K #) 1?0K Ans$er% A #i&% '(% 10-; AA"!% Analytic skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards
1? "o3yright : 01; earson ducation
;) The follo$ing information 3ertains to ingh "om3any% Average total assets ,et o3erating 3ro6t after ta@es Total current liabilities Total e@3enses Total liabilities Total revenues
J=09000 J1=9000 J409000 J?09000 J4=9000 JC09000
Gnvested ca3ital is de6ned as total assets. The ca3ital charge is 10K. 5hat is the residual income7 A) J19?00 !) J109000 ") J1=9000 #) J09000 Ans$er% ! #i&% '(% 10-; AA"!% Analytic skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards =) The follo$ing information 3ertains to >arcia "om3any% Total assets ,et o3erating 3ro6t after ta@es Total current liabilities Total e@3enses Total liabilities Total revenues
J=09000 J109000 J109000 J?09000 J1=9000 JC09000
Gnvested ca3ital is de6ned as total assets minus current liabilities. The after-ta@ cost of ca3ital is 0K. 5hat is the residual income7 A) J9000 !) J;9000 ") J19000 #) J09000 Ans$er% A #i&% '(% 10-; AA"!% Analytic skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards
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?) The follo$ing information 3ertains to Arnez "om3any% Total assets ,et o3erating 3ro6t after ta@es Total current liabilities Total e@3enses Total liabilities Total revenues
J1=09000 J19000 J1109000 J1?09000 J11=9000 J1C09000
Gnvested ca3ital is de6ned as total assets minus current liabilities. The after-ta@ cost of ca3ital is 10K. 5hat is the economic 3ro6t7 A) JC9000 !) J09000 ") J;09000 #) J=09000 Ans$er% A #i&% '(% 10-; AA"!% Analytic skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards ) 5hen measuring invested ca3ital for 3ur3oses of calculating return on investment9 managers in 3ractice 3redominantly use ________. A) net book value at current cost !) net book value at historical cost ") gross book value at historical cost #) gross book value at re3lacement cost Ans$er% ! #i&% '(% 10-; AA"!% *e+ective thinking skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards C) Fistorical cost is $idely used for asset valuation in calculating return on investment because ________. A) it re3orts the re3lacement cost of long-term assets !) it is more subective than other a33roaches ") it re
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E) The follo$ing information is available for Arne8 "om3any% "urrent assets ro3erty9 3lant and e
J1009000 1=09000 =09000 J4009000
"urrent liabilities 'ong-term liabilities tockholders e
J=9000 1009000 1=9000 J4009000
Gnvested ca3ital is de6ned as total assets. ,et o3erating income is J?09000. 5hat is *(G7 A) 0K !) 40K ") =0K #) 10K Ans$er% A #i&% '(% 10-; AA"!% Analytic skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards 40) The follo$ing information is available for ohler "om3any% "urrent assets ro3erty9 3lant and e
J1009000 =09000 1=09000 J4009000
"urrent liabilities 'ong-term liabilities tockholders e
J=9000 1009000 1=9000 J4009000
Gnvested ca3ital is de6ned as total assets. !efore-ta@ o3erating 3ro6t is J1=9000. After-ta@ o3erating 3ro6t is J1=9000. The after-ta@ cost of ca3ital is 10K. 5hat is economic 3ro6t7 A) JE=9000 !) J1=9000 ") J1;=9000 #) J1=9000 Ans$er% A #i&% '(% 10-; AA"!% Analytic skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards
1E "o3yright : 01; earson ducation
41) The follo$ing information is available for A33legate "om3any% "urrent assets ro3erty9 3lant and e
J1009000 1=09000 =09000 J4009000
"urrent liabilities 'ong-term liabilities tockholders e
J1=9000 1009000 =9000 J4009000
Gnvested ca3ital is de6ned as total assets less current liabilities. The after-ta@ o3erating income is J1=09000. The after-ta@ cost of ca3ital is 0K. The before-ta@ o3erating income is J009000. 5hat is the residual income7 A) JE09000 !) J109000 ") J1=9000 #) J1=9000 Ans$er% " #i&% '(% 10-; AA"!% Analytic skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards 4) *eturn on investment e
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4=) *eturn on sales e
1 "o3yright : 01; earson ducation
;1) LA uses after-ta@ numbers for o3erating income. Ans$er% T*B #i&% '(% 10-; AA"!% *e+ective thinking skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards ;) Gn general9 use of economic 3ro6t or LA $ill 3romote goal congruence and lead to be8er investment decisions than the use of *(G. Ans$er% T*B #i&% '(% 10-; AA"!% *e+ective thinking skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards ;4) ossible de6nitions of invested ca3ital for 3ur3oses o f calculating return on investment include total assets and total stockholders e
"o3yright : 01; earson ducation
;?) 2anagers evaluated using net book value for 3lant assets $ill tend to re3lace assets sooner than managers evaluated using gross book value. Ans$er% DA' #i&% '(% 10-; AA"!% *e+ective thinking skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards ;) The use of net book value for 3lant assets 3romotes a more conservative a33roach to asset re3lacement $hen com3ared to gross book value. Ans$er% T*B #i&% '(% 10-; AA"!% Analytic skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards ;C) elected data for t$o divisions of the *oyal "om3any are given belo
%$,et sales for year Average total assets for year (3erating income before ta@es for year Ta@ rate Average after-ta@ cost of ca3ital
outh #ivision J;90009000 J90009000 J4?09000 0K 10K
,orth #ivision J90009000 J90009000 J;09000 0K 1K
*e
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;E) The follo$ing information is available for the Tyson "om3any% ales for year Average invested ca3ital for year *eturn on investment for year
J190009000 J=009000 =K
*e
; "o3yright : 01; earson ducation
=0) Fudson "om3any has t$o divisions. The follo$ing information is available%
*evenue for year (3erating income before ta@es for year Average invested ca3ital for year Gnvested ca3ital at end of year Ta@ rate After-ta@ cost of ca3ital for year
,orth #ivision J4009000
outh #ivision J=009000
J1009000 J1009000 J009000 40K 0K
JE09000 J009000 J4009000 40K 1=K
*e
= "o3yright : 01; earson ducation
10.= Questions 1) 5hen a com3any uses economic 3ro6t as a 3erformance metric9 managers have an incentive to invest only in 3roects ________. A) earning less than the return on investment of the segment or division !) earning more than the return on investment of the segment or division ") earning more than the cost of ca3ital of the segment or division #) earning less than the cost of ca3ital of the segment or division Ans$er% " #i&% '(% 10-= AA"!% *e+ective thinking skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards ) 5hen a com3any uses return on investment as a 3erformance metric9 managers have an incentive to invest only in 3roects ________. A) that increase the return on investment of the segment or division !) that decrease the return on investment of the segment or division ") that have a return on investment that e@ceeds the cost of ca3ital of the segment or division #) that have a return on investment that is less than the cost of ca3ital of the segment or division Ans$er% A #i&% '(% 10-= AA"!% *e+ective thinking skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards 4) !rady #ivision has o3erating income of J009000 for the year ending #ecember 419 011. Average invested ca3ital is J190009000 and the $eighted-average cost of ca3ital is 10K. The division is considering a ne$ investment that $ould cost J=009000 and earn 1=K annually. Gf return on investment is the 3erformance metric9 should the manager of the !rady #ivision acce3t the ne$ investment7 A) ,o9 because the return on investment of the division decreases $ith the ne$ investment. !) ,o9 because the return on investment of the division increases $ith the ne$ investment. ") Ses9 because the return on investment of the division decreases $ith the ne$ investment. #) Ses9 because the return on investment of the division increases $ith the ne$ investment. Ans$er% A #i&% 4 '(% 10-= AA"!% Analytic skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards
? "o3yright : 01; earson ducation
;) 5isconsin #ivision has o3erating income of J;09000 for the year ending #ecember 419 011. Average invested ca3ital is JC009000 and the $eighted-average cost of ca3ital is 10K. The division is considering a ne$ investment that $ould cost JC009000 and earn K annually. Gf return on investment is the 3erformance metric9 should the manager of the 5isconsin #ivision acce3t the ne$ investment7 A) ,o9 because the return on investment of the division decreases $ith the ne$ investment. !) ,o9 because the return on investment of the division increases $ith the ne$ investment. ") Ses9 because the return on investment of the division decreases $ith the ne$ investment. #) Ses9 because the return on investment of the division increases $ith the ne$ investment. Ans$er% # #i&% 4 '(% 10-= AA"!% Analytic skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards =) !ombard #ivision has o3erating income of J009000 for the year ending #ecember 419 011. Average invested ca3ital is J190009000 and the $eighted-average cost of ca3ital is 10K. The division is considering a ne$ investment that $ould cost J=009000 and earn 1=K annually. Gf economic 3ro6t is the 3erformance metric9 should the manager of the !ombard #ivision acce3t the ne$ investment7 A) ,o9 because the return on investment of the division decreases $ith the ne$ investment. !) ,o9 because the return on investment of the division increases $ith the ne$ investment. ") Ses9 because the economic 3ro6t of the division increases $ith the ne$ investment. #) Ses9 because the return on investment of the division increases $ith the ne$ investment. Ans$er% " #i&% 4 '(% 10-= AA"!% Analytic skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards ?) 5endell #ivision has o3erating income of J;09000 for the year ending #ecember 419 011. Average invested ca3ital is JC009000 and the $eighted-average cost of ca3ital is 10K. The division is considering a ne$ investment that $ould cost JC009000 and earn K annually. Gf economic 3ro6t is the 3erformance metric9 should the manager of the 5endell #ivision acce3t the ne$ investment7 A) ,o9 because the return on investment of the division decreases $ith the ne$ investment. !) ,o9 because the economic 3ro6t for the investment is negative. ") Ses9 because the economic 3ro6t for the investment is 3ositive. #) Ses9 because the return on investment of the division increases $ith the ne$ investment. Ans$er% ! #i&% 4 '(% 10-= AA"!% Analytic skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards
"o3yright : 01; earson ducation
) Bse of ________ in evaluating ca3ital investment 3roects $ill 3romote goal congruence and lead to be8er decisions than using ________. A) return on investmentH economic 3ro6t !) economic 3ro6tH contribution by segment ") contribution controllable by division managerH contribution by segment #) economic 3ro6t9 return on investment Ans$er% # #i&% 4 '(% 10-= AA"!% *e+ective thinking skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards C) valuation of ca3ital investments based on economic 3ro6t motivates managers to invest in 3roects that ________ because those investments increase the divisions economic 3ro6t. A) earn a return in e@cess of the 3roects return on investment !) earn a return in e@cess of the segments return on investment ") earn a return in e@cess of the cost of ca3ital #) earn a return in e@cess of the segments net income Ans$er% " #i&% 4 '(% 10-= AA"!% *e+ective thinking skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards E) 5hy do some com3anies 3refer the use of economic 3ro6t over return on investment in decisionmaking7 A) The calculations for economic 3ro6t are easier. !) The data needed to calculate return on investment are not al$ays available. ") *eturn on investment can motivate managers to make investment decisions that are not in the best interests of the com3any as a $hole. #) The conce3t behind economic 3ro6t is more logical. Ans$er% " #i&% '(% 10-= AA"!% *e+ective thinking skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards
C "o3yright : 01; earson ducation
10) Drom the vie$ of the com3any as a $hole9 managers should acce3t investment 3roects that earn more than the ________. ________ should not be used for investment decisions. A) return on investmentH *eturn on sales !) return on salesH "a3ital turnover ") cost of ca3italH *eturn on investment #) ca3ital turnoverH *eturn on sales Ans$er% " #i&% '(% 10-= AA"!% *e+ective thinking skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards 11) The follo$ing information 3ertains to a segment of the 2oore "om3any. Gnvested ca3ital is de6ned as total assets. The $eighted average cost of ca3ital is 10K. The *(G of the segment before the 3roect is 0K. The *(G of the segment after the 3roect is 1CK. The manager is evaluated based on the segments *(G. A 3roect earning a *(G of 1K should be ________. A) acce3ted !) reected ") com3ared to the com3anys *(G #) com3ared to the com3anys residual income Ans$er% ! #i&% '(% 10-= AA"!% Analytic skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards 1) The follo$ing information 3ertains to a segment of the 2arian "om3any. Gnvested ca3ital is de6ned as total assets. The $eighted average cost of ca3ital is 10K. The *(G of the segment before the 3roect is 0K. The *(G of the segment after the 3roect is 1CK. The manager is evaluated based on the segments economic 3ro6t. A 3roect earning a *(G of 1K should be ________. A) acce3ted !) reected ") com3ared to the com3anys *(G #) com3ared to the com3anys residual income Ans$er% A #i&% '(% 10-= AA"!% Analytic skills 'earning (utcome% #iscuss and calculate various 3erformance measures used by management such as *(G9 residual income and balanced scorecards
E "o3yright : 01; earson ducation
14) elected data for t$o divisions of the *amble "om3any are given belo
%$,et sales Average total assets ,et o3erating income after ta@es Average 3lant assets Average cost of ca3ital
outh #ivision J;90009000 J90009000 J4?09000 JE=09000 10K
,orth #ivision J90009000 J90009000 J;09000 JC009000 1K
ach division is considering a ca3ital investment of J190009000. The annual return on the ca3ital investment is 11K. Gnvested ca3ital is de6ned as total assets. *e
40 "o3yright : 01; earson ducation
10.? Questions 1) 5hat does a decentralized com3any e@3ect from its transfer 3ricing system7 A) to increase the transferring segments 3ro6ts only !) to increase the buying segments 3ro6ts only ") to increase the com3anys overall 3ro6ts only #) to increase the transferring segments 3ro6ts and the com3anys o verall 3ro6ts Ans$er% # #i&% '(% 10-? AA"!% *e+ective thinking skills 'earning (utcome% ,one ) Gn com3anies $ith segment autonomy9 $ho determines the transfer 3rice for internal sales and 3urchases of 3roducts7 A) all segment managers !) segment mangers involved in transfer ") u33er management #) outside su33liers Ans$er% ! #i&% '(% 10-? AA"!% *e+ective thinking skills 'earning (utcome% ,one 4) 5hich of the follo$ing statements about the establishment of transfer 3rices for internal sales and 3urchases bet$een segments is DA'7 A) Gn decentralized organizations9 transfer 3ricing 3olicy sometimes leads to dysfunctional decisions. !) There is seldom a 3erfect transfer 3ricing 3olicy. ") (rganizations use a variety of methods to determine transfer 3rices. #) Gn centralized organizations9 segment managers set transfer 3rices. Ans$er% # #i&% '(% 10-? AA"!% *e+ective thinking skills 'earning (utcome% ,one ;) Transfer 3rices are ________. A) revenues of the segment 3roducing the transferred 3roduct !) costs of the segment ac
=) A transfer 3rice e@ists $hen t$o segments of the same organization sell ________. A) a 3roduct to the same customer !) a 3roduct to each other ") a 3roduct in a foreign country #) the same service to customers Ans$er% ! #i&% 1 '(% 10-? AA"!% *e+ective thinking skills 'earning (utcome% ,one ?) Transfer 3rices are the amounts charged by one segment of an organization for a 3roduct that it su33lies to an outside 6rm. Ans$er% DA' #i&% 1 '(% 10-? AA"!% *e+ective thinking skills 'earning (utcome% ,one ) The transfer 3rice is revenue to the ac
4 "o3yright : 01; earson ducation
) #ivision AA does not have e@cess ca3acity to 3roduce roduct //. The division can sell roduct // for J10 3er unit outside the com3any. Lariable costs are J? 3er unit. #ivision !! $ants to 3urchase roduct // from #ivision AA to use in roduct UU. The selling 3rice of roduct UU is J= 3er unit and variable costs to 6nish the 3roduct after the transfer are J1 3er unit. An outside su33lier $ill sell roduct // for J1 3er unit. 5hat is the minimum transfer 3rice for #ivision AA7 A) J; 3er unit !) J? 3er unit ") J10 3er unit #) J1 3er unit Ans$er% " #i&% 4 '(% 10- AA"!% Analytic skills 'earning (utcome% ,one 4) #ivision outh does not have e@cess ca3acity to 3roduce roduct S. The division can sell roduct S for J10 3er unit outside the com3any. Lariable costs are J? 3er unit. #ivision ,orth $ants to 3urchase roduct S from #ivision outh to use in roduct UU. The selling 3rice of roduct UU is J= 3er unit and variable costs to 6nish the 3roduct after the transfer are J1 3er unit. An outside su33lier $ill sell roduct S for J1 3er unit. 5hat is the ma@imum 3rice #ivision ,orth $ill 3ay for roduct S7 A) J1 3er unit !) J14 3er unit ") J= 3er unit #) none of the above Ans$er% A #i&% 4 '(% 10- AA"!% Analytic skills 'earning (utcome% ,one ;) #ivision 5est does not have e@cess ca3acity to 3roduce roduct //. The division can sell roduct // for J10 3er unit outside the com3any. Lariable costs are J? 3er unit. #ivision ast $ants to 3urchase roduct // from #ivision 5est to use in roduct UU. The selling 3rice of roduct UU is J= 3er unit and variable costs to 6nish the 3roduct after the transfer are J1 3er unit. An outside su33lier $ill sell roduct // for J11 3er unit. 5hat is the ma@imum 3rice #ivision ast $ill 3ay for roduct //7 A) J11 3er unit !) J1 3er unit ") J14 3er unit #) none of the above Ans$er% A #i&% 4 '(% 10- AA"!% Analytic skills 'earning (utcome% ,one
44 "o3yright : 01; earson ducation
=) #ivision !ig does have e@cess ca3acity to 3roduce roduct //. The division can sell roduct // for J10 3er unit outside the com3any. Lariable costs are J? 3er unit. #ivision mall $ants to 3urchase roduct // from #ivision !ig to use in roduct UU. The selling 3rice of roduct UU is J= 3er unit and variable costs to 6nish the 3roduct after the transfer are J1 3er unit. An outside su33lier $ill sell roduct // for J1. 5hat is the minimum transfer 3rice for #ivision !ig7 A) J; 3er unit !) J? 3er unit ") J10 3er unit #) J1 3er unit Ans$er% ! #i&% 4 '(% 10- AA"!% Analytic skills 'earning (utcome% ,one ?) A variable-costing transfer 3ricing system is a33ro3riate $hen there is ________. A) constrained ca3acity for the selling segment !) constrained ca3acity for the buying segment ") e@cess ca3acity for the selling segment #) e@cess ca3acity for the buying segment Ans$er% " #i&% 4 '(% 10- AA"!% Analytic skills 'earning (utcome% ,one ) Gf a selling segment has e@cess ca3acity9 the o33ortunity cost of selling a 3roduct internally e
4; "o3yright : 01; earson ducation
C) 5hat is the general rule for determining transfer 3rices on transferred 3roducts bet$een segments of a com3any7 The transfer 3rice e
4= "o3yright : 01; earson ducation
11) There isPare) ________ goalPs) of transfer 3ricing systems. There is no universally ________ transfer 3rice. A) multi3leH ma@imum !) oneH ma@imum ") multi3leH o3timal #) oneH o3timal Ans$er% " #i&% '(% 10- AA"!% *e+ective thinking skills 'earning (utcome% ,one 1) The 5est and ast #ivisions are divisions in the same com3any. "urrently the ast #ivision buys a 3art from 5est #ivision for J4C; 3er unit. The 5est #ivision $ants to increase the 3rice of the 3art it sells to ast #ivision by JE? to J;C0. The manager of the ast #ivision has stated that he cannot 3ay that much insofar as the divisions 3ro6t goes belo$ zero. The manager of t he ast #ivision can buy the 3art from an outside su33lier for J;;0 3er unit. The cost data 3ertaining to the 3art is su33lied by the 5est #ivision% #irect materials #irect labor Lariable overhead Di@ed overhead
J14? 00 ;0 ;
Gf 5est #ivision does not 3roduce the 3arts for the ast #ivision9 it $ill be able to avoid one-third of the 6@ed manufacturing overhead costs. The 5est #ivision has e@cess ca3acity but no alternative uses for the facilities. Drom the stand3oint of the com3any as a $hole9 should the ast #ivision buy the 3art from the 5est #ivision or the outside su33lier7 A) ast #ivision should buy the 3art from the 5est #ivision because the com3anys 3ro6t $ill be J1;.00 3er unit larger. !) ast #ivision should buy the 3art from the 5est #ivision because the com3anys 3ro6t $ill be J;0.00 3er unit larger. ") ast #ivision should buy the 3art from the 5est #ivision because the com3anys 3ro6t $ill be J=0.00 3er unit larger. #) ast #ivision should buy from an outside su33lier at J;;0 3er unit. Ans$er% " #i&% '(% 10- AA"!% Analytic skills 'earning (utcome% ,one
4? "o3yright : 01; earson ducation
14) The outh and ,orth #ivisions are divisions in the same com3any. "urrently the ,orth #ivision buys a 3art from outh #ivision for J4C; 3er unit. The outh #ivision $ants to increase the 3rice of the 3art it sells to ,orth #ivision by JE? to J;C0. The manager of the ,orth #ivision has stated that he cannot 3ay that much insofar as the divisions 3ro6t goes belo$ zero. The manager of the ,orth #ivision can buy the 3art from an outside su33lier for J;;C 3er unit. The cost data 3ertaining to the 3art is su33lied by the outh #ivision% #irect materials #irect labor Lariable overhead Di@ed overhead
J14?.00 00.00 ;0.00 4C.;0
Gf outh #ivision does not 3roduce the 3arts for the ,orth #ivision9 it $ill be able to avoid one-third of the 6@ed manufacturing overhead costs. The outh #ivision has e@cess ca3acity but no alternative uses for the facilities. ,orth #ivision $ill sell the 6nished 3roduct $ith the 3art Pfrom outh #ivision) for J19000 after incurring additional 3rocessing costs of J?00. 5hat is the ma@imum transfer 3rice 3er unit that ,orth #ivision should 3ay for the 3art7 A) J4CC.C0 !) J;00.00 ") J;;C.00 #) J;C0.00 Ans$er% ! #i&% '(% 10- AA"!% Analytic skills 'earning (utcome% ,one
4 "o3yright : 01; earson ducation
1;) The 5est and ast #ivisions are divisions in the same com3any. "urrently the ast #ivision buys a 3art from 5est #ivision for J4C; 3er unit. The 5est #ivision $ants to increase the 3rice of the 3art it sells to ast #ivision by JE? to J;C0. The manager of the ast #ivision has stated that he cannot 3ay that much insofar as the divisions 3ro6t goes belo$ zero. The manager of t he ast #ivision can buy the 3art from an outside su33lier for J;;C 3er unit. The cost data 3ertaining to the 3art is su33lied by the 5est #ivision% #irect materials #irect labor Lariable overhead Di@ed overhead
J14? 00 ;0 ;
Gf 5est #ivision does not 3roduce the 3arts for the ast #ivision9 it $ill be able to avoid one-third of the 6@ed manufacturing overhead costs. The 5est #ivision has e@cess ca3acity but no alternative uses for the facilities. 5est #ivision normally sells the 3art outside the com3any for J;00 3er unit. 5hat is the minimum transfer 3rice 3er unit that 5est #ivision should charge ast #ivision7 A) J4? !) J4E0 ") J;00 #) J;;C Ans$er% ! #i&% '(% 10- AA"!% Analytic skills 'earning (utcome% ,one 1=) Gf there is a com3etitive market for the 3roduct being transferred internally9 using the ________ as the transfer 3rice $ill lead to ________. A) full costH goal congruence !) variable costH goal congruence ") full cost 3lus 3ro6tH goal congruence #) market 3riceH goal congruence Ans$er% # #i&% '(% 10- AA"!% *e+ective thinking skills 'earning (utcome% ,one
4C "o3yright : 01; earson ducation
1?) Assuming a com3any uses a cost-based 3ricing system for transfer 3ricing9 $hich of the follo$ing items $ould ,(T be used7 A) variable-costing only !) full-costing 3lus 3ro6t only ") full-costing only #) 6@ed-costing only Ans$er% # #i&% '(% 10- AA"!% *e+ective thinking skills 'earning (utcome% ,one 1) "a3ricorn "om3anys records reveal the follo$ing% #ivision / 2arket 3rice of 6nished com3onent to outsiders Lariable costs 3er com3onent #ivision S ale 3rice of 6nished 3roduct Lariable costs% #ivision / P1 com3onent) #ivision S Assembly #ivision S ackaging
J4 3er unit J; 3er unit J; 3er unit 7 E 3er unit ; 3er unit
#ivision S $ants to buy the com3onent from #ivision /. The variable costs of #ivision S $ill be incurred $hether it buys the com3onent from #ivision / or from an outside su33lier. #ivision S can buy the com3onent for J40 3er unit from an outside su33lier. #ivision / has no e@cess ca3acity. 5hat is the highest 3rice 3er unit that #ivision S should 3ay to #ivision / for the com3onents7 A) J 3er unit !) JE 3er unit ") J40 3er unit #) J4 3er unit Ans$er% ! #i&% '(% 10- AA"!% Analytic skills 'earning (utcome% ,one
4E "o3yright : 01; earson ducation
1C) 2aralee "om3anys records reveal the follo$ing% #ivision / 2arket 3rice of 6nished com3onent to outsiders Lariable costs 3er com3onent #ivision S ale 3rice of 6nished 3roduct Lariable costs% #ivision / P1 com3onent) #ivision S Assembly #ivision S ackaging
J4 3er unit J; 3er unit J; 3er unit 7 E 3er unit ; 3er unit
#ivision S $ants to buy the com3onent from #ivision /. The variable costs of #ivision S $ill be incurred $hether it buys the com3onent from #ivision / or from an outside su33lier. Assume #ivision / is $orking at full ca3acityH there is no e@cess ca3acity. #ivision S can buy the com3onent from an outside su33lier for J4 3er unit. 5hat is the lo$est transfer 3rice 3er unit #ivision / should acce3t from #ivision S for the com3onent7 A) JC 3er unit !) J 3er unit ") J; 3er unit #) J4 3er unit Ans$er% # #i&% '(% 10- AA"!% Analytic skills 'earning (utcome% ,one
;0 "o3yright : 01; earson ducation
1E) !ernice "om3anys records reveal the follo$ing% #ivision / 2arket 3rice of 6nished com3onent to outsiders Lariable costs 3er com3onent #ivision S ale 3rice of 6nished 3roduct Lariable costs% #ivision /P1 com3onent) #ivision S Assembly #ivision S ackaging
J4 3er unit J; 3er unit
J; 3er unit 7 E 3er unit ; 3er unit
#ivision S $ants to buy the com3onent from #ivision /. The variable costs of #ivision S $ill be incurred $hether it buys the com3onent from #ivision / or from an outside su33lier. Assume #ivision / has e@cess ca3acity. #ivision S can buy the com3onent from an outside su33lier for J4 3er unit. 5hat is the lo$est transfer 3rice 3er unit at $hich #ivision / $ould be $illing to sell to #ivision S7 A) JC !) J ") J; #) J4 Ans$er% " #i&% '(% 10- AA"!% Analytic skills 'earning (utcome% ,one
;1 "o3yright : 01; earson ducation
0) Felen "om3anys records reveal the follo$ing% #ivision A 2arket 3rice of 6nished 3art to outsiders Lariable costs 3er 3art #ivision ! ale 3rice of 6nished 3roduct 3er unit Lariable costs% #ivision A P1 3art) #ivision ! rocessing #ivision ! elling
J= 3er unit J=1 3er unit J10= 3er unit 7 3er unit 1 3er unit
#ivision ! $ants to buy the 3art from #ivision A. The variable costs of #ivision ! $ill be incurred $hether it buys the 3art from #ivision A or from an outside su33lier. #ivision ! can buy the 3arts from an outside su33lier at J0 3er unit. #ivision A has no e@cess ca3acity. 5hat is the highest 3rice that #ivision ! should 3ay to #ivision A for the 3arts 3er unit7 A) J=1 !) J?? ") J0 #) J= Ans$er% ! #i&% '(% 10- AA"!% Analytic skills 'earning (utcome% ,one
; "o3yright : 01; earson ducation
1) "am3bell "om3anys records reveal the follo$ing% #ivision A 2arket 3rice of 6nished 3art to outsiders Lariable costs 3er 3art #ivision ! ale 3rice of 6nished 3roduct 3er unit Lariable costs% #ivision AP1 3art) #ivision ! rocessing #ivision ! elling
J; 3er unit J=0 3er unit J10= 3er unit 7 3er unit 1 3er unit
#ivision ! $ants to buy the 3art from #ivision A. The variable costs of #ivision ! $ill be incurred $hether it buys the 3art from #ivision A or from an outside su33lier. Assume #ivision A is $orking at full ca3acity9 and there is no e@cess ca3acity. #ivision ! can buy the 3arts from an outside su33lier at J0 3er unit. 5hat is the lo$est transfer 3rice 3er unit #ivision A should acce3t from #ivision !7 A) J; !) J?? ") J0 #) J; Ans$er% # #i&% '(% 10- AA"!% Analytic skills 'earning (utcome% ,one
;4 "o3yright : 01; earson ducation
) #ersey "om3anys records reveal the follo$ing% #ivision A 2arket 3rice of 6nished 3art to outsiders Lariable costs 3er 3art #ivision ! ale 3rice of 6nished 3roduct 3er unit Lariable costs% #ivision AP1 3art) #ivision ! rocessing #ivision ! elling
J; 3er unit J=0 3er unit
J10= 3er unit 7 3er unit 1 3er unit
#ivision ! $ants to buy the 3art from #ivision A. The variable costs of #ivision ! $ill be incurred $hether it buys the 3art from #ivision A or from an outside su33lier. #ivision A has e@cess ca3acity. #ivision ! can buy the 3art for J= 3er unit from an outside su33lier. 5hat is the lo$est transfer 3rice 3er unit #ivision A $ill acce3t from #ivision !7 A) J; !) J=0 ") J?? #) J= Ans$er% ! #i&% '(% 10- AA"!% Analytic skills 'earning (utcome% ,one 4) ________ is an a33roach for establishing a market-based transfer 3rice. A) Dull cost 3lus a normal 3ro6t marku3 !) @ternal market 3rice less selling and delivery costs saved from selling internally ") @ternal market 3rice 3lus a 3ro6t marku3 #) Lariable cost 3lus unavoidable 6@ed cost Ans$er% ! #i&% 1 '(% 10- AA"!% *e+ective thinking skills 'earning (utcome% ,one ;) Gf market 3rices are not available for transfer 3rices9 most com3anies use ________ transfer 3rices. A) negotiated !) average ") cost-based #) activity-based Ans$er% " #i&% '(% 10- AA"!% *e+ective thinking skills 'earning (utcome% ,one ;; "o3yright : 01; earson ducation
=) "ost-based transfer 3rices are easy to im3lement but can lead to ________ decisions. A)
;= "o3yright : 01; earson ducation
41) Gf actual costs are used for transfer 3ricing by a selling division9 the selling division has li8le incentive to control costs. Ans$er% T*B #i&% '(% 10- AA"!% *e+ective thinking skills 'earning (utcome% ,one 4) A full-cost transfer 3rice can 3otentially create dysfunctional decisions. Ans$er% T*B #i&% '(% 10- AA"!% *e+ective thinking skills 'earning (utcome% ,one 44) The time and e&ort s3ent negotiating a transfer 3rice bet$een a com3anys divisions adds nothing directly to the 3ro6ts of a com3any. Ans$er% T*B #i&% '(% 10- AA"!% *e+ective thinking skills 'earning (utcome% ,one
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4;) "ollier roducts has a Lalve #ivision that manufactures and sells a standard valve. The Lalve #ivision has a ca3acity of 1009000 units. The variable costs 3er unit are J1?. The 6@ed costs 3er unit are JE9 based on the ca3acity of 1009000 units. ,one of the 6@ed costs are avoidable. The selling 3rice to outside customers in the intermediate market are J40 3er unit. The um3 #ivision $ants to 3urchase the valve from the Lalve #ivision for one of its 3um3s. The um3 #ivision is currently 3urchasing 109000 valves 3er year from an overseas su33lier at a cost of JE 3er valve. The selling 3rice of the com3leted 3um3 is J100 3er unit and the costs to com3lete the 3um3 are J?0 3er unit9 e@cluding the valve 3urchased from the other division. *eive a range. #etermine the minimum transfer 3rice for the Lalve #ivision and the ma@imum transfer 3rice for the um3 #ivision. !) Assume the Lalve #ivision does not have idle ca3acity to 3roduce the valves for the um3 #ivision. Gt is selling all that it can 3roduce to outside customers in the intermediate market. 5hat should be the transfer 3rice bet$een the t$o divisions7 >ive a range. #etermine the minimum transfer 3rice for the Lalve #ivision and the ma@imum transfer 3rice for the um3 #ivision. 5ill a transfer occur7 ") Assume the Lalve #ivision does not have idle ca3acity to 3roduce the valves for the um3 #ivision. Gt is selling all that it can 3roduce to outside customers in the intermediate market. ,o$ assume the Lalve #ivision saves J4.00 3er unit by selling internally. 5hat should be the transfer 3rice bet$een the t$o divisions7 >ive a range. #etermine the minimum transfer 3rice for the Lalve #ivision and the ma@imum transfer 3rice for the um3 #ivision. Ans$er% A) J1? 3er unit to JE 3er unit. J1? is the minimum transfer 3rice for the Lalve #ivision and re3resents the outlay cost. The o33ortunity cost is zero because there is idle ca3acity. JE is the ma@imum transfer 3rice for the um3 #ivision and re3resents the minimum of JE and J;0. PJ;0 O J100 - J?0) !) ,o transfers $ill be made. The Lalve #ivision $ill $ant to sell at J40 3er unit9 $hich is the minimum transfer 3rice. The um3 #ivision can 3urchase the valves at JE 3er unit e@ternally9 $hich is the ma@imum transfer 3rice. ") J 3er unit to JE 3er unit. The minimum transfer 3rice for the Lalve #ivision $ill be J40 minus J4.00 O J. The ma@imum transfer 3rice for the um3 #ivision $ill be the lo$er of JE and J;0. #i&% 4 '(% 10- AA"!% Analytic skills 'earning (utcome% ,one
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10.C Questions 1) 2ultinational com3anies use transfer 3rices to minimize $orld$ide income ta@es9 ________ and ________. A) tari&sH 6nancial restrictions im3osed by B.. government !) tari&sH im3ort duties ") 6nancial restrictions im3osed by B.. governmentH im3ort duties #) foreign bribesH im3ort duties Ans$er% ! #i&% '(% 10-C AA"!% *e+ective thinking skills 'earning (utcome% ,one ) A!" #ivision is in the Bnited tates $ith high income ta@ rates. A!" #ivision 3roduces a com3onent for the 3ain #ivision in a lo$ income-ta@-rate country. 5hat transfer 3rice should A!" #ivision set for the com3onent sold to the 3ain #ivision to minimize ta@es7 A) A!" #ivision should set a high transfer 3rice to ma@imize 3ro6ts. !) A!" #ivision should set a lo$ transfer 3rice to ma@imize 3ro6ts. ") A!" #ivision should set a high transfer 3rice to minimize ta@es. #) A!" #ivision should set a lo$ transfer 3rice to minimize ta@es. Ans$er% # #i&% 4 '(% 10-C AA"!% *e+ective thinking skills 'earning (utcome% ,one 4) The variable cost of art / is J=0 3er unit and the full cost of the 3art is JC0 3er unit. The 3art is 3roduced in ortugal and transferred to a 3lant in the Bnited tates. ortugal has a 10K income ta@ rate. The Bnited tates has a =0K income ta@ rate and an im3ort duty e
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;) The variable cost of art / is J=0 3er unit and the full cost of the 3art is JC0 3er unit. The 3art is 3roduced in "ountry U and transferred to a 3lant in "ountry !. "ountry U has a 10K income ta@ rate. "ountry ! has a =0K income ta@ rate and an im3ort duty e
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