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CHAPTER 10: DIVISIONAL PERFORMANCE MEASUREMENT
Multiple Choice
c 1. Both ROI and RI can be used for performance evaluation of
a. cost centers.
b. profit centers.
c. investment centers.
d. all of the above.
b 2. The best transfer price is usually
a. actual cost plus a percentage markup.
b. a reliable market price.
c. budgeted full cost plus a percentage markup.
d. budgeted variable cost plus a percentage markup.
d 3. This year Division A made sales to Division B at a higher transfer
price than was used last year. All other things equal, which of the
following is true?
a. A’s profit this year should be about the same as last year.
b. B’s profit this year should be about the same as last year.
c. The company’s total profit should be higher this year than last
year.
d. The company’s total profit should be about the same this year as
last year.
b 4. Goal congruence is especially relevant to all of the following EXCEPT
a. setting transfer prices for an artificial profit center.
b. quoting prices for outside customers of an investment center.
c. selecting costs to be included in performance reports.
d. setting transfer prices for an investment center.
d 5. For a division, ROI
a. is usually less than ROI for the company as a whole.
b. eliminates the distortion that cost allocation can produce in other
measures of performance.
c. usually cannot be computed if divisional assets are valued at their
replacement costs.
d. is a performance measure inferior, for some purposes, to residual
income.
a 6. Divisional ROI is usually
a. higher than that for the company as a whole.
b. lower than that for an outside company operating in the same
industry.
c. lower than return on sales for the division.
d. lower than that for the enterprise as a whole.
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c 7. Divisional profits should
a. exclude revenues and expenses related to dealings with other
divisions within the same enterprise.
b. be computed so that the total profits of all the divisions equals
the total profit for the company.
c. be based on the principle of controllability.
d. be based on cash flows rather than accrual basis accounting.
c 8. Divisional profit
a. is computed in essentially the same way as is income for the company
as a whole.
b. should include a deduction for an appropriate share of the company’s
common costs.
c. normally includes the results of intracompany sales.
d. is not affected by depreciation methods.
d 9. Using replacement costs for assets in computing ROI and RI
a. is prohibited because it violates generally accepted accounting
principles.
b. will increase both ROI and RI for a division.
c. is unfair to divisional managers.
d. is less popular than the use of book values in those computations.
c 10. Using residual income for evaluating performance
a. penalizes managers whose segments have low ROIs.
b. penalizes managers of relatively large segments.
c. encourages managers to maximize dollars of profit after a required
ROI has been achieved.
d. encourages managers to maximize ROI for the company.
c 11. Which item is usually NOT relevant to a decision by a divisional
manager to reduce a transfer price to meet a price offered to another
division by an outside supplier?
a. Opportunity cost.
b. Variable manufacturing costs.
c. Fixed divisional overhead.
d. The price offered by the outside supplier.
c 12. Division A earns $6,000 on an investment of $36,000. On an investment
of $84,000, Division B earns $12,000. Which of the following is true?
a. Division A’s profits are too low.
b. If there are further costs that are common to both divisions, the
total company’s ROI is probably greater than 15%.
c. If the minimum desired ROI is 10%, Division A’s residual income is
lower than that of Division B.
d. ROI for Division B is greater than ROI for Division A.
d 13. Which equation describes ROI? (I = investment, S = sales, and
N = income)
a. S/I
b. S/I x N
c. S/I x S/N
d. N/S x S/I
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a 14. Which equation describes residual income? (I = investment, N = income,
and K = minimum required ROI)
a. N – (K x I)
b. (K x I) – N
c. N/I – K
d. (K x I) – (N/I)
c 15. If Division C has a 10% return on sales, income of $10,000, and an
investment turnover of 4 times, its sales are
a. $10,000.
b. $40,000.
c. $100,000.
d. $400,000.
b 16. If Division C has a 10% return on sales, income of $10,000, and an
investment turnover of 4 times, divisional investment is
a. $10,000.
b. $25,000.
c. $40,000.
d. $100,000.
c 17. If Division C has a 10% return on sales, income of $10,000, and an
investment turnover of 4 times, its ROI is
a. 5000%.
b. 100%.
c. 40%.
d. 10%.
b 18. If a division’s ROI and the minimum required ROI are the same, the
division’s residual income is
a. positive.
b. zero.
c. negative.
d. none of the above.
a 19. If residual income for Division Q of Company Z is negative, which of
the following is true?
a. Q’s ROI is less than Z’s minimum required ROI.
b. Q’s ROI equals Z’s minimum required ROI.
c. Q’s ROI is higher than Z’s minimum required ROI.
d. None of the above.
b 20. Market-based transfer prices are best for
a. the company when the selling division is operating below capacity.
b. the company when the selling division is operating at capacity.
c. the buying division if it is operating at capacity.
d. the buying division.
d 21. The worst transfer-pricing method is to base the prices on
a. market prices.
b. budgeted variable costs.
c. budgeted total costs.
d. actual total costs.
d 22. All other things remaining constant, if a division doubles its
investment turnover, its ROI will
a. decrease.
b. remain constant.
c. increase.
d. double.
c 23. Residual income
a. is always the best measure of divisional performance.
b. is not as good a measure of performance as ROI.
c. overcomes some of the problems associated with ROI.
d. cannot be used by divisions that deal with others in the same
company.
b 24. If two divisions earn the same ROI and RI, which of the following is
true?
a. Their managers must be about equally skillful.
b. Their incomes and investments must be the same.
c. Both divisions are doing as well as they should be.
d. All of the above.
c 25. Which of the following is most likely to be included in calculating
divisional profit?
a. Interest on corporate debt.
b. Income taxes.
c. Sales to other divisions within the company.
d. A share of corporate administration expenses.
