Chapter 10 Decentralized Performance Evaluation Answer Key
True / False Questions
1. In a decentralized organization, lower-level managers are given a great deal of autonomy in
decision-making.
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Learning Objective: 10-01 List and explain the advantages and disadvantages of decentralization.
Topic: Advantages and disadvantages of decentralization
2. The controllability principle holds that managers should be held responsible for what they can
control and for allocated costs.
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Learning Objective: 10-02 Describe the different types of responsibility centers and explain how managers of each type are
evaluated.
Topic: Types of responsibility centers
3. A legal services department would be an example of a cost center.
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Learning Objective: 10-02 Describe the different types of responsibility centers and explain how managers of each type are
evaluated.
Topic: Types of responsibility centers
10-1
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4. A profit center manager often also supervises revenue and cost center managers.
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Learning Objective: 10-02 Describe the different types of responsibility centers and explain how managers of each type are
evaluated.
Topic: Types of responsibility centers
5. Investment center managers have control over the investment of assets.
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Learning Objective: 10-02 Describe the different types of responsibility centers and explain how managers of each type are
evaluated.
Topic: Types of responsibility centers
6. Segment margin and profit margin are identical terms.
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Learning Objective: 10-02 Describe the different types of responsibility centers and explain how managers of each type are
evaluated.
Topic: Types of responsibility centers
7. The balanced scorecard attempts to focus managers’ attention on more than just financial
measures.
10-2
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Learning Objective: 10-03 Describe the four dimensions of the balanced scorecard and explain how they are used to evaluate
managerial performance.
Topic: Balanced scorecard
8. The balanced scorecard approach, which includes a broad set of financial and non-financial
performance indicators is not compatible with sustainability accounting.
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Difficulty: 1 Easy
Learning Objective: 10-03 Describe the four dimensions of the balanced scorecard and explain how they are used to evaluate
managerial performance.
Topic: Balanced scorecard
9. Return on investment is calculated as the return on the segment’s assets divided by the value
of those assets.
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Difficulty: 1 Easy
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Topic: Financial performance measures
10. The DuPont method breaks residual income into profit margin and investment turnover.
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Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Topic: Financial performance measures
10-3
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11. Profit margin is defined as the ratio of sales revenue to operating income.
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Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Topic: Financial performance measures
12. The hurdle rate is also called economic value added.
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Difficulty: 1 Easy
Learning Objective: 10-05 Compute and interpret residual income.
Topic: Financial performance measures
13. Residual income can mitigate the problems of goal incongruence.
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Difficulty: 2 Medium
Learning Objective: 10-05 Compute and interpret residual income.
Topic: Financial performance measures
14. Residual income is a leading indicator of financial performance.
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Difficulty: 1 Easy
Learning Objective: 10-05 Compute and interpret residual income.
Topic: Limitations of financial performance measures
15. In transfer pricing, the manager of the buying division is motivated to pay the highest price
possible, while the manager of the selling division is motivated to sell at the lowest price
possible.
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Difficulty: 1 Easy
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
Multiple Choice Questions
16. In what type of organization is decision-making authority spread throughout the organization?
A. Centralized organization
C. Participative organization
D. Top-down organization
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Difficulty: 1 Easy
Learning Objective: 10-01 List and explain the advantages and disadvantages of decentralization.
Topic: Advantages and disadvantages of decentralization
10-5
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17. Which of the following is not an advantage of decentralization?
A. Allows top managers to focus on strategic issues
C. Allows for development of managerial expertise
D. Managers can react quickly to local information
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Difficulty: 1 Easy
Learning Objective: 10-01 List and explain the advantages and disadvantages of decentralization.
Topic: Advantages and disadvantages of decentralization
18. Which of the following is a disadvantage of decentralization?
A. Develops managerial expertise
B. Managers have specialized knowledge
D. Allows top managers to focus on strategic issues
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Difficulty: 1 Easy
Learning Objective: 10-01 List and explain the advantages and disadvantages of decentralization.
Topic: Advantages and disadvantages of decentralization
19. Which of the following is considered a disadvantage of decentralization?
A. Upper-level managers with more knowledge about lower-level managers’ areas of
responsibility are further away from the day-to-day decisions.
B. Decentralization does not foster managerial expertise since upper level managers manage
less.
C. Decentralization does not empower upper-level managers to focus on strategy because
they are too busy managing lower-level managers.
10-6
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Learning Objective: 10-01 List and explain the advantages and disadvantages of decentralization.
Topic: Advantages and disadvantages of decentralization
20. One of the most important concepts in responsibility accounting is the:
A. balanced scorecard.
C. related-party transactions.
D. transfer price.
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Learning Objective: 10-02 Describe the different types of responsibility centers and explain how managers of each type are
evaluated.
Topic: Types of responsibility centers
21. The part of the organization for which managers are responsible is called a:
A. related-party center.
C. cost center.
D. shared center.
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Learning Objective: 10-02 Describe the different types of responsibility centers and explain how managers of each type are
evaluated.
Topic: Types of responsibility centers
10-7
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22. Which of the following statement is correct about the functions that fall within various
responsibility centers?
A. A revenue center manager is responsible for more functions than a profit center manager
is.
is.
C. A revenue center manager is responsible for the same number of functions as a profit
center manager is.
D. A revenue center manager is not responsible for any functions; only the profit center
manager is responsible for functions.
Revenue center managers are responsible for revenues, while profit center managers are
responsible for both revenues and costs. Thus, revenue center managers are responsible for
fewer functions than profit center managers are.
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Learning Objective: 10-02 Describe the different types of responsibility centers and explain how managers of each type are
evaluated.
Topic: Types of responsibility centers
23. Which of the following statements is correct about the connection between cost centers and
revenue?
A. Cost centers directly generate revenue from customers.
B. Cost centers do not directly generate revenue from customers, and they have no impact on
the customer experience.
impact on revenue through customer satisfaction and overall quality.
D. Cost centers are the primary driver of revenue from customers.
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Learning Objective: 10-02 Describe the different types of responsibility centers and explain how managers of each type are
evaluated.
Topic: Types of responsibility centers
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24. Which of the following is the primary tool used by cost centers to manage costs?
A. Return on investment
C. Balanced scorecard
D. Transfer pricing
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Learning Objective: 10-02 Describe the different types of responsibility centers and explain how managers of each type are
evaluated.
Topic: Types of responsibility centers
25. The most common method of evaluating a profit center manager is the:
B. budgetary planning and control system.
C. sales system.
D. return on investment.
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Learning Objective: 10-02 Describe the different types of responsibility centers and explain how managers of each type are
evaluated.
Topic: Types of responsibility centers
10-9
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26. The responsibility center in which the manager does not have responsibility and authority over
revenues is:
B. an investment center.
C. a profit center.
D. a revenue center.
A revenue center manager has responsibility for revenues, and profit and investment center
managers have authority over profit, which includes revenues. Thus, the cost center manager
is the only option listed without responsibility and authority over revenue.
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Learning Objective: 10-02 Describe the different types of responsibility centers and explain how managers of each type are
evaluated.
Topic: Types of responsibility centers
27. The responsibility center in which the manager has responsibility and authority over revenues,
costs and assets is the:
A. cost center.
C. profit center.
D. revenue center.
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Learning Objective: 10-02 Describe the different types of responsibility centers and explain how managers of each type are
evaluated.
Topic: Types of responsibility centers
10-10
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28. The responsibility center in which the manager does not have responsibility and authority over
costs is the:
A. cost center.
B. investment center.
C. profit center.
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Learning Objective: 10-02 Describe the different types of responsibility centers and explain how managers of each type are
evaluated.
Topic: Types of responsibility centers
29. The responsibility center in which the manager has responsibility and authority over revenues
and costs, but not assets, is the:
A. cost center.
B. investment center.
D. revenue center.
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Learning Objective: 10-02 Describe the different types of responsibility centers and explain how managers of each type are
evaluated.
Topic: Types of responsibility centers
10-11
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30. Which of the following responsibility centers will use a segmented income statement as an
evaluation tool?
A. The cost center
B. The revenue center
D. The administrative center
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Learning Objective: 10-02 Describe the different types of responsibility centers and explain how managers of each type are
evaluated.
Topic: Types of responsibility centers
31. Which of the following statements best represents the controllability principle?
A. A profit center manager should be evaluated based on residual income, not return on
investment.
B. An investment center manager should be evaluated based on return on investment, not
residual income.
D. A cost center manager should be evaluated on costs and revenues, not just costs.
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Learning Objective: 10-02 Describe the different types of responsibility centers and explain how managers of each type are
evaluated.
Topic: Types of responsibility centers
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32. Which of the following is not a perspective used by the balanced scorecard?
A. Financial
C. Customer
D. Learning and growth
The four key dimensions of the balanced scorecard are the customer perspective, the learning
and growth perspective, the internal business processes perspective, and the financial
perspective.
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Learning Objective: 10-03 Describe the four dimensions of the balanced scorecard and explain how they are used to evaluate
managerial performance.
Topic: Balanced scorecard
33. Which of the following balanced scorecard perspectives measures an organization’s ability to
change?
A. Customer
B. Internal business processes
D. Financial
The learning and growth perspective measures how the organization will sustain its ability to
change and improve.
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Difficulty: 1 Easy
Learning Objective: 10-03 Describe the four dimensions of the balanced scorecard and explain how they are used to evaluate
managerial performance.
Topic: Balanced scorecard
10-13
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34. Which of the following balanced scorecard perspectives measures how an organization
satisfies its stakeholders?
A. Customer
B. Internal business processes
C. Learning and growth
D. Financial
The financial perspective measures how the organization satisfies its shareholders, regulators,
and other stakeholders.
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Learning Objective: 10-03 Describe the four dimensions of the balanced scorecard and explain how they are used to evaluate
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Difficulty: 1 Easy
Learning Objective: 10-03 Describe the four dimensions of the balanced scorecard and explain how they are used to evaluate
managerial performance.
Topic: Balanced scorecard
10-14
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36. The balanced scorecard includes both leading and lagging indicators. Which of the following
correctly places each indicator on the spectrum of most leading to most lagging?
A. Financial → Customer → Internal business process → Learning and growth
B. Financial → Learning and growth → Internal business process → Customer
C. Customer → Learning and growth → Internal business process → Financial
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Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Topic: Balanced scorecard
37. Almond, Inc. uses a balanced scorecard. One of the measures on the scorecard is the
percentage of revenue from repeat sales. Which balanced scorecard perspective would this
measure most likely fit into?
B. Learning and growth perspective
C. Internal business perspective
D. Financial perspective
Percentage of revenue from repeat sales is a measure of how well customers are retained,
which belongs in the customer perspective.
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Learning Objective: 10-03 Describe the four dimensions of the balanced scorecard and explain how they are used to evaluate
managerial performance.
Topic: Balanced scorecard
10-15
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38. Almond, Inc. uses a balanced scorecard. One of the measures on the scorecard is the
average education level of the firm’s managers. Which balanced scorecard perspective would
this measure most likely fit into?
A. Customer perspective
C. Internal business perspective
D. Financial perspective
The education level of the managers would affect the firm’s ability to change and improve,
which is the focus of the learning and growth perspective.
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Learning Objective: 10-03 Describe the four dimensions of the balanced scorecard and explain how they are used to evaluate
managerial performance.
Topic: Balanced scorecard
39. Almond, Inc. uses a balanced scorecard. One of the measures on the scorecard is the
average age of raw materials inventory. Which balanced scorecard perspective would this
measure most likely fit into?
A. Customer perspective
B. Learning and growth perspective
C. Internal business perspective
D. Financial perspective
The average age of raw materials inventory is a measure of how effectively such inventory is
used, which is an internal business process.
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Learning Objective: 10-03 Describe the four dimensions of the balanced scorecard and explain how they are used to evaluate
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Difficulty: 2 Medium
Learning Objective: 10-03 Describe the four dimensions of the balanced scorecard and explain how they are used to evaluate
managerial performance.
Topic: Balanced scorecard
41. Which of the following statements is not correct about using the balanced scorecard for
sustainability accounting?
A. The company could add an additional category to the existing balanced scorecard to
capture sustainability objectives and metrics.
B. The company could create a separate balanced scorecard that focuses exclusively on
sustainability objectives and metrics within the existing categories.
C. The company could focus exclusively on short-term metrics, creating sustainability in its
operations.
D. The company could incorporate sustainability metrics within the existing balanced
scorecard.
The balance scorecard approach is aligned with sustainability accounting because it focuses
on long-term goals (not short-term goals) that focus attention on more than simply financial or
economic results.
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Learning Objective: 10-03 Describe the four dimensions of the balanced scorecard and explain how they are used to evaluate
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Difficulty: 1 Easy
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Topic: Financial performance measures
43. Investment turnover is defined as:
B. the ratio of net operating income to average invested assets.
C. the ratio of net operating income to sales revenue.
D. the ratio of profit margin to return on investment.
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Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Topic: Financial performance measures
44. Profit margin can be calculated as:
A. sales revenue/average invested assets.
C. operating income/average invested assets.
D. average invested assets/sales revenue.
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Topic: Financial performance measures
45. Investment turnover can be calculated as:
B. operating income/sales revenue.
C. operating income/average invested assets.
D. average invested assets/sales revenue.
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Difficulty: 1 Easy
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Topic: Financial performance measures
46. Investment turnover is defined as:
B. the ratio of net operating income to average invested assets.
C. the ratio of net operating income to sales revenue.
D. the ratio of profit margin to return on investment.
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Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Topic: Financial performance measures
47. Residual income is the difference between:
A. net operating income and the minimum profit the organization must earn to cover the ROI.
C. net operating income and the hurdle rate.
D. net operating income times the hurdle rate, less average invested assets.
Residual income is the difference between operating profit and the minimum profit the
organization must earn to cover the hurdle rate.
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Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-05 Compute and interpret residual income.
Topic: Financial performance measures
48. Avocado Company has an operating income of $80,000 on revenues of $1,000,000. Average
invested assets are $500,000, and Avocado Company has an 8% cost of capital. What is the
return on investment?
A. 8%
B. 10%
D. 20%
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Difficulty: 1 Easy
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Topic: Financial performance measures
49. Avocado Company has an operating income of $80,000 on revenues of $1,000,000. Average
invested assets are $500,000 and Avocado Company has an 8% cost of capital. What is the
profit margin?
B. 10%
C. 16%
D. 20%
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Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Topic: Financial performance measures
10-20
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50. Avocado Company has an operating income of $80,000 on revenues of $1,000,000. Average
invested assets are $500,000 and Avocado Company has an 8% cost of capital. What is the
investment turnover?
A. 10
B. 5
D. 16
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Difficulty: 1 Easy
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Topic: Financial performance measures
51. Florida Inc. has revenues of $1,500,000 resulting in an operating income of $105,000. Average
invested assets total $750,000; the cost of capital is 10%. Return on investment is:
A. 7%
C. $75,000
D. $30,000
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Difficulty: 1 Easy
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Topic: Financial performance measures
52. Florida Inc. has revenues of $1,500,000 resulting in an operating income of $105,000. Average
invested assets total $750,000; the cost of capital is 10%. The profit margin is:
B. 14%
C. 2.00
D. 0.50
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Difficulty: 1 Easy
10-21
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Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Topic: Financial performance measures
53. Florida Inc. has revenues of $1,500,000 resulting in an operating income of $105,000. Average
invested assets total $750,000; the cost of capital is 10%. The investment turnover is:
A. 7%
B. 14%
D. 0.50
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Difficulty: 1 Easy
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Topic: Financial performance measures
54. Crawford Corp. has an ROI of 15% and a residual income of $10,000. If operating income
equals $30,000, what is the amount of average invested assets?
B. $66,667
C. $450,000
D. $150,000
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Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Topic: Financial performance measures
55. Devon Inc. has a profit margin of 12% and an investment turnover of 2.5. Sales revenue is
$600,000. What is the operating income?
A. $180,000
B. $28,800
D. $240,000
Profit margin equals operating income divided by sales revenue, so operating income equals
profit margin times sales revenue. 12% × $600,000 = $72,000
10-22
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Difficulty: 2 Medium
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Topic: Financial performance measures
56. Devon Inc. has a profit margin of 12% and an investment turnover of 2.5. Sales revenue is
$600,000. What is the amount of average invested assets?
B. $1,500,000
C. $50,000
D. $72,000
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Difficulty: 2 Medium
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Topic: Financial performance measures
57. Palm Inc. has a profit margin of 15% and an investment turnover of 2. Sales revenue is
$800,000. What is the operating income?
A. $240,000
B. $60,000
D. $400,000
Profit margin equals operating income divided by sales revenue, so operating income equals
profit margin times sales revenue. 15% × $800,000 = $120,000
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Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Topic: Financial performance measures
10-23
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58. Palm Inc. has a profit margin of 15% and an investment turnover of 2. Sales revenue is
$800,000. What is the amount of average invested assets?
A. $240,000
C. $120,000
D. $60,000
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Difficulty: 2 Medium
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Topic: Financial performance measures
59. Grove Corp. has revenues of $1,500,000 resulting in an operating income of $105,000.
Average invested assets total $750,000. Calculate the ROI if sales increase by 10% and the
profit margin and investment level remain constant.
A. 7.7%
B. 14%
D. 7.0%
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Difficulty: 3 Hard
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Topic: Financial performance measures
60. Grove Corp. has revenues of $1,500,000 resulting in an operating income of $105,000.
Average invested assets total $750,000. If sales increase by 10% and the investment level
remains constant, what is the investment turnover?
A. 2.00
C. 7.0%
D. 7.7%
10-24
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Difficulty: 2 Medium
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Topic: Financial performance measures
61. Tropic Corp. has sales revenue of $500,000 resulting in operating income of $54,000. Average
invested assets total $600,000, and the cost of capital is 6%. Calculate the return on
investment if sales increase by 10% and the profit margin and invested assets remain the
same.
A. 9.0%
C. 10.8%
D. 6.0%
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Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Topic: Financial performance measures
62. Residual income can be calculated as:
A. Operating income – (hurdle rate × average invested assets)
B. Segment margin – (hurdle rate × average invested assets)
C. Operating income – (ROI × average invested assets)
D. Operating income – investment turnover
The formula for residual income is operating income minus the result of the hurdle rate
multiplied by average invested assets.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 10-05 Compute and interpret residual income.
Topic: Financial performance measures
64. Avocado Company has an operating income of $80,000 on revenues of $1,000,000. Average
invested assets are $500,000 and Avocado Company has an 8% cost of capital. What is the
residual income?
A. $100,000
B. $20,000
C. $120,000
D. $40,000
Residual income is the operating income less the result of the hurdle rate times the invested
assets computer as $80,000 – (8% × $500,000) = $40,000
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
10-26
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McGraw-Hill Education.
Difficulty: 1 Easy
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Medium
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Medium
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Topic: Financial performance measures
10-28
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70. Which of the following statements contrasting residual income with return on investment is
correct?
B. ROI is a lagging indicator while residual income is a leading indicator.
C. Residual income is a financial measure while return on investment emphasizes the
customer perspective.
D. Residual income is a long-term measure while ROI is a short-term measure.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Learning Objective: 10-05 Compute and interpret residual income.
Topic: Financial performance measures
71. Howard has an ROI of 16% based on revenues of $400,000. The investment turnover is 2.
What is the residual income if the cost of capital is 9%?
A. $64,000
B. $36,000
C. ($4,000)
D. $14,000
Investment turnover = 2 = $400,000/Assets; Assets = $200,000. ROI = 16% = Income/
$200,000; Income = $32,000. Residual income = $32,000 – (9% × $200,000) = $14,000.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
79. Which of the following is not a method used to determine transfer prices?
A. The market price method
B. The cost-based method
C. Negotiation
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
80. The transfer pricing method that uses the price the company would charge external customers
is the:
B. cost-based method.
C. negotiation method.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
10-33
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McGraw-Hill Education.
Difficulty: 1 Easy
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
81. The transfer pricing method that uses either the variable cost or the full cost as the basis for
setting the transfer price is the:
A. market price method.
C. negotiation.
D. balanced scorecard method.
The cost-based method uses cost as a basis for setting the transfer price.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
82. When negotiating a transfer price, the highest price the buyer will be willing to pay is the
_____________, while the lowest price the seller will be willing to accept is the
_______________.
A. market price; full cost
B. full cost; variable cost
D. variable cost; market price
The seller at least needs to cover the variable costs, and the buyer will be unwilling to pay
more than he/she would be able to pay elsewhere at the market price.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
10-34
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83. Evergreen Corp. has two divisions, Fern and Bark. Fern produces a widget that Bark could
use in the production of units that cost $175 in variable costs, plus the cost of the widget, to
manufacture. Fern’s variable costs are $60 per widget, and fixed manufacturing costs are
applied at a rate of $36 per widget. Widgets sell on the open market for $105 each.
Evergreen’s policy is that internal transfers will be made at variable cost. If Bark purchases the
widgets from Fern, what will be the transfer price?
B. $96
C. $100
D. $175
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
84. Evergreen Corp. has two divisions, Fern and Bark. Fern produces a widget that Bark could
use in the production of units that cost $175 in variable costs, plus the cost of the widget, to
manufacture. Fern’s variable costs are $60 per widget, and fixed manufacturing costs are
applied at a rate of $36 per widget. Widgets sell on the open market for $105 each.
Evergreen’s policy is that internal transfers will be made at full cost. If Bark purchases the
widgets from Fern, what will be the transfer price?
A. $60
C. $105
D. $175
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
10-35
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McGraw-Hill Education.
85. Evergreen Corp. has two divisions, Fern and Bark. Fern produces a widget that Bark could
use in the production of units that cost $175 in variable costs, plus the cost of the widget, to
manufacture. Fern’s variable costs are $60 per widget, and fixed manufacturing costs are
applied at a rate of $36 per widget. Widgets sell on the open market for $105 each.
Evergreen’s policy is that internal transfers will be made at variable cost plus 20%. If Bark
purchases the widgets from Fern, what will be the transfer price?
B. $115.20
C. $126.00
D. $210.00
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
86. Evergreen Corp. has two divisions, Fern and Bark. Fern produces a widget that Bark could
use in the production of units that cost $175 in variable costs, plus the cost of the widget, to
manufacture. Fern’s variable costs are $60 per widget, and fixed manufacturing costs are
applied at a rate of $36 per widget. Widgets sell on the open market for $105 each.
Evergreen’s policy is that internal transfers will be made at full cost plus 20%. If Bark
purchases the widgets from Fern, what will be the transfer price?
A. $72.00
C. $126.00
D. $210.00
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
10-36
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McGraw-Hill Education.
87. Holiday Corp. has two divisions, Quail and Marlin. Quail produces a widget that Marlin could
use in its production. Quail’s variable costs are $4 per widget while the full cost is $7. Widgets
sell on the open market for $12 each. If Quail has excess capacity, what would be the
minimum transfer price if Marlin currently is purchasing 100,000 units on the open market?
B. $5.00
C. $7.00
D. $12.00
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
88. Holiday Corp. has two divisions, Quail and Marlin. Quail produces a widget that Marlin could
use in its production. Quail’s variable costs are $4 per widget while the full cost is $7. Widgets
sell on the open market for $12 each. If Quail has excess capacity, what would be the
maximum transfer price if Marlin currently is purchasing 100,000 units on the open market?
A. $4.00
B. $5.00
C. $7.00
The maximum transfer price is the market price.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
10-37
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McGraw-Hill Education.
89. Holiday Corp. has two divisions, Quail and Marlin. Quail produces a widget that Marlin could
use in its production. Quail’s variable costs are $4 per widget while the full cost is $7. Widgets
sell on the open market for $12 each. If Quail has excess capacity, what would be the cost
savings if the transfer was made and Marlin currently is purchasing 100,000 units on the open
market?
A. $0
B. $700,000
D. $1,200,000
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
90. Holiday Corp. has two divisions, Quail and Marlin. Quail produces a widget that Marlin could
use in its production. Quail’s variable costs are $4 per widget while the full cost is $7. Widgets
sell on the open market for $12 each. If Quail is operating at capacity, what would be the
minimum transfer price if Marlin currently is purchasing 100,000 units on the open market?
A. $4.00
B. $5.00
C. $7.00
The minimum transfer price if there is no excess capacity is the market price.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
10-38
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McGraw-Hill Education.
91. Holiday Corp. has two divisions, Quail and Marlin. Quail produces a widget that Marlin could
use in its production. Quail’s variable costs are $4 per widget while the full cost is $7. Widgets
sell on the open market for $12 each. If Quail is operating at capacity, what would be the
maximum transfer price if Marlin currently is purchasing 100,000 units on the open market?
A. $4.00
B. $5.00
C. $7.00
The maximum transfer price is the market price.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
92. Holiday Corp. has two divisions, Quail and Marlin. Quail produces a widget that Marlin could
use in its production. Quail’s variable costs are $4 per widget while the full cost is $7. Widgets
sell on the open market for $12 each. If Quail is operating at capacity, what would be the cost
savings if the transfer was made and Marlin currently is purchasing 100,000 units on the open
market?
B. $700,000
C. $800,000
D. $1,200,000
If Quail is operating at capacity, both the minimum and maximum transfer price will be the
market price. Since Marlin is currently paying market price, there will be no cost savings.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
10-39
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McGraw-Hill Education.
93. Spring Corp. has two divisions, Daffodil and Tulip. Daffodil produces a gadget that Tulip could
use in its production. Tulip currently purchases 100,000 gadgets for $12.50 on the open
market. Daffodil’s variable costs are $6 per widget while the full cost is $9.35. Daffodil sells
gadgets for $13 each. If Daffodil is operating at capacity, what would be the maximum transfer
price Tulip would pay internally?
A. $6.00
B. $9.35
D. $13.00
The maximum transfer price is the market price.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
94. Spring Corp. has two divisions, Daffodil and Tulip. Daffodil produces a gadget that Tulip could
use in its production. Tulip currently purchases 100,000 gadgets for $12.50 on the open
market. Daffodil’s variable costs are $6 per widget while the full cost is $9.35. Daffodil sells
gadgets for $13 each. If Daffodil is operating at less than full capacity, what would be the
maximum transfer price Tulip would pay internally?
A. $6.00
B. $9.35
D. $13.00
The maximum transfer price is the market price.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
10-40
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McGraw-Hill Education.
95. Spring Corp. has two divisions, Daffodil and Tulip. Daffodil produces a gadget that Tulip could
use in its production. Tulip currently purchases 100,000 gadgets for $12.50 on the open
market. Daffodil’s variable costs are $6 per widget while the full cost is $9.35. Daffodil sells
gadgets for $13 each. If Daffodil is operating at capacity, what would be the minimum transfer
price Daffodil would accept for an internal transfer?
A. $6.00
B. $9.35
C. $12.50
The minimum transfer price if there is no excess capacity is the market price.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
96. Spring Corp. has two divisions, Daffodil and Tulip. Daffodil produces a gadget that Tulip could
use in its production. Tulip currently purchases 100,000 gadgets for $12.50 on the open
market. Daffodil’s variable costs are $6 per widget while the full cost is $9.35. Daffodil sells
gadgets for $13 each. If Daffodil is operating at less than full capacity, what would be the
minimum transfer price Daffodil would accept for an internal transfer?
B. $9.35
C. $12.50
D. $13.00
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
10-41
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McGraw-Hill Education.
97. Spice Company has two divisions, Parsley and Sage. Parsley produces a unit that Sage could
use in its production. Sage currently is purchasing 50,000 units from an outside supplier for
$50. Parsley is operating at less than its full capacity of 550,000 and has variable costs of $27
per unit. The full cost to manufacture the unit is $38. Parsley currently sells 450,000 units at a
selling price of $54. If an internal transfer is made, variable shipping and administrative costs
of $2 per unit could be avoided. What would be the impact on Spice Company’s overall profits
if the internal transfer were made?
A. no change in overall profits
C. $200,000 decrease in profits
D. $700,000 increase in profits
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
98. Spice Company has two divisions, Parsley and Sage. Parsley produces a unit that Sage could
use in its production. Sage currently is purchasing 50,000 units from an outside supplier for
$50. Parsley is operating at less than full capacity and has variable costs of $27 per unit. The
full cost to manufacture the unit is $38. Parsley currently sells 450,000 units at a selling price
of $54. If an internal transfer is made, variable shipping and administrative costs of $2 per unit
could be avoided. What would be the minimum transfer price?
B. $27
C. $36
D. $52
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
10-42
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McGraw-Hill Education.
99. Spice Company has two divisions, Parsley and Sage. Parsley produces a unit that Sage could
use in its production. Sage currently is purchasing 50,000 units from an outside supplier for
$50. Parsley is operating at less than full capacity and has variable costs of $27 per unit. The
full cost to manufacture the unit is $38. Parsley currently sells 450,000 units at a selling price
of $54. If an internal transfer is made, variable shipping and administrative costs of $2 per unit
could be avoided. What would be the maximum transfer price?
A. $25
B. $27
C. $38
The maximum transfer cost is the market price.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
100. Tiffany Company has two divisions, Gold and Silver. Gold produces a unit that Silver could use
in its production. Silver currently is purchasing 50,000 units from an outside supplier for $25.
Gold is operating at less than full capacity and has variable costs of $13.50 per unit. The full
cost to manufacture the unit is $20. Gold currently sells 450,000 units at a selling price of $27.
If an internal transfer is made, variable shipping and administrative costs of $1 per unit could
be avoided. If the internal transfer is made, what would be the impact on Tiffany Company’s
overall profits?
B. $1,125,000 increase
C. $225,000 decrease
D. No change in profits
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
10-43
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101. Tiffany Company has two divisions, Gold and Silver. Gold produces a unit that Silver could use
in its production. Silver currently is purchasing 50,000 units from an outside supplier for $25.
Gold is operating at less than full capacity and has variable costs of $13.50 per unit. The full
cost to manufacture the unit is $20. Gold currently sells 450,000 units at a selling price of $27.
If an internal transfer is made, variable shipping and administrative costs of $1 per unit could
be avoided. How much profit will Gold receive from the transfer if a transfer price of $22.50 is
agreed upon?
A. $225,000
B. $275,000
D. $725,000
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
102. Tiffany Company has two divisions, Gold and Silver. Gold produces a unit that Silver could use
in its production. Silver currently is purchasing 50,000 units from an outside supplier for $25.
Gold is operating at less than full capacity and has variable costs of $13.50 per unit. The full
cost to manufacture the unit is $20. Gold currently sells 450,000 units at a selling price of $27.
If an internal transfer is made, variable shipping and administrative costs of $1 per unit could
be avoided. How much will Silver save by not purchasing from outside if a transfer price of
$22.50 is agreed upon?
A. $225,000
B. $250,000
C. $175,000
Silver will save the difference between the current price and the agreed upon transfer price.
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
10-44
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McGraw-Hill Education.
103. Swan Company has two divisions, Hill and Paradise. Hill produces a unit that Paradise could
use in its production. Paradise currently is purchasing 5,000 units from an outside supplier for
$56. Hill is operating at less than full capacity and has variable costs of $30.80 per unit. The
full cost to manufacture the unit is $43.40. Hill currently sells 450,000 units at a selling price of
$61.60. What would be the impact on Swan Company’s overall profits if the internal transfer is
made?
A. $28,000 increase
C. $7,000 decrease
D. No change in profits
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
104. Swan Company has two divisions, Hill and Paradise. Hill produces a unit that Paradise could
use in its production. Paradise currently is purchasing 5,000 units from an outside supplier for
$56. Hill is operating at less than full capacity and has variable costs of $30.80 per unit. The
full cost to manufacture the unit is $43.40. Hill currently sells 450,000 units at a selling price of
$61.60. How much profit will Hill receive from the transfer if a transfer price of $42 is agreed
upon?
A. $7,000 loss
B. $98,000 loss
C. $35,000 profit
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
10-45
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McGraw-Hill Education.
105. Swan Company has two divisions, Hill and Paradise. Hill produces a unit that Paradise could
use in its production. Paradise currently is purchasing 5,000 units from an outside supplier for
$56. Hill is operating at less than full capacity and has variable costs of $30.80 per unit. The
full cost to manufacture the unit is $43.40. Hill currently sells 450,000 units at a selling price of
$61.60. How much will Paradise save by not purchasing from outside if a transfer price of $42
is agreed upon?
B. $56,000
C. $7,000 more cost
D. $28,000
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
Essay Questions
10-46
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McGraw-Hill Education.
106. Appletree Co. focuses on sustainability metrics in conjunction with its core operations:
producing and selling fruit. Match each of the following environmental and sustainability
metrics with each of the four dimensions of the balanced scorecard.
Learning
and
Growth
Internal
Business
Processes Customer Financial
a. Crop yield (number of apples) per tree
b. The number of repeat customers
c. The number of employees who attend educational events focused on environmental and
sustainability topics
d. Level of carbon emissions from automatic pickers
e. The number of subscribers to the electronic newsletter (instead of the paper newsletter)
f. The number of employees who are LEED associates (i.e., hold professional credentials
related to Leadership in Energy & Environmental Design)
g. Change in results of annual environmental impact audit year-over-year
h. The number of unsold inventory items (apples)
i. Annual sales
j. The percentage increase in the number of likes on Facebook (Appletree Co. page) and
followers on Instagram (Appletree Co.)
k. The percentage of unsold inventory items (apples) disposed of via secondary distribution
channels (e.g., food banks) versus the percentage of unsold inventory items discarded
l. Revenue from disposal of unsold inventory in secondary distribution channels (e.g., food
banks)
m. The operations ratio with and without sustainability measures in place
n. The percentage of repeat customers expressed as a percentage of total customers
o. Percentage of investment portfolio invested in sustainable investments
p. The number of mentions of “Appletree Co.” via social media
q. The percent increase in the number of blog posts with “environmental” or “sustainability”
subject matter
r. Amount of annual contributions to charitable causes
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-03 Describe the four dimensions of the balanced scorecard and explain how they are used to evaluate
managerial performance.
Topic: Balanced scorecard
107. Calculate the missing values for each unique company.
ROI
Profit
Margin
Investment
Turnover
Company 1 a. 6.2% 2.0
Company 2 21% b. 3.0
Company 3 21% 12% c.
Company 4 15% d. 0.75
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Topic: Financial performance measures
10-48
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McGraw-Hill Education.
108. Calculate the missing values:
ROI
Profit
Margin
Investment
Turnover
a. 8.3% 2.5
24% b. 5.0
18% 12% c.
14% d. 1.75
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Topic: Financial performance measures
10-49
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McGraw-Hill Education.
109. Eureka Corp. has a hurdle rate of 8%. Calculate the missing values on each line. (Each line is
independent of the others).
Operating
income
Average
Invested assets
Return on
investment
Residual
income
$105,000 $700,000 a. b.
c. $1,200,000 16% d.
$75,000 e. f. $43,000
g. $250,000 h. $12,000
$48,000 i. 15% j.
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Learning Objective: 10-05 Compute and interpret residual income.
Topic: Financial performance measures
10-50
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McGraw-Hill Education.
110.
The Marine Division of Pacific Corp. has average invested assets of $110,000,000. Sales
revenue of $50,250,000 results in an operating income of $9,967,000. The hurdle rate is 7%.
a. Calculate the return on investment.
b. Calculate the profit margin.
c. Calculate the investment turnover.
d. Calculate the residual income.
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Learning Objective: 10-05 Compute and interpret residual income.
Topic: Financial performance measures
111. Hubbard Division of the Market Company has an opportunity to invest in a new project. The
project will yield an incremental operating income of $36,750 on average invested assets of
$460,000. Hubbard currently has operating income of $210,000 on average invested assets of
$2,050,000. Market Company requires a 6% rate of return on new projects.
a. What is Hubbard’s ROI before making an investment in the project?
b. What is Hubbard’s residual income before making an investment in the project?
c. What is Hubbard’s ROI after making the investment in the project?
d. What is Hubbard’s residual income after making the investment in the project?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Learning Objective: 10-05 Compute and interpret residual income.
Topic: Financial performance measures
10-51
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McGraw-Hill Education.
112. Ontario Company has two divisions with the following results:
Jackson Canal
Sales revenue $300,000 $600,000
Divisional expenses 180,000 350,000
Segment income $120,000 $250,000
Average invested assets $800,000 $2,000,000
Ontario Company has a hurdle rate of 10%.
a. Calculate the return on investment for each division.
b. Break each division’s return on investment down into its component parts using the DuPont
method.
c. Calculate the residual income for each division.
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Learning Objective: 10-05 Compute and interpret residual income.
Topic: Financial performance measures
10-52
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McGraw-Hill Education.
113. Madison Corp. has a hurdle rate of 9%. Calculate the missing values:
Operating
income
Average
Invested assets
Return on
investment
Residual
income
$115,000 $800,000 a. b.
c. $1,350,000 17% d.
$175,000 e. f. $31,000
g. $750,000 h. $36,000
$46,800 i. 13% j.
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Learning Objective: 10-05 Compute and interpret residual income.
Topic: Financial performance measures
10-53
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McGraw-Hill Education.
114. The Walnut Division of Benton Corp. has average invested assets of $22,500,000. Sales
revenue of $27,000,000 results in an operating income of $2,379,500. The hurdle rate is 8%.
a. Calculate the return on investment.
b. Calculate the profit margin.
c. Calculate the investment turnover.
d. Calculate the residual income.
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Learning Objective: 10-05 Compute and interpret residual income.
Topic: Financial performance measures
115. Superior Division of the Monroe Company has an opportunity to invest in a new project. The
project will yield an incremental operating income of $73,350 on average invested assets of
$900,000. Superior Division currently has operating income of $425,000 on average invested
assets of $4,325,000. Monroe Company has a 7% hurdle rate for new projects.
a. What is Superior Division’s ROI before making an investment in the project?
b. What is Superior Division’s residual income before making an investment in the project?
c. What is Superior Division’s ROI after making the investment in the project?
d. What is Superior Division’s residual income after making the investment in the project?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Learning Objective: 10-05 Compute and interpret residual income.
Topic: Financial performance measures
10-54
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McGraw-Hill Education.
116. Warren Company has two divisions with the following results:
Ashland Erie
Sales revenue $450,000 $1,200,000
Divisional expenses 270,000 850,000
Segment income $180,000 $350,000
Average invested assets $1,200,000 $4,000,000
Warren Company has a hurdle rate of 12%.
a. Calculate the return on investment for each division.
b. Break each division’s return on investment down into its component parts using the DuPont
method.
c. Calculate the residual income for each division.
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Learning Objective: 10-05 Compute and interpret residual income.
Topic: Financial performance measures
10-55
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McGraw-Hill Education.
117. The following information is available about the status and operations of the Manufacturing
Division of Taylor Company, which has a hurdle rate of 6%.
Divisional identifiable average assets $411,637
Divisional income from operations $18,924
Divisional sales revenue $368,363
a. Compute the ROI for the Manufacturing Division.
b. Break the Manufacturing Division ROI down using the DuPont formula.
c. Compute the residual income for the Manufacturing Division.
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-04 Compute and interpret return on investment, investment turnover, and profit margin.
Learning Objective: 10-05 Compute and interpret residual income.
Topic: Financial performance measures
118. Avery Company has two divisions, Polk and Bishop. Polk produces an item that Bishop could
use in its production. Bishop currently is purchasing 25,000 units from an outside supplier for
$24 per unit. Polk is currently operating at less than its full capacity of 600,000 units and has
variable costs of $12 per unit. The full cost to manufacture the unit is $18. Polk currently sells
450,000 units at a selling price of $25.50 per unit.
a. What will be the effect on Avery Company’s operating profit if the transfer is made
internally?
b. What is the minimum transfer price from Polk’s perspective?
c. What is the maximum transfer price from Bishop’s perspective?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
10-56
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McGraw-Hill Education.
Topic: Transfer pricing
119. Sandy Company has two divisions, Huron and Cortez. Huron produces an item that Cortez
could use in its production. Cortez currently is purchasing 50,000 units from an outside
supplier for $24 per unit. Huron is currently operating at full capacity of 600,000 units and has
variable costs of $13.50 per unit. The full cost to manufacture the unit is $19.50. Huron
currently sells 600,000 units at a selling price of $25.50 per unit.
a. What will be the effect on Sandy Company’s operating profit if the transfer is made
internally?
b. What is the minimum transfer price from Huron’s perspective?
c. What is the maximum transfer price from Cortez’ perspective?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
10-57
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McGraw-Hill Education.
120. National Company has two divisions, Walton and Iowa. Walton produces an item that Iowa
could use in its production. Iowa currently is purchasing 50,000 units from an outside supplier
for $9.10 per unit. Walton has sufficient capacity and has variable costs of $5.25 per unit. The
full cost to manufacture the unit is $7.70. Walton currently sells 450,000 units at a selling price
of $9.80 per unit.
a. What will be the effect on National Company’s operating profit if the transfer is made
internally?
b. What will be the change in profits for Walton if the transfer price is $7 per unit?
c. What will be the change in profits for Iowa if the transfer price is $7 per unit?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
10-58
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McGraw-Hill Education.
121. Sugar Company has two divisions, Lenox and Berkshire. Lenox produces an item that
Berkshire could use in its production. Berkshire currently is purchasing 100,000 units from an
outside supplier for $43 per unit. Lenox is currently operating at full capacity of 750,000 units
and has variable costs of $28 per unit. The full cost to manufacture the unit is $35. Lenox
currently sells 750,000 units at a selling price of $44 per unit.
a. What will be the effect on Sugar Company’s operating profit if the transfer is made
internally?
b. What will be the change in profits for Lenox if the transfer price is $40 per unit?
c. What will be the change in profits for Berkshire if the transfer price is $40 per unit?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
122. Concord Company has two divisions, Rice and Pine. Rice produces an item that Pine could
use in its production. Pine currently is purchasing 12,000 units from an outside supplier for $18
per unit. Rice is currently operating at less than its full capacity of 500,000 units and has
variable costs of $10 per unit. The full cost to manufacture the unit is $14. Rice currently sells
450,000 units at a selling price of $20 per unit.
a. What will be the effect on Concord Company’s operating profit if the transfer is made
internally?
b. What is the minimum transfer price from Rice’s perspective?
c. What is the maximum transfer price from Pine’ perspective?
AICPA: FN Measurement
10-59
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McGraw-Hill Education.
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
123. Tint Company has two divisions, Blue and Green. Blue produces an item that Green could use
in its production. Green currently is purchasing 150,000 units from an outside supplier for $23
per unit. Blue is currently operating at full capacity of 1,600,000 units and has variable costs of
$14 per unit. The full cost to manufacture the unit is $18. Blue currently sells 1,600,000 units at
a selling price of $25 per unit.
a. What will be the effect on Tint Company’s operating profit if the transfer is made internally?
b. What is the minimum transfer price from Blue’s perspective?
c. What is the maximum transfer price from Green’s perspective?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
10-60
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McGraw-Hill Education.
124. Dickens Company has two divisions, Bloom and Heath. Bloom produces an item that Heath
could use in its production. Heath currently is purchasing 5,000 units from an outside supplier
for $44 per unit. Bloom has sufficient capacity and has variable costs of $35 per unit. The full
cost to manufacture the unit is $41. Bloom currently sells 450,000 units at a selling price of
$48 per unit.
a. What will be the effect on Dickens Company’s operating profit if the transfer is made
internally?
b. What will be the change in profits for Bloom if the transfer price is $41 per unit?
c. What will be the change in profits for Heath if the transfer price is $41 per unit?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
125. Washington Company has two divisions, Jefferson and Adams. Jefferson produces an item
that Adams could use in its production. Adams currently is purchasing 100,000 units from an
outside supplier for $78.40 per unit. Jefferson is currently operating at full capacity of 900,000
units and has variable costs of $46.40 per unit. The full cost to manufacture the unit is $59.20.
Jefferson currently sells 900,000 units at a selling price of $86.40 per unit.
a. What will be the effect on Washington Company’s operating profit if the transfer is made
internally?
b. What will be the change in profits for Jefferson if the transfer price is $67.20 per unit?
c. What will be the change in profits for Adams if the transfer price is $67.20 per unit?
10-61
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McGraw-Hill Education.
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
126. Rapid Industries has multiple divisions. One division, Iron Products, makes a component that
another division, Austin, is currently purchasing on the open market. Iron Products currently
has a capacity to produce 500,000 components at a variable cost of $7.50 and a full cost of
$10.00. Iron Products has outside sales of 460,000 components at a price of $12.50 per unit.
Austin currently purchases 50,000 units from an outside supplier at a price of $12.00 per unit.
Assume that Austin desires to use a single supplier for its component.
a. What will be the effect on Rapid Industries’ operating profit if the transfer is made internally?
Assume the 50,000 units Austin needs are either purchased 100% internally or 100%
externally.
b. What is the minimum transfer price?
c. What is the maximum transfer price?
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 10-06 Explain how transfer prices are set in decentralized organizations.
Topic: Transfer pricing
10-62
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McGraw-Hill Education.