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Indicate whether the statement is true or false.
1. The excess of divisional operating income over a minimum acceptable operating income is termed the residual income.
a.
True
b.
False
2. The negotiated price approach allows the managers of decentralized units to agree on the transfer price.
a.
True
b.
False
3. The manager of the Furniture Department of a leading retailer does not control the salaries of departmental personnel.
a.
True
b.
False
4. A centralized business organization is one in which all major planning and operating decisions are made by top
management.
a.
True
b.
False
5. Under the negotiated price approach, the transfer price is the price at which the product or service transferred could be
sold to outside buyers.
a.
True
b.
False
6. The process of measuring and reporting operating data by responsibility centers is termed responsibility accounting.
a.
True
b.
False
7. If operating income for a division is $5,000, invested assets are $25,000, and sales are $30,000, the profit margin is
20%.
a.
True
b.
False
8. The ratio of sales to invested assets is termed the investment turnover component of the return on investment.
a.
True
b.
False
9. The primary disadvantage of decentralized operations is that decisions made by one manager may affect other
managers in such a way that the profitability of the entire company may suffer.
a.
True
b.
False
10. The Human Resources Department in a department store is an example of a support department.
a.
True
b.
False
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21. If Division Q’s yearly operating income was $30,000 on invested assets of $200,000, the return on investment is 15%.
11. A decentralized business organization is one in which all major planning and operating decisions are made by top
management.
a.
True
b.
False
12. The three common types of responsibility centers are referred to as cost centers, profit centers, and investment centers.
a.
True
b.
False
13. The profit center income statement should include only controllable revenues and expenses.
a.
True
b.
False
14. The amount of detail presented in a budget performance report for a cost center depends upon the level of
management to which the report is directed.
a.
True
b.
False
15. The right or license granted to an individual or group to market another company’s goods or services is called a
franchise.
a.
True
b.
False
16. Purchase requisitions for Purchasing and the number of payroll checks for Payroll Accounting are examples of cost
drivers.
a.
True
b.
False
17. If the profit margin for a division is 8% and the investment turnover is 1.2, the return on investment is 9.6%.
a.
True
b.
False
18. Responsibility accounting reports for profit centers are normally in the form of income statements.
a.
True
b.
False
19. The right or license granted to an individual or group to market another company’s goods or services is called a
franchise.
a.
True
b.
False
20. By using the return on investment as a divisional performance measure, divisional managers will always be motivated
to invest in proposals that will increase the overall return on investment for the company.
a.
True
b.
False
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a.
True
b.
False
22. If operating income for a division is $6,000, invested assets are $25,000, and sales are $30,000, the investment
turnover is 1.2.
a.
True
b.
False
23. Three measures of investment center performance are operating income, return on investment, and residual income.
a.
True
b.
False
24. The right or license granted to an individual or group to market another company’s goods or services is called a patent.
a.
True
b.
False
25. If operating income for a division is $120,000, sales are $975,000, and invested assets are $750,000, the investment
turnover is 1.3.
a.
True
b.
False
26. The profit margin component of return on investment analysis focuses on profitability by indicating the rate of profit
earned on each sales dollar.
a.
True
b.
False
27. Budget performance reports prepared for the vice president of production would generally contain less detail than
reports prepared for the various plant managers.
a.
True
b.
False
28. A manager in a cost center also has responsibility and authority over the revenues.
a.
True
b.
False
29. Transfer prices may be used when decentralized units are organized as cost, profit, or investment centers.
a.
True
b.
False
30. The cost price approach for transfer pricing is most often used between responsibility centers organized as cost centers
that are not concerned with the revenue.
a.
True
b.
False
31. If divisional operating income is $75,000, invested assets are $737,500, and the minimum return on invested assets is
6%, the residual income is $36,750.
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a.
True
b.
False
32. In return on investment analysis, the investment turnover component focuses on efficiency in the use of assets and
indicates the rate at which sales are being generated for each dollar of invested assets.
a.
True
b.
False
33. If operating income for a division is $30,000, sales are $263,750, and invested assets are $187,500, the investment
turnover is 1.3.
a.
True
b.
False
34. If the profit margin for a division is 11% and the investment turnover is 1.5, the return on investment is 7.3%.
a.
True
b.
False
35. The rates at which centralized services are charged to each division are called support department allocation rates.
a.
True
b.
False
36. The profit center income statement should include only revenues and expenses that are controlled by the manager.
a.
True
b.
False
37. Controllable expenses are those that can be influenced by the decisions of the profit center manager.
a.
True
b.
False
38. Operating expenses directly traceable to or incurred for the sole benefit of a specific department and usually subject to
the control of the department manager are termed direct operating expenses.
a.
True
b.
False
39. Separation of businesses into more manageable operating units is termed decentralization.
a.
True
b.
False
40. The objective of transfer pricing is to encourage each division manager to transfer goods and services between
divisions if overall company income can be increased by doing so.
a.
True
b.
False
41. Responsibility accounting reports that are given to lower-level managers are usually very detailed, while higher-level
managers will be given a summary report.
a.
True
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assets invested in the department is termed a cost center.
b.
False
42. The ratio of operating income to sales is termed the profit margin component of the return on investment.
a.
True
b.
False
43. Support department allocations are similar to the expenses of a profit center that purchases services from a source
outside the company.
a.
True
b.
False
44. One of the advantages of decentralization is that delegating authority to managers closest to the operation always
results in better decisions.
a.
True
b.
False
45. Under the cost price approach, the transfer price is the price at which the product or service transferred could be sold
to outside buyers.
a.
True
b.
False
46. The major advantage of the return on investment over operating income as a divisional performance measure is that
divisional investment is directly considered and thus comparability of divisions is facilitated.
a.
True
b.
False
47. The minimum acceptable divisional operating income is set by top management by establishing a minimum return
considered acceptable on invested assets.
a.
True
b.
False
48. The return on investment may be computed by multiplying investment turnover by the profit margin.
a.
True
b.
False
49. The underlying principle of allocating indirect operating expenses to departments is to assign to each department an
amount of expense proportional to the revenues of that department.
a.
True
b.
False
50. The major advantage of residual income as a performance measure is that it gives consideration to not only a
minimum return on investment but also to the total magnitude of operating income earned by each division.
a.
True
b.
False
51. A responsibility center in which the department manager has responsibility for and authority over costs, revenues, and
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a.
True
b.
False
52. A franchise fee is often expressed as a percent of revenues earned by the franchisee.
a.
True
b.
False
53. Investment turnover (as used in determining the return on investment) focuses on the rate of profit earned on each
sales dollar.
a.
True
b.
False
54. If operating income for a division is $6,000, invested assets are $25,000, and sales are $30,000, the profit margin is
20%.
a.
True
b.
False
55. The manager of a profit center does not make decisions concerning the fixed assets invested in the center.
a.
True
b.
False
56. If divisional operating income is $100,000, invested assets are $850,000, and the minimum return on invested assets is
8%, the residual income is $68,000.
a.
True
b.
False
57. If operating income for a division is $6,000, invested assets are $25,000, and sales are $30,000, the investment
turnover is 5.
a.
True
b.
False
58. The primary accounting tool for controlling and reporting for cost centers is a budget performance report.
a.
True
b.
False
59. A responsibility center in which the authority over and responsibility for costs and revenues is vested in the
department manager is termed a profit center.
a.
True
b.
False
60. The major shortcoming of operating income as an investment center performance measure is that it ignores the amount
of assets invested in the center.
a.
True
b.
False
61. Operating expenses incurred by support departments are indirect expenses to a profit center.
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a.
True
b.
False
62. Developing and retaining quality managers are advantages of decentralization.
a.
True
b.
False
63. A disadvantage to using the residual income performance measure is that it encourages managers to spend only the
minimum acceptable return on assets set by upper management.
a.
True
b.
False
64. The ratio of sales to investment is termed the return on investment.
a.
True
b.
False
65. It is beneficial for divisions in a company to negotiate a transfer price when the supplying division has unused
capacity in its plant.
a.
True
b.
False
66. The plant managers in a cost center can be held responsible for major differences between budgeted and actual costs in
their plants.
a.
True
b.
False
67. The minimum accepted divisional operating income is set by top management by establishing a maximum return
considered acceptable on invested assets.
a.
True
b.
False
68. In an investment center, the manager has the responsibility and the authority to make decisions that affect not only
costs and revenues, but also the plant assets invested in the center.
a.
True
b.
False
Indicate the answer choice that best completes the statement or answers the question.
69. Which of the following expressions is termed the profit margin factor as used in the DuPont formula for determining
the return on investment (ROI)?
a.
Sales ÷ Operating Income
b.
Operating Income ÷ Sales
c.
Invested Assets ÷ Sales
d.
Sales ÷ Invested Assets
Materials used by Jefferson Company in producing Division C’s product are currently purchased from outside suppliers at
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a cost of $10.00 per unit. However, the same materials are available from Division A. Division A has unused capacity and
can produce the materials needed by Division C at a variable cost of $8.50 per unit. A transfer price of $9.50 per unit is
negotiated and 25,000 units of material are transferred, with no reduction in Division A’s current sales.
70. Division A’s operating income will increase by
a.
$0
b.
$75,000
c.
$25,000
d.
$50,000
71. In an investment center, the manager has the responsibility for and the authority to make decisions that affect
a.
the assets invested in the center, but not costs and revenues
b.
costs and assets invested in the center, but not revenues
c.
both costs and revenues for the department or division
d.
costs, revenues, and assets invested in the center
ABC Corporation has three support departments with the following costs and cost drivers:
Support Department
Cost
Cost Driver
Graphics Production
$200,000
number of copies made
Accounting
500,000
number of invoices
processed
Personnel
400,000
number of employees
ABC has three operating divisions, Micro, Macro, and Super. Their revenue, cost, and activity information are as follows:
Micro
Macro
Super
Revenues
$700,000
$850,000
$650,000
Direct operating expenses
50,000
70,000
100,000
Number of copies made
20,000
30,000
50,000
Number of invoices processed
700
800
500
Number of employees
130
145
125
72. The operating income of the Micro Division after all support department allocations will be
a.
$305,000
b.
$650,000
c.
$345,000
d.
$610,000
73. The Central Division for Chemical Company has a return on investment of 22% and an investment turnover of 1.4.
The profit margin is
a.
20%
b.
15.7%
c.
14%
d.
6.36%
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Mason Corporation had $650,000 in invested assets, sales of $700,000, operating income amounting to $99,000, and a
desired minimum return on investment of 15%.
74. The residual income for Mason Corporation is
a.
$0
b.
$84,150
c.
$(6,000)
d.
$1,500
Clydesdale Company has sales of $4,500,000, invested assets of $2,000,000, and operating expenses of $3,600,000. The
company has established a minimum return on investment of 7%.
75. Clydesdale Company’s investment turnover is
a.
1.80
b.
2.25
c.
1.25
d.
1.4
Materials used by Square Yard Products Inc. in producing Division 3’s product are currently purchased from outside
suppliers at a cost of $5.00 per unit. However, the same materials are available from Division 6. Division 6 has unused
capacity and can produce the materials needed by Division 3 at a variable cost of $3.00 per unit. A transfer price of $3.20
per unit is established, and 40,000 units of material are transferred, with no reduction in Division 6′s current sales.
76. Division 6’s operating income will increase by
a.
$8,000
b.
$15,000
c.
$80,000
d.
$150,000
ABC Corporation has three support departments with the following costs and cost drivers:
Support Department
Cost
Cost Driver
Graphics Production
$200,000
number of copies made
Accounting
500,000
number of invoices
processed
Personnel
400,000
number of employees
ABC has three operating divisions, Micro, Macro, and Super. Their revenue, cost, and activity information are as follows:
Micro
Macro
Super
Revenues
$700,000
$850,000
$650,000
Direct operating expenses
50,000
70,000
100,000
Number of copies made
20,000
30,000
50,000
Number of invoices processed
700
800
500
Number of employees
130
145
125
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Class:
Date:
77. The operating income of the Super Division after all support department allocations will be
a.
$300,000
b.
$325,000
c.
$550,000
d.
$200,000
78. The approach that requires the transfer price to be less than the market price but greater than the supplying division’s
variable costs per unit is called the _____ approach.
a.
cost price
b.
negotiated cost
c.
standard cost
d.
market price
Division D of Saunders Company has sales of $350,000, cost of goods sold of $120,000, operating expenses of $58,000,
and invested assets of $150,000.
79. The profit margin for Division D is
a.
42.9%
b.
83.4%
c.
49.1%
d.
65.7%
Clydesdale Company has sales of $4,500,000, invested assets of $2,000,000, and operating expenses of $3,600,000. The
company has established a minimum return on investment of 7%.
80. Clydesdale Company’s residual income is
a.
$252,000
b.
$900,000
c.
$1,400,000
d.
$760,000
81. The entity that grants the right or license to another company to market its goods or services is called the
a.
investor
b.
franchise
c.
franchisee
d.
franchisor
82. Which of the following statements best describes a decentralized company?
a.
One owner prepares plans and makes decisions for the entire company.
b.
Each of many units is responsible for its own operations and decision making.
c.
For a major company, operating decisions are made by top management.
d.
None of these choices describe a decentralized company.
83. Most manufacturing plants are considered cost centers because they have control over
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a.
sales and costs
b.
fixed assets and costs
c.
costs only
d.
fixed assets and sales
Materials used by Jefferson Company in producing Division C’s product are currently purchased from outside suppliers at
a cost of $10.00 per unit. However, the same materials are available from Division A. Division A has unused capacity and
can produce the materials needed by Division C at a variable cost of $8.50 per unit. A transfer price of $9.50 per unit is
negotiated and 25,000 units of material are transferred, with no reduction in Division A’s current sales.
84. Jefferson Company’s total operating income will increase by
a.
$37,500
b.
$100,000
c.
$62,500
d.
$150,000
85. Which of the following is not one of the common types of responsibility centers?
a.
cost center
b.
profit center
c.
investment center
d.
revenue center
86. Tom’s Tool Factory is an investment center and is responsible for all of its net income and the use of its assets. This
year, the invested assets totaled $475,000, and net income was $275,000. The return on investment (ROI) is
a.
57.9%
b.
172.3%
c.
5.0%
d.
115.0%
Chicks Corporation had $1,100,000 in invested assets, sales of $1,210,000, operating income amounting to $302,500, and
a desired minimum return on investment of 15%.
87. The profit margin for Chicks Corporation is
a.
25%
b.
22%
c.
15%
d.
27.5%
88. Heart Company has two divisions. Division A is interested in purchasing 10,000 units from Division B. Capacity is
available for Division B to produce these units. The per-unit market price is $30 per unit, with a variable cost of $25. The
manager of Division A has offered to purchase the units at $22 per unit. In an effort to make this transfer price beneficial
for the company as a whole, the range of prices that should be used during negotiations between the two divisions is
a.
$22 to $30
b.
$22 to $25
c.
over $30
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d.
$25 to $30
89. The profit margin is the
a.
ratio of operating income to sales
b.
ratio of operating income to invested assets
c.
ratio of assets to liabilities
d.
ratio of sales to invested assets
Materials used by Jefferson Company in producing Division C’s product are currently purchased from outside suppliers at
a cost of $10.00 per unit. However, the same materials are available from Division A. Division A has unused capacity and
can produce the materials needed by Division C at a variable cost of $8.50 per unit. A transfer price of $9.50 per unit is
negotiated and 25,000 units of material are transferred, with no reduction in Division A’s current sales.
90. Division C’s operating income will increase by
a.
$0
b.
$75,000
c.
$12,500
d.
$50,000
91. Which of the following formulas is the investment turnover factor as used in the DuPont formula for determining the
return on investment (ROI)?
a.
Invested Assets ÷ Sales
b.
Operating Income ÷ Invested Assets
c.
Operating Income ÷ Sales
d.
Sales ÷ Invested Assets
92. Which of the following is a measure of performance for the manager of an investment center?
a.
return on investment (ROI)
b.
residual income
c.
divisional income statements
d.
all of these choices
93. Which of the following is not a measure that management can use in evaluating and controlling investment center
performance?
a.
return on investment (ROI)
b.
negotiated price
c.
residual income
d.
operating income
94. In evaluating the profit center manager, the operating income should be compared
a.
across profit centers
b.
to a budget
c.
to the competitor’s net income
d.
to the total company earnings per share
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95. Assume that divisional operating income amounts to $215,000 and top management has established 15% as the
minimum return on divisional assets totaling $1,000,000. The residual income for the division is
a.
$65,000
b.
$215,000
c.
$635,000
d.
$150,000
ABC Corporation has three support departments with the following costs and cost drivers:
Support Department
Cost
Cost Driver
Graphics Production
$200,000
number of copies made
Accounting
500,000
number of invoices
processed
Personnel
400,000
number of employees
ABC has three operating divisions, Micro, Macro, and Super. Their revenue, cost, and activity information are as follows:
Micro
Macro
Super
Revenues
$700,000
$850,000
$650,000
Direct operating expenses
50,000
70,000
100,000
Number of copies made
20,000
30,000
50,000
Number of invoices processed
700
800
500
Number of employees
130
145
125
96. The support department cost that will be allocated to the Micro Division is
a.
$200,000
b.
$145,000
c.
$60,000
d.
$345,000
97. Which of the following is a disadvantage of decentralization?
a.
Decisions made by one manager may negatively affect the profitability of the entire company.
b.
Decentralization helps retain quality managers.
c.
Managers closest to the operations make decisions.
d.
Managers are able to acquire expertise in their areas of responsibility.
Mason Corporation had $650,000 in invested assets, sales of $700,000, operating income amounting to $99,000, and a
desired minimum return on investment of 15%.
98. The investment turnover for Mason Corporation is
a.
1.08
b.
0.93
c.
6.57
d.
7.07
99. Two divisions of Oregano Company (Divisions TX and OY) have the same profit margins. Division TX’s investment
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turnover is larger than that of Division OY (1.2 to 1.0). Operating income for Division TX is $55,000, and operating
income for Division OY is $43,000. Division TX has a higher return on investment than Division OY by
a.
using operating income as a performance measure
b.
comparing the profit margins
c.
applying a negotiated price measure
d.
using its assets more efficiently in generating sales
100. Some organizations use internal support departments to provide like services to several divisions or departments
within an organization. Which of the following would probably not lend itself as a support department?
a.
Inventory Control Department
b.
Payroll Accounting Department
c.
Information Systems Department
d.
Human Resources Department
101. Which of the following is a measure of a cost center manager’s performance?
a.
budget performance report
b.
return on investment and residual income measures
c.
divisional income statements
d.
balance sheet
102. Responsibility accounting reports for profit centers will include
a.
costs only
b.
revenues only
c.
expenses and fixed assets
d.
revenues, expenses, and operating income or loss
Division A of Chacha Company has sales of $140,000, cost of goods sold of $83,000, operating expenses of $43,000, and
invested assets of $150,000.
103. The return on investment (ROI) for Division A is
a.
9.3%
b.
99.3%
c.
74.6%
d.
4.6%
104. The ratio of operating income to sales, which is also a factor in the DuPont formula for determining the return on
investment (ROI), is called
a.
profit margin
b.
indirect expenses
c.
investment turnover
d.
cost
105. Managers of what type of decentralized units have authority and responsibility for revenues, costs, and assets
invested in the unit?
a.
profit center
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b.
investment center
c.
production center
d.
cost center
106. Operating income of the Pierce Automobile Division is $2,225,000. If operating income before support department
allocations is $3,250,000,
a.
operating expenses are $1,025,000
b.
total support department allocations are $1,025,000
c.
noncontrollable charges are $1,025,000
d.
direct manufacturing charges are $1,025,000
Chicks Corporation had $1,100,000 in invested assets, sales of $1,210,000, operating income amounting to $302,500, and
a desired minimum return on investment of 15%.
107. The residual income for Chicks Corporation is
a.
$165,000
b.
$302,500
c.
$137,500
d.
$191,500
108. Nelson Company’s Radio Division currently is purchasing transistors from Charlotte Co. for $3.50 each. The total
number of transistors needed is 8,000 per month. Nelson Company’s Electronics Division can produce the transistors for a
cost of $4.00 each, and it has plenty of capacity to manufacture the units. The $4.00 is made up of $3.25 in variable costs,
and $0.75 in allocated fixed costs. The range of a possible transfer price should be
a.
$3.26 to $3.49
b.
$3.51 to $3.99
c.
$3.26 to $3.99
d.
$3.25 to $3.50
109. Assume that Division Blue has achieved a yearly operating income of $110,000 using $900,000 of invested assets. If
management has set a minimum acceptable return on investment of 11%, the residual income is
a.
$99,000
b.
$691,000
c.
$209,000
d.
$11,000
110. In a profit center, the department manager has responsibility for and the authority to make decisions that affect
a.
not only costs and revenues, but also assets invested in the center
b.
the assets invested in the center, but not costs and revenues
c.
both costs and revenues for the department or division
d.
costs and assets invested in the center, but not revenues
111. Division A reported operating income of $975,000 and total support department allocations of $675,000. As a result,
a.
net income was $300,000
b.
the gross profit was $300,000
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c.
operating income before support department allocations was $1,650,000
d.
consolidated net income was $300,000
ABC Corporation has three support departments with the following costs and cost drivers:
Support Department
Cost
Cost Driver
Graphics Production
$200,000
number of copies made
Accounting
500,000
number of invoices
processed
Personnel
400,000
number of employees
ABC has three operating divisions, Micro, Macro, and Super. Their revenue, cost, and activity information are as follows:
Micro
Macro
Super
Revenues
$700,000
$850,000
$650,000
Direct operating expenses
50,000
70,000
100,000
Number of copies made
20,000
30,000
50,000
Number of invoices processed
700
800
500
Number of employees
130
145
125
112. The operating income of the Macro Division after all support department allocations will be
a.
$780,000
b.
$375,000
c.
$575,000
d.
$435,000
113. Determining the transfer price as the price at which the product or service transferred could be sold to outside buyers
is known as the
a.
cost price approach
b.
negotiated price approach
c.
revenue price approach
d.
market price approach
114. For higher levels of management, responsibility accounting reports
a.
are more detailed than for lower levels of management
b.
are more summarized than for lower levels of management
c.
contain about the same level of detail as reports for lower levels of management
d.
are rarely provided or reviewed
115. The ratio of sales to invested assets, which is also a factor in the DuPont formula for determining the return on
investment (ROI), is called
a.
profit margin
b.
indirect margin
c.
investment turnover
d.
cost ratio
Name:
Class:
Date:
International Boot Company has operating income of $80,000, invested assets of $500,000, and sales of $1,525,000.
116. The investment turnover for International Boot Company is
a.
16.0
b.
3.05
c.
0.33
d.
27.5
117. Businesses that are separated into two or more manageable units in which managers have authority and responsibility
for operations are said to be
a.
decentralized
b.
consolidated
c.
diversified
d.
centralized
118. The entity that pays for the right or license to market another company’s goods or services is called the
a.
investee
b.
franchise
c.
franchisee
d.
franchisor
119. Investment centers differ from profit centers in that they
a.
are responsible for net income only
b.
are able to invest in assets
c.
have less responsibilities than cost centers and profit centers
d.
are only responsible for revenues
Clydesdale Company has sales of $4,500,000, invested assets of $2,000,000, and operating expenses of $3,600,000. The
company has established a minimum return on investment of 7%.
120. Clydesdale Company’s return on investment is
a.
56%
b.
20%
c.
45%
d.
25%
121. The Southern Division of Knucklehead Company has a return on investment of 15% and an investment turnover of
1.2. What is the profit margin?
a.
1.5%
b.
12.5%
c.
0.67%
d.
6.67%
ABC Corporation has three support departments with the following costs and cost drivers:
Name:
Class:
Date:
Support Department
Cost
Cost Driver
Graphics Production
$200,000
number of copies made
Accounting
500,000
number of invoices
processed
Personnel
400,000
number of employees
ABC has three operating divisions, Micro, Macro, and Super. Their revenue, cost, and activity information are as follows:
Micro
Macro
Super
Revenues
$700,000
$850,000
$650,000
Direct operating expenses
50,000
70,000
100,000
Number of copies made
20,000
30,000
50,000
Number of invoices processed
700
800
500
Number of employees
130
145
125
122. The support department allocation rate for the Accounting Department is
a.
$714
b.
$250
c.
$625
d.
$0.004
Chicks Corporation had $1,100,000 in invested assets, sales of $1,210,000, operating income amounting to $302,500, and
a desired minimum return on investment of 15%.
123. The investment turnover for Chicks Corporation is
a.
1.3
b.
1.5
c.
1.0
d.
1.1
124. Blaser Corporation had $275,000 in invested assets, sales of $330,000, operating income amounting to $33,000, and
a desired minimum return on investment of 7.5%. The return on investment for Blaser Corporation is
a.
8.3%
b.
10%
c.
12%
d.
7.5%
ABC Corporation has three support departments with the following costs and cost drivers:
Support Department
Cost
Cost Driver
Graphics Production
$200,000
number of copies made
Accounting
500,000
number of invoices
processed
Personnel
400,000
number of employees
ABC has three operating divisions, Micro, Macro, and Super. Their revenue, cost, and activity information are as follows:
Name:
Class:
Date:
Micro
Macro
Super
Revenues
$700,000
$850,000
$650,000
Direct operating expenses
50,000
70,000
100,000
Number of copies made
20,000
30,000
50,000
Number of invoices processed
700
800
500
Number of employees
130
145
125
125. The support department cost that will be allocated to the Macro Division is
a.
$405,000
b.
$175,000
c.
$130,000
d.
$305,000
126. The costs of services charged to a profit center on the basis of its use of those services are
a.
operating expenses
b.
noncontrollable charges
c.
support department allocations
d.
activity charges
127. The investment turnover is the ratio of
a.
operating income to sales
b.
operating income to invested assets
c.
assets to liabilities
d.
sales to invested assets
128. Operating income for Division L is $250,000, total support department allocations are $400,000, and operating
expenses are $2,750,000. The revenues for Division L are
a.
$650,000
b.
$3,000,000
c.
$3,400,000
d.
$2,750,000
129. The excess of divisional operating income over a minimum acceptable amount of divisional operating income is
a.
profit margin
b.
residual income
c.
return on investment (ROI)
d.
gross profit
ABC Corporation has three support departments with the following costs and cost drivers:
Support Department
Cost
Cost Driver
Graphics Production
$200,000
number of copies made
Accounting
500,000
number of invoices
processed
Personnel
400,000
number of employees
Name:
Class:
Date:
ABC has three operating divisions, Micro, Macro, and Super. Their revenue, cost, and activity information are as follows:
Micro
Macro
Super
Revenues
$700,000
$850,000
$650,000
Direct operating expenses
50,000
70,000
100,000
Number of copies made
20,000
30,000
50,000
Number of invoices processed
700
800
500
Number of employees
130
145
125
130. The support department allocation rate for the Personnel Department is
a.
$2,758
b.
$3,200
c.
$3,077
d.
$1,000
131. The profit margin for Division C is 6%, and the investment turnover is 1.2. The return on investment for Division B
is
a.
20%
b.
6.7%
c.
7.3%
d.
7.2%
132. Marshall Corporation had $220,000 in invested assets, sales of $242,000, operating income of $66,000, and a desired
minimum return on investment of 3%. The return on investment for Marshall Corporation is
a.
9.1%
b.
30%
c.
3.0%
d.
27.3%
133. What additional information is needed to determine the return on investment if operating income is known?
a.
invested assets
b.
residual income
c.
direct expenses
d.
sales
134. All of the following are advantages of decentralization except
a.
managers make better decisions when closer to the operations of the company
b.
expertise in all areas of the business is difficult; decentralization makes it better to delegate certain
responsibilities
c.
each decentralized operation purchases its own assets and pays for operating costs
d.
decentralized managers can respond quickly to customer needs
135. Which of the following would not be considered an internal centralized support department?
a.
Payroll Accounting Department
b.
Manufacturing Department
Name:
Class:
Date:
c.
Information Systems Department
d.
Purchasing Department
Division D of Saunders Company has sales of $350,000, cost of goods sold of $120,000, operating expenses of $58,000,
and invested assets of $150,000.
136. The return on investment (ROI) for Division D is
a.
153.3%
b.
114.7%
c.
87.2%
d.
233%
137. A manager is responsible for costs only in a(n) _____ center.
a.
profit
b.
investment
c.
volume
d.
cost
138. Which of the following is not a commonly used approach to setting transfer prices?
a.
market price approach
b.
revenue price approach
c.
negotiated price approach
d.
cost price approach
International Boot Company has operating income of $80,000, invested assets of $500,000, and sales of $1,525,000.
139. The profit margin for International Boot Company is
a.
33.3%
b.
5.2%
c.
16.0%
d.
19.1%
140. To compute operating income, total support department allocations are
a.
added to operating income before support department allocations
b.
subtracted from operating expenses
c.
subtracted from operating income before support department allocations
d.
subtracted from gross profit
ABC Corporation has three support departments with the following costs and cost drivers:
Support Department
Cost
Cost Driver
Graphics Production
$200,000
number of copies made
Accounting
500,000
number of invoices
processed
Name:
Class:
Date:
Personnel
400,000
number of employees
ABC has three operating divisions, Micro, Macro, and Super. Their revenue, cost, and activity information are as follows:
Micro
Macro
Super
Revenues
$700,000
$850,000
$650,000
Direct operating expenses
50,000
70,000
100,000
Number of copies made
20,000
30,000
50,000
Number of invoices processed
700
800
500
Number of employees
130
145
125
141. The support department cost that will be allocated to the Super Division is
a.
$350,000
b.
$100,000
c.
$125,000
d.
$550,000
142. The support department allocation rate for Graphics Production is
a.
$2.00
b.
$10.00
c.
$6.66
d.
$0.50
143. The term used to describe expenses that are incurred by a specific department is _____ expenses.
a.
indirect
b.
margin
c.
departmental
d.
direct operating
144. The profit margin for the Central Division is 20%, and the investment turnover is 2.8. The return on investment
(ROI) for the Central Division is
a.
20%
b.
7.1%
c.
14%
d.
56%
145. Which of the following is a measure of a manager’s performance working in a profit center?
a.
a balance sheet
b.
the return on investment and residual income measures
c.
a budget performance report
d.
the divisional income statements
Division A of Chacha Company has sales of $140,000, cost of goods sold of $83,000, operating expenses of $43,000, and
invested assets of $150,000.
146. The investment turnover for Division A is
Name:
Class:
Date:
a.
0.93
b.
9.3
c.
1.07
d.
10.7
147. Which of the following transfer price approaches is used when the transfer price is set at the amount sold to outside
buyers?
a.
market price
b.
cost price
c.
negotiated price
d.
variable price
Materials used by Square Yard Products Inc. in producing Division 3’s product are currently purchased from outside
suppliers at a cost of $5.00 per unit. However, the same materials are available from Division 6. Division 6 has unused
capacity and can produce the materials needed by Division 3 at a variable cost of $3.00 per unit. A transfer price of $3.20
per unit is established, and 40,000 units of material are transferred, with no reduction in Division 6′s current sales.
148. Square Yard Products Inc.’s total operating income will increase by
a.
$32,000
b.
$112,000
c.
$80,000
d.
$150,000
149. In a profit center, the manager has responsibility and authority for making decisions that affect
a.
long-term liabilities
b.
assets
c.
investments
d.
revenues
150. Which of the following expenses incurred by a department store would be a direct expense of the Sporting Goods
Department?
a.
depreciation expense—office equipment
b.
commissions earned by Sporting Goods Department sales clerks
c.
uncollectible accounts expense
d.
office salaries
151. Which of the following would be most effective in a small owner/manager-operated business?
a.
profit centers
b.
centralization
c.
investment centers
d.
cost centers
152. Operating income for Division H is $220,000, and operating income before support department allocations is
$975,000. As a result,
a.
total operating expenses are $565,000
Name:
Class:
Date:
b.
total manufacturing expenses are $565,000
c.
direct materials, direct labor, and factory overhead total $565,000
d.
total support department allocations are $755,000
153. Which of the following is not a disadvantage of decentralized operations?
a.
competition among managers
b.
duplication of operations
c.
price cutting by departments that are competing in the same product market
d.
top management freed from everyday tasks to do strategic planning
154. The following data are taken from the management accounting reports of Dulcimer Co.:
Division A
Division B
Division C
Operating income
$1,900,000
$1,450,000
$1,450,000
Total support department allocations
1,700,000
1,050,000
1,100,000
If an incentive bonus is paid to the manager who achieved the highest operating income before support department
allocations, it follows that
a.
Division A’s manager is given the bonus
b.
Division B’s manager is given the bonus
c.
Division C’s manager is given the bonus
d.
Divisions B and C’s managers divide the bonus
Materials used by Square Yard Products Inc. in producing Division 3’s product are currently purchased from outside
suppliers at a cost of $5.00 per unit. However, the same materials are available from Division 6. Division 6 has unused
capacity and can produce the materials needed by Division 3 at a variable cost of $3.00 per unit. A transfer price of $3.20
per unit is established, and 40,000 units of material are transferred, with no reduction in Division 6′s current sales.
155. Division 3’s operating income will increase by
a.
$150,000
b.
$50,000
c.
$32,000
d.
$72,000
Division A of Chacha Company has sales of $140,000, cost of goods sold of $83,000, operating expenses of $43,000, and
invested assets of $150,000.
156. The profit margin for Division A is
a.
11.1%
b.
10.0%
c.
9.0%
d.
0.90%
157. The best measure of managerial efficiency in the use of investments in assets is
a.
return on stockholders’ equity
b.
investment turnover
Name:
Class:
Date:
c.
operating income
d.
inventory turnover
158. In a cost center, the manager has responsibility and authority for making decisions that affect
a.
revenues
b.
investments in assets
c.
both costs and revenues
d.
costs
159. The formula for the return on investment (ROI) is
a.
Invested Assets ÷ Operating Income
b.
Sales ÷ Invested Assets
c.
Operating Income ÷ Sales
d.
Operating Income ÷ Invested Assets
160. A responsibility center in which the department manager has responsibility for and authority over costs and revenues
is called a(n) _____ center.
a.
profit
b.
investment
c.
volume
d.
cost
161. A responsibility center in which the department manager is responsible for costs, revenues, and assets for a
department is called a(n) _____ center.
a.
cost
b.
profit
c.
operating
d.
investment
Clydesdale Company has sales of $4,500,000, invested assets of $2,000,000, and operating expenses of $3,600,000. The
company has established a minimum return on investment of 7%.
162. Clydesdale Company’s profit margin is
a.
20%
b.
80%
c.
44.4%
d.
18%
163. The Central Division of Nebraska Company has a return on investment of 28% and a profit margin of 14%. The
investment turnover is
a.
0.2
b.
2.0
c.
5.0
d.
0.5
Name:
Class:
Date:
Mason Corporation had $650,000 in invested assets, sales of $700,000, operating income amounting to $99,000, and a
desired minimum return on investment of 15%.
164. The profit margin for Mason Corporation is
a.
7.1%
b.
20%
c.
15.2%
d.
14.1%
165. Operating expenses directly traceable to or incurred for the sole benefit of a specific department and usually subject
to the control of the department manager are _____ expenses.
a.
miscellaneous administrative
b.
direct operating
c.
indirect
d.
fixed
166. A franchisor may provide support to the franchisee in which of the following ways?
a.
advertising
b.
management development
c.
supplier relationships
d.
all of these choices
167. In an investment center, the manager has responsibility and authority for making decisions that affect
a.
costs only
b.
revenues only
c.
assets only
d.
costs, revenues, and assets
A cost driver is used to allocate support department expenses. Match each of the following cost drivers with the
appropriate department (a–h).
a.
Purchasing
b.
Payroll Accounting
c.
Human Resources
d.
Maintenance
e.
Information Systems
f.
Marketing
g.
President’s Office
h.
Transportation
168. Number of work orders
169. Number of employees
Name:
Class:
Date:
170. Number of payroll checks
171. Number of purchase requisitions
172. Allocated equally among divisions
173. Number of advertising campaigns
174. Number of miles
175. Number of computers in department
Match each definition that follows with the term (a–e) it defines.
a.
Controllable revenues
b.
Profit margin
c.
Investment turnover
d.
Return on investments (ROI)
e.
Residual income
176. Operating income minus minimum acceptable operating income
177. Operating income divided by invested assets
178. Ratio of operating income to sales
179. Earned by profit centers
180. Ratio of sales to invested assets
Match each of the following phrases as describing (a) an advantage, (b) a disadvantage, or (c) neither of
decentralization.
a.
Advantage of decentralization
b.
Disadvantage of decentralization
c.
Neither an advantage nor a disadvantage
181. Responsibilities delegated to unit managers
182. Internal price wars
183. Operational issues are made by managers closest to the operations
184. Separate office staff
185. Separate sales forces
186. Peppy Portraits specializes in pet photography and has both franchised and company-operated studios. Profit margin
and investment turnover for both segments are as follows:
Profit Margin
Investment
Name:
Class:
Date:
Copyright Cengage Learning. Powered by Cognero.
Page 28
Turnover
Company-operated studios
70%
0.50
Franchised studios
40%
2.25
Peppy Portraits is expanding. Based on the return on investment (ROI), would you advise a new location to be a
company-operated or franchised studio?
187. Division G of Elephant Preservation Inc. has sales of $895,000, cost of goods sold of $475,000, operating expenses
of $79,500, and invested assets of $750,000. Round percentages to one decimal place and investment turnover to two
decimal places.
Compute:
a. The return on investment for Division G.
b. The profit margin for Division G.
c. The investment turnover for Division G.
188. Miller’s Quarter Horse Company has sales of $4,500,000. It also has invested assets of $2,500,000 and operating
expenses of $3,800,000. The company has established a minimum return of 7%. Round percentages and investment
turnover to one decimal place.
a. What is Miller’s profit margin?
b. What is the investment turnover?
c. What is the rate of return on investment?
d. What is Miller’s residual income?
189. The sales, operating income, and invested assets for each division of Grosbeak Company are as follows:
Sales
Operating
Income
Invested
Assets
Division E
$5,000,000
$550,000
$2,400,000
Division F
4,800,000
860,000
2,500,000
Division G
7,000,000
860,000
2,900,000
a.
Using the DuPont formula, determine the profit margin, investment turnover,
and return on investment for each division. Round profit margin percentage to
two decimal places, investment turnover to four decimal places, and return on
investment to one decimal place.
b.
Which division is the most profitable per dollar invested?
190. The sales, operating income, invested assets, and residual income for each division of Marcus Company are as
follows:
Sales
Operating
Income
Invested
Assets
Residual
Income
Division X
$5,000,000
$645,000
$4,100,000
$235,000
Division Y
6,800,000
777,000
4,000,000
377,000
Division Z
3,750,000
760,000
7,600,000
0
Determine the minimum return on invested assets
191. The materials used by Hibiscus Company’s Division A are currently purchased from an outside supplier at $55 per
unit. Division B is able to supply Division A with 20,000 units at a variable cost of $42 per unit. The two divisions have
Name:
Class:
Date:
recently negotiated a transfer price of $48 per unit for the 20,000 units.
a. By how much will each division’s income increase as a result of this transfer?
b. What is the total increase in income for Hibiscus Company?
192. A department store allocates payroll costs on the basis of the number of payroll checks issued. Accounting costs are
allocated on the basis of the number of reports. The payroll costs for the year were $231,000, and the accounting costs for
the year totaled $75,500. The departments and the number of payroll checks and accounting reports for each are as
follows:
Number of
Payroll Checks
Number
of Reports
Department R
483
70
Department S
1,470
85
Department T
147
345
Determine the amount of (a) payroll costs and (b) accounting costs to be allocated to each department.
193. Piano Company’s costs were over budget by $47,000. Piano Company is divided into two regions. The first region’s
costs were over budget by $5,000. Determine the amount that the second region’s cost was over or under budget.
194. Data for Divisions A, B, C, D, and E are as follows:
Div.
Sales
Operating
Income
Inv.
Assets
Return
on Inv.
Profit
Margin
Invest.
Turnover
A
(a)
$35,000
$200,000
(b)
(c)
1.6
B
$455,000
(d)
$284,375
16.0%
(e)
(f)
C
$525,000
$73,500
(g)
(h)
(i)
1.2
D
$800,000
(j)
(k)
(l)
13.0%
2.5
E
(m)
(n)
$250,000
(o)
16.0%
2.0
a.
Determine the missing items, identifying each by letter (a–o).
Round percentage and turnover values to one decimal place.
b.
Which division is most profitable in terms of operating income?
c.
Which division is most profitable in terms of return on investment?
195. The sales, operating income, and invested assets for each division of Wren Company are as follows:
Sales
Operating
Income
Invested
Assets
Division C
$5,000,000
$630,000
$4,000,000
Division D
6,800,000
760,000
3,900,000
Division E
3,750,000
750,000
7,500,000
Management has established a minimum acceptable return on investment of 8%.
a.
Determine the residual income for each division.
b.
Based on residual income, which division is the most profitable?
196. Magnolia Company’s Division A has operating income of $80,000 and assets of $400,000. The minimum acceptable
return on investment is 12%. What is the residual income for the division?
Name:
Class:
Date:
197. Xang Company’s costs were over budget by $46,000. Xang Company is divided into two regions. The first region’s
costs were over budget by $7,000.
Determine the amount that the second region’s cost was over or under budget.
198. Paduka Industries has several divisions. The Eastern Division has $350,000 of invested assets, operating income of
$200,000, and residual income of $151,000. Determine the minimum acceptable return on investment.
199. Using the data from Terrace Industries, determine the divisional operating income for Districts 1 and 2.
District 1
District 2
Sales
$300,000
$600,000
Cost of goods sold
120,000
150,000
Selling expenses
55,000
75,000
Support department expenses:
Purchasing
$70,000
Payroll accounting
80,000
Allocate support department expenses proportional to the sales of each district.
200. Bentz Co. has two divisions, A and B. Invested assets and condensed income statement data for each division for the
year ended December 31 are as follows:
Division A
Division B
Revenues
$190,000
$125,500
Operating expenses
112,500
92,750
Support department allocations
29,500
12,625
Invested assets
225,000
99,000
a.
Prepare condensed income statements for the past year for each division.
b.
Using the DuPont formula, determine the profit margin, investment turnover,
and return on investment (ROI) for each division. Round the profit margin
percentage to two decimal places, the investment turnover to four decimal
places, and the return on investment to one decimal place.
201. Several items are missing from the following table of return on investment and residual income. Determine the
missing items, identifying each item by the appropriate letter (a–l). Round percentages to one decimal place.
Division
Invested
Assets
Operating
Income
Return
on Inv.
Min. ROI
Min. Amt.
of Operating
Income
Residual
Income
East
(a)
(b)
(c)
16.0%
$128,000
$10,000
West
$850,000
$153,000
(d)
12.0%
(e)
(f)
North
$825,000
(g)
20.0%
(h)
(i)
$24,000
South
(j)
$129,000
24.0%
(k)
$60,000
(l)
202. Bottlebrush Company has operating income of $60,000, invested assets of $345,000, and sales of $786,000. Use the
DuPont formula to compute the return on investment, and show (a) the profit margin, (b) the investment turnover, and (c)
the return on investment. Round the profit margin percentage and the return on investment to two decimal places and the
investment turnover to three decimal places.
203. Ralston Company has operating income of $75,000, invested assets of $360,000, and sales of $790,000.
Name:
Class:
Date:
Use the DuPont formula to compute the return on investment (ROI), and show (a) the profit margin, (b) the investment
turnover, and (c) the return on investment. Round the profit margin percentage to two decimal places, the investment
turnover to three decimal places, and the return on investment to two decimal places.
204. Using the data below for Ace Guitar Company, determine the divisional operating income for the A and B regions.
A Region
B Region
Sales
$500,000
$900,000
Cost of goods sold
200,000
300,000
Selling expenses
150,000
275,000
Support department expenses:
Purchasing
$90,000
Payroll accounting
30,000
Allocate support department expenses proportional to the sales of each region. Round percentage of sales allocations to
one decimal place.
205. Materials used by Layton Company’s Division 1 are currently purchased from outside supplier at $58 per unit.
Division 2 is able to supply Division 1 with 20,000 units at a variable cost of $46 per unit. The two divisions have recently
negotiated a transfer price of $50 per unit for the 20,000 units.
a. By how much will each division’s income increase as a result of this transfer?
b. What is the total increase in income for Layton Company?
206. Using the data below for Coffee & Cocoa Company, determine the divisional operating income for the three regions
by allocating the support department expenses proportional to the sales of the regions. Round final allocation amounts to
the nearest whole dollar.
A Region
B Region
C Region
Sales
$600,000
$900,000
$300,000
Cost of goods sold
200,000
350,000
190,000
Selling expenses
150,000
275,000
100,000
Support department
expenses:
Purchasing
120,000
Payroll accounting
80,000
207. The materials used by Holly Company’s Division A are currently purchased from an outside supplier. Division B is
able to supply Division A with 20,000 units at a variable cost of $42 per unit. Division B normally sells its units for $53
per unit. What is the range of transfer prices within which the two division managers should negotiate?
208. The Creative Division of Barry Company reported the following results for December:
Invested assets $1,200,000
Profit margin 25%
Return on investment 30%
Based on this information, what were sales?
209. Materials used by Best Bread Company in producing Division A’s product are currently purchased from outside
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suppliers at a cost of $30 per unit. However, the same materials are available from Division B. Division B has unused
capacity and can produce the materials needed by Division A at a variable cost of $20 per unit.
a.
If a transfer price of $25 per unit is established and 60,000 units of material are transferred,
with no reductions in Division B’s current sales, how much would Best Bread Company’s
total operating income increase?
b.
Assuming a transfer price of $25 per unit is established and 60,000 units of material are
transferred, with no reductions in Division B’s current sales, how much would the operating
income of Division A increase?
c.
Assuming a transfer price of $25 per unit is established and 60,000 units of material are
transferred, with no reductions in Division B’s current sales, how much would the operating
income of Division B increase?
d.
If the negotiated price approach is used, what would be the range of acceptable transfer
prices?
210. The budget for Department 6 of Cardinal Company for the current month ending March 31 is as follows:
Materials
$208,000
Factory wages
265,000
Supervisory salaries
67,800
Depreciation of plant and equipment
35,000
Power and light
22,500
Insurance and property taxes
15,500
Maintenance
9,700
During March, the costs incurred in Department 6 of Cardinal Company were materials, $204,000; factory wages,
$285,000; supervisory salaries, $63,600; depreciation of plant and equipment, $35,000; power and light, $21,360;
insurance and property taxes, $14,400; and maintenance, $9,456.
a.
Prepare a budget performance report for the supervisor of Department 6 of Cardinal
Company for the month of March.
b.
Are there any significant variances (5% or greater) of the budgeted amounts that should be
examined by the supervisor?
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