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46. The difference between operating income and the minimum dollar return required on a company’s operating assets is
the _______________.
47. ___________________ is after-tax operating income minus the dollar cost of capital employed.
48. A _________________ is the price charged for a component by the selling division to the buying division of the same
company.
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49. If there is a competitive outside market for the transferred product, then the best transfer price is the _____________.
50. The ________________ is a strategic management system that defines a strategic-based responsibility accounting
system.
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51. ______________________ occurs whenever managers receive information about the effectiveness of strategy
implementation as well as the validity of the assumptions underlying the strategy.
52. _________________ emphasizes only effectiveness of implementation.
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53. ________________ is the difference between realization and sacrifice, where realization is what the customer receives
and sacrifice is what is given up in return.
54. Which of the following is true of a decentralized company?
a. In a decentralized company, lower-level managers are responsible only for implementing decisions.
b. In a decentralized company, overall profit margins can mask inefficiencies within various subdivisions.
c. In a decentralized company, the owner makes all important operating and strategic decisions.
d. Managers in a decentralized company make and implement fewer decisions than do managers in a centralized
firm.
e. Local managers in a decentralized company can make better decisions using local information.
55. Which of the following results from decentralization?
a. It results in better local decision-making by central management as they are in contact with immediate operating
conditions.
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b. It results in better implementation of decisions as central management is charged with both making and
implementing decisions.
c. It results in the usage of a firm’s resources to maximize firm value by the lower-level managers.
d. It results in enhanced competition as segments are protected from dealing with market forces.
e. All of these.
56. Divisions in a decentralized company can be created along which of the following lines?
a. geographical
b. types of goods or services produced
c. type of responsibility given to divisional manager
d. All of these answers are correct.
e. None of these answers are correct.
57. A responsibility center in which a manager is responsible only for costs is a(n)
a. investment center.
b. revenue center.
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c. profit center.
d. cost center.
e. center not presented here.
58. Which of the following is true of revenue centers?
a. These are responsibility centers wherein managers are responsible for costs and quantity sold.
b. These are responsibility centers wherein managers are responsible for price and quantity sold.
c. These are responsibility centers wherein managers are responsible for revenues.
d. These are responsibility centers wherein managers are responsible for investments.
e. None of these
59. A responsibility center in which a manager is responsible for both revenues and costs is a(n)
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a. cost center.
b. revenue center.
c. profit center.
d. investment center
e. None of these.
60. A responsibility center in which a manager is responsible for revenues, cost, and investment is a(n)
a. cost center.
b. revenue center.
c. profit center.
d. investment center.
e. None of these.
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61. The decision-making approach that allows managers at lower levels to make and implement key decisions pertaining
to their areas of responsibility is
a. responsibility accounting.
b. controllable accounting.
c. decentralization.
d. optimal strategic accounting.
e. None of these.
62. Which of the following is true of decentralization?
a. Under decentralization, lower-level managers are responsible only for implementing decisions.
b. Decentralization allows higher management to make better decisions by using local information.
c. It protects segments of a company from competitive pressures.
d. It is usually achieved by creating units called divisions.
e. Decentralization allows only the CEO of a company to make all important decisions.
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63. A segment of Mega Inc., manufactures and sells blankets. The various models of blankets are produced in a single
factory using stable technology. They are sold by the sales department, also located in the factory. The segment is most
probably accounted for as a(n)
a. cost center.
b. revenue center.
c. profit center.
d. investment center.
e. None of these.
64. JetSky Airways has three divisions, the Western Division, the Eastern Division, and the Northern Division. The
manager of the Western Division had wanted to purchase replacement airplanes for the division. However, he decided
against it because, although revenues would increase and the new planes would be less expensive to operate, the initial
cost of the planes was quite large. The Western Division is most probably accounted for as a(n)
a. cost center.
b. investment center.
c. profit center.
d. revenue center.
e. None of these.
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65. Which of the following formulas calculates the return on investment (ROI)?
a. Operating Income / Average Operating Assets
b. After-tax Operating Income / Total Capital Employed
c. Operating Income / Minimum Expected Return
d. Residual Income / Sales
e. Total Capital Employed / Operating Income
66. Which of the following ratios is equal to margin?
a. Operating Income / Sales
b. After-tax Operating Income / Total Capital Employed
c. Operating Income / Average Operating Assets
d. Residual Income / Sales
e. Total Capital Employed / Operating Income
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67. Which of the following formulas measures turnover?
a. After-tax Operating Income / Total Capital Employed
b. Average Operating Assets / Residual Income
c. (Beginning Operating Assets + Ending Operating Assets) / Total Capital Employed
d. Sales / Average Operating Assets
e. Total Capital Employed / Operating Income
68. A positive result that stems from the use of return on investment (ROI) is that it encourages managers to focus on
a. the relationship among sales, expenses, and investment.
b. cost efficiency.
c. operating asset efficiency.
d. the efficient use of resources in generating income.
e. All of these.
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69. Division A had ROI of 15% last year. The manager of Division A is considering an additional investment for the
coming year. What step will the manager likely choose to take?
a. Accept the investment as long as it provides positive operating income.
b. Accept the investment as long as its ROI is positive.
c. Reject the investment if it returns more than 15% ROI.
d. Reject the investment if it returns less than 15% ROI.
e. Reject the investment if it returns an ROI equal to 15%.
70. The manager of a division is displeased with the ROI of the division. One step that would increase ROI (holding
everything else constant) is
a. increasing investment.
b. increasing sales.
c. increasing costs.
d. decreasing operating income.
e. None of these.
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71. Which of the following is a disadvantage of a focus on return on investment?
a. It can encourage managers to focus on cost cutting efforts.
b. It can produce a narrow focus on divisional profitability at the expense of profitability for the overall firm.
c. It can encourage managers to cut inventories and reduce overall investment.
d. It can encourage managers to focus on the long run at the expense of the short run.
e. It can accomplish all of these disadvantages.
72. Planet Company had operating income of $12,000, average operating assets of $125,000, and sales of $45,000. What
is Planet’s return on investment (ROI)? (Note: Round answer to two decimal places.)
a. 9.60%
b. 20.60%
c. 25.50%
d. 5.80%
e. 4.50%
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73. Forward Company had operating income of $75,000, sales of $220,000, and a turnover ratio of 0.55. What is
Forward’s return on investment (ROI)? (Note: Round answer to two decimal places.)
a. 32.50%
b. 50.60%
c. 18.75%
d. 64.60%
e. Forward’s ROI cannot be determined from this information.
74. Alpha Division had the following information:
Average operating asset base in Alpha Division $500,000
Operating income in Alpha Division $60,000
Cost of capital 14%
Target return on investment (ROI) 16%
Margin for Alpha Division 21%
If the asset base is decreased by $120,000, with no other changes, what will Alpha Division’s return on investment be?
(Note: Round answer to two decimal places.)
a. 10.50%
b. 15.79%
c. 18.50%
d. 12.55%
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75. The National Division of Excellent Products Company had a turnover ratio of 4.50 and a margin of 0.15. Which of the
following is the return on investment (ROI)? (Note: Round answer to two decimal places.)
a. 73.80%
b. 42.00%
c. 67.50%
d. 23.80%
76. If the margin of 0.30 stayed the same and the turnover ratio of 5.0 increased by 10%, the ROI would
a. increase by 10%.
b. decrease by 10%.
c. increase by 15%.
d. remain the same.
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77. If the operating asset turnover ratio increased by 30% and the margin increased by 20%, the divisional ROI
a. would increase by 56%.
b. would decrease by 60%.
c. would increase by 20%.
d. cannot be determined.
78. If the operating asset turnover increased by 50% and the margin increased by 50%, the ROI would increase by
a. 50%.
b. 25%.
c. 100%.
d. 125%.
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79. Which of the following is not an advantage of ROI?
a. It encourages managers of departments with high ROIs to invest in average ROI projects.
b. It encourages managers to pay careful attention to the relationships among sales, expenses, and investment.
c. It encourages cost efficiency.
d. It discourages excessive investment in operating assets.
80. Which of the following is not a disadvantage of the ROI performance measure?
a. It encourages managers to focus on the long run rather than the short run.
b. It discourages managers from investing in projects that would decrease divisional ROI but increase the
profitability of the company as a whole.
c. It encourages myopic behavior.
d. All of these are disadvantages of the ROI measure.
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81. Atlas Company provided the following information for last year:
Operating income $ 92,000
Sales 235,000
Beginning operating assets 410,000
Ending operating assets 440,000
Calculate Atlas’s margin for last year. (Note: Round answer to two decimal places.)
a. 2.15
b. 0.26
c. 0.39
d. 0.50
e. 0.35
82. Atlas Company provided the following information for last year:
Operating income $ 92,000
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Sales 235,000
Beginning operating assets 410,000
Ending operating assets 440,000
Calculate Atlas’s turnover ratio for last year. (Note: Round answer to two decimal places.)
a. 2.15
b. 0.46
c. 0.55
d. 0.32
e. 0.10
83. Atlas Company provided the following information for last year:
Operating income $ 92,000
Sales 235,000
Beginning operating assets 410,000
Ending operating assets 440,000
Which of the following is Atlas’s return on investment (ROI) for last year? (Note: Round answer to two decimal places.)
a. 0.41
b. 0.22
c. 0.32
d. 0.50
e. 0.15
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84. The following information pertains to the three divisions of Yang Company:
Division A Division B Division C
Sales ? ? $1,345,000
Net operating income $48,000 $18,000 $82,000
Average operating assets $420,000 ? ?
Return on investment ? 15% 20%
Margin 0.2 0.015 ?
Turnover 2.1 ? ?
Target ROI 17% 14% 8%
What are the average operating assets for Division C?
a. $95,000
b. $410,000
c. $82,000
d. $420,000
85. The following information pertains to the three divisions of Yang Company:
Division A Division B Division C