Chapter 12 Decentralization and Performance Evaluation
12–21
*114. The Component Division of Sharp Ware Products produces blades for knives with the
following characteristics:
Annual capacity– number of knives 60,000
Selling price per unit $7.00
Variable cost per unit $3.80
Fixed cost per unit $1.60
The Hunting Division within the same company would like to buy its required supply of
blades from the Component Division. Currently, the Hunting Division purchases the
blades it uses to manufacture hunting knives from an outside supplier for $5.80 each. If
the Component Division sells to the Hunting Division, it can save $0.70 per blade. The
Component Division is currently operating at capacity and selling all its production
outside the company. If the Component Division decides to sell to the Hunting Division,
what is the transfer price?
A. $6.30
B. $7.00
C. $3.80
D. $3.10
115. Division 3 of Baritune Enterprises reported sales of $820,000, NOPAT totaling $61,500,
interest expense of $8,000, and invested capital totaling $512,500. Its income tax rate is
30 percent. As it pertains to evaluating investment centers, how much is Division 3’s
profit margin?
A. 12.0%
B. 7.5%
C. 8.2%
D. 1.6%
116. Hardin Division of WestCo has sales of $300,000 and NOPAT of $15,000. The
company’s invested capital is $240,000 and its non-interest-bearing current liabilities are
$20,000. What is Hardin Division’s profit margin as it relates to investment center
performance evaluation?
A. 8.0%
B. 6.25%
C. 5.0%
D. 6.8%
117. Division 3 of Baritune Enterprises reported sales of $820,000, NOPAT totaling $61,500,
interest expense of $8,000, and invested capital totaling $512,500. Its income tax rate is
30%. As it pertains to evaluating investment centers, how much is Division 3’s
investment turnover?
A. 1.60
B. 7.50
C. 12.00
D. 0.625
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
12–22
118. Hardin Division of WestCo. has sales of $300,000 and NOPAT of $15,000. The
company’s invested capital is $240,000 and its noninterest-bearing current liabilities are
$20,000. What is Hardin Division’s investment turnover as it relates to investment center
performance evaluation?
A. 5.00
B. 6.25
C. 1.25
D. 0.80
119. The Media Division of Winslow Company has invested capital of $1,250,000, sales of
$590,000, net income of $44,250, and interest expense of $7,000. Winslow’s income tax
rate is 40 percent. What is the Media Division’s return on investment?
A. 3.76%
B. 3.88%
C. 0.47%
D. 3.76%
120. Last year, Processor Division of Mathews PC Company earned NOPAT of $200,000 on
sales of $2,600,000. The division had invested capital of $1,600,000 with $62,000 of
noninterest–bearing current liabilities. How much is the division’s return on investment?
A. 12.5%
B. 13.0%
C. 7.7%
D. 61.5%
121. Align Division is one of the divisions of DynaCore. Align’s invested capital is $420,000.
Last year, Align generated NOPAT of $64,260 on sales of $756,000. Which one of the
following correctly calculates Align Division’s return on investment using the two
components of return on investment?
A. $64,260 ÷ $756,000
B. 11.76% × 0.56
C. $4,260 ÷ $756,000
D. 8.5% × 1.80
122. Bottling Division of Fizzies Drink Company bottles soft drink produced by other divisions
of Fizzies Drink Company. The Bottling Division had sales last year of $1,200,000, and
earned $300,000 in income (NOPAT). Its invested capital was $1,000,000. How much
are the Bottling Division’s profit margin, investment turnover, and return on investment?
A. 30%, 0.75, and 20%
B. 30%, 0.87, and 25%
C. 25%, 1.20, and 30%
D. 120%, 0.25, and 30%
123. The Pastry Division of Dream Bread has invested capital of $1,300,000. During the past
year, the Pastry Division reported sales of $1,200,000 and earned $400,000 of NOPAT.
How much return did the Pastry Division generate on each dollar of assets invested in
the division?
A. 8.5%
B. 3.25%
C. 27.63%
D. 30.77%
Chapter 12 Decentralization and Performance Evaluation
12–23
124. The Pastry Division of Dream Bread has invested capital of $1,300,000. During the past
year, the Pastry Division reported sales of $1,200,000 and earned $400,000 of NOPAT.
How much profit did the Pastry Division generate on each revenue dollar earned by the
division?
A. 92.3%
B. 16.0%
C. 33.3%
D. 30.8%
125. The Pastry Division of Dream Bread has invested capital of $1,300,000. During the past
year, the Pastry Division reported sales of $5,590,000 and earned $400,000 of NOPAT.
By how many times did revenue exceed the Pastry Division’s investment?
A. 4.30 times
B. 23.30 times
C. 3.25 times
D. 13.98 times
126. Leon Division had interest expense of $94,400. Its income tax rate was 32%. Leon
Division generated net income totaling $784,400. With $2,400,000 of assets invested in
Leon Division, for how much profit is the Leon Division manager responsible?
A. $631,192
B. $819,608
C. $848,592
D. $725,208
127. Tomlinson Tech has a cost of capital of 8 percent, a required rate of return of 9.5%, and
an income tax rate of 30 percent. The Consumer Division of Tomlinson Tech has assets
totaling $2,800,000 and current liabilities at $180,000 with $40,000 of this amount being
interest-bearing. Sales for the year totaled $1,900,000 and interest expense totaled
$20,000. Net income was $166,500 for the year. How much is the Consumer Division’s
invested capital?
A. $2,560,000
B. $2,660,000
C. $2,940,000
D. $2,620,000
128. Tomlinson Tech has a cost of capital of 8 percent, a required rate of return of 9.5
percent, and an income tax rate of 30 percent. The Consumer Division of Tomlinson
Tech has assets totaling $2,800,000 and current liabilities at $180,000 with $40,000 of
this amount being interest-bearing. Sales for the year totaled $1,900,000 and interest
expense totaled $20,000. Net income was $166,500 for the year. How much is the
Consumer Division’s NOPAT?
A. $180,500
B. $172,500
C. $186,500
D. $152,500
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
12–24
129. Tomlinson Tech has a cost of capital of 8 percent, a required rate of return of 9.5
percent, and an income tax rate of 30 percent. The Consumer Division of Tomlinson
Tech has assets totaling $2,800,000 and current liabilities at $180,000 with $40,000 of
this amount being interest-bearing. Sales for the year totaled $1,900,000 and interest
expense totaled $20,000. Net income was $166,500 for the year. How much is the
Consumer Division’s residual income/(loss)?
A. ($32,300)
B. ($72,200)
C. ($46,300)
D. None of these answer choices are correct.
130. The following information is reported for the current year for North Atlantic Division of XT
Enterprises:
Sales $3,800,000
Interest expense $250,000
Net income $500,000
Total assets $5,000,000
Noninterest-bearing current liabilities $400,000
Cost of capital 8%
Required rate of return 14%
Tax rate 30%
How much is the division’s NOPAT?
A. $575,000
B. $500,000
C. $750,000
D. $675,000
131. The following information is reported for the current year for North Atlantic Division of XT
Enterprises:
Sales $3,800,000
Interest expense $250,000
Net income $500,000
Total assets $5,000,000
Noninterest-bearing current liabilities $400,000
Cost of capital 8%
Required rate of return 14%
Tax rate 30%
As it relates to investment center evaluation, how much is the division’s profit margin,
rounded to the nearest whole percentage?
A. 18%
B. 13%
C. 10%
D. 11%
Chapter 12 Decentralization and Performance Evaluation
12–25
132. The following information is reported for the current year for North Atlantic Division of XT
Enterprises:
Sales $3,800,000
Interest expense $250,000
Net income $500,000
Total assets $5,000,000
Noninterest-bearing current liabilities $400,000
Cost of capital 8%
Required rate of return 14%
Tax rate 30%
How much is the division’s invested capital?
A. $5,000,000
B. $5,400,000
C. $5,500,000
D. $4,600,000
133. The following information is reported for the current year for North Atlantic Division of XT
Enterprises:
Sales $3,800,000
Interest expense $250,000
Net income $500,000
Total assets $5,000,000
Noninterest-bearing current liabilities $400,000
Cost of capital 8%
Required rate of return 14%
Tax rate 30%
As it relates to investment center evaluation, how much is the division’s investment
turnover?
A. 0.76
B. 0.71
C. 0.83
D. 0.15
134. The following information is reported for the current year for North Atlantic Division of XT
Enterprises:
Sales $3,800,000
Interest expense $250,000
Net income $500,000
Total assets $5,000,000
Noninterest-bearing current liabilities $400,000
Cost of capital 8%
Required rate of return 14%
Tax rate 30%
How much is the division’s residual income?
A. $31,000
B. $275,000
C. $644,000
D. $307,000
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
12–26
135. The following information is reported for the current year for North Atlantic Division of XT
Enterprises:
Sales $3,800,000
Interest expense $250,000
Net income $500,000
Total assets $5,000,000
Noninterest-bearing current liabilities $400,000
Cost of capital 8%
Required rate of return 14%
Tax rate 30%
How much is the division’s return on investment rounded to one decimal?
A. 16.3%
B. 7.1%
C. 14.7%
D. 12.5%
136. Winton Company has three divisions. The Florida Division has a 30 percent tax rate, a
4.5 percent cost of capital, and a 7.5 percent required rate of return. During the fiscal
year, the division reported sales of $3,920,000. Interest expense was $120,000 and net
income was $122,800. The Florida Division has total assets of $2,950,000 and
noninterest-bearing liabilities of $150,000. How much is the Florida Division’s NOPAT?
A. $242,800
B. $158,800
C. $206,800
D. None of these answer choices are correct.
137. Winton Company has three divisions. The Florida Division has a 30 percent tax rate, a
4.5 percent cost of capital, and a 7.5 percent required rate of return. During the fiscal
year, the division reported sales of $3,920,000. Interest expense was $120,000 and net
income was $122,800. The Florida Division has total assets of $2,950,000 and
noninterest-bearing liabilities of $150,000. How much is the Florida Division’s invested
capital?
A. $2,800,000
B. $3,100,000
C. $2,950,000
D. None of these answer choices are correct.
138. Winton Company has three divisions. The Florida Division has a 30 percent tax rate, a
4.5 percent cost of capital, and a 7.5 percent required rate of return. During the fiscal
year, the division reported sales of $3,920,000. Interest expense was $120,000 and net
income was $122,800. The Florida Division has total assets of $2,950,000 and
noninterest-bearing liabilities of $150,000. How much is the Florida Division’s residual
income?
A. $80,800
B. ($3,200)
C. $32,800
D. None of these answer choices are correct.
Chapter 12 Decentralization and Performance Evaluation
12–27
139. Last year, Green Thumb’s Residential Division reported sales of $950,000, interest
expense of $100,000, and net income of $126,000. The company’s tax rate is 30
percent, and it has an 8 percent cost of capital and a 9 percent required rate of return.
Residential Division has noninterest-bearing current liabilities that total $75,000 and it
has total assets of $820,000. How much is the Residential Division’s NOPAT?
A. $156,000
B. $56,000
C. $196,000
D. $96,000
140. Last year, Green Thumb’s Residential Division reported sales of $950,000, interest
expense of $100,000, and net income of $126,000. The company’s tax rate is 30
percent, and it has an 8 percent cost of capital and a 9 percent required rate of return.
Residential Division has noninterest-bearing current liabilities that total $75,000 and it
has total assets of $820,000. How much is the Residential Division’s invested capital?
A. $820,000
B. $875,000
C. $895,000
D. $745,000
141. Last year, Green Thumb’s Residential Division reported sales of $950,000, interest
expense of $100,000, and net income of $126,000. The company’s tax rate is 30
percent, and it has an 8 percent cost of capital and a 9 percent required rate of return.
Residential Division has noninterest-bearing current liabilities that total $75,000 and it
has total assets of $820,000. How much is the Residential Division’s residual
income/(loss)?
A. $136,400
B. $128,950
C. $96,400
D. ($3,600)
142. Under which one of the following performance evaluation methods will a manager most
likely ‘overinvest’?
A. ROI
B. Residual income
C. EVA
D. Profit
143. Which of the following components are evaluated when using the Balanced Scorecard
approach?
A. Innovation, financial, expansion, and internal processes
B. Value added, innovation/growth, expansion, and customer
C. Financial, development, expansion and research
D. Learning and growth, financial, customer, and internal processes
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
12–28
144. Which one of the following is not an advantage of decentralization for an organization?
A. Enhanced goal congruence, because the subunits managers are more focused
to improve the performance of the company as a whole.
B. Faster response to changing circumstances, because decisions are not made
by higher-level managers who need to be advised of all the facts
C. Increased motivation of managers, because they are responsible for their own
decisions and the results of their respective divisions
D. Better training for future executives, because lower level managers get involved
in more diverse business decisions
145. Why are accounting distortions removed when evaluating performance using EVA?
A. To remove amounts that are a free source of financing
B. To remove amounts that divisional managers are unable to control
C. To remove the costs of assets that must be capitalized under GAAP
D. To encourage managers to spend money on elements that will benefit the
company in the long run
146. Why is an adjustment made to net income when calculating NOPAT?
A. It is an amount on which income taxes are not considered.
B. This adjustment amount has no cost of capital associated with it.
C. Only assets that incur no interest costs are included with NOPAT.
D. Divisional managers have no ability to control costs such as these.
147. Why is an adjustment made to assets when determining residual income?
A. The assets to which these relate have no financing cost associated with them.
B. The company incurs financing costs, which is not within divisional managers’
control.
C. This amount is not controllable by the managers being evaluated.
D. Only assets that incur no interest costs are included as part of invested capital.
148. Standard Media has a required rate of return of 5 percent, a cost of capital of 4 percent,
and an income tax rate of 30 percent. The following information about its two divisions
has been provided by management:
Audio Division Video Division
NOPAT $1,400,000 $2,000,000
Sales $10,000,000 $12,500,000
Invested capital $15,000,000 $17,500,000
How much is the residual income of the Audio Division?
A. $600,000
B. $650,000
C. $800,000
D. $2,000,000
Chapter 12 Decentralization and Performance Evaluation
12–29
149. Standard Media has a required rate of return of 5 percent, a cost of capital of 4 percent,
and an income tax rate of 30 percent. The following information about its two divisions
has been provided by management:
Audio Division Video Division
NOPAT $1,400,000 $2,000,000
Sales $10,000,000 $12,500,000
Invested capital $15,000,000 $17,500,000
As it relates to investment center evaluation, how much is the profit margin of the Video
Division?
A. 11.4%
B. 71.43%
C. 60.00%
D. 16.00%
150. Standard Media has a required rate of return of 5 percent, a cost of capital of 4 percent,
and an income tax rate of 30 percent. The following information about its two divisions
has been provided by management:
Audio Division Video Division
NOPAT $1,400,000 $2,000,000
Sales $10,000,000 $12,500,000
Invested capital $15,000,000 $17,500,000
How much is the ROI of the Audio Division?
A. 9.33%
B. 66.67%
C. 14.00%
D. 16.00%
151. Standard Media has a required rate of return of 5 percent, a cost of capital of 4 percent,
and an income tax rate of 30 percent. The following information about its two divisions
has been provided by management:
Audio Division Video Division
NOPAT $1,400,000 $2,000,000
Sales $10,000,000 $12,500,000
Invested capital $15,000,000 $17,500,000
An opportunity is available that yields an expected income of $45,900 on an investment
of $450,000. If the divisions are evaluated based on return on investment, which
division(s) will accept the opportunity?
A. Both will accept.
B. Neither will accept.
C. Only the Video Division will accept.
D. Only the Audio division will accept.
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
12–30
152. Standard Media has a required rate of return of 5 percent, a cost of capital of 4 percent,
and an income tax rate of 30 percent. The following information about its two divisions
has been provided by management:
Audio Division Video Division
NOPAT $1,400,000 $2,000,000
Sales $10,000,000 $12,500,000
Invested capital $15,000,000 $17,500,000
An opportunity is available that yields an expected income of $45,900 on an investment
of $450,000. If the divisions are evaluated based on residual income, which division(s)
will accept the opportunity?
A. Both will accept.
B. Neither will accept.
C. Only the Video Division will accept.
D. Only the Audio division will accept.
*153. RedEx Transport’s Rail Division has an annual capacity to process 800,000 tons of
gravel used as a base under railroad tracks by railroads. The normal selling price is $62
per ton. At current operating levels, fixed costs are $10 per ton and variable costs are
$32 per ton. The Air Division of RedEx Transport would like to buy 200,000 tons of
gravel from the Rail Division to use in producing quality aggregate to be used for
runways. The Rail Division is operating at 100 percent of capacity. The Air Division
currently buys the gravel for $55 per ton from an outside source. The Rail Division can
save $5 per ton in variable costs on the transfer. What is the lowest price the Rail
Division should consider if it wishes to see no decline in profits?
A. $62.00
B. $27.00
C. $57.00
D. $67.00
*154. RedEx Transport’s Rail Division has an annual capacity to process 800,000 tons of
gravel used as a base under railroad tracks by railroads. The normal selling price is $62
per ton. At current operating levels, fixed costs are $10 per ton and variable costs are
$32 per ton. The Air Division of RedEx Transport would like to buy 200,000 tons of
gravel from the Rail Division to use in producing quality aggregate to be used for
runways. The Rail Division is operating at 100 percent of capacity. The Air Division
currently buys the gravel for $55 per ton from an outside source. What is the lowest price
the Rail Division should accept if it wishes to see no decline in profits?
A. $62
B. $32
C. $42
D. $55
Chapter 12 Decentralization and Performance Evaluation
12–31
*155. RedEx Transport’s Rail Division has an annual capacity to process 800,000 tons of
gravel used as a base under railroad tracks by railroads. The normal selling price is $62
per ton. At current operating levels, fixed costs are $10 per ton and variable costs are
$32 per ton. The Air Division of RedEx Transport would like to buy 200,000 tons of
gravel from the Rail Division to use in producing quality aggregate to be used for
runways. The Rail Division is operating at 80 percent of capacity. The Air Division
currently buys the gravel for $55 per ton from an outside source. How much is the lowest
transfer price the Rail Division should accept to maintain current profitability?
A. $55
B. $32
C. $62
D. $30
*156. Electronic Division makes a part that sells externally for $50.00 per unit. It has a variable
production cost of $22.00 per unit, a variable selling and administrative cost of $7.00 per
unit, a fixed production cost of $1,000,000 per year, and a fixed selling and
administrative cost of $500,000 per year. Production capacity is 250,000 units per year.
Electronic Division is selling all it can produce externally at $50.00 per unit. One-half of
the variable selling and administrative cost can be eliminated on units transferred to the
Digital Division. Digital Division can buy the part externally at $48.00 per unit and uses
30,000 parts annually. Should a transfer take place, and if so what are the rational limits
on the range of transfer prices?
A. No transfer should take place.
B. A transfer should take place at $46.50.
C. A transfer should take place at $48.
D. A transfer should take place between $46.50 and $48.
157. Bajalia Company compiled the following information for the year ending December 31,
2017:
Research and development costs
$ 800,000
Sales
6,400,000
Net income
1,200,000
Interest expense
400,000
Income tax rate
30%
At the end of 2017, total assets totaled $6,900,000. Bajalia’s total current liabilities
were $1,400,000, of which $600,000 were interest–bearing obligations. Bajalia’s cost of
capital is 12 percent and it amortizes intangibles over 4 years. What adjustment must
Bajalia make to income for accounting distortions if EVA is to be calculated for 2017?
A. $420,000
B. $600,000
C. $180,000
D. $140,000
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
12–32
158. Bajalia Company compiled the following information for the year ending December 31,
2017:
Research and development costs
$ 800,000
Sales
6,400,000
Net income
1,200,000
Interest expense
400,000
Income tax rate
30%
At the end of 201, total assets totaled $6,900,000. Bajalia’s total current liabilities were
$1,400,000, of which $600,000 were interest–bearing obligations. Bajalia’s cost of
capital is 12 percent and it amortizes intangibles over 4 years. What adjustment must
Bajalia make to invested capital for accounting distortions if EVA is to be calculated for
201?
A. $420,000
B. $600,000
C. $800,000
D. $200,000
159. The following income statements and other information are available for the Biltmore
Company:
2018
2017
$230,000,000
$220,000,000
105,000,000
96,000,000
145,000,000
124,000,000
25,000,000
22,500,000
15,600,000
12,400,000
104,400,000
89,100,000
36,540,000
31,185,000
$ 67,860,000
$ 67,915,000
$650,000,000
$605,000,000
$ 15,000,000
$ 12,300,000
Biltmore’s interest expense is $0, its income tax rate is 35 percent, and its cost of capital
is 10 percent. Biltmore amortizes R&D over 4 years. By how much is invested capital
adjusted as it relates to computing EVA for 2018?
A. $17,900,000
B. $7,800,000
C. $15,600,000
D. $21,000,000
Chapter 12 Decentralization and Performance Evaluation
12–33
160. Thomas Company compiled the following information from its financial records for the
year ending December 31, 2017:
Research and development costs incurred during
2017
$1,200,000
Total assets
5,200,000
Current liabilities, interest bearing
300,000
Current liabilities, noninterest-bearing
800,000
Net income
950,000
Sales
11,300,000
Interest expense
670,000
Cost of capital
10%
Income tax rate
30%
Thomas’ amortization policy is 4 years. How much is the accounting distortion
adjustment to NOPAT when calculating EVA for 2017?
A. $900,000
B. $630,000
C. $840,000
D. $270,000
161. Thomas Company compiled the following information from its financial records for the
year ending December 31, 2017:
Research and development costs incurred during
2017
$1,200,000
Total assets
5,200,000
Current liabilities, interest bearing
300,000
Current liabilities, noninterest-bearing
800,000
Net income
950,000
Sales
11,300,000
Interest expense
670,000
Cost of capital
10%
Income tax rate
30%
Thomas’ amortization policy is 4 years. How much is the accounting distortion
adjustment to invested capital when calculating EVA for 2017?
A. $900,000
B. $300,000
C. $840,000
D. $630,000
Material from the appendix to the chapter is marked with an asterisk (*).
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
12–34
Chapter 12 Decentralization and Performance Evaluation
12–35
MATCHING
162. Match each of the following terms with the phrase that most closely describes it. Each
answer may be used only once.
_____ 1. Balanced scorecard ________ 7. NOPAT
_____ 2. Cost center ________ 8. Profit center
_____ 3. Decentralized organization ________ 9. Profit margin
_____ 4. Economic value added ________ 10. Residual income
_____ 5. Goal congruence ________ 11. Return on investment
_____ 6. Investment center ________ 12. Investment turnover
A. Ratio of investment center income to invested capital
B. Net income + interest expense – tax savings due to interest expense
C. Firms that grant substantial decision-making authority to the managers of
subunits
D. Ratio of income to sales
E. Compatibility between personal goals and the goals of the organization
F. Residual income adjusted for accounting distortions
G. Subunit that has responsibility for controlling costs but is not responsible for
generating revenues
H. Ratio of sales to invested capital
I. Subunit that has responsibility for generating revenues as well as controlling
costs
J. Set of performance measures that consider factors other than financial results
K. Subunit charged with earning income that is consistent with the amount of assets
invested in the segment
L. NOPAT minus profit required for the level of investment in the investment center
Answers to Matching