Chapter 14
112. The best measure of managerial efficiency in the use of investments in assets is:
a.
rate of return on stockholders’ equity.
b.
rate of return on investment.
c.
operating income.
d.
inventory turnover.
Multiple Choice
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113. Two divisions of Crowson Company (Divisions X and Y) have the same profit margins. Division X’s investment
turnover is larger than that of Division Y (1.2 to 1.0). Which of the following statements is true?
a.
Division Y will have a higher return on investment as it is using its assets more efficiently in generating sales.
b.
Division X will have a higher return on investment as it is generating more operating income.
c.
Division X will have a higher return on investment as it is using its assets more efficiently in generating sales.
d.
Division Y will have a higher return on investment as it is generating more operating income.
Multiple Choice
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Chapter 14
114. The excess of actual operating income over a minimum acceptable operating income is called:
a.
net profit.
b.
gross profit.
c.
non-operating income.
d.
residual income.
Easy
Multiple Choice
False
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115. Assume that divisional operating income amounts to $325,000 and top management has established 10% as the
minimum rate of return on divisional assets totaling $1,250,000. The residual income for the division is:
a.
$200,000.
b.
$292,500.
c.
$125,000.
d.
$0.
a
Moderate
Multiple Choice
False
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Chapter 14
116. Which one of the following is not a measure that management can use in evaluating and controlling investment
center performance?
a.
Rate of return on investment
b.
Negotiated price
c.
Residual income
d.
Operating income
Moderate
Multiple Choice
False
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117. Division A has generated sales revenue of $22,700,000 and achieved operating income of $265,000 using $1,500,000
of invested assets. If the management desires a minimum rate of return of 12% on the invested assets, Division A’s
residual income would be:
a.
$85,000.
b.
$52,500.
c.
$81,500.
d.
$38,000.
a
Moderate
Multiple Choice
False
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Chapter 14
118. Division Y has generated sales revenue of $260,000 and achieved operating income of $18,500 using $20,000 of
invested assets. If management desires a minimum rate of return of 10%, the profit margin would be:
a.
19.5%.
b.
14.4%.
c.
10.2%.
d.
7.1%.
Moderate
Multiple Choice
False
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119. Which of the following is not a approach used for setting transfer prices?
a.
Market price approach
b.
Revenue price approach
c.
Negotiated price approach
d.
Cost price approach
Easy
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4OTI-GO4W-NQNBEE
Chapter 14
120. Materials used by Meeta-Products Inc. in producing Division A’s product are currently purchased from outside
suppliers at a cost of $12 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 $7 per unit. A transfer price of $9 per
unit is established, and 35,000 units of material are transferred with no reduction in Division B’s current sales.
How much would Division A’s operating income increase?
a.
$175,000
b.
$70,000
c.
$105,000
d.
$75,000
c
Moderate
False
JFND-GO3A-EW4D-GOTU
121. Materials used by Meeta-Products Inc. in producing Division A’s product are currently purchased from outside
suppliers at a cost of $12 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 $7 per unit. A transfer price of $9 per
False
United States – AK – IMA: Performance Measurement
JFND-GO3A-EW4D-GO1D
Chapter 14
unit is established, and 35,000 units of material are transferred with no reduction in Division B’s current sales.
How much would Division B’s operating income increase?
a.
$75,000
b.
$175,000
c.
$105,000
d.
$70,000
Moderate
False
JFND-GO3A-EW4D-GOT1
122. Materials used by Meeta-Products Inc. in producing Division A’s product are currently purchased from outside
suppliers at a cost of $12 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 $7 per unit. A transfer price of $9 per
unit is established, and 35,000 units of material are transferred with no reduction in Division B’s current sales.
How much would Meeta-Products total operating income increase?
a.
$70,000
b.
$175,000
c.
$105,000
d.
$100,000
Moderate
False
Chapter 14
123. Materials used by Boone Company in producing Division C’s product are currently purchased from outside suppliers
at a cost of $20 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 $17 per unit. A transfer price of $19 per unit is
negotiated and 60,000 units of material are transferred, with no reduction in Division A’s current sales.
How much would Division C’s operating income increase?
a.
$0
b.
$180,000
c.
$60,000
d.
$120,000
c
Moderate
False
JFND-GO3A-EW4D-GOTO
124. Materials used by Boone Company in producing Division C’s product are currently purchased from outside suppliers
at a cost of $20 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 $17 per unit. A transfer price of $19 per unit is
negotiated and 60,000 units of material are transferred, with no reduction in Division A’s current sales.
How much would Division A’s operating income increase?
a.
$0
b.
$180,000
c.
$60,000
d.
$120,000
Moderate
JFND-GO3A-EW4D-GOTT
Chapter 14
125. Materials used by Boone Company in producing Division C’s product are currently purchased from outside suppliers
at a cost of $20 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 $17 per unit. A transfer price of $19 per unit is
negotiated and 60,000 units of material are transferred, with no reduction in Division A’s current sales.
How much would Boone’s total operating income increase?
a.
$180,000
b.
$240,000
c.
$120,000
d.
$300,000
a
Moderate
Multiple Choice
False
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126. Which transfer price approach is used when the transfer price is set at the amount sold to outside buyers?
a.
Market price
Multiple Choice
False
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Chapter 14
b.
Cost price
c.
Negotiated price
d.
Variable price
Multiple Choice
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127. The balanced scorecard measures:
a.
only financial information.
b.
only nonfinancial information.
c.
both financial and nonfinancial information.
d.
both external and internal information.
Multiple Choice
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Chapter 14
128. Which component of the balanced scorecard evaluates the economic performance of the responsibility centers?
a.
Internal process
b.
Financial
c.
Innovation and learning
d.
Customer
Easy
Multiple Choice
False
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129. A common balanced scorecard measures performance in all of the following areas except:
a.
education.
b.
internal process.
c.
financial.
d.
innovation and learning.
a
Easy
Multiple Choice
False
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Chapter 14
130. Which of the following is true of the balanced scorecard?
a.
It ignores the financial performance of the company.
b.
It has the ability to reveal the underlying nonfinancial drivers of financial performance.
c.
It aims to improve the nonfinancial performance of the business.
d.
It focuses primarily on the short term performance of the business.
Moderate
Multiple Choice
False
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131. The budget for Department 5 of Plant M for the current month ending March 31 is as follows:
Materials
$206,000
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 5 of Plant M 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; maintenance, $9,456.
(a)
Prepare a budget performance report for the supervisor of Department 5 of Plant M for the
month of March.
(b)
Are there any significant variances (greater than 5%) of the budgeted amounts that should
be examined by the supervisor?
(a)
Chapter 14
Factory wages
Supervisory salaries
Power and light
Insurance and property taxes
Subjective Short Answer
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132. A department store apportions payroll costs to the various departments on the basis of the number of payroll checks
issued by each department. Accounting costs are apportioned on the basis of the number of reports generated for each
department. The payroll costs for the year were $150,000, and the accounting costs for the year totaled $70,000. The
number of payroll checks issued and the number of reports generated for each department are as follows:
Number of
Number
Payroll Checks
of Reports
Department A
396
60
Department B
1,278
90
Department C
126
150
Determine the amount of (a) payroll cost and (b) accounting cost to be apportioned to each department.
Number of payroll checks
Chapter 14
133. A portion of the divisional income statement for the year just ended is presented below in a condensed form.
Department F
Net sales
$93,800
Cost of goods sold
72,400
Gross profit
$21,400
Operating expenses
28,900
Loss from operations
$(7,500)
The operating expenses of Department F include $16,000 for direct expenses.
It is estimated that the discontinuance of Department F would not have affected the sales of the other departments nor
have reduced the indirect expenses of the business. Assuming the accuracy of these estimates, determine the effect
(increase or decrease and the amount) on the operating income of the business if Department F had been discontinued.
Subjective Short Answer
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Payroll cost
Number of reports
Accounting cost
Subjective Short Answer
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134. PDT Co. has two divisions, East and West. Invested assets and condensed income statement data for each division
for the past year ended December 31 are as follows:
East Division
West Division
Revenues
$1,200,000
$800,000
Operating expenses
950,000
640,000
Service department charges
145,000
72,000
Invested assets
800,000
500,000
(a)
Prepare condensed income statements for the past year for each division.
(b)
Using the expanded expression, determine the profit margin, investment turnover, and
rate of return on investment for each division. Round to one decimal place.
Revenues
Operating expenses
Operating income before service department charges
Service department charges
Operating income
Profit margin × investment
Operating Income ×
Invested Assets
East Division:
West Division:
Challenging
Chapter 14
135. The sales, operating income, and invested assets for each division of Garner Company are as follows:
Operating
Invested
Sales
Income
Assets
Division E
$3,000,000
$470,000
$2,500,000
Division F
3,600,000
430,000
2,400,000
Division G
6,000,000
560,000
3,000,000
(a)
Using the expanded expression, determine the profit margin, investment turnover, and
rate of return on investment for each division. Round to one decimal place.
(b)
Which division is (are) the most profitable as per dollar invested?
(a)
Rate of Return on Investment:
Operating Income ×
Invested Assets
Division E: ROI =
$470,000 ×
$3,000,000
$3,000,000
$2,500,000
Division F: ROI =
$430,000 ×
$3,600,000
$3,600,000
$2,400,000
Division G: ROI =
$560,000 ×
$6,000,000
$6,000,000
$3,000,000
Subjective Short Answer
False
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Chapter 14
136. The sales, operating income, and invested assets for each division of Salem Company are as follows:
Operating
Invested
Sales
Income
Assets
Division C
$4,000,000
$410,000
$3,500,000
Division D
3,500,000
600,000
4,000,000
Division E
2,250,000
780,000
7,000,000
Management has established a minimum rate of return for invested assets of 11%.
(a)
Determine the residual income for each division.
(b)
Based on residual income, which division is the most profitable?
(b)
Division D
Challenging
Subjective Short Answer
False
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Challenging
Subjective Short Answer
False
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137. Materials used by Ford Company in producing Division A’s product are currently purchased from outside 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 Ford
Company’s total operating income increase?
(b)
How much would the operating income of Division A increase?
(c)
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?
(a)
$600,000; [60,000 × ($30 – $25)] + [60,000 × ($25 – $20)]
(b)
Division A would save $5 per unit on 60,000 units or $300,000.
Division B would earn an additional $300,000 by selling 60,000 units at $5 above the
(d)
$20.01 to $29.99
Challenging
Subjective Short Answer
False
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