Chapter 10—Decentralization: Responsibility Accounting,
Performance Evaluation, and Transfer Pricing Key
1. Responsibility accounting is a system that measures the results of each responsibility center and compares
those results with some expected or budgeted outcome.
2. A responsibility center is a part of a business whose workers are accountable for specified activities.
3. In an investment responsibility center, the manager is only responsible for costs.
4. In centralized organizations, lower-level managers are responsible only for implementing decisions.
5. Decentralization is the practice of delegating decision-making authority to the lower levels of management.
6. Local managers can make better decisions using distant information and outside managers can provide more
timely responses to changing conditions.
7. Cognitive limitations mean it is difficult for central managers to be fully knowledgeable about all products
and markets.
8. Decentralization stimulates competition among the divisions of a firm.
9. Return on investment (ROI) refers to earnings before interest and income taxes.
10. Margin is the ratio of operating income to sales.
11. One disadvantage of ROI in evaluating performance is that it encourages managers to slack off.
12. Economic value added (EVA) is after-tax operating income minus the total annual cost of capital.
13. Goal congruence means that the goals of managers are aligned with the goals of the company.
14. Firms encourage goal congruence by constructing management early retirement programs.
15. It is important for the multinational firm to separate the evaluation of a division manager from the division.
16. Transfer pricing exists when one division of a company produces a product that can be used in the
production by a different division.
17. A transfer price is the price charged by one division of a company to another company.
18. The transfer price is revenue to the selling division and cost to the buying division.
19. The transfer pricing problem concerns finding a system that simultaneously satisfies the three objectives of
the transfer pricing system.
20. The minimum transfer price is the absolute maximum price that can be accepted.
21. Investments are not controlled by managers of a __________ center.
22. The delegation of decision-making authority to successively lower management levels is called __________
.
23. When the major functions of a company are controlled by top management, it is called __________ .
24. __________ managers can make better decisions using __________ information.
25. __________ limitations make it difficult for any central manager to know everything about all products
and markets.
26. __________ is after-tax operating profit minus the total annual cost of capital.
27. __________ are a noncash benefit received over and above salary.
28. In a multinational firm, it is important to separate the evaluation of a division manager from the __________
.
29. The __________ transfer price is the minimum price acceptable when transferring a product.
30. The price charged for goods produced in one division to another division within the company is called the
__________ price.
31. Responsibility accounting is defined as a system that
32. A manufacturing division of a company would most likely be evaluated as a(n)
33. Which of the following departments is likely to be an investment center?
34. Both revenue center and profit center managers are responsible for achieving
35. Which of the following departments would NOT be classified as a profit center?
36. Which of the following responsibility centers would have a manager responsible for revenues, costs, and
investments?
37. A manager of a profit center does not control:
38. The manager of a profit center is responsible for
39. The manager of an investment center is responsible for
40. The manager of a cost center is responsible for
41. Which of the following departments would NOT be a cost center?
42. An example of an investment center is a
43. Responsibility accounting is a system that does NOT consider
44. The delegation of decision-making authority to successively lower management levels in an organization is
called:
45. When top management controls the major functions of an organization it is called:
46. Which of the following would NOT be a reason for decentralization?
47. One of the reasons for decentralization is more timely response. This means
48. The return on investment is computed as
49. Which of the following changes would NOT change return on investment (ROI)?
50. Which of the following changes would increase return on investment (ROI)?
51. Omega Division had the following information:
Asset base in Omega Division
$500,000
Net income in Omega Division
$60,000
Weighted average cost of capital
12%
Target ROI
15%
Margin for Omega Division
20%
What is the return on investment of Omega Division?
52. Mako Division had the following information:
Asset base in Mako Division
$400,000
Net income in Mako Division
$50,000
Weighted average cost of capital
12%
Target ROI
15%
Margin for Mako Division
20%
What is the turnover ratio for Mako Division?
53. If a company has sales of $2,500,000, net income of $250,000, and an asset base of $1,250,000, its return on
investment is
54. Patron Corporation had sales of $350,000, income of $10,000, and an asset base of $100,000. The turnover
is
55. Lowellson Company had sales of $200,000, net income of $10,000, and an asset base of $300,000. Its
margin is
56. The following information pertains to the three divisions of Merrymount Company:
Division X
Division Y
Division Z
?
?
1,250,000
$36,000
$25,000
$75,000
300,000
?
?
?
20%
15%
0.10
0.05
?
1.5
?
?
15%
12%
10%
What is the margin for Division Z?
57. Epsilon Division had the following information:
Asset base in Epsilon Division
$400,000
Net income in Epsilon Division
$50,000
Weighted average cost of capital
12%
Target ROI
15%
Margin for Epsilon Division
20%
If the asset base is decreased by $100,000, with no other changes, the return on investment of Epsilon Division will be
58. The following information pertains to the three divisions of Merrymount Company:
Division X
Division Y
Division Z
Sales
?
?
1,250,000
Net operating income
$36,000
$25,000
$75,000
Average operating assets
300,000
?
?
Return on investment
?
20%
15%
Margin
0.10
0.05
?
Turnover
1.5
?
?
Target ROI
15%
12%
10%
What are the average operating assets for Division Z?
59. The following information pertains to the three divisions of Merrymount Company:
Division X
Division Y
Division Z
Sales
?
?
1,250,000
Net operating income
$36,000
$25,000
$75,000
Average operating assets
300,000
?
?
Return on investment
?
20%
15%
Margin
0.10
0.05
?
Turnover
1.5
?
?
Target ROI
15%
12%
10%
What is the turnover for Division Z?
60. The following information pertains to the three divisions of Merrymount Company:
Division X
Division Y
Division Z
Sales
?
?
1,250,000
Net operating income
$36,000
$25,000
$75,000
Average operating assets
300,000
?
?
Return on investment
?
20%
15%
Margin
0.10
0.05
?
Turnover
1.5
?
?
Target ROI
15%
12%
10%
What are the sales for Division Y?
61. The following information pertains to the three divisions of Merrymount Company:
Division X
Division Y
Division Z
Sales
?
?
1,250,000
Net operating income
$36,000
$25,000
$75,000
Average operating assets
300,000
?
?
Return on investment
?
20%
15%
Margin
0.10
0.05
?
Turnover
1.5
?
?
Target ROI
15%
12%
10%
What are the average operating assets for Division Y?
62. If the Southern Division of American Products Company had a turnover ratio of 4.2 and a margin of 0.10,
the return on investment would be
63. If the margin of 0.3 stayed the same and the turnover ratio of 5.0 increased by 10 percent, the ROI would
64. If the operating asset turnover ratio increased by 40 percent and the margin increased by 30 percent, the
divisional ROI
65. If the operating asset turnover increased by 50 percent and the margin increased by 50 percent, the ROI
would increase by
66. If the turnover increased by 30 percent and the margin decreased by 30 percent, the ROI would
67. Which of the following is NOT an advantage of ROI?
68. Which of the following is NOT a disadvantage of the ROI performance measure?
69. The emphasis on short-run results at the expense of the long run is
70. The following information pertains to the three divisions of Merrymount Company:
Division X
Division Y
Division Z
Sales
?
?
1,250,000
Net operating income
$36,000
$25,000
$75,000
Average operating assets
300,000
?
?
Return on investment
?
20%
15%
Margin
0.10
0.05
?
Turnover
1.5
?
?
Target ROI
15%
12%
10%
What is the residual income for Division X?
71. Lambda Division had the following information:
Asset base in Lambda Division
$400,000
Net income in Lambda Division
$50,000
Weighted average cost of capital
12%
72. The Women’s Wear of Bigelow Department Store had a net income of $560,000, a net asset base of
$4,000,000, and a required rate of return of 12 percent. Sales for the period totaled $3,000,000. The residual
income for the period is
73. Which of the following is a disadvantage of both residual income and ROI?
74. Omikron Division had the following information:
Asset base in Omikron Division
$400,000
Net income in Omikron Division
$50,000
Weighted average cost of capital
12%
Target ROI
15%
Margin for Omikron Division
20%
What is EVA for Omikron Division?
Target ROI
15%
Margin for Lambda Division
20%
75. The after-tax operating profit minus the total annual cost of capital equals the:
76. Olden Company has a tax rate of 40 percent. Information for the company is as follows:
Amount
After-tax Cost
Mortgage bonds
$1,000,000
0.048
Unsecured bonds
3,000,000
0.050
Common stock
6,000,000
0.150
What is the weighted average cost of capital?
77. Olden Company has a tax rate of 40 percent. Information for the company is as follows:
Amount
After-tax Cost
Mortgage bonds
$1,000,000
0.048
Unsecured bonds
3,000,000
0.050
Common stock
6,000,000
0.150
What is the EVA if the before-tax operating income is $1,500,000?
78. Return on investment can be divided into two separate components
79. Cornwall Company has two divisions, A and B. Information for each division is as follows:
A
B
Net earnings for division
$40,000
$260,000
Asset base for division
$100,000
$1,200,000
Target rate of return
15%
18%
Margin
10%
20%
Weighted average cost of capital
12%
12%
What is the return on investment for A?
80. Cornwall Company has two divisions, A and B. Information for each division is as follows:
A
B
Net earnings for division
$40,000
$260,000
Asset base for division
$100,000
$1,200,000
Target rate of return
15%
18%
Margin
10%
20%
Weighted average cost of capital
12%
12%
What is the total sales amount for B?
81. Cornwall Company has two divisions, A and B. Information for each division is as follows:
A
B
Net earnings for division
$40,000
$260,000
Asset base for division
$100,000
$1,200,000
Target rate of return
15%
18%
Margin
10%
20%
Weighted average cost of capital
12%
12%
What is the operating asset turnover for A?
82. Cornwall Company has two divisions, A and B. Information for each division is as follows:
A
B
Net earnings for division
$40,000
$260,000
Asset base for division
$100,000
$1,200,000
Target rate of return
15%
18%
Margin
10%
20%
Weighted average cost of capital
12%
12%
What is the residual income for A?
83. Cornwall Company has two divisions, A and B. Information for each division is as follows:
A
B
Net earnings for division
$40,000
$260,000
Asset base for division
$100,000
$1,200,000
Target rate of return
15%
18%
Margin
10%
20%
Weighted average cost of capital
12%
12%
What is EVA for Division A?
84. Cornwall Company has two divisions, A and B. Information for each division is as follows:
A
B
Net earnings for division
$40,000
$260,000
Asset base for division
$100,000
$1,200,000
Target rate of return
15%
18%
Margin
10%
20%
Weighted average cost of capital
12%
12%
What is EVA for Division B?
85. Economic value added is calculated by which of the following formulas?
86. EVA encourages the right kind of behavior from divisions because of its emphasis on
87. Multiple measures of performance are beneficial if they
88. A type of fringe benefit received over and above salary is(are) called:
89. Which of the following is NOT an environmental factor affecting performance evaluation in the
multinational firm?
90. Which of the following would be a reason why managers would NOT provide good service?
91. The right to buy a certain number of shares of a company’s stock at a particular price is(are) called:
92. Which of the following managerial rewards is NOT a short-term reward?
93. Goal congruence can be defined as
94. It is important to separate the evaluation of the manager from the evaluation of the division in a
multinational firm. A manager’s evaluation should NOT include
95. Which of the following is an economic factor affecting performance evaluation in a multinational firm?
96. Which of the following is a political or legal factor affecting performance evaluation in a multinational
firm?
97. Comparison of an international division’s ROI can potentially be misleading because of
98. Division ‘A’ produces a component and wants to sell it to Division ‘B’. The transfer price is
99. Transfer prices are the prices charged
100. The transfer price that would leave the selling division no worse off if the good is sold to an internal
division is(are) called:
101. The transfer price that would leave the buying division no worse off if an input is purchased from an
internal division is(are) called: