CHAPTER 10: DECENTRALIZATION: RESPONSIBILITY ACCOUNTING,
PERFORMANCE EVALUATION, AND TRANSFER PRICING
1. Responsibility accounting is a system that measures the results of each responsibility center and compares those
results with some expected or budgeted outcome.
a. True
b. False
2. A responsibility center is a part of a business whose workers are accountable for specified activities.
a. True
b. False
3. In an investment responsibility center, the manager is only responsible for costs.
a. True
b. False
4. In centralized organizations, lower-level managers are responsible only for implementing decisions.
a. True
b. False
5. Decentralization is the practice of delegating decision-making authority to the lower levels of management.
a. True
b. False
6. Local managers can make better decisions using distant information and outside managers can provide more
timely responses to changing conditions.
a. True
b. False
7. Cognitive limitations mean it is difficult for central managers to be fully knowledgeable about all products
and markets.
a. True
b. False
Chapter 10: Decentralization: Responsibility, Accounting, Performance Evaluation, and Transfer Pricing
8. Decentralization stimulates competition among the divisions of a firm.
a. True
b. False
9. Return on investment (ROI) refers to earnings before interest and income taxes.
a. True
b. False
10. Margin is the ratio of operating income to sales.
a. True
b. False
11. One disadvantage of ROI in evaluating performance is that it encourages managers to slack off.
a. True
b. False
12. Economic value added (EVA) is after-tax operating income minus the total annual cost of capital.
a. True
b. False
13. Goal congruence means that the goals of managers are aligned with the goals of the company.
a. True
b. False
14. Firms encourage goal congruence by constructing management early retirement programs.
a. True
b. False
15. It is important for the multinational firm to separate the evaluation of a division manager from the division.
a. True
b. False
Chapter 10: Decentralization: Responsibility, Accounting, Performance Evaluation, and Transfer Pricing
16. Transfer pricing exists when one division of a company produces a product that can be used in the production by a
different division.
a. True
b. False
17. A transfer price is the price charged by one division of a company to another company.
a. True
b. False
18. The transfer price is revenue to the selling division and cost to the buying division.
a. True
b. False
19. The transfer pricing problem concerns finding a system that simultaneously satisfies the three objectives of the
transfer pricing system.
a. True
b. False
20. The minimum transfer price is the absolute maximum price that can be accepted.
a. True
b. False
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.
Chapter 10: Decentralization: Responsibility, Accounting, Performance Evaluation, and Transfer Pricing
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 fringe 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
a. defines responsibility by function only.
b. measures actual results against a flexible budget.
c. measures the results of a manager responsible for revenues and costs.
d. measures the results of each responsibility center and compares those results with some measure of expected
or budgeted outcome.
32. A manufacturing division of a company would most likely be evaluated as a(n)
a. cost center.
b. investment center.
c. revenue center.
d. asset center.
33. Which of the following departments is likely to be an investment center?
a. machining department
b. food products division
c. personnel department
d. accounting department
Chapter 10: Decentralization: Responsibility, Accounting, Performance Evaluation, and Transfer Pricing
34. Both revenue center and profit center managers are responsible for achieving
a. budgeted revenues.
b. budgeted net income.
c. budgeted costs.
d. budgeted contribution margin.
35. Which of the following departments would NOT be classified as a profit center?
a. hardware department
b. men’s shoes department
c. accounting department
d. automotive department
36. Which of the following responsibility centers would have a manager responsible for revenues, costs, and
investments?
a. cost center
b. investment center
c. profit center
d. expense center
37. A manager of a profit center does not control:
a. Revenues
b. Costs
c. Profits
d. Investments
38. The manager of a profit center is responsible for
a. delivering a quality product or service at reasonable but minimal cost.
b. decisions to invest in capital equipment.
c. decisions regarding revenue generation.
d. both a and c.
Chapter 10: Decentralization: Responsibility, Accounting, Performance Evaluation, and Transfer Pricing
39. The manager of an investment center is responsible for
a. decisions regarding costs.
b. decisions regarding revenues.
c. decisions to invest in assets.
d. all of these.
40. The manager of a cost center is responsible for
a. decisions regarding costs.
b. decisions regarding revenues.
c. decisions to invest in assets.
d. both a and b.
41. Which of the following departments would NOT be a cost center?
a. advertising department
b. city police department
c. building and grounds department
d. sales department
42. An example of an investment center is a
a. production department.
b. company.
c. marketing department.
d. credit department.
43. Responsibility accounting is a system that does NOT consider
a. responsibility.
b. accountability.
c. performance evaluation.
d. static budgeting.
Chapter 10: Decentralization: Responsibility, Accounting, Performance Evaluation, and Transfer Pricing
44. The delegation of decision-making authority to successively lower management levels in an organization is called:
a. Centralization
b. Decentralization
c. Optimization
d. An unfavorable overhead variance
45. When top management controls the major functions of an organization it is called:
a. Centralization
b. Decentralization
c. Optimization
d. An unfavorable overhead variance
46. Which of the following would NOT be a reason for decentralization?
a. Managers will make decisions for their own benefit, rather than the organization’s benefit.
b. Lower level managers have better access to information.
c. Upper management can spend more time focusing on strategic planning and decision making.
d. Lower level managers with decision-making ability are more motivated.
47. One of the reasons for decentralization is more timely response. This means
a. lower-level managers being more in contact with immediate operating conditions.
b. central management can be free to focus on strategic planning.
c. allowing an organization to determine each division’s contribution to profit and expose each division to market
forces.
d. local management both makes and implements decisions.
48. The return on investment is computed as
a. operating income divided by sales.
b. operating income divided by average operating assets.
c. sales divided by average operating assets.
d. operating asset turnover divided by the operating income margin.
49. Which of the following changes would NOT change return on investment (ROI)?
a. Decrease sales and expenses by the same percentage.
b. Increase total assets.
c. Increase sales dollars by the same amount as total assets.
d. Decrease sales and expenses by the same dollar amount.
Chapter 10: Decentralization: Responsibility, Accounting, Performance Evaluation, and Transfer Pricing
50. Which of the following changes would increase return on investment (ROI)?
a. Decrease sales and expenses by the same percentage.
b. Increase total assets.
c. Increase sales and expenses by the same percentage.
d. Decrease sales and expenses by the same dollar amount.
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?
a. 12.0%
b. 25.0%
c. 88.0%
d. 833.0%
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?
a. 0.200
b. 0.625
c. 0.125
d. 8.000
Chapter 10: Decentralization: Responsibility, Accounting, Performance Evaluation, and Transfer Pricing
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
a. 20%.
b. 10%.
c. 500%.
d. 200%.
54. Patron Corporation had sales of $350,000, income of $10,000, and an asset base of $100,000. The turnover is a.
0.035.
b. 0.35.
c. 3.00.
d. 3.50.
55. Lowellson Company had sales of $200,000, net income of $10,000, and an asset base of $300,000. Its margin is
a. 66.7%.
b. 5.0%.
c. 3.3%.
d. 150.0%.
Chapter 10: Decentralization: Responsibility, Accounting, Performance Evaluation, and Transfer Pricing
56. 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 margin for Division Z?
a. 1.5%
b. 100.0%
c. 6.0%
d. 15.0%
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
a. 100.0%.
b. 600.0%.
c. 16.7%.
d. 62.5%.
Chapter 10: Decentralization: Responsibility, Accounting, Performance Evaluation, and Transfer Pricing
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?
a. $75,000
b. $500,000
c. $1,250,000
d. $187,500
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?
a. 1.500
b. 0.150
c. 6.670
d. 2.500
Chapter 10: Decentralization: Responsibility, Accounting, Performance Evaluation, and Transfer Pricing
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?
a. $500,000
b. $125,000
c. $208,333
d. $25,000
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?
a. $25,000
b. $208,333
c. $5,000
d. $125,000
Chapter 10: Decentralization: Responsibility, Accounting, Performance Evaluation, and Transfer Pricing
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
a. 23.8%.
b. 42.0%.
c. 420.0%.
d. 238.0%.
63. If the margin of 0.3 stayed the same and the turnover ratio of 5.0 increased by 10 percent, the ROI would
a. increase by 10 percent.
b. decrease by 10 percent.
c. increase by 15 percent.
d. remain the same.
64. If the operating asset turnover ratio increased by 40 percent and the margin increased by 30 percent, the divisional
ROI
a. would decrease by 70 percent.
b. would increase by 82 percent.
c. would increase by 30 percent.
d. cannot be determined.
65. If the operating asset turnover increased by 50 percent and the margin increased by 50 percent, the ROI would
increase by
a. 50 percent.
b. 25 percent.
c. 100 percent.
d. 125 percent.
Chapter 10: Decentralization: Responsibility, Accounting, Performance Evaluation, and Transfer Pricing
66. If the turnover increased by 30 percent and the margin decreased by 30 percent, the ROI would
a. decrease by 9 percent.
b. increase by 69 percent.
c. increase by 91 percent.
d. stay the same.
67. 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.
68. 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 are disadvantages of the ROI measure.
69. The emphasis on short-run results at the expense of the long run is
a. efficient behavior.
b. effective behavior.
c. optimal behavior.
d. myopic behavior.
Chapter 10: Decentralization: Responsibility, Accounting, Performance Evaluation, and Transfer Pricing
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?
a. $36,000
b. $45,000
c. $(9,000)
d. $(36,000)
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%
Target ROI 15%
Margin for Lambda Division 20%
What is the residual income for Lambda Division?
a. $(10,000)
b. $48,000
c. $7,500
d. $60,000
Chapter 10: Decentralization: Responsibility, Accounting, Performance Evaluation, and Transfer Pricing
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
a. $480,000.
b. $80,000.
c. $120,000.
d. $360,000.
73. Which of the following is a disadvantage of both residual income and ROI?
a. They are both absolute measures of return.
b. They are both difficult to calculate.
c. They both do not discourage myopic behavior.
d. All of these are disadvantages of both ROI and residual income.
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?
a. $2,000
b. $7,500
c. $48,000
d. $60,000
75. The after-tax operating profit minus the total annual cost of capital equals the:
a. Residual income
b. EVA
c. ROI
d. Net income
Chapter 10: Decentralization: Responsibility, Accounting, Performance Evaluation, and Transfer Pricing
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?
a. 0.0827
b. 0.2480
c. 0.1098
d. 0.0366
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?
a. $(198,000)
b. $402,000
c. $534,000
d. $1,134,000
Chapter 10: Decentralization: Responsibility, Accounting, Performance Evaluation, and Transfer Pricing
78. Return on investment can be divided into two separate components
a. margin and profit.
b. margin and turnover.
c. value and turnover.
d. liquidity and margin.
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?
a. 18%
b. 40%
c. 20%
d. 15%
Chapter 10: Decentralization: Responsibility, Accounting, Performance Evaluation, and Transfer Pricing
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?
a. $666,667
b. $800,000
c. $1,300,000
d. $1,200,000
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?
a. 0.15
b. 0.10
c. 4.00
d. 2.50
Chapter 10: Decentralization: Responsibility, Accounting, Performance Evaluation, and Transfer Pricing
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?
a. $25,000
b. $28,000
c. $15,000
d. $40,000
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?
a. $40,000
b. $28,000
c. $15,000
d. $25,000