CHAPTER 22 QUIZ
1. If management decides to pursue an unwise goal, the management control system for
that company should
a. reinforce this company goal.
b. be scrapped because an unwise goal will harm the company and should not be
reinforced with a systematic approach.
c. not be changed from the previous wise goals to incorporate the current unwise goal.
d. not tie the managers’ reward to the pursuit of an unwise goal.
2. Which of the following is not a benefit associated with decentralization?
a. Quicker decision making
b. Increased motivation of subunit managers
c. Increased competition among managers
d. Greater responsiveness to local needs
3. Which of the following is a cost associated with decentralization?
a. Not enough time spent in gathering information about different subunits of the
organization
b. Decreased loyalty toward the organization as a whole
c. More management development and learning
d. Lack of day-to-day involvement by top management in operating decisions
4. [CPA Adapted] In a decentralized organization in which subunits may buy goods from
one another, the transfer-pricing system should be designed primarily to
a. allow subunit managers to buy from external parties.
b. increase the consolidated value of inventory.
c. minimize the degree of autonomy of subunit managers.
d. evaluate performance of individual subunits and their managers.
5. [CPA Adapted] In order to motivate subunit managers to exert effort to maximize their
own subunit’s operating income, interdivisional transfers of a product preferably should be
made at prices
a. equal to fully allocated costs to the producing subunit.
b. equal to the market price of the product.
c. equal to variable costs of the producing subunit.
d. negotiated by top management.
The following data apply to questions 6 through 10.
The Santa Fe Manufacturing Company has two divisions in Kansas, the Holton Division
and the Derby Division. Currently, Derby buys a part (10,000 units) from Holton for $16
per unit. Holton has purchased new equipment and wants to increase the price to Derby to
$18 per unit. The controller of Derby claims that she cannot afford to go that high, as it
will decrease the division’s profit to near zero. Derby can buy the part from an outside
supplier for $16 per unit. The incremental costs per unit that Santa Fe incurs to produce
each unit are Holton’s variable costs of $12. Fixed costs per unit for Holton with the recent
purchase of equipment are $5.
6. Holton has no alternative uses for its facilities. Should Derby continue to buy from
Holton or buy from the external supplier?
Company as a whole Derby Division only
a. Buy from external supplier Buy from external supplier
b. Buy from external supplier Buy from Holton Division
c. Buy from Holton Division Buy from Holton Division
d. Buy from Holton Division Buy from external supplier
7. If Santa Fe would prefer to negotiate a transfer price between the divisions, what range
of transfer prices would be used?
a. $12 to $16
b. $12 to $17
c. $12 to $18
d. $16 to $18
8. If Holton could use its facilities for other manufacturing operations, that would result in
monthly cash operating savings of $45,000. What would be the advantage (disadvantage)
to Santa Fe?
a. $(25,000)
b. $5,000
c. $20,000
d. $25,000
9. If Holton has no alternative uses for its facilities and the external supplier drops the
price to $11 per unit, what should be done from the point of view of
Company as a whole Derby Division only
a. Buy from Holton Division Buy from external supplier
b. Buy from external supplier Buy from Holton Division
c. Buy from external supplier Buy from external supplier
d. Buy from Holton Division Buy from Holton Division
10. Assume the Derby Division is located in England rather than Kansas. The income tax
rate used in England is 45 percent, whereas the effective income tax rate is 30 percent in
Kansas. Which cost would be the best transfer price for the company as a whole (based
upon the original data)?
a. Full cost of $17
b. Market price of $16
c. Variable cost of $12
d. The price that best promotes goal congruence
CHAPTER 22 QUIZ SOLUTIONS
