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Exam 23: Performance Evaluation for Decentralized Operations

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Question 61

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Operating expenses incurred for the entire business as a unit that are not subject to the control of individual department managers are called indirect expenses.

A) True
B) False

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Question 62

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If the profit margin for a division is 11% and the investment turnover is 1.5, the rate of return on investment is 7.3%.

A) True
B) False

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Question 63

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Materials used by Best Bread 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 Best Bread Company's total income from operations increase? b) Assuming 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 the income from operations of Division A increase? c) Assuming 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 the income from operations of Division B increase? d) If the negotiated price approach is used, what would be the range of acceptable transfer prices?

Which of the following is not a commonly used approach to setting transfer prices?

An activity base is used to charge service department expenses. Match each of the following activity bases with the appropriate department a-h) . -Number of computers in department

Most manufacturing plants are considered cost centers because they have control over

The minimum accepted divisional income from operations is set by top management by establishing a maximum rate of return considered acceptable for invested assets.

Responsibility accounting reports that are given to lower level managers are usually very detailed, in turn, higher level managers will be given a summary report.

What is the rate of return on investment for Division D?

Match each of the following phrases as describing a) an advantage, b) a disadvantage, or c) neither of decentralization. -Responsibilities delegated to unit managers

The ratio of income from operations to sales is termed the profit margin component of the rate of return on investment.

Materials used by the Layton Company's Division 1 are currently purchased from outside supplier at $58 per unit. Division 2 is able to supply Division 1 with 22,000 units at a variable cost of $46 per unit. The two divisions have recently negotiated a transfer price of $50 per unit for the 20,000 units. a) By how much will each division's income increase as a result of this transfer? b) What is the total increase in income for Layton?

In evaluating the profit center manager, the income from operations should be compared

ABC Corporation has three service departments with the following costs and activity base: ABC has three operating divisions, Micro, Macro and Super. Their revenue, cost and activity information are as follows: $\begin{array} { | l | l | l | l | } \hline & \text { Micro } & \text { Macro } & \text { Super } \\\hline \text { Direct revenues } & \$ 700,000 & \$ 850,000 & \$ 650,000 \\\hline \text { Direct operating expenses } & 50,000 & 70,000 & 100,000 \\\hline \text { Number of copies made } & 20,000 & 30,000 & 50,000 \\\hline \text { Number of invoices processed } & 700 & 800 & 500 \\\hline \text { Number of employees } & 130 & 145 & 125 \\\hline\end{array}$ -What is the service department charge rate for the Personnel Department?

If income from operations for a division is $120,000, sales are $975,000, and invested assets are $750,000, the investment turnover is 1.3.

Using the data from the Terrace Industries, determine the divisional income from operations for Districts 1 & 2. Allocate service department expenses proportional to the sales of each district.

If income from operations for a division is $6,000, invested assets are $25,000, and sales are $30,000, the investment turnover is 1.2.

The objective of transfer pricing is to encourage each division manager to transfer goods and services between divisions if overall company income can be increased by doing so.

Blaser Corporation had $275,000 in invested assets, sales of $330,000, income from operations amounting to $33,000 and a desired minimum rate of return of 7.5%. The rate of return on investment for Blaser Corporation is

To calculate income from operations, total service department charges are