Question 1

Decentralization occurs when

Accepted Answer

A)  the firm's operations are located over a large geographic area to reduce risk. 
B)  authority for important decisions is delegated to lower segments of the organization. 
C)  important decisions are made at the upper levels and the lower levels of the organization are responsible for implementing the decisions. 
D)  None of the above are correct. 
A)  the firm's operations are located over a large geographic area to reduce risk. 
B)  authority for important decisions is delegated to lower segments of the organization. 
C)  important decisions are made at the upper levels and the lower levels of the organization are responsible for implementing the decisions. 
D)  None of the above are correct. B

Question 2

Figure 19-1   Assume the division's current ROI is 10 per cent and the firm's minimum required rate of return is 6 per cent.
-Refer to Figure 19-1. If you were the division manager and you were evaluated based on ROI, which projects would you accept?

Accepted Answer

A)  Projects A, B, and C 
B)  Projects A and B 
C)  Projects B and C 
D)  Project B only 
A)  Projects A, B, and C 
B)  Projects A and B 
C)  Projects B and C 
D)  Project B only D

Question 3

Advantages of decentralization include all of the following EXCEPT

Accepted Answer

A)  divisional management is able to react to changing market conditions more rapidly than top management. 
B)  divisional management is a source of personnel for promotion to top management positions. 
C)  decentralization can motivate divisional managers. 
D)  decentralization permits divisional management to concentrate on firmwide problems and long-range planning. 
A)  divisional management is able to react to changing market conditions more rapidly than top management. 
B)  divisional management is a source of personnel for promotion to top management positions. 
C)  decentralization can motivate divisional managers. 
D)  decentralization permits divisional management to concentrate on firmwide problems and long-range planning. D

Question 4

A negative EVA means

Accepted Answer

A)  the company is destroying capital. 
B)  the company is increasing capital. 
C)  ROI is negative. 
D)  both a and c 
A)  the company is destroying capital. 
B)  the company is increasing capital. 
C)  ROI is negative. 
D)  both a and c

Question 5

The evaluation of investment centres and the evaluation of the managers who run them

Accepted Answer

A)  should be the same evaluation. 
B)  should be separate evaluations. 
C)  should be done quarterly. 
D)  None of the above are correct. 
A)  should be the same evaluation. 
B)  should be separate evaluations. 
C)  should be done quarterly. 
D)  None of the above are correct.

Question 6

Figure 19-4
Beta Division had the following information:  
-Refer to Figure 19-4. What is the residual income for Beta Division?

Accepted Answer

A)  £60,000 
B)  £48,000 
C)  £7,500 
D)  £(10,000) 
A)  £60,000 
B)  £48,000 
C)  £7,500 
D)  £(10,000)

Question 7

A disadvantage of ROI is

Accepted Answer

A)  it leads to goal incongruence. 
B)  its short-run focus. 
C)  its focus on divisional profit rather than overall profit of the firm. 
D)  all of the above. 
A)  it leads to goal incongruence. 
B)  its short-run focus. 
C)  its focus on divisional profit rather than overall profit of the firm. 
D)  all of the above.

Question 8

Which of the following departments would NOT be a cost centre?

Accepted Answer

A)  advertising department 
B)  city police department 
C)  building and grounds department 
D)  sales department 
A)  advertising department 
B)  city police department 
C)  building and grounds department 
D)  sales department

Question 9

Figure 19-3
The following results for the year pertain to the Maddox Division of Ryan Ltd.:   The weighted average cost of capital is 12 per cent. The firm's minimum required rate of return is 14 per cent. Taxes for the firm are 40 per cent.
-Refer to Figure 19-3. If average operating assets are £1,000,000, return on investment for the Maddox Division is

Accepted Answer

A)  48%. 
B)  34%. 
C)  18%. 
D)  16%. 
A)  48%. 
B)  34%. 
C)  18%. 
D)  16%.

Question 10

TotToys Ltd. recently made £2,000,000 of capital available to its Toddler Division. The manager of the Toddler Division is evaluating the possibility of investing the additional funds in two new toys. Information about the two new toys is as follows:   Any funds not invested in a project will be invested to earn the company's required minimum return of 10 per cent. Without the additional investment, the Toddler Division's average operating assets would have been £10,000,000, and its operating income would have been £1,400,000.
Required: 
a.
Compute the Toddler Division's operating income and ROI, assuming that the division manager rejects both projects.
b.
Compute the Toddler Division's operating income and ROI, assuming that the division manager accepts only the Toy #1 project.
c.
Compute the Toddler Division's operating income and ROI, assuming that the division manager accepts only the Toy #2 project.
d.
Compute the Toddler Division's operating income and ROI, assuming that the division manager accepts both projects.
(Round all computations to the nearest two decimal places.)

Accepted Answer

The answer of TotToys Ltd. recently made £2,000,000 of capital...

Question 11

What is an advantage of using economic value added (EVA) in performance measurement over return on investment (ROI)?

Accepted Answer

A)  It is easier to calculate. 
B)  It encourages investments that are profitable to the company. 
C)  both a and b 
D)  none of the above 
A)  It is easier to calculate. 
B)  It encourages investments that are profitable to the company. 
C)  both a and b 
D)  none of the above

Question 12

Return on investment can be broken into two components:

Accepted Answer

A)  profit margin and asset turnover. 
B)  contribution margin and asset turnover. 
C)  segment margin and asset turnover. 
D)  profit margin and inventory turnover. 
A)  profit margin and asset turnover. 
B)  contribution margin and asset turnover. 
C)  segment margin and asset turnover. 
D)  profit margin and inventory turnover.

Question 13

Correll Company has two divisions, A and B. Information for each division is as follows:   What is the residual income for A?

Accepted Answer

A)  £40,000 
B)  £25,000 
C)  £15,000 
D)  £28,000 
A)  £40,000 
B)  £25,000 
C)  £15,000 
D)  £28,000

Question 14

Figure 19-3
The following results for the year pertain to the Maddox Division of Ryan Ltd.:   The weighted average cost of capital is 12 per cent. The firm's minimum required rate of return is 14 per cent. Taxes for the firm are 40 per cent.
-Refer to Figure 19-3. If the total capital employed by the Maddox Division is £800,000, what is the economic value added (EVA)?

Accepted Answer

A)  £12,000 
B)  £96,000 
C)  £108,000 
D)  £180,000 
A)  £12,000 
B)  £96,000 
C)  £108,000 
D)  £180,000

Question 15

Figure 19-1   Assume the division's current ROI is 10 per cent and the firm's minimum required rate of return is 6 per cent.
-The operating margin for the Randall Company last year was 8 per cent. If total sales are £1,250,000 and average operating assets are £400,000, ROI was

Accepted Answer

A)  25%. 
B)  20%. 
C)  16%. 
D)  10%. 
A)  25%. 
B)  20%. 
C)  16%. 
D)  10%.

Question 16

A possible disadvantage of a decentralized organization is that

Accepted Answer

A)  decisions are made more slowly. 
B)  divisional managers are less motivated. 
C)  divisional managers are not specialized. 
D)  divisional managers will run their divisions to benefit themselves at the expense of suboptimizing the entire organization. 
A)  decisions are made more slowly. 
B)  divisional managers are less motivated. 
C)  divisional managers are not specialized. 
D)  divisional managers will run their divisions to benefit themselves at the expense of suboptimizing the entire organization.

Question 17

Figure 19-4
Beta Division had the following information:  
-Refer to Figure 19-4. What is EVA for Beta Division?

Accepted Answer

A)  £60,000 
B)  £48,000 
C)  £7,500 
D)  £2,000 
A)  £60,000 
B)  £48,000 
C)  £7,500 
D)  £2,000

Question 18

Which of the following is a disadvantage of both residual income and ROI?

Accepted Answer

A)  They are both absolute measures of return. 
B)  They both are difficult to calculate. 
C)  They both do not discourage myopic behaviour. 
D)  All of the above are disadvantages of both ROI and residual income. 
A)  They are both absolute measures of return. 
B)  They both are difficult to calculate. 
C)  They both do not discourage myopic behaviour. 
D)  All of the above are disadvantages of both ROI and residual income.

Question 19

The following information is provided:   Assume the division's current ROI is 10 per cent and the firm's minimum required rate of return is 7 per cent. If you were the president of the company, which projects would you want the division manager to accept?

Accepted Answer

A)  Projects A, B, and C 
B)  Projects A and C 
C)  Projects A and B 
D)  Project A only 
A)  Projects A, B, and C 
B)  Projects A and C 
C)  Projects A and B 
D)  Project A only

Question 20

Economic value added (EVA) is

Accepted Answer

A)  a monetary figure. 
B)  a percentage rate of return. 
C)  negative if the company is creating capital. 
D)  none of the above. 
A)  a monetary figure. 
B)  a percentage rate of return. 
C)  negative if the company is creating capital. 
D)  none of the above.

Exam 19: Divisional Financial Performance Measures

Decentralization occurs when

Figure 19-1 Assume the division's current ROI is 10 per cent and the firm's minimum required rate of return is 6 per cent. -Refer to Figure 19-1. If you were the division manager and you were evaluated based on ROI, which projects would you accept?

Advantages of decentralization include all of the following EXCEPT

A negative EVA means

The evaluation of investment centres and the evaluation of the managers who run them

Figure 19-4 Beta Division had the following information: -Refer to Figure 19-4. What is the residual income for Beta Division?

A disadvantage of ROI is

Which of the following departments would NOT be a cost centre?

What is an advantage of using economic value added (EVA) in performance measurement over return on investment (ROI)?

Return on investment can be broken into two components:

Correll Company has two divisions, A and B. Information for each division is as follows: What is the residual income for A?

Figure 19-1 Assume the division's current ROI is 10 per cent and the firm's minimum required rate of return is 6 per cent. -The operating margin for the Randall Company last year was 8 per cent. If total sales are £1,250,000 and average operating assets are £400,000, ROI was

A possible disadvantage of a decentralized organization is that

Figure 19-4 Beta Division had the following information: -Refer to Figure 19-4. What is EVA for Beta Division?

Which of the following is a disadvantage of both residual income and ROI?

The following information is provided: Assume the division's current ROI is 10 per cent and the firm's minimum required rate of return is 7 per cent. If you were the president of the company, which projects would you want the division manager to accept?

Economic value added (EVA) is

Introduction to Management Accounting

An Introduction to Cost Terms and Concepts

Cost Assignment

Accounting Entries for a Job Costing System

Process Costing

Joint and By-Product Costing

Income Effects of Alternative Cost Accumulation Systems

Cost-Volume-Profit Analysis

Measuring Relevant Costs and Revenues for Decision-Making

Activity-Based Costing

Pricing Decisions and Profitability Analysis

Decision-Making Under Conditions of Risk and Uncertainty

Capital Investment Decisions: Appraisal Methods

Capital Investment Decisions: the Impact of Capital Rationing, Taxation, Inflation and Risk

The Budgeting Process

Management Control Systems

Standard Costing and Variance Analysis 1

Standard Costing and Variance Analysis 2: Further Aspects

Transfer Pricing in Divisionalized Companies

Cost Management

Strategic Management Accounting

Cost Estimation and Cost Behaviour

Quantitative Models for the Planning and Control of Stocks

The Application of Linear Programming to Management Accounting

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