Exam 10: Management Control in Decentralized Organizations

Kent Company records reveal the following: The variable costs of Division Y will be incurred whether it buys from Division X or from an outside supplier. If Division X is working at full capacity, the best transfer price from the viewpoint of the company as a whole would be:

EVA companies look upon R&D as a capital investment, and not immediately expensed.

Identify which of the following statements about cost centers and decentralization is true.

Give four possible definitions of invested capital that can be used in measuring ROI or residual income.

Identify which of the following definitions of invested capital is not recommended for measuring the performance of division managers.

Garvey Company's records reveal the following: The variable costs of Division B will be incurred whether it buys from Division A or from an outside supplier. If Division A is working at full capacity, the best transfer price from the viewpoint of the company as a whole would be:

All control systems are imperfect.

When the selling division cannot sell an item on the external market, using either a market- based or cost- based transfer for the item can lead to dysfunctional decisions.

The income percentage of revenue is determined by multiplying return on investment by the capital turnover.

The time and effort spent negotiating a transfer price between a company's divisions add nothing directly to the profits of the company.

Sandler Company makes internal transfers at 180% of full cost. The Soda Refining division purchases 30,000 containers of carbonated water per day, on average, from a local supplier who delivers the water for $30 per container via an external shipper. To reduce costs, the company located an independent producer in Ohio who is willing to sell 30,000 containers at $20 each, delivered to Sandler Company's shipping division in Ohio. The company's Shipping Division in Ohio has excess capacity and can ship the 30,000 containers at a variable cost of $2.50 per container. is the total cost to Sandler Company if the carbonated water is purchased from the local supplier.

Invested capital can mean any of the following, except:

ROI = return on sales / capital turnover.

The amount of income generated by the investment is a better test of profitability than the return on investment.

Historical cost is widely used for asset valuation because it:

When companies maximize residual income, they are maximizing their rate of return, a percentage.

Wills Company's records reveal the following: Division $A$ M arket pric of finished part to out siders \ 75 Variable costs per part 51 Contribution margin per part \ 24 Tot al contribution for 10000 parts \ 240,000 Division $B$ ales price of finished product \1 05 Variable costs: Division A (1 p art @ \ 51) \5 1 Division B Processing \2 7 Selling 12 39 -90 Contribution margin per unit \1 5 Total contribution for 10,000 \1 50,000 units The variable costs of Division B will be incurred whether it buys from Division A or from an outside supplier. The highest price that Division B would want to pay to Division A for the parts would be:

Some level of decentralization creates benefits for most organizations.

is not an acceptable means of asset valuation.

Any decision that is in conflict with organizational goals