Exam 19: Strategic Performance Measurement: Investment Centers and Transfer Pricing

Accounting records from Division A, Alpha Manufacturing Company indicate the following: Divisional Sales \ 1,500,000 Average Investment: \ 1,000,000 Net operating income \ 169,500 Minimum Rate of Return: 14\% Required: 1. Compute the return on sales (ROS) for Division A. (Round answer to one decimal point.) 2. Compute the asset turnover (AT) for Division A. 3. Compute return on investment (ROI) for this division, using answers to parts (1) and (2). (Round answer to two decimal points.) 4. Compute residual income (RI) for Division A. 5. Describe how Alpha Manufacturing would determine whether or not to invest in any particular project in the future.

Consider the following data for three divisions of a company, X, Y, and Z: Divisional: X Y Z Sales \ 1,800,000 \ 900,000 \ 4,800,000 Operating Income 252,000 108,000 240,000 Investment in assets 630,000 540,000 3,000,000 The return on investment (ROI) for Division X is:

Meridian Investments has three divisions (A, B, C) organized for performance evaluation purposes as investment centers. Each division's required rate of return for purposes of calculating residual income (RI) is 15%. Budgeted operating results for 2019 for each of the three divisions are as follows: Division Operating income Investment A \ 15,000,000 \ 100,000,000 B \ 25,000,000 \ 125,000,000 C \ 11,000,000 \ 50,000,000 The company is planning an expansion, which will require each division to increase its investments by $25,000,000 and its operating income by $4,500,000. Required: 1. Compute the current ROI for each division. 2. Compute the current residual income (RI) for each division. 3. Rank the divisions according to their current ROIs and in terms of their residual incomes. 4. Determine the effects after adding the new project to each division's ROI and residual income (RI). 5. Assuming the managers are evaluated on either ROI or residual income (RI). Which divisions are pleased with the expansion and which ones are unhappy? Explain briefly.

Replacement cost of a division's assets will most probably be greater than:

The use of replacement cost of assets for purposes of calculating return on investment (ROI) has the advantage of:

The biggest problem with cost-based transfer prices is:

The primary limitation of a full-cost based transfer pricing system is that:

Determination of the useful life of an asset and choice of a depreciation method will affect all of the following except:

Residual income (RI) is:

A fully-owned subsidiary of a multinational company reports its return on investment (ROI) periodically during the year. This unit of the company, for performance evaluation purposes, is likely considered a(n):

Selected data from Division A of Green Company are as follows: Sales \ 500,000 Average investment \ 300,000 Operating income \ 60,000 Minimum rate of return 15\% Division A's asset turnover (AT) is (rounded):

Consider the following data from two divisions of a company, P and Q: Divisional Sales \ 1,500,000 \ 1,000,000 Operating Income \ 600,000 \ 450,000 Investment \ 4,000,000 \ 2,750,000 If the minimum rate of return is 11%, what is Division Q's residual income (RI)?

The estimated cost to replicate assets of an investment center at the current level of service and functionality of these assets is defined as:

A company established a branch to sell automobile seat covers. The company purchases these covers and stores them in a warehouse. The covers are then shipped from the warehouse to both the home office and the new branch, FOB (Free On Board) destination. Home office management is responsible for setting the transfer price of the covers charged to the branch. Per-unit costs of the covers are: \ 60.00 purchase price \ 2.50 shipping cost to warehouse \ 3.00 handling cost, including \ 1 allocated administrative overhead \ 3.50 shipping cost to branch, paid by home office According to the general transfer-pricing formula given in the text, the minimum transfer price that home office should charge the branch is:

Selected data from an investment center's accounting records reveal the following: Sales \ 700,000 Average investment \ 350,000 Operating income \ 50,000 Minimum rate of return 12\% Required: 1.Calculate return on investment (ROI) for this investment center (show separately the two major components of the ROI calculation) 2.Calculate residual income (RI) for this investment center. Round all computations to two decimal places.

Selected data from one of the investment centers from Jones Company are as follows: Sales \ 400,000 Average divisional assets \ 320,000 Divisional operating income \ 40,000 Minimum rate of return 11\% Required: 1.Calculate return on investment (ROI), including each of the two component measures of ROI. 2.Calculate residual income (RI).

Which of the following is the most appropriate and comprehensive short-term financial-performance indicator for an investment center that is a division of a larger business entity?

Given a competitive outside market for identical intermediate goods, what is generally considered the best transfer price, assuming all relevant information is readily available?

Under the notion of controllability, it is most appropriate for top management to evaluate the profitability of an investment center in terms of:

Return on investment (ROI) is a term often used to express income earned on capital invested in a division (investment center). A division's ROI would increase if: