Exam 12: Performance Evaluation and Decentralization

Queen Company has two divisions, the Domestic Division and the International Division. Last year, the Domestic Division earned operating income of $360,000 using average operating assets of $1,440,000. Sales for the Domestic Division were $3,600,000. Last year, the International Division earned operating income of $560,000 using average operating assets of $2,800,000. Sales for the International Division were $7,000,000. Required: A. For the Domestic Division, the margin was __________________, the turnover was __________________, and the ROI was __________________. B. For the International Division, the margin was __________________, the turnover was __________________, and the ROI was __________________. C. If these were the only two divisions of Queen Company, what was the ROI for Queen Company?

Which Balanced Scorecard perspective defines the capabilities that an organization needs to create long-term improvement?

How is turnover calculated?

Win Company has the following data: Division A Division B Sales \ 400,000 \ 300,000 Contribution margin 160,000 125,000 Operating income 80,000 30,000 Average operating assets 320,000 200,000 Cost of capital 15\% 15\% Dixie Company has a target ROI of 20% and a 0% income tax rate. Required: Calculate the following amounts for each division: A. Margin ratio B. Turnover ratio C. ROI D. Residual income E. EVA

A transfer price is the price charged for a component by the selling division to the buying division of the same company.

The use of residual income encourages managers to accept any project that earns below the minimum rate.

Borraw Company The following information pertains to the three divisions of Borraw Company: Division A Division B Sales ? 1,250,000 Net operating income \ 25,000 \ 75,000 Average operating assets ? ? Rebum on investment 20\% 15\% Margin 0.05 ? Tumover ? ? Target ROI 12\% 10\% -Refer to Borraw Company. What are the average operating assets for Division A?

The after-tax operating income reduced by the total annual cost of capital is equal to the economic value added.

Along which of the following lines are divisions in a decentralized company NOT created?

Dynex Company had the following income statement for last year: Sales \ 200,000 Less: COGS 100,000 Gross Profit \ 100,000 Less: Selling \& Admin. Expense 40,000 Operating income \ 60,000 Beginning assets were $280,000, and ending assets were $300,000 Required: A. Average operating assets were $__________________. B. Margin was __________________. C. Turnover was __________________. D. Return on investment was __________________%.

Giga-Stuff, Inc.Giga-Stuff, Inc. has a number of divisions. One division, Sophistosand, makes component X, which is used in the manufacture of DVD players. Another division, Videostuff, makes DVD players and needs 60,000 units of component X per year. Sophistosand incurs the following costs for one unit of component X: Direct materials \ 0.30 Direct labour 0.15 Variable overhead 0.70 Fixed overhead Total Sophistosand has the capacity to make 400,000 units of component X per year but, due to a soft market, plans to produce and sell only 320,000 units next year. Videostuff currently buys component X from an outside supplier for $2.50 each (the same price that Sophistosand receives). -Refer to Giga-Stuff, Inc. Assume the company allows negotiated transfer pricing. What is the ceiling of the bargaining range, and which division sets it?

When a product is transferred at market price, the transfer will optimize both divisional and company-wide profits.

The manager of a division is displeased with the ROI of the division. What would increase ROI (holding everything else constant)?

Match each of the following terms with their correct description from the items listed below.* Each term may be used more than once, and it is possible that one or more of the classifications may not be used at all. -A responsibility centre in which a manager is responsible only for costs

Ruter Company Ruter Company had the following historical accounting data per unit: Direct materials \ 70 Direct labour 40 Variable overhead 25 Fixed overhead 34 Variable selling expenses 55 Fixed selling expenses 19 The units are normally transferred internally from Division X to Division Y. The units also may be sold externally for $210 per unit. The minimum profit level accepted by the company is a markup of 30%. There was no beginning or ending inventories. -Refer to Ruter Company. Suppose Division X uses full cost plus markup. What would be the transfer price?

Return on investment (ROI) is the most common measure of performance for a revenue centre.

Refer to Plank Inc. Assume the following: ∙ Paint Division can make 1,000,000 L per year, and expects to produce 1,000,000 L. ∙ Construction Division currently buys 200,000 L of paint from an outside supplier for $5.20 per litre (the same price that the Paint Division receives). Required: A. The maximum transfer price per litre of paint is $__________________. B. The minimum transfer price per litre of paint is $__________________. C. Does it matter whether or not the two divisions transfer?

Each month, a vacuum cleaner manufacturing cell has 800 hours of time available. During that time, the cell could have manufactured up to 2,400 vacuums, but only 1,600 vacuums were actually manufactured. Required: Calculate the following: A. Theoretical cycle time in minutes B. Theoretical velocity per hour C. Actual cycle time in minutes D. Actual velocity per hour

Which of the following is an absolute dollar measure rather than a percentage?

Economic value added is residual income with the cost of capital equal to which of the following?