Chapter 23 - Performance Evaluation For Decentralized Operations

2.

A decentralized business organization is one in which all major planning and operating decisions are made by top management.

True
False

Correct Answer

A. False

Explanation

A decentralized business organization is one in which major planning and operating decisions are delegated to lower-level managers and employees, rather than being made solely by top management. This allows for greater autonomy and decision-making power at lower levels of the organization, leading to increased efficiency and responsiveness.

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3.

Espinosa Corporation had $1,100,000 in invested assets, sales of $1,210,000, income from operations amounting to $242,000, and a desired minimum rate of return of 15%. Determine the investment turnover for Espinosa.

1.3
1.1
1.0
1.2

Correct Answer

A. 1.1

Explanation

The investment turnover ratio is calculated by dividing sales by average invested assets. In this case, the sales are $1,210,000 and the invested assets are $1,100,000. Therefore, the investment turnover ratio is $1,210,000 / $1,100,000 = 1.1. This means that for every dollar invested, Espinosa Corporation generated $1.1 in sales.

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4.

The profit margin for Division Q is 15% and the investment turnover is 1.2. What is the rate of return on investment for Division Q?

12.5%
18%
15%
10%

Correct Answer

A. 18%

Explanation

The rate of return on investment is calculated by multiplying the profit margin by the investment turnover. In this case, the profit margin is 15% and the investment turnover is 1.2. Multiplying these two values together gives us a rate of return on investment of 18%.

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5.

Three measures of investment center performance are rate of return on investment, residual income, and income from operations.

True
False

Correct Answer

A. True

Explanation

The statement is true because rate of return on investment, residual income, and income from operations are indeed three commonly used measures of investment center performance. Rate of return on investment is a measure of profitability that calculates the return on the investment made in the center. Residual income measures the profit generated by the center after deducting the cost of capital. Income from operations is a measure of the center's operating profit, which indicates its ability to generate revenue from its operations.

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6.

The DuPont formula uses non-financial information to measure the performance of a business.

True
False

Correct Answer

A. False

Explanation

The DuPont formula is a financial ratio that measures the return on equity (ROE) of a business. It is calculated by multiplying the profit margin, asset turnover, and equity multiplier ratios. It does not use non-financial information to measure performance, but rather focuses on financial metrics. Therefore, the statement that the DuPont formula uses non-financial information to measure the performance of a business is false.

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7.

Espinsoa Corporation had $1,100,000 in invested assets, sales of $1,210,000, income from operations amounting to $242,000, and a desired minimum rate of return of 15%. Determine the profit margin for Espinosa:

20%
22%
15%
32%

Correct Answer

A. 20%

Explanation

The profit margin is calculated by dividing the income from operations by the sales and multiplying by 100. In this case, the income from operations is $242,000 and the sales are $1,210,000.

Profit Margin = (Income from Operations / Sales) * 100
Profit Margin = ($242,000 / $1,210,000) * 100
Profit Margin = 0.2 * 100
Profit Margin = 20%

Therefore, the profit margin for Espinosa Corporation is 20%.

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8.

The manager of which of the following centers has the most authority and responsibility?

Cost center
Profit center
Data center
Investment center

Correct Answer

A. Investment center

Explanation

An investment center has the most authority and responsibility among the given options. This is because an investment center is responsible for both generating profits and managing the invested capital. It has the authority to make decisions regarding investments, pricing, cost control, and resource allocation. The performance of an investment center is evaluated based on both profitability and return on investment, making it a key area of responsibility for managers.

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9.

A good example of a non-finacial performance measure is:

Residual income
Income from operations
Customer retention rate
Investment turnover

Correct Answer

A. Customer retention rate

Explanation

Customer retention rate is a good example of a non-financial performance measure because it focuses on the ability of a company to retain its existing customers over a specific period of time. Unlike financial measures such as residual income or income from operations, customer retention rate provides insights into the effectiveness of a company's customer relationship management strategies and its ability to satisfy and retain customers. This measure is important for businesses as it indicates customer loyalty and the potential for future revenue growth. Investment turnover, on the other hand, is a financial measure that assesses the efficiency of a company's investment in its assets.

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10.

Division F has sales of $750,000, cost of goods sold of $450,000, operating expenses of $228,000, and invested assets of $300,000. What is the rate of return on investment of Division F?

9.6%
20%
24%
10%

Correct Answer

A. 24%

Explanation

The rate of return on investment (ROI) is calculated by dividing the net income by the invested assets and multiplying by 100. In this case, the net income can be calculated by subtracting the cost of goods sold and operating expenses from the sales. Therefore, the net income is $750,000 - $450,000 - $228,000 = $72,000. The ROI is then ($72,000 / $300,000) * 100 = 24%.

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11.

Which of the following is considered an advantage of decentralization?

Decentralized decision making provides excellent training for managers.
Decisions made by different managers all positively affect the overall profitability of the company.
Assets and costs are duplicated across operating divisions.
All of the above.

Correct Answer

A. Decentralized decision making provides excellent training for managers.

Explanation

Decentralization allows decision-making authority to be distributed among different managers, which provides them with an opportunity to gain valuable experience and develop their skills. By making decisions on their own, managers can learn to analyze situations, make judgments, and take responsibility for their actions. This hands-on experience can enhance their managerial abilities and prepare them for higher-level positions in the future. Therefore, decentralized decision making is considered an advantage as it provides excellent training for managers.

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12.

Income from operations for Division B is $150,000, total service department charges are $400,000, and cost of goods sold of $2,266,000. What are the revenues for Division B?

$550,000
$3,216,000
$2,816,000
2,666,000

Correct Answer

A. $2,816,000

Explanation

The revenues for Division B can be calculated by subtracting the cost of goods sold from the income from operations. In this case, the income from operations is $150,000 and the cost of goods sold is $2,266,000. By subtracting the cost of goods sold from the income from operations, we get $150,000 - $2,266,000 = $2,816,000. Therefore, the correct answer is $2,816,000.

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13.

The primary responsibility accounting report for a cost center is the income statement.

True
False

Correct Answer

A. False

Explanation

The primary responsibility accounting report for a cost center is not the income statement. Responsibility accounting involves assigning responsibility for costs and revenues to specific individuals or departments within an organization. The primary responsibility accounting report for a cost center is typically a cost report, which provides information on the costs incurred by the cost center. The income statement, on the other hand, provides information on the revenues and expenses of the entire organization. Therefore, the correct answer is false.

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14.

Stevenson Corporation had $550,000 in invested assets, sales of $660,000, income from operation amounting to $99,000, and the minimum rate of return of 15%. The residual income for Stevenson is:

$0
$17,820
$82,500
$16,500

Correct Answer

A. $16,500

Explanation

Residual income is calculated by subtracting the minimum required return on invested assets from the income from operations. In this case, the minimum rate of return is 15% of $550,000, which is $82,500. The income from operations is $99,000, so the residual income is $99,000 - $82,500 = $16,500.

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15.

The Hua Company's radio division currently purchases transistors from Xiang Co. for $3.50 each. The total number of transistors is 8,000 per month. Hua Company's electronics division can produce the transistors for a cost of $4.00 each. The $4.00 is made up of $3.00 in variable costs and $1.00 in allocated fixed costs. What should be the range of possible transfer prices?

No transfer should take place.
$3.51 to $3.99
$3.01 to $3.99
$3.01 to $3.49

Correct Answer

A. $3.01 to $3.49

Chapter 23 - Performance Evaluation For Decentralized Operations

The profit center income statement should include only controllable revenues and expenses.

Quiz Preview

A decentralized business organization is one in which all major planning and operating decisions are made by top management.

Espinosa Corporation had $1,100,000 in invested assets, sales of $1,210,000, income from operations amounting to $242,000, and a desired minimum rate of return of 15%. Determine the investment turnover for Espinosa.

The profit margin for Division Q is 15% and the investment turnover is 1.2. What is the rate of return on investment for Division Q?

Three measures of investment center performance are rate of return on investment, residual income, and income from operations.

The DuPont formula uses non-financial information to measure the performance of a business.

Espinsoa Corporation had $1,100,000 in invested assets, sales of $1,210,000, income from operations amounting to $242,000, and a desired minimum rate of return of 15%. Determine the profit margin for Espinosa:

The manager of which of the following centers has the most authority and responsibility?

A good example of a non-finacial performance measure is:

Division F has sales of $750,000, cost of goods sold of $450,000, operating expenses of $228,000, and invested assets of $300,000. What is the rate of return on investment of Division F?

Which of the following is considered an advantage of decentralization?

Income from operations for Division B is $150,000, total service department charges are $400,000, and cost of goods sold of $2,266,000. What are the revenues for Division B?

The primary responsibility accounting report for a cost center is the income statement.

Stevenson Corporation had $550,000 in invested assets, sales of $660,000, income from operation amounting to $99,000, and the minimum rate of return of 15%. The residual income for Stevenson is: