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Exam 24: Evaluating Decentralized Operations

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Question 81

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The negotiated price approach allows the managers of decentralized units to agree on the transfer price.

A) True
B) False

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Question 82

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Using the data from Terrace Industries, determine the divisional operating income for Districts 1 and 2. Allocate support department expenses proportional to the sales of each district.

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Percentage of sales allocation:
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Question 83

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Match each definition that follows with the term (a-e) it defines. -Operating income divided by invested assets A)Controllable revenues B)Profit margin C)Investment turnover D)Return on investments (ROI)e.Residual income

Match each definition that follows with the term (a-e) it defines. -Ratio of operating income to sales A)Controllable revenues B)Profit margin C)Investment turnover D)Return on investments (ROI)e.Residual income

The materials used by Hibiscus Company's Division A are currently purchased from an outside supplier at $55 per unit. Division B is able to supply Division A with 20,000 units at a variable cost of $42 per unit. The two divisions have recently negotiated a transfer price of $48 per unit for the 20,000 units. a. By how much will each division's income increase as a result of this transfer? b. What is the total increase in income for Hibiscus Company?

Which of the following is not a disadvantage of decentralized operations?

The support department cost that will be allocated to the Super Division is

Investment centers differ from profit centers in that they

Division A of Chacha Company has sales of $140,000, cost of goods sold of $83,000, operating expenses of $43,000, and invested assets of $150,000.​ -The profit margin for Division A is

The profit margin for the Central Division is 20%, and the investment turnover is 2.8. The return on investment (ROI) for the Central Division is

The amount of detail presented in a budget performance report for a cost center depends upon the level of management to which the report is directed.

To compute operating income, total support department allocations are

A cost driver is used to allocate support department expenses. Match each of the following cost drivers with the appropriate department (a-h). -Allocated equally among divisions A)Purchasing B)Payroll Accounting C)Human Resources D)Maintenance E)Information Systems F)Marketing G)President's Office H)Transportation

The excess of divisional operating income over a minimum acceptable operating income is termed the residual income.

Match each of the following phrases as describing (a) an advantage, (b) a disadvantage, or (c) neither of decentralization. -Separate office staff A)Advantage of decentralization B)Disadvantage of decentralization C)Neither an advantage nor a disadvantage

Which of the following formulas is the investment turnover factor as used in the DuPont formula for determining the return on investment (ROI) ?

Peppy Portraits specializes in pet photography and has both franchised and company-operated studios. Profit margin and investment turnover for both segments are as follows: Peppy Portraits is expanding. Based on the return on investment (ROI), would you advise a new location to be a company-operated or franchised studio?

Miller's Quarter Horse Company has sales of $4,500,000. It also has invested assets of $2,500,000 and operating expenses of $3,800,000. The company has established a minimum return of 7%. Round percentages and investment turnover to one decimal place. a. What is Miller's profit margin? b. What is the investment turnover? c. What is the rate of return on investment? d. What is Miller's residual income?

Support department allocations are similar to the expenses of a profit center that purchases services from a source outside the company.

Controllable expenses are those that can be influenced by the decisions of the profit center manager.