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Exam 14: Performance Evaluation for Decentralized Operations

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Question 51

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The sales, income from operations, and invested assets for each division of Salem Company are as follows: $\begin{array}{llll}\text { Invested}&\text { Income from}\\\text { Asssets } & \text { Operations } & \text { Sales } & \\\$ 3,500,000 & \$ 410,000 & \$ 4,000,000 & \text { Division C} \\4,000,000 & 600,000 & 3,500,000 & \text { Division D} \\7,000,000 & 780,000 & 2,250,000 & \text { Division E}\end{array}$ Management has established a minimum rate of return for invested assets of 11%. (a)Determine the residual income for each division. (b)Bassed on residual income, which division is the most profitable?

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Question 52

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Espinosa Corporation had $220,000 invested in assets, sales of $242,000, income from operations amounting to $48,400, and a desired minimum rate of return of 3%. The rate of return on investment for Espinosa is:

A) 20%.
B) 22%.
C) 3%.
D) 6.4%.

E) B) and C)
F) B) and D)

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Question 53

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In an investment center, the manager has responsibility and authority for making decisions that affect:

Some organizations use internal service departments to provide services to several divisions or departments within an organization. Which of the following would probably not lend itself as a service department?

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

Blancher Corporation had $495,000 in invested assets, sales of $660,000, income from operations amounting to $99,000, and a desired minimum rate of return of 15%. The residual income for Blancher is:

A department store apportions payroll costs on the basis of the number of payroll checks issued. Accounting costs are apportioned on the basis of the number of reports. The payroll costs for the year were $100,000, and the accounting costs for the year totaled $50,000. The number of payroll checks issued and the number of reports for each department are as follows: $\begin{array}{ccl}\text { Number }&\text { Number of } \\\text { of Reports }& \text { Payroll Checks }\\45 & 300 & \text { Department F } \\80 & 850 & \text { Department S } \\125 & 100 & \text { Department T }\end{array}$ Determine the amount of (a) payroll cost and (b) accounting cost to be apportioned to each department.

Division Q for Mott Company has a rate of return on investment of 28% and an investment turnover of 1.4. What is the profit margin?

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

Blancher Corporation had $495,000 in invested assets, sales of $660,000, income from operations amounting to $99,000, and a desired minimum rate of return of 15%. The investment turnover for Blancher is:

The following financial information was summarized from the accounting records of Block Corporation for the current year ended December 31: The net income for Block Corporation is:

Separation of businesses into more manageable operating units is termed centralization.

Income from operations for Division M is $150,000, and income from operations before service department charges is $975,000. Therefore,:

A portion of the divisional income statement for the year just ended is presented below in a condensed form. $\begin{array}{ll}\text { Department F }\\\$ 93,800 & \text { Net sales } \\ \underline{72,400 }& \text { Cost of goods sold } \\\$ 21,400 & \text { Grossprofit } \\ \underline{ 28,900} & \text { Operating expenses } \\ \underline{\$(7,500)} & \text { Loss from operations }\end{array}$ The operating expenses of Department F include $16,000 for direct expenses. It is estimated that the discontinuance of Department F would not have affected the sales of the other departments nor have reduced the indirect expenses of the business. Assuming the accuracy of these estimates, determine the effect (increase or decrease and the amount) on the income from operations of the business if Department F had been discontinued.

The following data are taken from the management accounting reports of Dancer Co.: $\begin{array}{llll}\underline{\text { Div. C }}&\underline{ \text { Div. B }} &\underline{ \text { Div. A} } & \\1,900,000 & \$1,350,000 & \$1,800,000 & \text { Income from operations } \\1,100,000 & 1,050,000 & 1,700,000 & \text { Total service department charges }\end{array}$ If an incentive bonus is paid to the manager who achieved the highest income from operations before service department charges, it follows that

The three common types of responsibility centers are referred to as asset centers, liabilities centers, and equity centers.

It is beneficial for two related companies to use the cost price approach for transfer pricing when both the companies operate as cost centers and are not concerned with the revenue.

Materials used by Boone Company in producing Division C's product are currently purchased from outside suppliers at a cost of $20 per unit. However, the same materials are available from Division A. Division A has unused capacity and can produce the materials needed by Division C at a variable cost of $17 per unit. A transfer price of $19 per unit is negotiated and 60,000 units of material are transferred, with no reduction in Division A's current sales. How much would Division A's income from operations increase?

The investment turnover is the ratio of:

The major advantage of residual income as a performance measure is that it gives consideration to not only a minimum rate of return on investment but also to the total magnitude of income from operations earned by each division.