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Exam 10: Decentralized Performance Evaluation

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Question 31

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Return on investment can be calculated as

A) ROI = sales revenue/average invested assets
B) ROI = operating income/sales revenue
C) ROI = operating income/average invested assets
D) ROI = average invested assets/sales revenue

E) A) and D)
F) A) and C)

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Question 32

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Crawford Corp.has an ROI of 15% and a residual income of $10,000.If operating income equals $30,000,what is the amount of average invested assets?

A) $200,000
B) $66,667
C) $450,000
D) $150,000

E) All of the above
F) None of the above

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Question 33

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Spring Corp.has two divisions,Daffodil and Tulip.Daffodil produces a gadget that Tulip could use in its production.Tulip currently purchases 100,000 gadgets for $12.50 on the open market.Daffodil's variable costs are $6 per widget while the full cost is $9.35.Daffodil sells gadgets for $13 each.If Daffodil is operating at capacity,what would be the maximum transfer price Tulip would pay internally?

Avocado Company has an operating income of $80,000 on revenues of $1,000,000.Average invested assets are $500,000 and Avocado Company has an 8% cost of capital.What is the investment turnover?

If the ROI of a project is greater than the hurdle rate,the residual income will be

A profit center manager often also supervises revenue and cost center managers.Because profit center managers are responsible for both costs and revenues,they often supervise revenue and cost center managers.

Spice Company has two divisions,Parsley and Sage.Parsley produces a unit that Sage could use in its production.Sage currently is purchasing 50,000 units from an outside supplier for $50.Parsley is operating at less than its full capacity of 550,000 and has variable costs of $27 per unit.The full cost to manufacture the unit is $38.Parsley currently sells 450,000 units at a selling price of $54.If an internal transfer is made,variable shipping and administrative costs of $2 per unit could be avoided.What would be the impact on Spice Company's overall profits if the internal transfer were made?

One disadvantage of decentralization is that it fosters competition among divisions.This is considered a benefit of decentralization.

A ________________ is the amount that one division charges when it sells goods or services to another division in the same company

The DuPont method breaks residual income into profit margin and investment turnover.The DuPont method breaks return on investment into profit margin and investment turnover.

Avocado Company has an operating income of $80,000 on revenues of $1,000,000.Average invested assets are $500,000 and Avocado Company has an 8% cost of capital.What is the profit margin?

Florida Inc.has revenues of $1,500,000 resulting in an operating income of $105,000.Average invested assets total $750,000;the cost of capital is 10%.Return on investment is

Which of the following is not a perspective used by the balanced scorecard?

Pine Corp.has revenues of $500,000 resulting in an operating income of $54,000.Invested assets total $600,000.Residual income is $18,000.Calculate the new residual income if sales increase by 10% and the profit margin and invested assets remain the same.

Reef Corp.has revenues of $500,000 resulting in an operating income of $54,000.Invested assets total $600,000,the cost of capital is 6%.Calculate the increase in residual income if sales increase by 10% and the profit margin and invested assets remain the same.

Miami Corp.has an operating income of $120,000,average invested assets of $600,000,and a cost of capital of 7%.What is the residual income?

Swan Company has two divisions,Hill and Paradise.Hill produces a unit that Paradise could use in its production.Paradise currently is purchasing 5,000 units from an outside supplier for $56.Hill is operating at less than full capacity and has variable costs of $30.80 per unit.The full cost to manufacture the unit is $43.40.Hill currently sells 450,000 units at a selling price of $61.60.What would be the impact on Swan Company's overall profits if the internal transfer is made?

Howard has an ROI of 16% based on revenues of $400,000.The investment turnover is 2.What is the residual income if the cost of capital is 9%?

Dade Corp.has residual income of $10,000.If operating income equals $30,000 and the minimum required rate of return is 8%,what are average invested assets?

Residual income can avoid the problems of goal incongruence.Any project that earns more than the hurdle rate will have a positive residual income,which avoids the problems of goal incongruence.