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Exam 9: Responsibility Accounting

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Question 51

True/False

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An important disadvantage of decentralization is that managers may engage in suboptimal behavior.

A) True
B) False

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Question 52

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Which of the following is not typically found in a decentralized organization?

A) Cost center
B) Decision center
C) Investment center
D) Profit center

E) B) and C)
F) A) and C)

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Question 53

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Retail Sales and Wholesale Sales are the only divisions of Terra Company.The following information was gathered for the two divisions for the current year: $\begin{array} { l l c } & \text { Retail Division } & \text { Wholesale Division } \\\text { Operating income } & \$ 2,500,000 & \$ 6,000,000 \\\text { Operating assets } & \$ 16,000,000 & \$ 36,000,000\end{array}$ The company has $1,200,000 in operating assets that are not assigned to either of the divisions and $500,000 in corporate expenses that are not reflected in the information above.Based on this information,what is the ROI for the company as a whole?

Payne Company reported the following information for the current year: $\begin{array} { l l} \text { Sales } & \$ 1,600,000 \\\text { Average Operating Assets } & \$ 500,000 \\\text { Desired ROI } & 14 \% \\\text { Net Income } & \$ 85,000\end{array}$ The company's residual income was:

Patterson Company has three divisions that all report to the vice president of manufacturing.Each division has two departments.The vice president of manufacturing should receive detailed responsibility reports on all six of the departments.

Investment centers are often evaluated on the basis of return on investment.

Indicate whether each of the following statements about transfer pricing is true or false. A cost-based transfer price has the advantage of promoting efficiency and fairness.______ A market-based transfer price may be adjusted to take into account cost savings that occur as a result of sales being made within the company.______ A decentralized company should adopt a policy of requiring divisions in the company to make sales to other divisions when such sales will benefit the company as a whole.______ The level of capacity at which the selling division is operating should not affect the level of the transfer price for a sale to another division in the same company.______ Companies with operations in two or more countries sometimes try to set transfer prices at a level that will reduce their overall income tax bill.______

Which of the following may be used to establish transfer prices?

Which of the following statements about return on investment (ROI) is false?

Terra Company has two divisions,the Retail Division and the Wholesale Division.The following information was gathered for the two divisions for the current year: $\begin{array} { l l c } & \text { Retail Division } & \text { Wholesale Division } \\\text { Operating income } & \$ 2,500,000 & \$ 6,000,000 \\\text { Operating assets } & \$ 16,000,000 & \$ 36,000,000\end{array}$ Assuming that these are the only divisions of Terra Company,what is the ROI for the company as a whole?

In the current year,the New Products Division of Testar Company had operating income of $8,000,000 and operating assets of $44,800,000.Testar has set a target return on investment (ROI) of 16% for each of its divisions.Which of the following statements is correct?

The Water Management Company has two operating divisions,the Service Division and the Irrigation Division.The company evaluates the performance of its divisions using the return on investment (ROI)measure.The following information pertains to the two divisions as of the end of the current year. $\begin{array}{l}&\text { Service } & \text { Irrigation } & \\&\text { Division } & \text { Division } & \text { Total }\\\text {Units repaired; Units produced}\\\text {and sold}&8,000&250\\\text {Level of investment in operating}\\\text {assets}&\$400,000&\$1,000,000&\$1,400,000\\\\\text { Expenses: }\\\text { Direct materials } & 40,000 & 400,000 & 440,000 \\\text { Direct labor } & 200,000 & 200,000 & 400,000 \\\text { Overhead } & 25,000 & 250,000 & 275,000\\\text { Selling/administrative (S\&A) }\\\text { costs } & \underline{15,000 }& \underline{150,000} & \underline{ 165,000} \\\text { Total expenses } & \underline{ \$ 280,000} & \underline{\$ 1,000,000 }& \underline{ \$ 1,280,000}\end{array}$ The average service fee was $50.00 per unit for the Service Division,while the average selling price of an irrigation system was $5,000 for the Irrigation Division.The company requires a minimum return on investment of 12%. Required: Compute the return on investment (ROI)measure for both divisions and the company as a whole.Based on ROI alone,which division had the better performance? (Round ROI measures to the nearest whole percent.)

Fairpoint Products provided the following selected information about its consumer products division for the current year: $\begin{array} { l c c } \text { Desired ROI } & 8 \% \\\text { Net Income } & \$100,000 \\\text { Residual Income } & \$ 60,000\end{array}$ Based on this information,the division's investment amount was:

Select the incorrect statement concerning the application of the controllability concept to responsibility accounting.

Describe the concept of decentralization as applied to large business organizations.Why do large organizations practice decentralization?

The Electronics Division of Anton Company reports the following results for the current year: $\begin{array} { l c c } \text { Revenuses } & \$ & 800,000 \\\text { Operating expenses } & \$ & 656,000 \\\text { Operating income } & \$ & 144,000 \\\text { Operating assets } & \$ & 1,200,000\end{array}$ Anton Company has set a target return on investment (ROI) of 11% for the Electronics Division. The Electronic Division's turnover (asset utilization) is:

Marcy is plant manager for Diversified Industries.She and the managers of four other plants report to the vice president in charge of manufacturing operations.Three department managers report to Marcy.Select the incorrect statement regarding the preparation of responsibility reports.

Sanford Company reported the following information for the current year: $\begin{array} { l c c } \text { Sales } & \$ 880,000 \\\text { Average operating assets } & \$ 475,000 \\\text { Desired ROI } & 10 \% \\\text { Net Income } & \$ 90,000\end{array}$ Required: Based on this information,calculate the company's residual income.

Cambridge Company has three divisions that all report to the vice president of manufacturing.Each division has two departments.On Cambridge's organization chart,there will be three lines leading to the vice president of manufacturing,one for each division.

The Electronics Division of Anton Company reports the following results for the current year: $\begin{array} { l c c } \text { Revenues } & \$ & 800,000 \\\text { Operating expenses } & \$ & 656,000 \\\text { Operating income } & \$ & 144,000 \\\text { Operating assets } & \$ & 1,200,000\end{array}$ Anton Company has set a target return on investment (ROI) of 11% for the Electronics Division. The Electronic Division's margin is: