Responsibility Accounting and Transfer Pricing (A.

Decentralization and Performance Evaluation)

MODULE 7 RESPONSIBILITY ACCOUNTING AND TRANSFER PRICING ). A. DECENTRALIZATION AND PERFORMANCE EVALUATION THEORIES: Central !at "n #$. %e&entral !at "n Centralization 3. In a company with a centralized approach to responsibility accounting, upper-level managers typically A. make key decisions only B. implement key decisions only C. both make and implement key decisions . review the outcomes o! key decisions only ecentralization ". #hy would a company decentralize$ A. to train and motivate division managers B. to !ocus top management%s attention to operating decisions C. to allow division managers to concentrate on strategic planning . all o! the above &. Advantages o! decentralization include all o! the !ollowing e'cept A. divisional management is able to react to changing market conditions more rapidly than top management B. divisional management is a source o! personnel !or promotion to top management positions C. decentralization can motivate divisional managers . decentralization permits divisional management to concentrate on company-wide problems and long-range planning (. In a company with a decentralized approach to responsibility accounting, lower-level managers typically A. make key decisions only B. implement key decisions only
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C. both make and implement key decisions . review the outcomes o! key decisions only ecentralization occurs when A. the !irm%s operations are located over a large geographic area to reduce risk B. authority !or important decisions is delegated to lower segments o! the organization C. important decisions are made at the upper levels and the lower levels o! the organization are responsible !or implementing the decisions . none o! the above

G"al &"n'r(en&e) S(*"+t , !at "n - ,ana'e,ent *. "*/e&t #e$ *oal congruence +. Consistency between goals o! the !irm and the goals o! its employees is, A. goal optimization C. goal congruence B. goal con!ormance . goal compensation "-. *oal congruence is most likely to result when A. reports to managers include all costs B. managers% behavior is a!!ected by the criteria used to .udge their per!ormance C. per!ormance evaluation criteria encourage behavior in the company%s best interests as well as in the manager%s best interests . a manager knows the criteria used to .udge his or her per!ormance 3/. #hen a manager takes an action that bene!its his or her responsibility center, but not the company as a whole, A. it is a non-controllable action B. there is a lack o! goal congruence C. the center must be an arti!icial pro!it center . the manager should be !ired 0uboptimization "1. A management decision may be bene!icial !or a given pro!it center, but not !or the entire company. 2rom the overall company viewpoint, this decision would lead to A. goal congruence C. centralization B. suboptimization . ma'imization 3anagement by ob.ectives "). An emphasis on obtaining goal congruence is consistent with a broad managerial approach

Responsibility Accounting and Transfer Pricing (A. Decentralization and Performance Evaluation)

called A. management by crisis B. management by ob.ectives C. management through goal congruence . .ust-in-time philosophy 3+. In a responsibility accounting system, the process in which a supervisor and a subordinate .ointly determine the subordinate%s goals and plans !or achieving these goals is A. 4op-down budgeting C. Bottom-up budgeting B. Imposed budgeting . 3anagement by ob.ectives Re$+"n$ * l t. A&&"(nt n' /. 5esponsibility accounting is a system whose attributes include A. responsibility, liability, and culpability B. liability, accountability, and per!ormance evaluation C. per!ormance evaluation, accountability, and responsibility . culpability, liability, and accountability -. 0ome basic elements o! responsibility accounting are A. chart o! accounts classi!ication C. control-based reports B. budgeting system . all o! the above 1. #hat term identi!ies an accounting system in which the operations o! the business are broken down into reportable segments and the control !unctions o! a !oreperson, sales managers, or supervisor is emphasized$ A. 5esponsibility accounting C. 6perations-research accounting B. Control accounting . Budgetary accounting "7. 4he Atwood Company uses a per!ormance reporting system that re!lects the company%s decentralization o! decision making. 4he departmental per!ormance report shows one line o! data !or each subordinate who reports to the group vice-president. 4he data presented shows the actual costs incurred during the period, the budgeted costs, and all variances !rom budget !or that subordinate%s department. 4he Atwood Company is using a type o! system called A. 2le'ible budgeting C. 5esponsibility accounting B. Contribution budgeting . Cost-bene!it accounting "(. 4he accumulation o! accounting data on the basis o! the individual manager who has the authority to make day-to-day decisions about activities in an area is called
112

A. static reporting. B. !le'ible accounting.

C. responsibility accounting. . master budgeting.

3-. #hich o! the !ollowing is critically important !or a responsibility accounting system to be e!!ective$ A. 8ach employee should receive a separate per!ormance report. B. 0ervice department costs should be allocated to the operating departments that use the service. C. 8ach manager should know the criteria used !or evaluating his or her per!ormance. . 4he details on the per!ormance reports !or individual managers should add up to the totals on the report to their supervisor. 5esponsibility report "3. 4he report to a territorial sales manager which shows the contribution to pro!it by each salesperson in the territory is called A. a pro!it reportA. C. an absorption pro!it report B. a responsibility report . a distribution report Re$+"n$ * l t. &enter$ "/. A responsibility center A. is an organization unit where management control e'ists over incurring costs or generating revenue B. is responsible !or all other departments C. has a responsible manager in charge o! it . all o! the above Activity center 3&. A segment o! an organization !or which management wants to report the cost o! the activities per!ormed separately is called a9n: A. cost center C. activity-based costing center B. activity center . batch activity center Cost center &7. 4he se;uence that re!lects increasing breadth o! responsibility is A. cost center, investment center, pro!it center B. cost center, pro!it center, investment center C. pro!it center, cost center, investment center . investment center, cost center, pro!it center

Responsibility Accounting and Transfer Pricing (A. Decentralization and Performance Evaluation)

37. A cost center is used to A. show responsibility !or scheduling materials, labor, and overhead B. collect costs incurred per!orming a set o! homogeneous activities C. show authority !or choosing product markets and sources o! supply . assign responsibility !or setting the chart o! accounts 3". Cost centers in a responsibility accounting system A. will organize the company into the smallest units o! activity < the individual worker B. will have a speci!ic manager in charge o! every cost center C. should have the same code number !or similar units wherever they appear in an organization . should show the contribution margin in its control report =ro!it center &". A pro!it center is A. a responsibility center that always reports a pro!it. B. a responsibility center that incurs costs and generates revenues. C. evaluated by the rate o! return earned on the investment allocated to the center. . re!erred to as a loss center when operations do not meet the company>s ob.ectives. &&. A responsibility center having control over generating revenue is A. a cost center C. a pro!it center B. an investment center . an operation center Investment center &(. A distinguishing characteristic o! an investment center is that A. revenues are generated by selling and buying stocks and bonds. B. interest revenue is the ma.or source o! revenues. C. the pro!itability o! the center is related to the !unds invested in the center. . it is a responsibility center which only generates revenues. Comprehensive &/. In which type o! responsibility center is the manager held accountable !or its pro!its$ A. Cost center C. Investment center B. =ro!it center . =ro!it centers or Investment centers &-. #hich o! the !ollowing responsibility centers have managers who are held accountable !or
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costs$ A. Cost centers and Investment centers B. 5evenue centers and =ro!it centers C. 5evenue centers and Investment centers . Cost centers and =ro!it centers C"ntr"lla*le - n"n&"ntr"lla*le &"$t$ &). In responsibility accounting the most relevant classi!ication o! costs is A. !i'ed and variable C. discretionary and committed B. incremental and nonincremental . controllable and noncontrollable Controllable costs &1. Controllable costs are costs that A. !luctuate in total in response to small changes in the rate o! capacity utilization. B. will be una!!ected by current managerial decisions. C. management decides to incur in the current period to enable the company to achieve ob.ectives other than !illing customers% orders. . are likely to respond to the amount o! attention devoted to them by a speci!ied manager. &3. 6vertime conditions and pay were recently set by the personnel department. 4he production department has .ust received a re;uest !or a rush order !rom the sales department. 4he production department protests that additional overtime costs would be incurred as a result o! the order. 4he sales department argues the order is !rom an important customer. 4he production department processes the order. In order to control costs, which department should be charged with the overtime costs generated as a result o! the rush order$ A. =ersonnel department B. =roduction department C. 0ales department . 0hared by production department and sales department 3(. #hich one o! the !ollowing would ?64 usually be considered a controllable cost !or the product or division manager$ A. !actory wages C. maintenance B. plant salaries . plant rent e'pense Pr"0 ta* l t. a&&"(nt n' &+. 3icro 3anu!acturing uses an accounting system that charges costs to the manager who has been delegated the authority to make the decisions incurring the costs. 2or e'ample, i! the

Responsibility Accounting and Transfer Pricing (A. Decentralization and Performance Evaluation)

sales manager accepts a rush order that re;uires the incurrence o! additional manu!acturing costs, these additional costs are charged to the sales manager because the authority to accept or decline the rush order was given to the sales manager. 4his type o! accounting system is known as A. 2unctional accounting C. Contribution accounting B. 5eciprocal allocation . =ro!itability accounting B(%'et n' $.$te, 33. A basic budgeting system includes A. a planning schedule B. !ollow-up plan steps

A. B. C. .

rate o! return on investment. success in meeting budgeted goals !or controllable costs. amount o! controllable margin generated by the pro!it center. amount o! contribution margin generated by the pro!it center.

C. involvement o! all managers . all o! these

"&. #hen used !or per!ormance evaluation, periodic internal reports based on a responsibility accounting system should not A. be related to the organization chart B. include allocated !i'ed overhead C. include variances between actual and budgeted controllable costs . distinguish between controllable and noncontrollable costs 31. the most desirable measure o! departmental per!ormance !or evaluating the departmental manager is departmental A. 5evenue less controllable departmental e'penses B. ?et income C. Contribution to indirect e'penses . 5evenue less departmental variable e'penses (7. 6! little or no relevance in evaluating the per!ormance o! an activity would be A. 2le'ible budgets !or mi'ed costs B. 2i'ed budgets !or mi'ed costs C. 4he di!!erence between planned and actual results . 4he planning and control o! !uture activities Per0"r,an&e ,ea$(re$ 5eturn on Investment (+. 5eturn on investment 956I: is calculated as A. divisional operating incomeAdivisional investment B. divisional investment < divisional income C. divisional investmentAdivisional operating income . divisional income < 9divisional investment ' re;uired rate o! return: (3. 4he return on investment calculation only considers the !ollowing components, 0 B 0ales I B Investment ?I B ?et Income #hich o! the !ollowing !ormulas best describes the return on investment calculation$
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Se',ente% n&",e $tate,ent$ "". 0egmented income statements are most meaning!ul to managers when they are prepared A. on an absorption cost basis C. on a cost behavior basis B. on a cash basis . in a multi-step !ormat Per0"r,an&e e#al(at "n 3). 4he criteria used !or evaluating per!ormance A. should be designed to help achieve goal congruence B. can be used only with pro!it centers and investment centers C. should be used to compare past per!ormance with current per!ormance . motivate people to work in the company%s best interest (&. 6! most relevance in deciding how or which costs should be assigned to a responsibility center is the degree o! A. Avoidability C. Causality B. Controllability . @ariability (". Internal reports prepared under the responsibility accounting approach should be limited to which o! the !ollowing costs$ A. 6nly variable costs o! production B. 6nly conversion costs C. 6nly controllable costs . 6nly costs properly allocable to the cost center under generally accepted accounting principles (1. 4he best measure o! the per!ormance o! the manager o! a pro!it center is the

Responsibility Accounting and Transfer Pricing (A. Decentralization and Performance Evaluation)

A. 9IA0: ' 90A?I: B IA?I B. 9IA0: ' 9?IA0: B 9I' ?I: ' 90 ' 0:

C. 90AI: ' 9?IA0: B ?IAI . 90AI: ' 90A?I: B 90 ' 0:A9I ' ?I:

. physical sales volume, prices, variable costs, and !i'ed costs. 5esidual Income /7. Esing residual income !or evaluating per!ormance A. penalizes managers whose segments have low 56Is B. penalizes managers o! relatively large segment C. encourages managers to ma'imize pesos o! pro!it a!ter a re;uired 56I has been achieved . encourage managers to ma'imize 56I !or the company /3. 5esidual income A. is always the best measure o! divisional per!ormance B. is not as good a measure o! per!ormance as 56I C. overcomes some o! the problems associated with 56I . cannot be used by divisions that deal with others in the same company /1. #hen a !irm uses residual income to make decisions, the !irm should !avor those pro.ects whose residual income A. is closest to the !irm%s minimum capital rate B. is lowest C. is highest . e'ceeds a speci!ic target amount -&. A division>s investment in con.unction with the residual income may be A. operating assets B. operating and non-operating assets C. assets minus current liabilities . any o! the above -/. In order to promote goal congruence a manager o! an investment center is best evaluated using A. standard variable costing income statements B. return on investment C. budgets and standard costs . residual income -(. An advantage o! residual income is that it encourages managers to A. accept pro.ects which provide returns in e'cess o! the company>s re;uired rate o! return B. to increase asset turnover
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(-. 4o properly motivate divisional management, the divisional 56Is should be A. 8;ual B. *reater in the less pro!itable divisions to motivate those divisions to achieve higher 56Is C. Cower in more pro!itable divisions in which motivation is necessary . i!!erent based upon strategic goals o! the !irm /". 8valuating per!ormance using 56I encourages managers to !ocus on A. income and investment B. cost e!!iciency and operating asset e!!iciency C. both a and b . neither a nor b /+. A measure !re;uently used to evaluate the per!ormance o! the manager o! an investment center is A. the amount o! pro!it generated. B. the rate o! return on !unds invested in the center. C. the percentage increase in pro!it over the previous year. . departmental gross pro!it. -". In the !ormula !or 56I, idle plant assets are A. included in the calculation o! controllable margin. B. included in the calculation o! operating assets. C. e'cluded in the calculation o! operating assets. . e'cluded !rom total assets. u=ont 3odel ((. C company%s return on investment is a!!ected by a change in A. B. Capital turnover Des Des =ro!it margin on sales Des ?o

C. ?o ?o

. ?o Des

//. 5eturn on investment !or divisions and other company segments is a !unction o! A. assets employed and e'pected !uture cash !lows. B. contribution margin and invested capital. C. investment turnover and pro!it margin on sales.

Responsibility Accounting and Transfer Pricing (A. Decentralization and Performance Evaluation)

C. attempt to increase the margin . all o! the above 8conomic value added -7. In contrast to residual income 95I:, economic value added 98@A: uses, A. the !irm>s minimum rate o! return instead o! its cost o! capital. B. the !irm>s cost o! capital instead o! its minimum rate o! return C. a re;uired rate o! return. . values determined by using conventional accounting policies -+. #hich o! the !ollowing would promote goal congruence$ A. return on investment C. single measures o! per!ormance B. income based compensation . economic value added 0ensitivity Analysis Return on investment (/. Assuming that sales and net income remain the same, a company%s return on investment will A, Increase i! invested capital increases B. ecrease i! invested capital decreases C. ecrease i! the invested capital-employed turnover rate decreases . ecrease i! the invested capital-employed turnover rate increases /&. 4he other things remaining constant, i! a division doubles its investment turnover, its 56I will A. decrease C. remain constant B. increase . double /(. 6ther !actors remaining unchanged, the rate o! return on investment may be improved by A. increasing investment in assets. B. increasing e'penses. C. reducing sales . decreasing investment in assets. /-. #hich o! the !ollowing will not improve return on investment i! other !actors remain constant$ A. Increasing sales volume while holding !i'ed e'penses constant. B. ecreasing assets. C. Increasing selling prices. . ?one o! the above.
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/). Assuming that sales and net income remain the same, a company%s return on investment 956I: would A. increase i! the invested capital-employed turnover rate decreases. B. Increase i! the invested capital-employed turnover rate increases. C. Increase i! invested capital increases. . ecrease i! invested capital decreases. -3. 4o improve asset turnover in con.unction with 56I computations, A. sales may be increased C. assets may be decreased B. assets may be increased . a and c --. Fow can an investment center improve its return on investment 956I:$ A. increase margin, increase investments B. decrease margin, decrease turnover C. increase margin, increase turnover . decrease margin, increase investments Economic value added -). 8conomic value added would decrease i!, A. operating income increases B. the division invests in a pro.ect wherein the a!ter-ta' operating income is more than the cost o! capital C. operating e'penses increase . cost o! capital decreases E$t ,at n' C(rrent Mar1et Val(e "0 A$$et$ (). #hich o! the !ollowing is ?64 a method !or developing or estimating the current market value o! assets$ A. *ross Book @alue. C. Ci;uidation @alue. B. 5eplacement Cost. . 8conomic @alue Added. C",+re2en$ #e "+. #hich o! the !ollowing is not a true statement$ A. 3any costs are controllable at some level with a company. B. 5esponsibility accounting applies to both pro!it and not-!or-pro!it entities. C. 2ewer costs are controllable as one moves up to each higher level o! managerial responsibility. . 4he term segment is sometimes used to identi!y areas o! responsibility in decentralized

Responsibility Accounting and Transfer Pricing (A. Decentralization and Performance Evaluation)

operations. PROBLEMS: D(P"nt M"%el 5eturn on sales " . 4he ela 3erced Company%s Fousehold =roducts ivision reported in &77) sales o! ="/,777,777, an asset turnover ratio o! 3.7, and a rate o! return on average assets o! "+ percent. 4he percentage o! net income to sales is A. - percent. C. 3 percent B. "& percent. . / percent. Ret(rn "n a$$et$ 5e;uired unit sales & . 4he @alve ivision o! Industrial Company produces a small valve that is used by various companies as a component part in their products. Industrial Company operates its divisions as autonomous units, giving its divisional manager great discretion in pricing and other decisions. 8ach division is e'pected to generate a rate o! return o! at least "( percent on its operating assets. 4he @alve ivision has average operating assets o! =)77,777. 4he valves are sold !or =/ each. @ariable costs are =3 per valve, and !i'ed costs total =(-&,777 per year. 4he ivision has a capacity o! 377,777 units. Fow many valves must the @alve ivision sell each year to generate the desired rate o! return on its assets$ A. &+7,777 C. 3//,3+/ B. 3/7,777 . &-/,777 D # $ "nal ROI 3 . 3arsh Company that had current operating assets o! one million and net income o! =&77,777 had an opportunity to invest in a pro.ect that re;uires an additional investment o! =&/7,777 and increased net income by =(7,777. A!ter the investment, the company>s 56I will be A. "-.7G C. "1.&G B. "+.7G . &7.&G
(

Capital charge 4he divisional return on investment is, A. "/ percent B. &/ percent

"&G C. "3 percent . &7 percent

5e;uired sales / . 4he manager o! the 3ac ivision o! =ower Company e'pects the !ollowing results in &779pesos in millions:, 0ales =(1.-7 @ariable costs 9-7G: &1.)Contribution margin ="1.+( 2i'ed costs "&.77 =ro!it = ).+( Investment, =lant e;uipment ="1./" #orking capital "(.++ =3(.31 56I =).+(A=3(.31 &&.+7G 4he division has a target 56I o! 37 percent, and the manager has asked you to determine how much sales volume the division would need to reach that. Fe states that the sales mi' is relatively constant so variable costs and e;uipment should be close to -7 percent o! sales, !i'ed cost and plant and e;uipment should remain constant, and working capital 9cash, receivables, and inventories: should vary closely with sales in the percentage re!lected above. 4he peso sales that the division needs in order to reach the 37 percent 56I target is A. ="1,+&1,73& C. =/),/17,3&& B. =((,3)3,+)" . =/1,/"7,777 Re$ %(al n&",e . 4he current income !or a subunit is =3-,777. Its current invested capital is =&77,777. 4he subunit is considering purchasing !or =&7,777 e;uipment that will increase annual income by an estimated =&,+77. 4he !irm>s cost o! capital is "&G. I! the e;uipment is purchased, the residual income o! the subunit will A. increase by =&,+77 C. increase by =(77 B. increase by ="-,777 . increase by (G 3inimum selling price ) . 3atipid ivision o! 8'penditures Company e'pects the !ollowing results !or &77), Enit sales )7,777
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4he !ollowing data relate to the 3otor ivision o! 8urosun Company, 0ales @ariable costs irect !i'ed costs Invested capital Allocated actual interest costs

="7,777,777 3,777,777 /,777,777 +,777,777 +77,777

Responsibility Accounting and Transfer Pricing (A. Decentralization and Performance Evaluation)

Enit selling price = "7 Enit variable cost = ( 4otal !i'ed costs =377,777 4otal investment =/77,777 4he minimum re;uired 56I is "/ percent, and divisions are evaluated on residual income. A !oreign customer has approached 3atipid%s manager with an o!!er to buy "7,777 units at =) each. I! 3atipid accepts the order, it would not lose any o! the )7,777 units at the regular price. Accepting the order would increase !i'ed costs by ="7,777 and investment by =(7,777. #hat is the minimum price that 3atipid could accept !or the order and still maintain its e'pected residual income$ A. =/.77 C. =/.-7 B. =(.)/ . =1.77 3a'imum lost unit sales + . 3agastos ivision o! 8'penditures Company e'pects the !ollowing results !or &77-, Enit sales )7,777 Enit selling price = "7 Enit variable cost = ( 4otal !i'ed cost 4otal !i'ed costs = 377,777 4otal investment = /77,777 4he minimum re;uired 56I is "/ percent, and divisions are evaluated on residual income. A !oreign customer has approached 3agastos% manager with an o!!er to buy "7,777 units at =) each. 3agastos ivision has capacity o! )/,777 units and the !oreign customer will not accept !ewer than "7,777 units. Accepting the order would increase !i'ed costs by ="7,777 and investment by =(7,777. At the price o! =) o!!ered by !oreign customer, what is the ma'imum number o! units in regular sales that 3agastos ivision could sacri!ice and still maintain its e'pected residual income$ A. &,333 C. 3,333 B. &,--) . 3,--) E&"n", & Val(e A%%e% 1 . Consider the !ollowing, Investment center%s a!ter-ta' operating pro!it Investment center%s total assets Investment center%s current liabilities

#eighted-average cost o! capital #hat is the economic value added 98@A:$ A. =-7,777 B. = 3,&77

-./G C. = -,777 . =/7,777

Se',ente% In&",e State,ent Controllable segment pro!it margin "7 . 0egment A generated sales revenues o! =(77,777 and variable operating e'penses o! ="+7,777. Its controllable !i'ed e'penses were =(7,777. It was assigned &7G o! =&77,777 o! !i'ed costs controlled by others. 4he common !i'ed costs were =&/,777. #hat was 0egment A>s controllable segment pro!it margin$ A. =&&7,777 C. ="(7,777 B. ="+7,777 . ="-7,777 Sen$ t # t. Anal.$ $ "" . I! the investment turnover increased by 37G and 560 decreased by &7G, the 56I would A. increase by 37G C. increase by -G B. increase by (G . none o! these
"&

. I! the investment turnover decreased by "7G and 560 decreased by 37G, the 56I would A. increase by 37G C. decrease by "7G B. decrease by 3)G . none o! the above

C",+re2en$ #e Ese the !ollowing in!ormation to answer ;uestions & thru -, Carlyle Company had the !ollowing in!ormation pertaining to &77/, =ro!it 0ales Asset 4urnover ratio 4he desired minimum rate o! return is "/ percent.
"3

="77,777 =",777,777 & times

. #hat is the 56I$ A. "7 percent B. / percent . #hat is the return on sales$ A. "7 percent B. / percent

C. &7 percent . "/ percent C. &7 percent . "/ percent

= /7,777 +77,777 +7,777

118

"(

Responsibility Accounting and Transfer Pricing (A. Decentralization and Performance Evaluation)

"/

. #hat is the amount o! assets$ A. =&/7,777 B. =/77,777

C. =",777,777 . =&,777,777

"-

. 4he manager o! Carlyle is paid a bonus based on 56I. #ould the manager invest in a pro.ect that will pay a return on investment o! "+ percent$ A. Des, because the pro.ect>s 56I e'ceeds the desired minimum rate o! return. B. Des, because the pro.ect>s 56I is greater than the company>s current 56I. C. Des, because the pro.ect>s 56I is e;ual than the company>s current 56I. . ?o, because the pro.ect>s 56I is less than the company>s current 56I. . #hat is Carlyle>s residual income$ A. = &/,777 B. =9 /7,777: C. =9&77,777: . = "/7,777

")

119

. .

Answer, A 5eturn on 0ales, "+G H 3 B -G Answer, A 6perating pro!it, 97."( ' =)77,777: Enits sold B 92i'ed costs I =ro!it: H EC3 9=(-&,777 I =1+,777: H =& 9&77,777 I (7,777: H 9"3 I 7.&/3: =1+,777 &+7,777 "1.&G

. Answer, C ?ew 56I, .

Answer, B 6perating income, "73 < 33 < /3 B =& 3illion 56I B =&3 H =+3 B &/G

. Answer, C Cet 0 B 0ales 7.39"1,/"7,777 I 7.30: B 9.(0 < "&,777,777: 0 B /),/17,3&&./+ . Answer, C Increase in annual income Additional re;uired returns 9=&7,777 ' 7."&: Increase in residual value =&,+77 &,(77 = (77 =(.77 ".77 7.-7 =/.-7

. Answer, C Enit variable cost Incremental unit !i'ed cost 9="7,777A"7: 3inimum return per =" o! additional asset re;uirement (7,777 ' 7."/ A"7,777 3inimum selling price . Answer, A Contribution provided by "7,777 units "7,777 ' 9).77 < /.-7: ivided by regular contribution margin per unit 3a'imum decrease in regular sales

"(,777 H &,333

. Answer, B 8@A B Investment center>s a!ter-ta' operating income - 9Investment center>s total assets - Investment center>s current liabilities: ' #eighted-average cost o! capitalJ. ?et operating pro!it =/7,777 Cost o! investment 9=+77,777 < =+7,777: ' 7.7)/ (-,+77 8conomic @alue Added = 3,&77 . Answer, B Controllable segment pro!it margin B 5evenue - 90egment>s variable operating costs I Controllable !i'ed costs:. 9=(77,777 < ="+7,777 < =(7,777: ="+7,777 Answer, B 9".3 ' 7.+: < "77G B (.7G Answer, B ecrease in 56I, 97.17 ' 7.)7: < ".77 B 3).7G

10

11

. .

12

13

Answer, C 56I B 6perating =ro!it H Average investment Average 6perating assets, 9=",777,777 H &: B =/77,777 56I, 9="77,777 H =/77,777: B &7G Answer, A 5eturn on sales B =ro!it H ?et sales ="77,777 H =",777,777 B "7G Answer, B 4otal assets B 0ales H Asset turnover =",777,777 H & B =/77,777

14

15

16

. Answer, ?o, because the manager>s bonus would go down because the company>s 56I is &7 percent only. . Answer, A 6perating pro!it Cess 5e;uired return on average assets, 9=/77,777 ' "/G: 5esidual income ="77,777 )/,777 = &/,777

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