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Chapter 25 Performance Evaluation for Decentralized Operations

Multiple Choice
Identify the choice that best completes the statement or answers the question.

In what type of company are all major planning and operating decisions made by the managers of the separate divisions?
A 1. a. decentralized
b. divisional
c. profitable
d. centralized

What is the process of measuring and reporting operating data by responsibility centre?
B 2. a. divisional accounting
b. responsibility accounting
c. using a cost centre
d. using an activity base

In which of the following does the unit manager have responsibility and authority for controlling the costs incurred?
C 3. a. divisional accounting
b. responsibility accounting
c. using a cost centre
d. using an activity base

Each service department uses which of the following to charge service department expenses to the Theme Park and Movie
C 4. Production divisions?
a. divisional accounting
b. responsibility accounting
c. an activity base
d. a cost centre

How can the formula to calculate the rate of return on investment be expressed in its simplest form?
C 5. a. Sales Invested assets
b. Income from operations Sales
c. Profit margin Investment turnover
d. Income from operations/invested assets

The profit margin for Division X is 12%, and the investment turnover is 1.5. What is the rate of return on investment for
B 6. Division X?
a. 13.5%
b. 18.0%
c. 12.0%
d. 15.0%

Assume that income from operations amounts to $250,000 and top management has established 13% as the minimum rate
C 7. of return on divisional assets totalling $1,000,000. What is the residual income for the division?
a. $250,000
b. $130,000
c. $120,000
d. $80,000

Which of the following is correct regarding transfer prices?


B 8. a. They can be set above the market price.
b. They can be set as low as the variable cost per unit.
c. They should never be negotiated.
d. They cannot be used when decentralized units are set up as cost centres.

Materials used by the company in producing Division Cs product are currently purchased from outside suppliers at a cost of
C 9. $15 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 $10.00 per unit. A transfer price of $11.00 per unit is negotiated and
60,000 units of material are transferred, with no reduction in Division As current sales. How much would Division As income
from operations increase?
a. $0
b. $30,000
c. $60,000
d. $90,000

What happens when the cost price approach is used when setting transfer prices?
C 10. a. It requires only fixed costs be used in setting the transfer price.
Chapter 26 Differential Analysis and Product Pricing
Multiple Choice
Identify the choice that best completes the statement or answers the question.

What are costs that have been incurred in the past but are no longer relevant to decision making?
A 1. a. sunk costs
b. relevant costs
c. differential costs
d. discontinued costs

Barron Company is considering replacing equipment that originally cost $250,000 and which has $200,000 accumulated
D 2. amortization to date. A new machine will cost $350,000. What is the sunk cost in this situation?
a. $250,000
b. $200,000
c. $350,000
d. $50,000

What is the total cost concept formula for the markup percentage?
B 3. a. Total costs/Desired profit
b. Desired profit/Total costs
c. Total fixed costs/Total variable costs
d. Total variable costs/Total fixed costs

Ragged Edge Arts has estimated its desired profits at $200,000 and total costs at $2,000,000. What is the markup
B 4. percentage?
a. 5%
b. 10%
c. 15%
d. 20%

What is a method that calculates the difference between the expected selling price and the desired profit?
D 5. a. cost plus pricing
b. theory of constraints
c. product costing
d. target costing

Which of the following identifies and traces costs and expenses to activities and then to specific products?
B 6. a. target costing
b. activity-based costing
c. theory of constraints
d. product costing

What occurs in a production process when the demand for the companys product exceeds the ability to produce the
B 7. product?
a. fabrication
b. a bottleneck
c. assembly
d. a setup

What is a manufacturing strategy that focuses on reducing the influence of bottlenecks on a process?
B 8. a. target costing
b. theory of constraints
c. product costing
d. product market

A business manufactures three similar products for eventual sale: J, K, and L. The selling prices are $30, $40, and $50,
D 9. respectively. The variable costs of producing each are $25, $33, and $35, respectively. Each product must go through the
same machine, and that machine is limited in its production to 1,800 hours per month. Product J takes one hour to process,
Product K takes two hours, and Product L takes three hours. What is the contribution per machine hour for product L?
a. $3.50
b. $7
c. $15
d. $5

A business manufactures three similar products for eventual sale: J, K, and L. The selling prices are $30, $40, and $50,
C 10. respectively. The variable costs of producing each are $25, $33, and $35, respectively. Each product must go through the
same machine, and that machine is limited in its production to 1,800 hours per month. Product J takes one hour to process,
Product K takes two hours, and Product L takes three hours. What is the contribution per machine hour for product K?
a. $5
b. $7
c. $3.50
d. $4