Professional Documents
Culture Documents
10Decentralization: Responsibility Accounting,
Performance Evaluation, and Transfer Pricing
1. Responsibility accounting is a system that measures the results of each responsibility center and compares
those results with some expected or budgeted outcome.
True False
2. A responsibility center is a part of a business whose workers are accountable for specified activities.
True False
3. In an investment responsibility center, the manager is only responsible for costs.
True False
4. In centralized organizations, lowerlevel managers are responsible only for implementing decisions.
True False
5. Decentralization is the practice of delegating decisionmaking authority to the lower levels of management.
True False
6. Local managers can make better decisions using distant information and outside managers can provide more
timely responses to changing conditions.
True False
7. Cognitive limitations mean it is difficult for central managers to be fully knowledgeable about all products
and markets.
True False
8. Decentralization stimulates competition among the divisions of a firm.
True False
9. Return on investment (ROI) refers to earnings before interest and income taxes.
True False
10. Margin is the ratio of operating income to sales.
True False
11. One disadvantage of ROI in evaluating performance is that it encourages managers to slack off.
True False
12. Economic value added (EVA) is aftertax operating income minus the total annual cost of capital.
True False
13. Goal congruence means that the goals of managers are aligned with the goals of the company.
True False
14. Firms encourage goal congruence by constructing management early retirement programs.
True False
15. It is important for the multinational firm to separate the evaluation of a division manager from the division.
True False
16. Transfer pricing exists when one division of a company produces a product that can be used in the
production by a different division.
True False
17. A transfer price is the price charged by one division of a company to another company.
True False
18. The transfer price is revenue to the selling division and cost to the buying division.
True False
19. The transfer pricing problem concerns finding a system that simultaneously satisfies the three objectives of
the transfer pricing system.
True False
20. The minimum transfer price is the absolute maximum price that can be accepted.
True False
21. Investments are not controlled by managers of a __________ center.
________________________________________
22. The delegation of decisionmaking authority to successively lower management levels is called __________
.
________________________________________
23. When the major functions of a company are controlled by top management, it is called __________ .
________________________________________
24. __________ managers can make better decisions using __________ information.
________________________________________
25. __________ limitations make it difficult for any central manager to know everything about all products and
markets.
________________________________________
26. __________ is aftertax operating profit minus the total annual cost of capital.
________________________________________
27. __________ are a noncash benefit received over and above salary.
________________________________________
28. In a multinational firm, it is important to separate the evaluation of a division manager from the __________
.
________________________________________
29. The __________ transfer price is the minimum price acceptable when transferring a product.
________________________________________
30. The price charged for goods produced in one division to another division within the company is called the
__________ price.
________________________________________
31. Responsibility accounting is defined as a system that
A. defines responsibility by function only.
B. measures actual results against a flexible budget.
C. measures the results of a manager responsible for revenues and costs.
D. measures the results of each responsibility center and compares those results with some measure of expected
or budgeted outcome.
32. A manufacturing division of a company would most likely be evaluated as a(n)
A. cost center.
B. investment center.
C. revenue center.
D. asset center.
33. Which of the following departments is likely to be an investment center?
A. machining department
B. food products division
C. personnel department
D. accounting department
34. Both revenue center and profit center managers are responsible for achieving
A. budgeted revenues.
B. budgeted net income.
C. budgeted costs.
D. budgeted contribution margin.
35. Which of the following departments would NOT be classified as a profit center?
A. hardware department
B. men's shoes department
C. accounting department
D. automotive department
36. Which of the following responsibility centers would have a manager responsible for revenues, costs, and
investments?
A. cost center
B. investment center
C. profit center
D. expense center
37. A manager of a profit center does not control:
A. Revenues
B. Costs
C. Profits
D. Investments
38. The manager of a profit center is responsible for
A. delivering a quality product or service at reasonable but minimal cost.
B. decisions to invest in capital equipment.
C. decisions regarding revenue generation.
D. both a and c.
39. The manager of an investment center is responsible for
A. decisions regarding costs.
B. decisions regarding revenues.
C. decisions to invest in assets.
D. all of these.
40. The manager of a cost center is responsible for
A. decisions regarding costs.
B. decisions regarding revenues.
C. decisions to invest in assets.
D. both a and b.
41. Which of the following departments would NOT be a cost center?
A. advertising department
B. city police department
C. building and grounds department
D. sales department
42. An example of an investment center is a
A. production department.
B. company.
C. marketing department.
D. credit department.
43. Responsibility accounting is a system that does NOT consider
A. responsibility.
B. accountability.
C. performance evaluation.
D. static budgeting.
44. The delegation of decisionmaking authority to successively lower management levels in an organization is
called:
A. Centralization
B. Decentralization
C. Optimization
D. An unfavorable overhead variance
45. When top management controls the major functions of an organization it is called:
A. Centralization
B. Decentralization
C. Optimization
D. An unfavorable overhead variance
46. Which of the following would NOT be a reason for decentralization?
A. Managers will make decisions for their own benefit, rather than the organization's benefit.
B. Lower level managers have better access to information.
C. Upper management can spend more time focusing on strategic planning and decision making.
D. Lower level managers with decisionmaking ability are more motivated.
47. One of the reasons for decentralization is more timely response. This means
A. lowerlevel managers being more in contact with immediate operating conditions.
B. central management can be free to focus on strategic planning.
C. allowing an organization to determine each division’s contribution to profit and expose each division to
market forces.
D. local management both makes and implements decisions.
48. The return on investment is computed as
A. operating income divided by sales.
B. operating income divided by average operating assets.
C. sales divided by average operating assets.
D. operating asset turnover divided by the operating income margin.
49. Which of the following changes would NOT change return on investment (ROI)?
A. Decrease sales and expenses by the same percentage.
B. Increase total assets.
C. Increase sales dollars by the same amount as total assets.
D. Decrease sales and expenses by the same dollar amount.
50. Which of the following changes would increase return on investment (ROI)?
A. Decrease sales and expenses by the same percentage.
B. Increase total assets.
C. Increase sales and expenses by the same percentage.
D. Decrease sales and expenses by the same dollar amount.
51. Omega Division had the following information:
Asset base in Omega Division $500,000
Net income in Omega Division $60,000
Weighted average cost of capital 12%
Target ROI 15%
Margin for Omega Division 20%
What is the return on investment of Omega Division?
A. 12.0%
B. 25.0%
C. 88.0%
D. 833.0%
52. Mako Division had the following information:
Asset base in Mako Division $400,000
Net income in Mako Division $50,000
Weighted average cost of capital 12%
Target ROI 15%
Margin for Mako Division 20%
What is the turnover ratio for Mako Division?
A. 0.200
B. 0.625
C. 0.125
D. 8.000
53. If a company has sales of $2,500,000, net income of $250,000, and an asset base of $1,250,000, its return on
investment is
A. 20%.
B. 10%.
C. 500%.
D. 200%.
54. Patron Corporation had sales of $350,000, income of $10,000, and an asset base of $100,000. The turnover
is
A. 0.035.
B. 0.35.
C. 3.00.
D. 3.50.
55. Lowellson Company had sales of $200,000, net income of $10,000, and an asset base of $300,000. Its
margin is
A. 66.7%.
B. 5.0%.
C. 3.3%.
D. 150.0%.
56. The following information pertains to the three divisions of Merrymount Company:
What is the margin for Division Z?
A. 1.5%
B. 100.0%
C. 6.0%
D. 15.0%
57. Epsilon Division had the following information:
Asset base in Epsilon Division $400,000
Net income in Epsilon Division $50,000
Weighted average cost of capital 12%
Target ROI 15%
Margin for Epsilon Division 20%
If the asset base is decreased by $100,000, with no other changes, the return on investment of Epsilon Division will be
A. 100.0%.
B. 600.0%.
C. 16.7%.
D. 62.5%.
58. The following information pertains to the three divisions of Merrymount Company:
What are the average operating assets for Division Z?
A. $75,000
B. $500,000
C. $1,250,000
D. $187,500
59. The following information pertains to the three divisions of Merrymount Company:
What is the turnover for Division Z?
A. 1.500
B. 0.150
C. 6.670
D. 2.500
60. The following information pertains to the three divisions of Merrymount Company:
What are the sales for Division Y?
A. $500,000
B. $125,000
C. $208,333
D. $25,000
61. The following information pertains to the three divisions of Merrymount Company:
What are the average operating assets for Division Y?
A. $25,000
B. $208,333
C. $5,000
D. $125,000
62. If the Southern Division of American Products Company had a turnover ratio of 4.2 and a margin of 0.10,
the return on investment would be
A. 23.8%.
B. 42.0%.
C. 420.0%.
D. 238.0%.
63. If the margin of 0.3 stayed the same and the turnover ratio of 5.0 increased by 10 percent, the ROI would
A. increase by 10 percent.
B. decrease by 10 percent.
C. increase by 15 percent.
D. remain the same.
64. If the operating asset turnover ratio increased by 40 percent and the margin increased by 30 percent, the
divisional ROI
A. would decrease by 70 percent.
B. would increase by 82 percent.
C. would increase by 30 percent.
D. cannot be determined.
65. If the operating asset turnover increased by 50 percent and the margin increased by 50 percent, the ROI
would increase by
A. 50 percent.
B. 25 percent.
C. 100 percent.
D. 125 percent.
66. If the turnover increased by 30 percent and the margin decreased by 30 percent, the ROI would
A. decrease by 9 percent.
B. increase by 69 percent.
C. increase by 91 percent.
D. stay the same.
67. Which of the following is NOT an advantage of ROI?
A. It encourages managers of departments with high ROIs to invest in average ROI projects.
B. It encourages managers to pay careful attention to the relationships among sales, expenses, and investment.
C. It encourages cost efficiency.
D. It discourages excessive investment in operating assets.
68. Which of the following is NOT a disadvantage of the ROI performance measure?
A. It encourages managers to focus on the long run rather than the short run.
B. It discourages managers from investing in projects that would decrease divisional ROI but increase the
profitability of the company as a whole.
C. It encourages myopic behavior.
D. All are disadvantages of the ROI measure.
69. The emphasis on shortrun results at the expense of the long run is
A. efficient behavior.
B. effective behavior.
C. optimal behavior.
D. myopic behavior.
70. The following information pertains to the three divisions of Merrymount Company:
What is the residual income for Division X?
A. $36,000
B. $45,000
C. $(9,000)
D. $(36,000)
71. Lambda Division had the following information:
Asset base in Lambda Division $400,000
Net income in Lambda Division $50,000
Weighted average cost of capital 12%
Target ROI 15%
Margin for Lambda Division 20%
What is the residual income for Lambda Division?
A. $(10,000)
B. $48,000
C. $7,500
D. $60,000
72. The Women’s Wear of Bigelow Department Store had a net income of $560,000, a net asset base of
$4,000,000, and a required rate of return of 12 percent. Sales for the period totaled $3,000,000. The residual
income for the period is
A. $480,000.
B. $80,000.
C. $120,000.
D. $360,000.
73. Which of the following is a disadvantage of both residual income and ROI?
A. They are both absolute measures of return.
B. They are both difficult to calculate.
C. They both do not discourage myopic behavior.
D. All of these are disadvantages of both ROI and residual income.
74. Omikron Division had the following information:
Asset base in Omikron Division $400,000
Net income in Omikron Division $50,000
Weighted average cost of capital 12%
Target ROI 15%
Margin for Omikron Division 20%
What is EVA for Omikron Division?
A. $2,000
B. $7,500
C. $48,000
D. $60,000
75. The aftertax operating profit minus the total annual cost of capital equals the:
A. Residual income
B. EVA
C. ROI
D. Net income
76. Olden Company has a tax rate of 40 percent. Information for the company is as follows:
Amount Aftertax Cost
Mortgage bonds $1,000,000 0.048
Unsecured bonds 3,000,000 0.050
Common stock 6,000,000 0.150
What is the weighted average cost of capital?
A. 0.0827
B. 0.2480
C. 0.1098
D. 0.0366
77. Olden Company has a tax rate of 40 percent. Information for the company is as follows:
Amount Aftertax Cost
Mortgage bonds $1,000,000 0.048
Unsecured bonds 3,000,000 0.050
Common stock 6,000,000 0.150
What is the EVA if the beforetax operating income is $1,500,000?
A. $(198,000)
B. $402,000
C. $534,000
D. $1,134,000
78. Return on investment can be divided into two separate components
A. margin and profit.
B. margin and turnover.
C. value and turnover.
D. liquidity and margin.
79. Cornwall Company has two divisions, A and B. Information for each division is as follows:
A B
Net earnings for division $40,000 $260,000
Asset base for division $100,000 $1,200,000
Target rate of return 15% 18%
Margin 10% 20%
Weighted average cost of capital 12% 12%
What is the return on investment for A?
A. 18%
B. 40%
C. 20%
D. 15%
80. Cornwall Company has two divisions, A and B. Information for each division is as follows:
A B
Net earnings for division $40,000 $260,000
Asset base for division $100,000 $1,200,000
Target rate of return 15% 18%
Margin 10% 20%
Weighted average cost of capital 12% 12%
What is the total sales amount for B?
A. $666,667
B. $800,000
C. $1,300,000
D. $1,200,000
81. Cornwall Company has two divisions, A and B. Information for each division is as follows:
A B
Net earnings for division $40,000 $260,000
Asset base for division $100,000 $1,200,000
Target rate of return 15% 18%
Margin 10% 20%
Weighted average cost of capital 12% 12%
What is the operating asset turnover for A?
A. 0.15
B. 0.10
C. 4.00
D. 2.50
82. Cornwall Company has two divisions, A and B. Information for each division is as follows:
A B
Net earnings for division $40,000 $260,000
Asset base for division $100,000 $1,200,000
Target rate of return 15% 18%
Margin 10% 20%
Weighted average cost of capital 12% 12%
What is the residual income for A?
A. $25,000
B. $28,000
C. $15,000
D. $40,000
83. Cornwall Company has two divisions, A and B. Information for each division is as follows:
A B
Net earnings for division $40,000 $260,000
Asset base for division $100,000 $1,200,000
Target rate of return 15% 18%
Margin 10% 20%
Weighted average cost of capital 12% 12%
What is EVA for Division A?
A. $40,000
B. $28,000
C. $15,000
D. $25,000
84. Cornwall Company has two divisions, A and B. Information for each division is as follows:
A B
Net earnings for division $40,000 $260,000
Asset base for division $100,000 $1,200,000
Target rate of return 15% 18%
Margin 10% 20%
Weighted average cost of capital 12% 12%
What is EVA for Division B?
A. $144,000
B. $216,000
C. $116,000
D. $44,000
85. Economic value added is calculated by which of the following formulas?
A. EVA = Aftertax operating income + (Weighted average cost of capital ´ Total capital employed)
B. EVA = Aftertax operating income * Weighted average cost of capital
C. EVA = Aftertax operating income (Weighted average cost of capital ´ Total capital employed)
D. EVA = Total capital employed (Weighted average cost of capital ´ Aftertax operating income)
86. EVA encourages the right kind of behavior from divisions because of its emphasis on
A. aftertax net income.
B. total capital employed.
C. true cost of capital.
D. beforetax operating income.
87. Multiple measures of performance are beneficial if they
A. are all financial measures.
B. include nonfinancial operating measures.
C. focus only on shortrun factors.
D. all of these statements are true.
88. A type of fringe benefit received over and above salary is(are) called:
A. Bonus based on net income
B. Cash compensation
C. Perquisites
D. EVA
89. Which of the following is NOT an environmental factor affecting performance evaluation in the
multinational firm?
A. sociological factors
B. economic factors
C. political or legal factors
D. All of these are environmental factors affecting performance evaluation in the multinational firm.
90. Which of the following would be a reason why managers would NOT provide good service?
A. They may have low ability.
B. They may not prefer to work hard.
C. They may prefer to spend company resources on perquisites.
D. All of these are reasons.
91. The right to buy a certain number of shares of a company's stock at a particular price is(are) called:
A. Perquisites
B. Cash compensation
C. Stockbased compensation
D. Stock options
92. Which of the following managerial rewards is NOT a shortterm reward?
A. stock ownership
B. cash bonuses
C. stock options
D. both a and b
93. Goal congruence can be defined as
A. an incentive plan arranged so the managers’ goals are aligned with the shareholders’ goals.
B. managers operating the business in the best interest of the shareholders.
C. tying management rewards to shareholder results.
D. all of these are correct.
94. It is important to separate the evaluation of the manager from the evaluation of the division in a
multinational firm. A manager’s evaluation should NOT include
A. revenues.
B. income taxes.
C. operating costs.
D. cost of goods sold.
95. Which of the following is an economic factor affecting performance evaluation in a multinational firm?
A. currency restrictions
B. economic stability
C. impact of foreign policy
D. both a and b
96. Which of the following is a political or legal factor affecting performance evaluation in a multinational
firm?
A. social attitude toward industry and business
B. literacy rate
C. effect of defense policy
D. currency restrictions
97. Comparison of an international division's ROI can potentially be misleading because of
A. the absence of activitybased management.
B. differing production technologies.
C. the lack of good information.
D. differing environmental factors.
98. Division ‘A’ produces a component and wants to sell it to Division ‘B’. The transfer price is
A. revenue to Division ‘A’ and a cost to Division ‘B’
B. revenue to Division ‘B’ and a cost to Division ‘A’
C. revenue to Division ‘A’ and no effect on Division ‘B’
D. a cost to Division ‘B’ and no effect on Division ‘A’
99. Transfer prices are the prices charged
A. for distributing goods from one warehouse to another.
B. for the goods produced by one division to another division that needs these goods.
C. when delivering goods to the customer.
D. when transferring goods to international divisions.
100. The transfer price that would leave the selling division no worse off if the good is sold to an internal
division is(are) called:
A. The maximum transfer price
B. The negotiated transfer price
C. The minimum transfer price
D. Both a and c
101. The transfer price that would leave the buying division no worse off if an input is purchased from an
internal division is(are) called:
A. The maximum transfer price
B. The minimum transfer price
C. The negotiated transfer price
D. Both a and c
102. In the Bombadier Company, Division A has a product that can be sold either to outside customers or to
Division B. Information about these divisions is given below:
Case 1 Case 2
Division A:
Capacity in units 100,000 100,000
Number of units sold externally 100,000 60,000
Market selling price $90 $75
Variable costs per unit 73 58
Fixed costs per unit based on capacity 10 10
Division B:
Number of units needed for production 40,000 40,000
Purchase price per unit from external supplier $86 $74
The company uses the opportunity cost approach to transfer pricing. What is the minimum transfer price in Case 1?
A. $90
B. $73
C. $83
D. $86
103. In the Bombadier Company, Division A has a product that can be sold either to outside customers or to
Division B. Information about these divisions is given below:
Case 1 Case 2
Division A:
Capacity in units 100,000 100,000
Number of units sold externally 100,000 60,000
Market selling price $90 $75
Variable costs per unit 73 58
Fixed costs per unit based on capacity 10 10
Division B:
Number of units needed for production 40,000 40,000
Purchase price per unit from external supplier $91 $74
The company uses the opportunity cost approach to transfer pricing. What is the maximum transfer price in Case 1?
A. $90
B. $91
C. $83
D. $73
104. In the Bombadier Company, Division A has a product that can be sold either to outside customers or to
Division B. Information about these divisions is given below:
Case 1 Case 2
Division A:
Capacity in units 100,000 100,000
Number of units sold externally 100,000 60,000
Market selling price $90 $75
Variable costs per unit 73 58
Fixed costs per unit based on capacity 10 10
Division B:
Number of units needed for production 40,000 40,000
Purchase price per unit from external supplier $86 $74
The company uses the opportunity cost approach to transfer pricing. What is the minimum transfer price in Case 2?
A. $58
B. $74
C. $68
D. $75
105. In the Bombadier Company, Division A has a product that can be sold either to outside customers or to
Division B. Information about these divisions is given below:
Case 1 Case 2
Division A:
Capacity in units 100,000 100,000
Number of units sold externally 100,000 60,000
Market selling price $90 $75
Variable costs per unit 73 58
Fixed costs per unit based on capacity 10 10
Division B:
Number of units needed for production 40,000 40,000
Purchase price per unit from external supplier $86 $74
The company uses the opportunity cost approach to transfer pricing. What is the maximum transfer price in Case 2?
A. $75
B. $68
C. $74
D. $58
106. In the Bombadier Company, Division A has a product that can be sold either to outside customers or to
Division B. Information about these divisions is given below:
Case 1 Case 2
Division A:
Capacity in units 100,000 100,000
Number of units sold externally 100,000 60,000
Market selling price $90 $75
Variable costs per unit 73 58
Fixed costs per unit based on capacity 10 10
Division B:
Number of units needed for production 40,000 40,000
Purchase price per unit from external supplier $86 $74
The company uses the opportunity cost approach to transfer pricing. Which case should not be transferred internally?
A. Both should be transferred internally.
B. Neither should be transferred internally.
C. Case 1
D. Case 2
107. When there is an outside market for an intermediate product that is perfectly competitive, the most
equitable method of transfer pricing is
A. market price.
B. production cost pricing.
C. variable cost pricing.
D. cost plus markup pricing.
108. The Engine Division provides diesel engines for the Motor Home Division of a company. The standard
unit costs for Engine Division are as follows:
Direct materials $ 600
Direct labor 1,200
Variable overhead 300
Fixed overhead 150
Market price per unit 2,730
What is the best transfer price to avoid transfer price problems?
A. $2,100
B. $600
C. $1,800
D. $2,730
109. Negotiated prices are transfer prices
A. determined between a division and corporate headquarters.
B. negotiated with external customers.
C. used when supplying and buying divisions independently agree on a price.
D. agreed to by division management and employees.
110. When there is an outside market for an intermediate product that is perfectly competitive, the most
equitable method of transfer pricing is
A. market price.
B. production cost pricing.
C. variable cost pricing.
D. cost plus markup pricing.
111. The “floor” in transfer pricing is
A. the transfer price that would leave the buying division no worse off if an input is purchased from an internal
division.
B. the transfer price that would leave the selling division no worse off if the good is sold to an internal division.
C. the transfer price that would leave the buying division worse off if an input is purchased from an internal
division.
D. none of these.
112. The Jet Engine Division provides engines for the Jet Plane Division of a company. The standard unit costs
for the Jet Engine Division are as follows:
Direct materials $ 600
Direct labor 1,200
Variable overhead 300
Fixed overhead 150
Market price per unit 2,730
The engine department has excess capacity. What is the best transfer price to avoid transfer price problems?
A. $1,350
B. $900
C. $2,100
D. $300
113. Hydroxide Company has two divisions, the Blending Division and Canning Division. The Blending
Division sells chemicals to the Canning Division.
Standard costs for the Blending Division are as follows:
Direct materials $3.00 per gallon
Direct labor 2.40 per gallon
The Canning Division uses the following predetermined overhead rate:
Variable overhead $3.60 per gallon
Fixed overhead 2.40 per gallon
Total $6.00 per gallon
What is the transfer price for the chemicals per gallon based on standard variable cost?
A. $3.00
B. $9.00
C. $5.40
D. $11.40
114. The Engine Division provides engines for the Truck Division of a company. The standard unit costs for the
Engine Division are as follows:
Direct materials $ 600
Direct labor 1,200
Variable overhead 300
Fixed overhead 150
Market price per unit 2,730
What is the transfer price based on full cost plus a markup of 30 percent?
A. $585
B. $2,925
C. $2,760
D. $2,730
115. The Chasis Division provides frames for the Tractor Division of a company. The standard unit costs for the
Chasis Division are as follows:
Direct materials $ 800
Direct labor 1,500
Variable overhead 400
Fixed overhead 350
Market price per unit 4,575
What is the transfer price based on full cost plus a markup of 20 percent?
A. $5,490
B. $4,575
C. $3,240
D. $3,660
116. The Engine Division provides engines for the Final Assembly Division of a company. The standard unit
costs for the Engine Division are as follows:
Direct materials $ 600
Direct labor 1,200
Variable overhead 300
Fixed overhead 150
Market price per unit 2,730
What is the transfer price based on variable product costs plus a fixed fee of $210?
A. $210
B. $1,800
C. $2,100
D. $2,310
117. Gunnison Furniture had the following historical accounting data, per hundred board feet, concerning one of
its products:
Finished shelving:
Direct materials $30
Direct labor 16
Variable overhead 10
Fixed overhead 12
Variable selling expenses 8
Fixed selling expenses 4
The shelving is normally transferred internally from the Cutting Division to the Finishing Division. It also may be sold externally for $110 per
hundred board feet. The minimum profit level accepted by the company is a markup of 20 percent.
If the negotiated price is used, Gunnison Furniture's transfer price should be a
A. maximum of $100.80.
B. minimum of $84.00.
C. minimum of $80.00.
D. maximum of $110.00.
118. Gunnison Furniture had the following historical accounting data, per hundred board feet, concerning one of
its products:
Finished shelving:
Direct materials $30
Direct labor 16
Variable overhead 10
Fixed overhead 12
Variable selling expenses 8
Fixed selling expenses 4
The shelving is normally transferred internally from the Cutting Division to the Finishing Division. It also may be sold externally for $110 per
hundred board feet. The minimum profit level accepted by the company is a markup of 20 percent.
If the variable manufacturing cost transfer price method is used without a fixed fee, Gunnison Furniture's transfer price will be
A. $56
B. $84
C. $64
D. $68
119. RagstoRiches Corporation has two divisions, X and Y. Division X sells its product to Division Y.
Standard costs for Division X are as follows:
Direct materials $ 4 per unit
Direct labor 2 per unit
Variable overhead 5 per unit
Fixed overhead 3 per unit
Total $14 per unit
What is the transfer price for Division X based on standard variable cost plus a markup of 25 percent?
A. $11.00
B. $17.50
C. $13.75
D. $7.50
120. The Engine Division provides engines for the Tractor Division of a company. The standard unit costs for
the Engine Division are as follows:
Direct materials $ 600
Direct labor 1,200
Variable overhead 300
Fixed overhead 150
Market price per unit 2,730
What is the transfer price based on variable product costs plus 20 percent?
A. $720
B. $2,160
C. $2,100
D. $2,520
121. Panther Company had the following historical accounting data per unit:
Direct materials $60
Direct labor 30
Variable overhead 15
Fixed overhead 24
Variable selling expenses 45
Fixed selling expenses 9
The units are normally transferred internally from Division A to Division B. The units also may be sold externally for $210 per unit. The minimum
profit level accepted by the company is a markup of 30 percent. There were no beginning or ending inventories.
If the negotiated price is used, Division A's transfer price should be a
A. minimum of $120.00.
B. minimum of $153.00.
C. maximum of $198.90.
D. maximum of $210.00.
122. Panther Company had the following historical accounting data per unit:
Direct materials $60
Direct labor 30
Variable overhead 15
Fixed overhead 24
Variable selling expenses 45
Fixed selling expenses 9
The units are normally transferred internally from Division A to Division B. The units also may be sold externally for $210 per unit. The minimum
profit level accepted by the company is a markup of 30 percent. There were no beginning or ending inventories.
What would be the transfer price if Division X uses full cost plus markup?
A. $198.90
B. $167.70
C. $136.50
D. $129.00
123. Panther Company had the following historical accounting data per unit:
Direct materials $60
Direct labor 30
Variable overhead 15
Fixed overhead 24
Variable selling expenses 45
Fixed selling expenses 9
The units are normally transferred internally from Division A to Division B. The units also may be sold externally for $210 per unit. The minimum
profit level accepted by the company is a markup of 30 percent. There were no beginning or ending inventories.
If variable manufacturing costs without a fixed fee are used as the transfer price, Division A's transfer price would be
A. $60.
B. $105.
C. $90.
D. $144.
124. Worldwide Inc., is a multinational company with divisions around the world. Division A in the United
States purchases a part from Division G in China. The part can be purchased externally for $7 each.
Transportation costs amount to $1 and the commission of $.50 will not need to be paid.
What is the transfer price using the comparable uncontrolled price method?
A. $8.50
B. $8
C. $7
D. $7.50
125. Worldwide Inc., is a multinational company with divisions around the world. Division A in the United
States purchases a part from Division G in China. There is no outside market for the part. The part is sold for
$12 and normally receives a 20% markup on cost.
What is the transfer price using the resale price method?
A. $9.60
B. $10
C. $12
D. $14.40
126. Worldwide Inc., is a multinational company with divisions around the world. Division A in the United
States purchases a part from Division G in China. There is no outside market for the part because it is used to
manufacture another product. The manufacturing cost for the part is $5. Transportation is $1 and commissions
are $.5 but do not need to be paid.
What is the transfer price using the costplus method?
A. $5.50
B. $6.50
C. $6
D. $5
127. How are accountability, information, and responsibility, related?
128. How do the differences between centralization and decentralization affect decision making? Why would a
Company decentralize its operations?
129. Compare and discuss the advantages and disadvantages of the following performance measures: ROI,
EVA, and Residual Income.
130. Provide the missing data in the following situations:
131. O’Malley Company requires a return on capital of 15 percent. The following information is available for
2014:
Required:
a. Compute return on investment using both book and current values for each division. (Round answer to three decimal places.)
b. Compute residual income for both book and current values for each division.
c. Does book value or current value provide the better basis for performance evaluation?
d. Which division do you consider the most successful?
132. Sporadic Company has the following data for 2014:
Division A Division B
Sales $400,000 $300,000
Contribution margin 160,000 125,000
Operating income 80,000 30,000
Average operating assets 320,000 200,000
Weighted average cost of capital 15% 15%
Sprint Company has a target ROI of 20 percent.
Required:
Calculate the following amounts for each division:
a. Margin ratio
b. Turnover ratio
c. ROI
d. Residual income
e. EVA
133. Nantucket Company has two divisions that report on a decentralized basis. Their results for 2014 were as
follows:
Helmet Ball
Sales $150,000 $300,000
Income $ 15,000 $ 45,000
Asset base $ 75,000 $150,000
Weighted average cost of capital 12% 12%
Required:
Compute the following amounts for each division:
a. Return on investment (ROI).
b. Residual income if the desired rate of return is 20 percent.
c. EVA.
d. Turnover.
e. Margin for each division.
134. Provide the missing data for the following divisions.
135. The records for the Venusian Division show the following data:
Asset base $500,000
Sales Revenues $725,000
Expenses $662,500
Required:
a. What is the margin, turnover, and ROI for Venusian Division?
b. Venusian has an option to make an additional investment that would add $100,000 to the asset base. It would generate an additional
$50,000 in sales revenue and no additional expenses. What would be the effect on margin, turnover, and ROI?
c. Another alternative (independent of alternative ‘b’) for Venusian is to run an advertising campaign that would require additional
advertising expenses of $37,500, but the best estimate is the campaign would generate an additional $75,000 of revenue. What would
be the effect on margin, turnover, and ROI?
136. What problems do owners face in encouraging goal congruence of managers? What is a stock option? How
can stock options encourage goal congruence?
137. The Hampton Division of Long Island Company sells all of its output to the Finishing Division of the
company. The only product of the Hampton Division is chair legs that are used by the Finishing Division. The
retail price of the legs is $20 per leg. Each chair completed by the Finishing Division requires four legs.
Production quantity and cost data for 2014 are as follows:
Chair legs 30,000
Direct materials $135,000
Direct labor $90,000
Factory overhead (25% is variable) $90,000
Operating expenses (20% is variable) $150,000
Required:
Compute the transfer price for a chair leg using:
a. market price.
b. variable product costs plus a fixed fee of 20 percent.
c. full cost plus 20 percent markup.
d. variable costs.
e. full cost plus 10 percent markup.
138. Benjamin Manufacturing Company has two divisions, X and Y. Division X prepares the steel for
processing. Division Y processes the steel into the final product. No inventories exist in either division at the
beginning or end of 2014. During the year, Division X prepared 80,000 lbs. of steel at a cost of $800,000. All
the steel was transferred to Division Y where additional operating costs of $5 per lb. were incurred. The final
product was sold for $3,000,000.
Required:
a. Determine the gross profit for each division and for the company as a whole if the transfer price is $8 per lb.
b. Determine the gross profit for each division and for the company as a whole if the transfer price is $12 per lb.
139. The Uniforms Division of Baseball Company has just revised its actual cost data for 2014. Uniforms
Division transfers goods to the Sport Division. Sport Division can buy the same goods in the open market for
$122 each. Uniforms's new cost data are as follows:
Direct materials $ 40
Direct labor 30
Variable overhead 10
Fixed overhead 16
Variable selling expenses 6
Fixed selling and administrative expenses 12
Total costs $114
Desired return 20
Sales price $134
Current production is 200,000 units, and the Uniforms Division has a capacity of 300,000 units.
Required:
a. What is the lowest price the Uniforms Division should charge for the internal transfers of its goods?
b. What is the highest price the Sport Division should pay for the units?
c. Give the primary reason why the Uniforms Division should reduce its price.
Chapter 10Decentralization: Responsibility Accounting,
Performance Evaluation, and Transfer Pricing Key
1. Responsibility accounting is a system that measures the results of each responsibility center and compares
those results with some expected or budgeted outcome.
TRUE
2. A responsibility center is a part of a business whose workers are accountable for specified activities.
FALSE
3. In an investment responsibility center, the manager is only responsible for costs.
FALSE
4. In centralized organizations, lowerlevel managers are responsible only for implementing decisions.
TRUE
5. Decentralization is the practice of delegating decisionmaking authority to the lower levels of management.
TRUE
6. Local managers can make better decisions using distant information and outside managers can provide more
timely responses to changing conditions.
FALSE
7. Cognitive limitations mean it is difficult for central managers to be fully knowledgeable about all products
and markets.
TRUE
8. Decentralization stimulates competition among the divisions of a firm.
TRUE
9. Return on investment (ROI) refers to earnings before interest and income taxes.
TRUE
10. Margin is the ratio of operating income to sales.
TRUE
11. One disadvantage of ROI in evaluating performance is that it encourages managers to slack off.
FALSE
12. Economic value added (EVA) is aftertax operating income minus the total annual cost of capital.
TRUE
13. Goal congruence means that the goals of managers are aligned with the goals of the company.
TRUE
14. Firms encourage goal congruence by constructing management early retirement programs.
FALSE
15. It is important for the multinational firm to separate the evaluation of a division manager from the division.
TRUE
16. Transfer pricing exists when one division of a company produces a product that can be used in the
production by a different division.
TRUE
17. A transfer price is the price charged by one division of a company to another company.
FALSE
18. The transfer price is revenue to the selling division and cost to the buying division.
TRUE
19. The transfer pricing problem concerns finding a system that simultaneously satisfies the three objectives of
the transfer pricing system.
TRUE
20. The minimum transfer price is the absolute maximum price that can be accepted.
FALSE
21. Investments are not controlled by managers of a __________ center.
profit
22. The delegation of decisionmaking authority to successively lower management levels is called __________
.
decentralization
23. When the major functions of a company are controlled by top management, it is called __________ .
centralization
24. __________ managers can make better decisions using __________ information.
Local; local
25. __________ limitations make it difficult for any central manager to know everything about all products and
markets.
Cognitive
26. __________ is aftertax operating profit minus the total annual cost of capital.
Economic valuation added (EVA) or
Economic valuation added or
EVA
27. __________ are a noncash benefit received over and above salary.
Perquisites
28. In a multinational firm, it is important to separate the evaluation of a division manager from the __________
.
division
29. The __________ transfer price is the minimum price acceptable when transferring a product.
minimum
30. The price charged for goods produced in one division to another division within the company is called the
__________ price.
transfer
31. Responsibility accounting is defined as a system that
A. defines responsibility by function only.
B. measures actual results against a flexible budget.
C. measures the results of a manager responsible for revenues and costs.
D. measures the results of each responsibility center and compares those results with some measure of expected
or budgeted outcome.
32. A manufacturing division of a company would most likely be evaluated as a(n)
A. cost center.
B. investment center.
C. revenue center.
D. asset center.
33. Which of the following departments is likely to be an investment center?
A. machining department
B. food products division
C. personnel department
D. accounting department
34. Both revenue center and profit center managers are responsible for achieving
A. budgeted revenues.
B. budgeted net income.
C. budgeted costs.
D. budgeted contribution margin.
35. Which of the following departments would NOT be classified as a profit center?
A. hardware department
B. men's shoes department
C. accounting department
D. automotive department
36. Which of the following responsibility centers would have a manager responsible for revenues, costs, and
investments?
A. cost center
B. investment center
C. profit center
D. expense center
37. A manager of a profit center does not control:
A. Revenues
B. Costs
C. Profits
D. Investments
38. The manager of a profit center is responsible for
A. delivering a quality product or service at reasonable but minimal cost.
B. decisions to invest in capital equipment.
C. decisions regarding revenue generation.
D. both a and c.
39. The manager of an investment center is responsible for
A. decisions regarding costs.
B. decisions regarding revenues.
C. decisions to invest in assets.
D. all of these.
40. The manager of a cost center is responsible for
A. decisions regarding costs.
B. decisions regarding revenues.
C. decisions to invest in assets.
D. both a and b.
41. Which of the following departments would NOT be a cost center?
A. advertising department
B. city police department
C. building and grounds department
D. sales department
42. An example of an investment center is a
A. production department.
B. company.
C. marketing department.
D. credit department.
43. Responsibility accounting is a system that does NOT consider
A. responsibility.
B. accountability.
C. performance evaluation.
D. static budgeting.
44. The delegation of decisionmaking authority to successively lower management levels in an organization is
called:
A. Centralization
B. Decentralization
C. Optimization
D. An unfavorable overhead variance
45. When top management controls the major functions of an organization it is called:
A. Centralization
B. Decentralization
C. Optimization
D. An unfavorable overhead variance
46. Which of the following would NOT be a reason for decentralization?
A. Managers will make decisions for their own benefit, rather than the organization's benefit.
B. Lower level managers have better access to information.
C. Upper management can spend more time focusing on strategic planning and decision making.
D. Lower level managers with decisionmaking ability are more motivated.
47. One of the reasons for decentralization is more timely response. This means
A. lowerlevel managers being more in contact with immediate operating conditions.
B. central management can be free to focus on strategic planning.
C. allowing an organization to determine each division’s contribution to profit and expose each division to
market forces.
D. local management both makes and implements decisions.
48. The return on investment is computed as
A. operating income divided by sales.
B. operating income divided by average operating assets.
C. sales divided by average operating assets.
D. operating asset turnover divided by the operating income margin.
49. Which of the following changes would NOT change return on investment (ROI)?
A. Decrease sales and expenses by the same percentage.
B. Increase total assets.
C. Increase sales dollars by the same amount as total assets.
D. Decrease sales and expenses by the same dollar amount.
50. Which of the following changes would increase return on investment (ROI)?
A. Decrease sales and expenses by the same percentage.
B. Increase total assets.
C. Increase sales and expenses by the same percentage.
D. Decrease sales and expenses by the same dollar amount.
51. Omega Division had the following information:
Asset base in Omega Division $500,000
Net income in Omega Division $60,000
Weighted average cost of capital 12%
Target ROI 15%
Margin for Omega Division 20%
What is the return on investment of Omega Division?
A. 12.0%
B. 25.0%
C. 88.0%
D. 833.0%
52. Mako Division had the following information:
Asset base in Mako Division $400,000
Net income in Mako Division $50,000
Weighted average cost of capital 12%
Target ROI 15%
Margin for Mako Division 20%
What is the turnover ratio for Mako Division?
A. 0.200
B. 0.625
C. 0.125
D. 8.000
53. If a company has sales of $2,500,000, net income of $250,000, and an asset base of $1,250,000, its return on
investment is
A. 20%.
B. 10%.
C. 500%.
D. 200%.
54. Patron Corporation had sales of $350,000, income of $10,000, and an asset base of $100,000. The turnover
is
A. 0.035.
B. 0.35.
C. 3.00.
D. 3.50.
55. Lowellson Company had sales of $200,000, net income of $10,000, and an asset base of $300,000. Its
margin is
A. 66.7%.
B. 5.0%.
C. 3.3%.
D. 150.0%.
56. The following information pertains to the three divisions of Merrymount Company:
What is the margin for Division Z?
A. 1.5%
B. 100.0%
C. 6.0%
D. 15.0%
57. Epsilon Division had the following information:
Asset base in Epsilon Division $400,000
Net income in Epsilon Division $50,000
Weighted average cost of capital 12%
Target ROI 15%
Margin for Epsilon Division 20%
If the asset base is decreased by $100,000, with no other changes, the return on investment of Epsilon Division will be
A. 100.0%.
B. 600.0%.
C. 16.7%.
D. 62.5%.
58. The following information pertains to the three divisions of Merrymount Company:
What are the average operating assets for Division Z?
A. $75,000
B. $500,000
C. $1,250,000
D. $187,500
59. The following information pertains to the three divisions of Merrymount Company:
What is the turnover for Division Z?
A. 1.500
B. 0.150
C. 6.670
D. 2.500
60. The following information pertains to the three divisions of Merrymount Company:
What are the sales for Division Y?
A. $500,000
B. $125,000
C. $208,333
D. $25,000
61. The following information pertains to the three divisions of Merrymount Company:
What are the average operating assets for Division Y?
A. $25,000
B. $208,333
C. $5,000
D. $125,000
62. If the Southern Division of American Products Company had a turnover ratio of 4.2 and a margin of 0.10,
the return on investment would be
A. 23.8%.
B. 42.0%.
C. 420.0%.
D. 238.0%.
63. If the margin of 0.3 stayed the same and the turnover ratio of 5.0 increased by 10 percent, the ROI would
A. increase by 10 percent.
B. decrease by 10 percent.
C. increase by 15 percent.
D. remain the same.
64. If the operating asset turnover ratio increased by 40 percent and the margin increased by 30 percent, the
divisional ROI
A. would decrease by 70 percent.
B. would increase by 82 percent.
C. would increase by 30 percent.
D. cannot be determined.
65. If the operating asset turnover increased by 50 percent and the margin increased by 50 percent, the ROI
would increase by
A. 50 percent.
B. 25 percent.
C. 100 percent.
D. 125 percent.
66. If the turnover increased by 30 percent and the margin decreased by 30 percent, the ROI would
A. decrease by 9 percent.
B. increase by 69 percent.
C. increase by 91 percent.
D. stay the same.
67. Which of the following is NOT an advantage of ROI?
A. It encourages managers of departments with high ROIs to invest in average ROI projects.
B. It encourages managers to pay careful attention to the relationships among sales, expenses, and investment.
C. It encourages cost efficiency.
D. It discourages excessive investment in operating assets.
68. Which of the following is NOT a disadvantage of the ROI performance measure?
A. It encourages managers to focus on the long run rather than the short run.
B. It discourages managers from investing in projects that would decrease divisional ROI but increase the
profitability of the company as a whole.
C. It encourages myopic behavior.
D. All are disadvantages of the ROI measure.
69. The emphasis on shortrun results at the expense of the long run is
A. efficient behavior.
B. effective behavior.
C. optimal behavior.
D. myopic behavior.
70. The following information pertains to the three divisions of Merrymount Company:
What is the residual income for Division X?
A. $36,000
B. $45,000
C. $(9,000)
D. $(36,000)
71. Lambda Division had the following information:
Asset base in Lambda Division $400,000
Net income in Lambda Division $50,000
Weighted average cost of capital 12%
Target ROI 15%
Margin for Lambda Division 20%
What is the residual income for Lambda Division?
A. $(10,000)
B. $48,000
C. $7,500
D. $60,000
72. The Women’s Wear of Bigelow Department Store had a net income of $560,000, a net asset base of
$4,000,000, and a required rate of return of 12 percent. Sales for the period totaled $3,000,000. The residual
income for the period is
A. $480,000.
B. $80,000.
C. $120,000.
D. $360,000.
73. Which of the following is a disadvantage of both residual income and ROI?
A. They are both absolute measures of return.
B. They are both difficult to calculate.
C. They both do not discourage myopic behavior.
D. All of these are disadvantages of both ROI and residual income.
74. Omikron Division had the following information:
Asset base in Omikron Division $400,000
Net income in Omikron Division $50,000
Weighted average cost of capital 12%
Target ROI 15%
Margin for Omikron Division 20%
What is EVA for Omikron Division?
A. $2,000
B. $7,500
C. $48,000
D. $60,000
75. The aftertax operating profit minus the total annual cost of capital equals the:
A. Residual income
B. EVA
C. ROI
D. Net income
76. Olden Company has a tax rate of 40 percent. Information for the company is as follows:
Amount Aftertax Cost
Mortgage bonds $1,000,000 0.048
Unsecured bonds 3,000,000 0.050
Common stock 6,000,000 0.150
What is the weighted average cost of capital?
A. 0.0827
B. 0.2480
C. 0.1098
D. 0.0366
77. Olden Company has a tax rate of 40 percent. Information for the company is as follows:
Amount Aftertax Cost
Mortgage bonds $1,000,000 0.048
Unsecured bonds 3,000,000 0.050
Common stock 6,000,000 0.150
What is the EVA if the beforetax operating income is $1,500,000?
A. $(198,000)
B. $402,000
C. $534,000
D. $1,134,000
78. Return on investment can be divided into two separate components
A. margin and profit.
B. margin and turnover.
C. value and turnover.
D. liquidity and margin.
79. Cornwall Company has two divisions, A and B. Information for each division is as follows:
A B
Net earnings for division $40,000 $260,000
Asset base for division $100,000 $1,200,000
Target rate of return 15% 18%
Margin 10% 20%
Weighted average cost of capital 12% 12%
What is the return on investment for A?
A. 18%
B. 40%
C. 20%
D. 15%
80. Cornwall Company has two divisions, A and B. Information for each division is as follows:
A B
Net earnings for division $40,000 $260,000
Asset base for division $100,000 $1,200,000
Target rate of return 15% 18%
Margin 10% 20%
Weighted average cost of capital 12% 12%
What is the total sales amount for B?
A. $666,667
B. $800,000
C. $1,300,000
D. $1,200,000
81. Cornwall Company has two divisions, A and B. Information for each division is as follows:
A B
Net earnings for division $40,000 $260,000
Asset base for division $100,000 $1,200,000
Target rate of return 15% 18%
Margin 10% 20%
Weighted average cost of capital 12% 12%
What is the operating asset turnover for A?
A. 0.15
B. 0.10
C. 4.00
D. 2.50
82. Cornwall Company has two divisions, A and B. Information for each division is as follows:
A B
Net earnings for division $40,000 $260,000
Asset base for division $100,000 $1,200,000
Target rate of return 15% 18%
Margin 10% 20%
Weighted average cost of capital 12% 12%
What is the residual income for A?
A. $25,000
B. $28,000
C. $15,000
D. $40,000
83. Cornwall Company has two divisions, A and B. Information for each division is as follows:
A B
Net earnings for division $40,000 $260,000
Asset base for division $100,000 $1,200,000
Target rate of return 15% 18%
Margin 10% 20%
Weighted average cost of capital 12% 12%
What is EVA for Division A?
A. $40,000
B. $28,000
C. $15,000
D. $25,000
84. Cornwall Company has two divisions, A and B. Information for each division is as follows:
A B
Net earnings for division $40,000 $260,000
Asset base for division $100,000 $1,200,000
Target rate of return 15% 18%
Margin 10% 20%
Weighted average cost of capital 12% 12%
What is EVA for Division B?
A. $144,000
B. $216,000
C. $116,000
D. $44,000
85. Economic value added is calculated by which of the following formulas?
A. EVA = Aftertax operating income + (Weighted average cost of capital ´ Total capital employed)
B. EVA = Aftertax operating income * Weighted average cost of capital
C. EVA = Aftertax operating income (Weighted average cost of capital ´ Total capital employed)
D. EVA = Total capital employed (Weighted average cost of capital ´ Aftertax operating income)
86. EVA encourages the right kind of behavior from divisions because of its emphasis on
A. aftertax net income.
B. total capital employed.
C. true cost of capital.
D. beforetax operating income.
87. Multiple measures of performance are beneficial if they
A. are all financial measures.
B. include nonfinancial operating measures.
C. focus only on shortrun factors.
D. all of these statements are true.
88. A type of fringe benefit received over and above salary is(are) called:
A. Bonus based on net income
B. Cash compensation
C. Perquisites
D. EVA
89. Which of the following is NOT an environmental factor affecting performance evaluation in the
multinational firm?
A. sociological factors
B. economic factors
C. political or legal factors
D. All of these are environmental factors affecting performance evaluation in the multinational firm.
90. Which of the following would be a reason why managers would NOT provide good service?
A. They may have low ability.
B. They may not prefer to work hard.
C. They may prefer to spend company resources on perquisites.
D. All of these are reasons.
91. The right to buy a certain number of shares of a company's stock at a particular price is(are) called:
A. Perquisites
B. Cash compensation
C. Stockbased compensation
D. Stock options
92. Which of the following managerial rewards is NOT a shortterm reward?
A. stock ownership
B. cash bonuses
C. stock options
D. both a and b
93. Goal congruence can be defined as
A. an incentive plan arranged so the managers’ goals are aligned with the shareholders’ goals.
B. managers operating the business in the best interest of the shareholders.
C. tying management rewards to shareholder results.
D. all of these are correct.
94. It is important to separate the evaluation of the manager from the evaluation of the division in a
multinational firm. A manager’s evaluation should NOT include
A. revenues.
B. income taxes.
C. operating costs.
D. cost of goods sold.
95. Which of the following is an economic factor affecting performance evaluation in a multinational firm?
A. currency restrictions
B. economic stability
C. impact of foreign policy
D. both a and b
96. Which of the following is a political or legal factor affecting performance evaluation in a multinational
firm?
A. social attitude toward industry and business
B. literacy rate
C. effect of defense policy
D. currency restrictions
97. Comparison of an international division's ROI can potentially be misleading because of
A. the absence of activitybased management.
B. differing production technologies.
C. the lack of good information.
D. differing environmental factors.
98. Division ‘A’ produces a component and wants to sell it to Division ‘B’. The transfer price is
A. revenue to Division ‘A’ and a cost to Division ‘B’
B. revenue to Division ‘B’ and a cost to Division ‘A’
C. revenue to Division ‘A’ and no effect on Division ‘B’
D. a cost to Division ‘B’ and no effect on Division ‘A’
99. Transfer prices are the prices charged
A. for distributing goods from one warehouse to another.
B. for the goods produced by one division to another division that needs these goods.
C. when delivering goods to the customer.
D. when transferring goods to international divisions.
100. The transfer price that would leave the selling division no worse off if the good is sold to an internal
division is(are) called:
A. The maximum transfer price
B. The negotiated transfer price
C. The minimum transfer price
D. Both a and c
101. The transfer price that would leave the buying division no worse off if an input is purchased from an
internal division is(are) called:
A. The maximum transfer price
B. The minimum transfer price
C. The negotiated transfer price
D. Both a and c
102. In the Bombadier Company, Division A has a product that can be sold either to outside customers or to
Division B. Information about these divisions is given below:
Case 1 Case 2
Division A:
Capacity in units 100,000 100,000
Number of units sold externally 100,000 60,000
Market selling price $90 $75
Variable costs per unit 73 58
Fixed costs per unit based on capacity 10 10
Division B:
Number of units needed for production 40,000 40,000
Purchase price per unit from external supplier $86 $74
The company uses the opportunity cost approach to transfer pricing. What is the minimum transfer price in Case 1?
A. $90
B. $73
C. $83
D. $86
103. In the Bombadier Company, Division A has a product that can be sold either to outside customers or to
Division B. Information about these divisions is given below:
Case 1 Case 2
Division A:
Capacity in units 100,000 100,000
Number of units sold externally 100,000 60,000
Market selling price $90 $75
Variable costs per unit 73 58
Fixed costs per unit based on capacity 10 10
Division B:
Number of units needed for production 40,000 40,000
Purchase price per unit from external supplier $91 $74
The company uses the opportunity cost approach to transfer pricing. What is the maximum transfer price in Case 1?
A. $90
B. $91
C. $83
D. $73
104. In the Bombadier Company, Division A has a product that can be sold either to outside customers or to
Division B. Information about these divisions is given below:
Case 1 Case 2
Division A:
Capacity in units 100,000 100,000
Number of units sold externally 100,000 60,000
Market selling price $90 $75
Variable costs per unit 73 58
Fixed costs per unit based on capacity 10 10
Division B:
Number of units needed for production 40,000 40,000
Purchase price per unit from external supplier $86 $74
The company uses the opportunity cost approach to transfer pricing. What is the minimum transfer price in Case 2?
A. $58
B. $74
C. $68
D. $75
105. In the Bombadier Company, Division A has a product that can be sold either to outside customers or to
Division B. Information about these divisions is given below:
Case 1 Case 2
Division A:
Capacity in units 100,000 100,000
Number of units sold externally 100,000 60,000
Market selling price $90 $75
Variable costs per unit 73 58
Fixed costs per unit based on capacity 10 10
Division B:
Number of units needed for production 40,000 40,000
Purchase price per unit from external supplier $86 $74
The company uses the opportunity cost approach to transfer pricing. What is the maximum transfer price in Case 2?
A. $75
B. $68
C. $74
D. $58
106. In the Bombadier Company, Division A has a product that can be sold either to outside customers or to
Division B. Information about these divisions is given below:
Case 1 Case 2
Division A:
Capacity in units 100,000 100,000
Number of units sold externally 100,000 60,000
Market selling price $90 $75
Variable costs per unit 73 58
Fixed costs per unit based on capacity 10 10
Division B:
Number of units needed for production 40,000 40,000
Purchase price per unit from external supplier $86 $74
The company uses the opportunity cost approach to transfer pricing. Which case should not be transferred internally?
A. Both should be transferred internally.
B. Neither should be transferred internally.
C. Case 1
D. Case 2
107. When there is an outside market for an intermediate product that is perfectly competitive, the most
equitable method of transfer pricing is
A. market price.
B. production cost pricing.
C. variable cost pricing.
D. cost plus markup pricing.
108. The Engine Division provides diesel engines for the Motor Home Division of a company. The standard
unit costs for Engine Division are as follows:
Direct materials $ 600
Direct labor 1,200
Variable overhead 300
Fixed overhead 150
Market price per unit 2,730
What is the best transfer price to avoid transfer price problems?
A. $2,100
B. $600
C. $1,800
D. $2,730
109. Negotiated prices are transfer prices
A. determined between a division and corporate headquarters.
B. negotiated with external customers.
C. used when supplying and buying divisions independently agree on a price.
D. agreed to by division management and employees.
110. When there is an outside market for an intermediate product that is perfectly competitive, the most
equitable method of transfer pricing is
A. market price.
B. production cost pricing.
C. variable cost pricing.
D. cost plus markup pricing.
111. The “floor” in transfer pricing is
A. the transfer price that would leave the buying division no worse off if an input is purchased from an internal
division.
B. the transfer price that would leave the selling division no worse off if the good is sold to an internal division.
C. the transfer price that would leave the buying division worse off if an input is purchased from an internal
division.
D. none of these.
112. The Jet Engine Division provides engines for the Jet Plane Division of a company. The standard unit costs
for the Jet Engine Division are as follows:
Direct materials $ 600
Direct labor 1,200
Variable overhead 300
Fixed overhead 150
Market price per unit 2,730
The engine department has excess capacity. What is the best transfer price to avoid transfer price problems?
A. $1,350
B. $900
C. $2,100
D. $300
113. Hydroxide Company has two divisions, the Blending Division and Canning Division. The Blending
Division sells chemicals to the Canning Division.
Standard costs for the Blending Division are as follows:
Direct materials $3.00 per gallon
Direct labor 2.40 per gallon
The Canning Division uses the following predetermined overhead rate:
Variable overhead $3.60 per gallon
Fixed overhead 2.40 per gallon
Total $6.00 per gallon
What is the transfer price for the chemicals per gallon based on standard variable cost?
A. $3.00
B. $9.00
C. $5.40
D. $11.40
114. The Engine Division provides engines for the Truck Division of a company. The standard unit costs for the
Engine Division are as follows:
Direct materials $ 600
Direct labor 1,200
Variable overhead 300
Fixed overhead 150
Market price per unit 2,730
What is the transfer price based on full cost plus a markup of 30 percent?
A. $585
B. $2,925
C. $2,760
D. $2,730
115. The Chasis Division provides frames for the Tractor Division of a company. The standard unit costs for the
Chasis Division are as follows:
Direct materials $ 800
Direct labor 1,500
Variable overhead 400
Fixed overhead 350
Market price per unit 4,575
What is the transfer price based on full cost plus a markup of 20 percent?
A. $5,490
B. $4,575
C. $3,240
D. $3,660
116. The Engine Division provides engines for the Final Assembly Division of a company. The standard unit
costs for the Engine Division are as follows:
Direct materials $ 600
Direct labor 1,200
Variable overhead 300
Fixed overhead 150
Market price per unit 2,730
What is the transfer price based on variable product costs plus a fixed fee of $210?
A. $210
B. $1,800
C. $2,100
D. $2,310
117. Gunnison Furniture had the following historical accounting data, per hundred board feet, concerning one of
its products:
Finished shelving:
Direct materials $30
Direct labor 16
Variable overhead 10
Fixed overhead 12
Variable selling expenses 8
Fixed selling expenses 4
The shelving is normally transferred internally from the Cutting Division to the Finishing Division. It also may be sold externally for $110 per
hundred board feet. The minimum profit level accepted by the company is a markup of 20 percent.
If the negotiated price is used, Gunnison Furniture's transfer price should be a
A. maximum of $100.80.
B. minimum of $84.00.
C. minimum of $80.00.
D. maximum of $110.00.
118. Gunnison Furniture had the following historical accounting data, per hundred board feet, concerning one of
its products:
Finished shelving:
Direct materials $30
Direct labor 16
Variable overhead 10
Fixed overhead 12
Variable selling expenses 8
Fixed selling expenses 4
The shelving is normally transferred internally from the Cutting Division to the Finishing Division. It also may be sold externally for $110 per
hundred board feet. The minimum profit level accepted by the company is a markup of 20 percent.
If the variable manufacturing cost transfer price method is used without a fixed fee, Gunnison Furniture's transfer price will be
A. $56
B. $84
C. $64
D. $68
119. RagstoRiches Corporation has two divisions, X and Y. Division X sells its product to Division Y.
Standard costs for Division X are as follows:
Direct materials $ 4 per unit
Direct labor 2 per unit
Variable overhead 5 per unit
Fixed overhead 3 per unit
Total $14 per unit
What is the transfer price for Division X based on standard variable cost plus a markup of 25 percent?
A. $11.00
B. $17.50
C. $13.75
D. $7.50
120. The Engine Division provides engines for the Tractor Division of a company. The standard unit costs for
the Engine Division are as follows:
Direct materials $ 600
Direct labor 1,200
Variable overhead 300
Fixed overhead 150
Market price per unit 2,730
What is the transfer price based on variable product costs plus 20 percent?
A. $720
B. $2,160
C. $2,100
D. $2,520
121. Panther Company had the following historical accounting data per unit:
Direct materials $60
Direct labor 30
Variable overhead 15
Fixed overhead 24
Variable selling expenses 45
Fixed selling expenses 9
The units are normally transferred internally from Division A to Division B. The units also may be sold externally for $210 per unit. The minimum
profit level accepted by the company is a markup of 30 percent. There were no beginning or ending inventories.
If the negotiated price is used, Division A's transfer price should be a
A. minimum of $120.00.
B. minimum of $153.00.
C. maximum of $198.90.
D. maximum of $210.00.
122. Panther Company had the following historical accounting data per unit:
Direct materials $60
Direct labor 30
Variable overhead 15
Fixed overhead 24
Variable selling expenses 45
Fixed selling expenses 9
The units are normally transferred internally from Division A to Division B. The units also may be sold externally for $210 per unit. The minimum
profit level accepted by the company is a markup of 30 percent. There were no beginning or ending inventories.
What would be the transfer price if Division X uses full cost plus markup?
A. $198.90
B. $167.70
C. $136.50
D. $129.00
123. Panther Company had the following historical accounting data per unit:
Direct materials $60
Direct labor 30
Variable overhead 15
Fixed overhead 24
Variable selling expenses 45
Fixed selling expenses 9
The units are normally transferred internally from Division A to Division B. The units also may be sold externally for $210 per unit. The minimum
profit level accepted by the company is a markup of 30 percent. There were no beginning or ending inventories.
If variable manufacturing costs without a fixed fee are used as the transfer price, Division A's transfer price would be
A. $60.
B. $105.
C. $90.
D. $144.
124. Worldwide Inc., is a multinational company with divisions around the world. Division A in the United
States purchases a part from Division G in China. The part can be purchased externally for $7 each.
Transportation costs amount to $1 and the commission of $.50 will not need to be paid.
What is the transfer price using the comparable uncontrolled price method?
A. $8.50
B. $8
C. $7
D. $7.50
125. Worldwide Inc., is a multinational company with divisions around the world. Division A in the United
States purchases a part from Division G in China. There is no outside market for the part. The part is sold for
$12 and normally receives a 20% markup on cost.
What is the transfer price using the resale price method?
A. $9.60
B. $10
C. $12
D. $14.40
126. Worldwide Inc., is a multinational company with divisions around the world. Division A in the United
States purchases a part from Division G in China. There is no outside market for the part because it is used to
manufacture another product. The manufacturing cost for the part is $5. Transportation is $1 and commissions
are $.5 but do not need to be paid.
What is the transfer price using the costplus method?
A. $5.50
B. $6.50
C. $6
D. $5
127. How are accountability, information, and responsibility, related?
Managers are responsible for making decisions about segments of business. The manager is accountable for the
results of a specified set of activities. Information is collected to measure the results and the expected outcomes.
Without information measures, no comparisons can be made that make managers accountable for their actions
and decisions. Managers must explain deviations. Information, responsibility, and accountability are essential
ingredients of responsibility accounting and performance measurement.
128. How do the differences between centralization and decentralization affect decision making? Why would a
Company decentralize its operations?
Decentralization is the delegation of decisionmaking authority to lower levels. In centralized decision making,
decisions are made at the very top level of management and lowerlevel managers are responsible for
implementing these decisions. For decentralized decision making, decisions are made and implemented by
lowerlevel managers.
Reasons for decentralization: access to local information, cognitive limitations, more timely response, focusing
of central management, training and evaluation, motivation, and enhanced competition.
129. Compare and discuss the advantages and disadvantages of the following performance measures: ROI,
EVA, and Residual Income.
The return on investment measure is a ratio of operating income to average operating assets. It encourages
efficiency, discourages excessive investment, forces managers to pay attention to relationships among variables,
and allows comparison of different size ventures. It discourages investments in ventures that have a lower ROI
than the division currently has and encourages shortrun focus and disregards the cost of capital.
The residual income is the excess earning over the minimum expected return on operating assets. It has the
advantage of accepting projects that add contribution beyond the hurdle rate. However, residual income is an
absolute measure and does not foster comparison of different size projects. It also does not discourage myopic
behavior.
The EVA is a measure that looks at the value added by current operations by determining the excess of aftertax
operating income over the actual cost of capital employed. It looks at the wealth created from operations.
However, it also is subject to manipulation by managers and is an absolute measure, making comparisons of
different size divisions difficult.
130. Provide the missing data in the following situations:
a. $400,000/a = 0.08 a = $5,000,000
b. $400,000/b = 0.16 b = $2,500,000
c. c = $5,000,000/$2,500,000 = 2.0
d. $10,000/d = 0.10 d = $100,000
e. e = $10,000/$250,000 = 4%
f. f = $250,000/$100,000 = 2.5 times
g. $144,000/g = 0.12 g = $1,200,000
h. h = 0.12 ´ 1.5 = 18%
131. O’Malley Company requires a return on capital of 15 percent. The following information is available for
2014:
Required:
a. Compute return on investment using both book and current values for each division. (Round answer to three decimal places.)
b. Compute residual income for both book and current values for each division.
c. Does book value or current value provide the better basis for performance evaluation?
d. Which division do you consider the most successful?
c. When available, current values are the better basis for performance evaluation. Unfortunately, they are more costly to acquire than book
values.
d. Division Y is the most successful division. It has a positive residual income using current values.
132. Sporadic Company has the following data for 2014:
Division A Division B
Sales $400,000 $300,000
Contribution margin 160,000 125,000
Operating income 80,000 30,000
Average operating assets 320,000 200,000
Weighted average cost of capital 15% 15%
Sprint Company has a target ROI of 20 percent.
Required:
Calculate the following amounts for each division:
a. Margin ratio
b. Turnover ratio
c. ROI
d. Residual income
e. EVA
Division A:
a. Margin ratio = $80,000/$400,000 = 20%
b. Turnover ratio = $400,000/$320,000 = 1.25
c. ROI = 0.20 ´ 1.25 = 25%
d. Residual income = $80,000 0.20($320,000) = $16,000
e. EVA = $80,000 0.15($320,000) = $32,000
Division B:
a. Operating income margin = $30,000/$300,000 = 10%
b. Turnover ratio = $300,000/$200,000 = 1.50
c. ROI = 0.10 ´ 1.50 = 15%
d. Residual income = $30,000 0.20($200,000) = $(10,000)
e. EVA = $30,000 0.15($200,000) = $0
133. Nantucket Company has two divisions that report on a decentralized basis. Their results for 2014 were as
follows:
Helmet Ball
Sales $150,000 $300,000
Income $ 15,000 $ 45,000
Asset base $ 75,000 $150,000
Weighted average cost of capital 12% 12%
Required:
Compute the following amounts for each division:
a. Return on investment (ROI).
b. Residual income if the desired rate of return is 20 percent.
c. EVA.
d. Turnover.
e. Margin for each division.
a. Helmet Division: ROI = $15,000/$75,000 = 20%
Ball Division: ROI = $45,000/$150,000 = 30%
b. Helmet Ball
Asset base $75,000 $150,000
Desired return rate
´ 0.20
´ 0.20
Minimum return $15,000 $ 30,000
Earned income $15,000 $ 45,000
Minimum return 15,000 30,000
Residual income $ 0 $ 15,000
c. Helmet Division: EVA = $15,000 ($75,000 ´ 0.12) = $6,000
Ball Division: EVA = $45,000 ($150,000 ´ 0.12) = $27,000
d. Helmet Division: Turnover = $150,000/$75,000 = 2.0
Ball Division: Turnover = $300,000/$150,000 = 2.0
e. Helmet Division: Margin = $15,000/$150,000 = 10%
Ball Division: Margin = $45,000/$300,000 = 15%
134. Provide the missing data for the following divisions.
a. Asset base = $22,500/0.10 = $225,000
b. Operating income margin = $22,500/$300,000 = 7.5%
c. Operating asset turnover = $300,000/$225,000* = 1.33
*From part (a).
d. Sales = $100,000/0.10 = $1,000,000
e. Asset base = $100,000/0.20 = $500,000
f. Operating asset turnover = $1,000,000*/$500,000** = 2.0
*From part (d).
**From part (e).
g. Income = $800,000 ´ 0.12 = $96,000
h. Return on investment = 0.12 ´ 4.0 = 48%
135. The records for the Venusian Division show the following data:
Asset base $500,000
Sales Revenues $725,000
Expenses $662,500
Required:
a. What is the margin, turnover, and ROI for Venusian Division?
b. Venusian has an option to make an additional investment that would add $100,000 to the asset base. It would generate an additional
$50,000 in sales revenue and no additional expenses. What would be the effect on margin, turnover, and ROI?
c. Another alternative (independent of alternative ‘b’) for Venusian is to run an advertising campaign that would require additional
advertising expenses of $37,500, but the best estimate is the campaign would generate an additional $75,000 of revenue. What would
be the effect on margin, turnover, and ROI?
a b c
Asset base $500,000 $600,000 $500,000
Revenue $725,000 $775,000 $800,000
Expenses $662,500 $662,500 $700,000
Operating Income $ 62,500 $112,500 $100,000
(Revenue Expense)
Margin 0.0862 0.1452 0.1250
(Operating Income /
Revenue)
Turnover 1.45 1.2917 1.6
(Revenue / Asset Base)
ROI 0.125 0.1875 0.2
(Operating Income / Asset
Base)
136. What problems do owners face in encouraging goal congruence of managers? What is a stock option? How
can stock options encourage goal congruence?
Owners may have difficulty in developing goal congruence with managers because managers may want to work
less hard than the owner would like and because managers may wish to use the company's resources for their
own benefits. Properly structured incentive pay plans may be successful in overcoming these problems.
A stock option is the right to purchase a certain amount of stock at a fixed price. It can encourage goal
congruence by allowing managers to have an ownership stake in the firm.
137. The Hampton Division of Long Island Company sells all of its output to the Finishing Division of the
company. The only product of the Hampton Division is chair legs that are used by the Finishing Division. The
retail price of the legs is $20 per leg. Each chair completed by the Finishing Division requires four legs.
Production quantity and cost data for 2014 are as follows:
Chair legs 30,000
Direct materials $135,000
Direct labor $90,000
Factory overhead (25% is variable) $90,000
Operating expenses (20% is variable) $150,000
Required:
Compute the transfer price for a chair leg using:
a. market price.
b. variable product costs plus a fixed fee of 20 percent.
c. full cost plus 20 percent markup.
d. variable costs.
e. full cost plus 10 percent markup.
a. $20
b. 1.20 ´ [$135,000 + $90,000 + (0.25 ´ $90,000)]/30,000 = $9.90
c. 1.20 ´ ($135,000 + $90,000 + $90,000)/30,000 = $12.60
d. [$135,000 + $90,000 + (0.25 ´ $90,000) +
(0.20 ´ $150,000)]/30,000 = $9.25
e. [1.10 ´ ($135,000 + $90,000 + $90,000 + $150,000)]/30,000 = $17.05
138. Benjamin Manufacturing Company has two divisions, X and Y. Division X prepares the steel for
processing. Division Y processes the steel into the final product. No inventories exist in either division at the
beginning or end of 2014. During the year, Division X prepared 80,000 lbs. of steel at a cost of $800,000. All
the steel was transferred to Division Y where additional operating costs of $5 per lb. were incurred. The final
product was sold for $3,000,000.
Required:
a. Determine the gross profit for each division and for the company as a whole if the transfer price is $8 per lb.
b. Determine the gross profit for each division and for the company as a whole if the transfer price is $12 per lb.
139. The Uniforms Division of Baseball Company has just revised its actual cost data for 2014. Uniforms
Division transfers goods to the Sport Division. Sport Division can buy the same goods in the open market for
$122 each. Uniforms's new cost data are as follows:
Direct materials $ 40
Direct labor 30
Variable overhead 10
Fixed overhead 16
Variable selling expenses 6
Fixed selling and administrative expenses 12
Total costs $114
Desired return 20
Sales price $134
Current production is 200,000 units, and the Uniforms Division has a capacity of 300,000 units.
Required:
a. What is the lowest price the Uniforms Division should charge for the internal transfers of its goods?
b. What is the highest price the Sport Division should pay for the units?
c. Give the primary reason why the Uniforms Division should reduce its price.
a. Lowest price would be total variable costs per unit; ($40 + $30 + $10 + $6) = $86.
b. Highest price would be the open market price: $122.
c. It should reduce its price because it is not operating at capacity and the fixed costs could be reduced per unit if more units were produced
and sold. Also, there would probably be few, if any, variable selling expenses. The current contribution margin is $36 per unit ($122
$86), which amounts to a 29.5 percent contribution margin ratio on the $122 open market price.