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Exam 14: Performance Evaluation for Decentralized Operations

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Question 1

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Since transfer prices will affect a division's financial performance, it is used by decentralized segments of a business.

A) True
B) False

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Question 2

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If operating income for a division is $6,000, invested assets are $25,000, and sales are $30,000, the profit margin calculated would be 20%.

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B) False

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Question 3

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The profit center income statement should include only controllable revenues and expenses.

If operating income for a division is $120,000, sales are $975,000, and invested assets are $750,000, the investment turnover would be 6.3.

Responsibility accounting reports for profit centers will include:

In the rate of return on investment analysis, the investment turnover component focuses on the efficiency in the use of assets and indicates the number of sales dollar generated for each dollar of invested assets.

The rates at which services are charged to each division are called service department charge rates.

PDT Co.has two divisions, East and West.Invested assets and condensed income statement data for each division for the past year ended December 31 are as follows: $\begin{array} { l r r } & \text { East Division } & \text { West Division } \\\text { Revenues } & \$ 1,200,000 & \$ 800,000 \\\text { Operating expenses } & 950,000 & 640,000 \\\text { Service department charges } & 145,000 & 72,000 \\\text { Invested assets } & 800,000 & 500,000\end{array}$ ? (a)Prepare condensed income statements for the past year for each division. (b)Using the expanded expression, determine the profit margin, investment turnover, and rate of return on investment for each division.Round to one decimal place.

If operating income for a division is $6,000, invested assets are $25,000, and sales are $30,000, the profit margin calculated would be 24%.

Materials used by Meeta-Products Inc.in producing Division A's product are currently purchased from outside suppliers at a cost of $12 per unit.However, the same materials are available from Division B.Division B has unused capacity and can produce the materials needed by Division A at a variable cost of $7 per unit.A transfer price of $9 per unit is established, and 35,000 units of material are transferred with no reduction in Division B's current sales. How much would Division B's operating income increase?

The manager of a profit center has the responsibility for making decisions that affect the center's _____.

The investment turnover is calculated as the ratio of sales to:

The major shortcoming of using operating income as an investment center performance measure is that, it ignores the amount of assets invested in each center.

A common balanced scorecard measures performance in all of the following areas except:

In an investment center, the manager has responsibility and authority for making decisions that affect:

A portion of the divisional income statement for the year just ended is presented below in a condensed form. $\begin{array} { l r } & \text { Department F } \\\text { Net sales } & \$ 93,800 \\\text { Cost of goods sold } & 72,400 \\\text { Gross profit } & \$ 21,400 \\\text { Operating expenses } & 28,900 \\\text { Loss from operations } & \$ ( 7,500 ) \\\hline\end{array}$ ​ The operating expenses of Department F include $16,000 for direct expenses. It is estimated that the discontinuance of Department F would not have affected the sales of the other departments nor have reduced the indirect expenses of the business.Assuming the accuracy of these estimates, determine the effect (increase or decrease and the amount) on the operating income of the business if Department F had been discontinued.

The rate of return on investment can be computed by dividing investment turnover by the profit margin.

Blair Inc.had $725,000 in invested assets, sales of $1,100,000, operating income amounting to $72,000, and a minimum acceptable rate of return of 14% on its invested assets.Blair's investment turnover is _____.

If operating income for a division is $6,000, invested assets are $25,000, and sales are $30,000, the investment turnover would be 1.2.

Which component of the balanced scorecard evaluates the economic performance of the responsibility centers?