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Exam 9: Evaluating Decentralized Operations

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Question 91

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ABC Corporation has three service departments with the following costs and activity base: How much service department cost would be allocated to the Macro Division?

A) $405,000
B) $175,000
C) $130,000
D) $305,000

E) A) and C)
F) A) and D)

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Question 92

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The profit margin for Division C is 6% and the investment turnover is 1.2. What is the rate of return on investment for Division B?

A) 20%
B) 6.7%
C) 7.3%
D) 7.2%

E) All of the above
F) A) and D)

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Question 93

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The major advantage of residual income as a performance measure is that it gives consideration to not only a minimum rate of return on investment but also the total magnitude of income from operations earned by each division.

The primary disadvantage of decentralized operations is that decisions made by one manager may affect other managers in such a way that the profitability of the entire company may suffer.

Developing and retaining quality managers are advantages of decentralization.

The budget for Department 6 of Cardinal Company for the current month ending March 31 is as follows: During March, the costs incurred in Department 6 of Cardinal Company were materials, $204,000; factory wages, $285,000; supervisory salaries, $63,600; depreciation of plant and equipment, $35,000; power and light, $21,360; insurance and property taxes, $14,400; maintenance, $9,456. (a) Prepare a budget performance report for the supervisor of Department 6 of Cardinal Company for the month of March. (b) Are there any significant variances (5% or greater) of the budgeted amounts that should be examined by the supervisor?

The profit margin is the

The three common types of responsibility centers are referred to as cost centers, profit centers, and investment centers.

Assume that Division Blue has achieved a yearly income from operations of $110,000 using $900,000 of invested assets. If management  has set a minimum acceptable rate of return of 11%, the residual income is

Property tax expense for a department store's store equipment is an example of a direct expense.

A responsibility center in which the authority over and responsibility for costs and revenues is vested in the department manager is termed a profit center.

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

Which of the following is a measure of a cost center manager's performance?

ABC Corporation has three service departments with the following costs and activity base: What will the income of the Macro Division be after all service department allocations?

The major shortcoming of income from operations as an investment center performance measure is that it ignores the amount of revenues earned by the center.

The Magnolia Company's Division A has income from operations of $80,000 and assets of $400,000. The minimum acceptable rate of return on assets is 12%. What is the residual income for the division?

Office salaries expense for a department store is an indirect expense.

Tom's Tool Factory is an investment center and is responsible for all of its net income and the use of its assets. This year, the invested assets totaled $475,000, and net income was $275,000. What is the rate of return on assets?

Heart Company has two divisions. Division A is interested in purchasing 10,000 units from Division B. Capacity is available for Division B to produce these units. The per-unit market price is $30 per unit, with a variable cost of $25. The manager of Division A has offered to purchase the units at $22 per unit. In an effort to make this transfer price beneficial for the company as a whole, what is the range of prices that should be used during negotiations between the two divisions?

Using the data from the Terrace Industries, determine the divisional income from operations for Districts 1 & 2. Allocate service department expenses proportional to the sales of each district.