Question 1

Division A's asset turnover (AT)  is (rounded) :

Accepted Answer

A)  0.72.
B)  1.00.
C)  1.58.
D)  1.67.
E)  2.08.F) A) and D)
G) A) and C)

Question 2

Eikelberry, Inc. has the following financial results for 2013 for its three regional divisions:
  Required:
Calculate return on investment (ROI), asset turnover (AT), and return on sales (ROS) for each division for 2013. The sales in the North, Mid and South Atlantic regions are $2,350,000, $1,450,000, and $500,000, respectively. Calculate ROI and asset turnover (AT) for each of the four measures of investment (i.e., for each of four possible denominators in determining ROI and AT). Round all answers except ROI to 2 decimal places, e.g., round 0.12487 to 12.49%. Round ROI to whole percentage amounts, e.g., 0.1998 to 20%.

Accepted Answer

Answer may...

Question 3

The choice of valuation method for inventories would normally not affect which item(s)  used in calculating ROI?

Accepted Answer

A)  The valuation of fixed assets (e.g., Plant, Property, and Equipment)  used by an investment center.
B)  The amount of operating income earned by an investment center in a given period.
C)  Both the investment base and the level of operating income reported by an investment center.
D)  The estimated value of current assets of a business entity, such as an investment center.
E)  The return on sales (ROS)  of an investment center for the period.F) D) and E)
G) A) and B)

Question 4

The historical cost of an asset less its accumulated depreciation is:

Accepted Answer

A)  Net book value (NBV) .
B)  Return on equity (RO
E)  .
C)  Return on investment (ROI) .
D)  A rough measure of current replacement cost of the asset.
E)  An estimate of liquidation value of the asset.F) C) and E)
G) A) and B)

Question 5

Which one of the following determines the transfer price based on the seller's costs, plus a gross profit percentage determined from comparison of sales of the seller to those of unrelated parties?

Accepted Answer

A)  Wholesale-price method.
B)  Resale-price method.
C)  Net-price method.
D)  Cost-plus method.
E)  Comparable-price method.F) C) and D)
G) D) and E)

Question 6

If both divisions were presented with an opportunity to invest in a project that is estimated to achieve an ROI of 15%, what will the units likely decide?

Accepted Answer

A)  Division P will invest; Division Q will not invest.
B)  Division P will invest; Division Q will be indifferent.
C)  Division P will not invest; Division Q will invest.
D)  Division P will be indifferent; Division Q will not invest.
E)  Neither unit will invest in the projects.F) C) and D)
G) A) and B)

Question 7

Return on investment (ROI)  is a term often used to express income earned on capital invested in a division (investment center) . A division's ROI would increase if:

Accepted Answer

A)  Sales increased by the same dollar amount as expenses and total assets increased.
B)  Sales remained the same and expenses were reduced by the same dollar amount that total assets increased.
C)  Sales decreased by the same dollar amount that expenses increased.
D)  Sales and expenses increased by the same percentage that total assets increased.
E)  Net profit margin on sales increased by the same percentage that total assets increased.F) None of the above
G) B) and E) B

Question 8

The most likely result of a negotiated transfer price is that it:

Accepted Answer

A)  Takes away the ultimate responsibility of the resulting transfer price from the two parties.
B)  Decreases sub-unit (i.e., divisional)  autonomy.
C)  Can be costly and time-consuming to implement.
D)  Generally results in transferring more than the optimum number of units between the buying and selling divisions of the organization.
E)  Provides performance indicators that are independent of the negotiating skills of divisional managers.F) B) and D)
G) C) and E) C

Question 9

Which one of the following is an advantage of both ROI and Residual Income (RI) ?

Accepted Answer

A)  They both measure all elements important for measuring short-term financial performance of investment centers: revenues, costs, and investment.
B)  They are both very widely used.
C)  They both can use the minimum rate of return to adjust for differences in risk across different investment centers.
D)  They are both comparable to interest rates and to rates of return on alternate investments.
E)  They can both use a different minimum rate of return for different types of assets used by an investment center.F) None of the above
G) C) and D)

Question 10

Division A's return on sales (ROS)  is:

Accepted Answer

A)  1.8%.
B)  7.5%.
C)  12.0%.
D)  20.0%.
E)  48.0%.F) A) and D)
G) C) and D)

Question 11

If the minimum rate of return (i.e., cost of capital)  was 13%, Chering Division's residual income (RI)  would calculate to be:

Accepted Answer

A)  $4,400.
B)  $8,800.
C)  $9,240.
D)  $22,380.
E)  $49,500.F) C) and D)
G) A) and B)

Question 12

If the minimum rate of return was 10%, Division A's residual income (RI)  would be:

Accepted Answer

A)  $15,000.
B)  $24,000.
C)  $30,000.
D)  $36,000.
E)  $45,000.F) A) and E)
G) B) and E) C

Question 13

Domi Products, a multi-divisional manufacturing company, measures performance and awards bonuses to division managers based upon divisional operating income. Under the current bonus plan, common company-wide operating expenses are allocated evenly to all five of its divisions. For example, if rent were $50,000, each division would be charged $10,000. In planning next year's budget, corporate management has requested that the division managers recommend how common expenses should be distributed to the divisions. The division managers met and jointly developed an incentive plan that would more equitably distribute common expenses on the basis of resources used and measure each division manager's performance based on return on assets (ROI), with divisional bonuses based on a target ROI. They jointly presented their recommendation to corporate management.
Required:
1. Describe at least three problems that Domi Products could encounter when using return on investment (ROI) as the basis of performance measurement.
2a. Define the residual income (RI) approach to segment performance measurement.
2b. Determine if Domi Products should implement this approach instead of the ROI approach.
3. Discuss the behavioral implications of the division managers' involvement in the corporate budgeting process, and the decision to more equitably allocate common costs.

Accepted Answer

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Question 14

This question pertains to factors affecting the setting of transfer prices in an international setting.
Required:
What are the primary factors affecting the setting of transfer prices between divisions of a company that operates in different countries?

Accepted Answer

Answer may vary
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Question 15

Under the notion of controllability, it is most appropriate for top management to evaluate the profitability of an investment center in terms of:

Accepted Answer

A)  Profits in relation to the amount of capital invested in the unit.
B)  Returns expressed as a percentage.
C)  Profits expressed in absolute terms.
D)  Operating profit generated.
E)  Returns expressed in actual dollar amounts.F) B) and E)
G) None of the above

Question 16

A division's after-tax cash operating income less depreciation and less an imputed cost of capital is called its:

Accepted Answer

A)  After-tax operating income.
B)  Income from continuing operations.
C)  Return on sales (ROS) .
D)  Economic value added (EV
A)  .
E)  Residual income (RI) .F) A) and E)
G) B) and C)

Question 17

A company earning a profit can increase its return on investment (ROI)  by:

Accepted Answer

A)  Increasing sales revenue and operating expenses by the same dollar amount.
B)  Decreasing sales revenues and operating expenses by the same percentage.
C)  Increasing investment and operating expenses by the same dollar amount.
D)  Increasing sales revenues and operating expenses by the same percentage.
E)  Decreasing investment and sales by the same percentage.F) B) and C)
G) A) and E)

Question 18

The basic objective of the residual income (RI)  approach to performance measurement of a business unit considered an investment center is to have the investment center maximize its:

Accepted Answer

A)  Return on investment.
B)  Imputed interest rate charge.
C)  Cash flows.
D)  Cash flows in excess of a desired minimum amount.
E)  Operating income in excess of a desired minimum return.F) A) and B)
G) D) and E)

Question 19

What special problems and opportunities arise in setting transfer prices in an international setting (i.e., for transfers between subunits that operate in different countries)? Hint: In terms of special problems, make sure you reference OECD requirements and practical implementation alternatives for general OECD requirements.)

Accepted Answer

Answer may vary
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Question 20

The return on investment (ROI)  for Division Y is:

Accepted Answer

A)  8.0%.
B)  12.0%.
C)  20.0%.
D)  25.0%.
E)  40.0%.F) A) and D)
G) C) and D)

Exam 19: Strategic Performance Measurement: Investment Centers and Transfer Pricing

Division A's asset turnover (AT) is (rounded) :

Correct Answer
verified

Correct Answer
verified
Answer may...
View Answer

The choice of valuation method for inventories would normally not affect which item(s) used in calculating ROI?

Correct Answer
verified

The historical cost of an asset less its accumulated depreciation is:

Correct Answer
verified

Which one of the following determines the transfer price based on the seller's costs, plus a gross profit percentage determined from comparison of sales of the seller to those of unrelated parties?

Correct Answer
verified

If both divisions were presented with an opportunity to invest in a project that is estimated to achieve an ROI of 15%, what will the units likely decide?

Correct Answer
verified

Return on investment (ROI) is a term often used to express income earned on capital invested in a division (investment center) . A division's ROI would increase if:

Correct Answer
verified
B

The most likely result of a negotiated transfer price is that it:

Correct Answer
verified
C

Which one of the following is an advantage of both ROI and Residual Income (RI) ?

Correct Answer
verified

Division A's return on sales (ROS) is:

Correct Answer
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If the minimum rate of return (i.e., cost of capital) was 13%, Chering Division's residual income (RI) would calculate to be:

Correct Answer
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If the minimum rate of return was 10%, Division A's residual income (RI) would be:

Correct Answer
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C

Correct Answer
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Answer may vary
Feedback:
1. At least th...
View Answer

This question pertains to factors affecting the setting of transfer prices in an international setting. Required: What are the primary factors affecting the setting of transfer prices between divisions of a company that operates in different countries?

Correct Answer
verified
Answer may vary
Feedback: There are two ...
View Answer

Under the notion of controllability, it is most appropriate for top management to evaluate the profitability of an investment center in terms of:

Correct Answer
verified

A division's after-tax cash operating income less depreciation and less an imputed cost of capital is called its:

Correct Answer
verified

A company earning a profit can increase its return on investment (ROI) by:

Correct Answer
verified

The basic objective of the residual income (RI) approach to performance measurement of a business unit considered an investment center is to have the investment center maximize its:

Correct Answer
verified

Correct Answer
verified
Answer may vary
Feedback: Opportunities:...
View Answer

The return on investment (ROI) for Division Y is:

Correct Answer
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Exam 19: Strategic Performance Measurement: Investment Centers and Transfer Pricing

Division A's asset turnover (AT) is (rounded) :

Correct AnswerverifiedShow Answer

Correct AnswerverifiedAnswer may...View AnswerShow Answer

The choice of valuation method for inventories would normally not affect which item(s) used in calculating ROI?

Correct AnswerverifiedShow Answer

The historical cost of an asset less its accumulated depreciation is:

Correct AnswerverifiedShow Answer

Which one of the following determines the transfer price based on the seller's costs, plus a gross profit percentage determined from comparison of sales of the seller to those of unrelated parties?

Correct AnswerverifiedShow Answer

If both divisions were presented with an opportunity to invest in a project that is estimated to achieve an ROI of 15%, what will the units likely decide?

Correct AnswerverifiedShow Answer

Return on investment (ROI) is a term often used to express income earned on capital invested in a division (investment center) . A division's ROI would increase if:

Correct AnswerverifiedB

The most likely result of a negotiated transfer price is that it:

Correct AnswerverifiedC

Which one of the following is an advantage of both ROI and Residual Income (RI) ?

Correct AnswerverifiedShow Answer

Division A's return on sales (ROS) is:

Correct AnswerverifiedShow Answer

If the minimum rate of return (i.e., cost of capital) was 13%, Chering Division's residual income (RI) would calculate to be:

Correct AnswerverifiedShow Answer

If the minimum rate of return was 10%, Division A's residual income (RI) would be:

Correct AnswerverifiedC

Correct AnswerverifiedAnswer may varyFeedback:1. At least th...View AnswerShow Answer

This question pertains to factors affecting the setting of transfer prices in an international setting. Required: What are the primary factors affecting the setting of transfer prices between divisions of a company that operates in different countries?

Correct AnswerverifiedAnswer may varyFeedback: There are two ...View AnswerShow Answer

Under the notion of controllability, it is most appropriate for top management to evaluate the profitability of an investment center in terms of:

Correct AnswerverifiedShow Answer

A division's after-tax cash operating income less depreciation and less an imputed cost of capital is called its:

Correct AnswerverifiedShow Answer

A company earning a profit can increase its return on investment (ROI) by:

Correct AnswerverifiedShow Answer

The basic objective of the residual income (RI) approach to performance measurement of a business unit considered an investment center is to have the investment center maximize its:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedAnswer may varyFeedback: Opportunities:...View AnswerShow Answer

The return on investment (ROI) for Division Y is:

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Answer may...
View Answer

Correct Answer
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Correct Answer
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B

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C

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C

Correct Answer
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Answer may vary
Feedback:
1. At least th...
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Answer may vary
Feedback: There are two ...
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Correct Answer
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Correct Answer
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Answer may vary
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