Chapter 22-Performance Evaluation For Decentralized Operations

Chapter 22—Performance Evaluation For Decentralized Operations
TRUE/FALSE
1. Separation of businesses into more manageable operating units is termed decentralization.
ANS: T DIF: 1 OBJ: 01
2. The process of measuring and reporting operating data by areas of responsibility is termed
responsibility accounting.
3. A decentralized business organization is one in which all major planning and operating decisions
are made by top management.
ANS: F DIF: 1 OBJ: 01
4. A centralized business organization is one in which all major planning and operating decisions
are made by top management.
5. 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.
6. The three common types of responsibility centers are referred to as cost centers, profit centers,
and investment centers.
7. A responsibility center in which the department manager has responsibility for and authority over
costs, revenues, and assets invested in the department is termed a cost center.
8. Budget performance reports prepared for the vice-president of production would generally
contain less detail than reports prepared for the various plant managers.
9. The amount of detail presented in a budget performance report for a cost center depends upon the
level of management to which the report is directed.
10. The primary accounting tool for controlling and reporting for cost centers is a budget.

11. 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.
12. Operating expenses directly traceable to or incurred for the sole benefit of a specific department
and usually subject to the control of the department manager are termed direct expenses.
13. Sales commissions expense for a department store is an example of a direct expense.
14. Operating expenses incurred for the entire business as a unit that are not subject to the control of
individual department managers are called indirect expenses.
15. Office salaries expense for a department store is an indirect expense.
16. The underlying principle of allocating operating expenses to departments is to assign to each
department an amount of expense proportional to the revenues of that department.
17. Property tax expense for a department store's store equipment is an example of a direct expense.
18. Depreciation expense on store equipment for a department store is an indirect expense.
19. Responsibility accounting reports for profit centers are normally in the form of income
statements.
20. The manager of a profit center does not make decisions concerning the fixed assets invested in
the center.
21. The profit center income statement should include only revenues and expenses that are controlled
by the manager.
22. The manager of the furniture department of a leading retailer does not control the salaries of
departmental personnel.
23. Service department charges are similar to the expenses of a profit center that purchased services
from a source outside the company.
24. Purchase requisitions for Purchasing and the number of payroll checks for Payroll Accounting are
examples of activity bases.
25. The rates at which services are charged to each division are called service department charge
rates.
26. In an investment center, the manager has the responsibility and the authority to make decisions
that affect not only costs and revenues, but also the plant assets invested in the center.
27. Three measures of investment center performance are income from operations, rate of return on
investment, and residual income.
28. 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.
29. If Division Q's income from operations was $30,000 on invested assets of $200,000, the rate of
return on investment is 15%.
30. The rate of return on investment may be computed by multiplying investment turnover by the
profit margin.
31. If the profit margin for a division is 8% and the investment turnover is 1.20, the rate of return on
investment is 9.6%.
32. If the profit margin for a division is 11% and the investment turnover is 1.5, the rate of return on
investment is 7.3%.

33. Investment turnover (as used in determining the rate of return on investment) focuses on the rate
of profit earned on each sales dollar.
34. The ratio of sales to investment is termed the rate of return on investment.
35. The major advantage of the rate of return on investment over income from operations as a
divisional performance measure is that divisional investment is directly considered and thus
comparability of divisions is facilitated.
36. By using the rate of return on investment as a divisional performance measure, divisional
managers will always be motivated to invest in proposals which will increase the overall rate of
return for the company.
37. The excess of divisional income from operations over a minimum amount of desired income
from operations is termed the residual income.
38. The minimum amount of desired divisional income from operations is set by top management by
establishing a maximum rate of return considered acceptable for invested assets.
39. 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.
40. The ratio of income from operations to sales is termed the profit margin component of the rate of
return on investment.
41. The ratio of sales to invested assets is termed the investment turnover component of the rate of
return on investment.
42. If income from operations for a division is $6,000, invested assets are $25,000, and sales are
$30,000, the profit margin is 20%.

$30,000, the profit margin is 24%.
$30,000, the investment turnover is 1.2.
$30,000, the investment turnover is 5.
46. If income from operations for a division is $30,000, sales are $243,750, and invested assets are
47. If income from operations for a division is $120,000, sales are $975,000, and invested assets are
48. If divisional income from operations is $75,000, invested assets are $637,500, and the minimum
rate of return on invested assets is 6%, the residual income is $36,750.
49. If divisional income from operations is $100,000, invested assets are $850,000, and the minimum
rate of return on invested assets is 8%, the residual income is $68,000.
50. The profit margin component of rate of return on investment analysis focuses on profitability by
indicating the rate of profit earned on each sales dollar.
51. In rate of return on investment analysis, the investment turnover component focuses on efficiency
in the use of assets and indicates the rate at which sales are being generated for each dollar of
invested assets.
52. The minimum amount of desired divisional income from operations is set by top management by
establishing a minimum rate of return considered acceptable for invested assets.
53. The objective of transfer pricing is to encourage each division manager to transfer goods and
services between divisions if overall company income can be increased by doing so.
54. Transfer prices may be used when decentralized units are organized as cost, profit, or investment
centers.
55. Under the cost price approach, the transfer price is the price at which the product or service
transferred could be sold to outside buyers.
56. Under the negotiated price approach, the transfer price is the price at which the product or service
transferred could be sold to outside buyers.
57. The negotiated price approach allows the managers of decentralized units to agree among
themselves as to the transfer price.
MULTIPLE CHOICE
1. Which of the following would be most effective in a small owner/manager-operated business?

a. Profit centers
b. Centralization
c. Investment centers
d. Cost centers
ANS: B DIF: 3 OBJ: 01
2. Businesses that are separated into two or more manageable units in which managers have
authority and responsibility for operations are said to be:
a. decentralized
b. consolidated
c. diversified
d. centralized
ANS: A DIF: 1 OBJ: 01
3. Which of the following is NOT a disadvantage of decentralized operation?

a. Competition among managers decreases profits
b. Duplication of operations
c. Price cutting by departments that are competing in the same product market
d. Top management freed from everyday tasks to do strategic planning
ANS: D DIF: 5 OBJ: 01
4. A manager is responsible only for costs in a(n):

a. profit center
b. investment center
c. volume center
d. cost center
5. In a cost center, the manager has responsibility and authority for making decisions that affect:
a. revenues
b. assets
c. both costs and revenues
d. costs
6. For higher levels of management, responsibility accounting reports:

a. are more detailed than for lower levels of management
b. are more summarized than for lower levels of management
c. contain about the same level of detail as reports for lower levels of management
d. are rarely provided or reviewed
7. A responsibility center in which the department manager has responsibility for and authority over
costs and revenues is called a(n):
a. profit center
b. investment center
c. volume center
d. cost center
8. In a profit center, the department manager has responsibility for and the authority to make
decisions that affect:
a. not only costs and revenues, but also assets invested in the center
b. the assets invested in the center, but not costs and revenues
c. both costs and revenues for the department or division
d. costs and assets invested in the center, but not revenues
ANS: C DIF: 1 OBJ: 03
9. Which of the following expenses incurred by the sporting goods department of a department store
is a direct expense?
a. Depreciation expense--office equipment
b. Insurance on inventory of sporting goods
c. Uncollectible accounts expense
d. Office salaries
10. Which of the following expenses incurred by a department store is an indirect expense?
a. Insurance on merchandise inventory
b. Sales salaries
c. Depreciation on store equipment
d. Salary of vice-president of finance
11. In a profit center, the manager has responsibility and authority for making decisions that affect:
a. liabilities
b. assets
c. equity
d. costs
12. Operating expenses directly traceable to or incurred for the sole benefit of a specific department
and usually subject to the control of the department manager are termed:
a. miscellaneous administrative expenses
b. direct expenses
c. indirect expenses
d. operating expenses
13. In evaluating the profit center manager, the income from operations should be compared:
a. across profit centers
b. to historical performance or budget
c. to the competition's net income
d. to the total company earnings per share
14. Income from operations of the Commercial Aviation Division is $2,225,000. If income from
operations before service department charges is $3,250,000:
a. operating expenses are $1,025,000
b. total service department charges are $1,025,000
c. noncontrollable charges are $1,025,000
d. direct manufacturing charges are $1,025,000
15. The costs of services charged to a profit center on the basis of its use of those services are called:
a. operating expenses
b. noncontrollable charges
c. service department charges
d. activity charges
16. Division T reported income from operations of $875,000 and total service department charges of
$575,000. Therefore:
a. net income was $300,000
b. the gross profit margin was $300,000
c. income from operations before service department charges was $1,450,000
d. consolidated net income was $300,000
17. To calculate income from operations, total service department charges are:
a. added to income from operations before service department charges
b. subtracted from operating expenses
c. subtracted from income from operations before service department charges
d. subtracted from gross profit margin
18. Income from operations for Division B is $150,000, total service department charges are
$400,000 and operating expenses are $2,266,000. What are the revenues for Division B?
a. $550,000
b. $3,216,000
c. $2,816,000
d. $2,666,000
19. Income from operations for Division M is $120,000, and income from operations before service
department charges is $975,000. Therefore:
a. total operating expenses are $855,000
b. total manufacturing expenses are $855,000
c. direct materials, direct labor, and factory overhead total $855,000
d. total service department charges are $855,000
20. The following data are taken from the management accounting reports of Dancer Co.:
Div. A Div. B Div. C

Income from operations $1,800,000 $1,350,000 $1,350,000
Total service
department charges 1,700,000 1,050,000 1,100,000
If an incentive bonus is paid to the manager who achieved the highest income from operations
before service department charges, it follows that:
a. Division A's manager is given the bonus
b. Division B's manager is given the bonus
c. Division C's manager is given the bonus
d. The managers of Divisions B and C divide the bonus
21. What is the term used to describe expenses that are incurred for the benefit of a specific
department?
a. Indirect expenses
b. Margin expenses
c. Departmental expenses
d. Direct expenses
22. The following financial information was summarized from the accounting records of Block
Corporation for the current year ended December 31:
Software Hardware Corporate

Division Division Total
Cost of goods sold $47,200 $30,720
Direct operating expenses 27,200 20,040
Net sales 95,000 64,000
Interest expense $ 2,040
General overhead 18,160
Income tax 4,700
The gross profit for the Software Division is:

a. $47,800
b. $20,600
c. $13,240
d. $33,280

Net sales 95,000 64,000
Income tax 4,700
The income from operations for the Software Division is:

a. $47,800
b. $20,600
c. $13,240
d. $33,280

Net sales 95,000 64,000
Income tax 4,700
The gross profit for the Hardware Division is:

a. $47,800
b. $20,600
c. $13,240
d. $33,280

Net sales 95,000 64,000
Income tax 4,700
The income from operations for the Hardware Division is:

a. $47,800
b. $20,600
c. $13,240
d. $33,280

Net sales 95,000 64,000
Income tax 4,700
The net income for Block Corporation is:

a. $13,640
b. $ 8,940
c. $15,680
d. $10,980
27. Stevenson Corporation had $275,000 in invested assets, sales of $330,000, income from
operations amounting to $49,500 and a desired minimum rate of return of 7.5%. The rate of
return on investment for Stevenson is:
a. 8%
b. 10%
c. 18%
d. 7.5%
operations amounting to $99,000, and a desired minimum rate of return of 15%. The profit
margin for Stevenson is:
a. 16%
b. 20%
c. 18%
d. 15%
operations amounting to $99,000, and a desired minimum rate of return of 15%. The investment
turnover for Stevenson is:
a. 1.2
b. 1.0
c. 1.1
d. 1.3
operations amounting to $99,000, and a desired minimum rate of return of 15%. The residual
income for Stevenson is:
a. $0
b. $17,820
c. $14,850
d. $16,500
31. Espinosa Corporation had $220,000 in invested assets, sales of $242,000, income from operations
amounting to $48,400, and a desired minimum rate of return of 3%. The rate of return on
investment for Espinosa is:
a. 4%
b. 22%
c. 3%
d. 6.4%
32. Espinosa Corporation had $1,100,000 in invested assets, sales of $1,210,000, income from
operations amounting to $242,000, and a desired minimum rate of return of 15%. The profit
margin for Espinosa is:
a. 20%
b. 22%
c. 15%
d. 32%
operations amounting to $242,000, and a desired minimum rate of return of 15%. The investment
turnover for Espinosa is:
a. 1.3
b. 1.2
c. 1.0
d. 1.1
operations amounting to $242,000, and a desired minimum rate of return of 15%. The residual
income for Espinosa is:
a. $60,500
b. $22,000
c. $77,000
d. $24,200
35. Managers of what type of decentralized units have authority and responsibility for revenues,
costs, and assets invested in the unit?
a. Profit center
b. Investment center
c. Production center
d. Cost center
36. A responsibility center in which the department manager is responsible for costs, revenues, and
assets for a department is called:
a. a cost center
b. a profit center
c. an operating center
d. an investment center
37. In an investment center, the manager has the responsibility for and the authority to make
decisions that affect:
a. the assets invested in the center, but not costs and revenues
b. costs and assets invested in the center, but not revenues
c. both costs and revenues for the department or division
d. not only costs and revenues, but also assets invested in the center
38. In an investment center, the manager has responsibility and authority for making decisions that
affect:
a. costs
b. revenues
c. assets
d. costs, revenues, and assets
39. The profit margin is the:

a. ratio of income from operations to sales
b. ratio of income from operations to invested assets
c. ratio of assets to liabilities
d. ratio of sales to invested assets
40. The investment turnover is the:

a. ratio of income from operations to sales
b. ratio of income from operations to invested assets
c. ratio of assets to liabilities
d. ratio of sales to invested assets
41. Identify the formula for the rate of return on investment.
a. Invested Assets/Income From Operations
b. Sales/Invested Assets
c. Income From Operations/Sales
d. Income From Operations/Invested Assets
42. Which of the following expressions is termed the profit margin factor as used in determining the
rate of return on investment?
a. Sales/Income From Operations
b. Income From Operations/Sales
c. Invested Assets/Sales
d. Sales/Invested Assets
43. Which of the following expressions is termed the investment turnover factor as used in
determining the rate of return on investment?
a. Invested Assets/Sales
b. Income From Operations/Invested Assets
c. Income From Operations/Sales
d. Sales/Invested Assets
44. The profit margin for Division E is 28% and the investment turnover is 2.8. What is the rate of
return on investment for Division E?
a. 20%
b. 28%
c. 14%
d. 78.4%
45. Division Q for Mott Company has a rate of return on investment of 28% and an investment
turnover of 1.4. What is the profit margin?
a. 28%
b. 20%
c. 14%
d. 39.2%
46. Division I of Norris Company has a rate of return on investment of 28% and a profit margin of
20%. What is the investment turnover?
a. 3.6
b. 1.4
c. 5.0
d. .7
47. What additional information is needed to find the rate of return on investment if income from
operations is known?
a. Invested assets
b. Residual income
c. Direct expenses
d. Sales
48. Division A of Purvis Company has a rate of return on investment of 15% and an investment
turnover of 1.2. What is the profit margin?
a. 10%
b. 12.5%
c. 9%
d. 6%
49. The best measure of managerial efficiency in the use of investments in assets is:
a. rate of return on stockholders' equity
b. investment turnover
c. income from operations
d. inventory turnover
50. Two divisions of Halloway Company (Divisions X and Y) have the same profit margins.
Division X's investment turnover is larger than that of Division Y (1.2 to 1.0). Income from
operations for Division X is $50,000, and income from operations for Division Y is $38,000.
Division X has a higher return on investment than Division Y by:
a. using income from operations as a performance measure
b. comparing income from operations
c. applying a negotiated price measure
d. using its assets more efficiently in generating sales
51. The profit margin for Division K is 8% and the investment turnover is 1.20. What is the rate of
return on investment for Division K?
a. 8%
b. 6.7%
c. 7.3%
d. 9.6%
52. The excess of divisional income from operations over a minimum amount of divisional income
from operations is termed:
a. profit margin
b. residual income
c. rate of return on investment
d. gross profit
53. Assume that divisional income from operations amounts to $187,000 and top management has
established 15% as the minimum rate of return on divisional assets totaling $1,000,000. The
residual income for the division is:
a. $37,000
b. $28,050
c. $67,000
d. $0
54. Which one of the following is NOT a measure that management can use in evaluating and
controlling investment center performance?
a. Rate of return on investment
b. Negotiated price
c. Residual income
d. Income from operations
55. A factor in determining the rate of return on investment--the ratio of income from operations to
sales--is called:
a. profit margin
b. indirect expenses
c. investment turnover
d. cost
56. A factor in determining the rate of return on investment--the ratio of sales to invested assets--is
called:
a. profit margin
b. indirect margin
c. investment turnover
d. cost ratio
57. Assume that Division P has achieved income from operations of $165,000 using $900,000 of
invested assets. If management desires a minimum rate of return of 8%, the residual income is:
a. $72,000
b. $13,200
c. $185,000
d. $93,000
58. Division W of Comer Company has sales of $140,000, cost of goods sold of $83,000, operating
expenses of $43,000, and invested assets of $100,000. What is the rate of return on investment
for Division W?
a. 14%
b. 2.8%
c. 10%
d. 5.47%
expenses of $43,000, and invested assets of $100,000. What is the profit margin for Division W?
a. 14%
b. 2.8%
c. 10%
d. 5.47%
expenses of $43,000, and invested assets of $100,000. What is the investment turnover for
Division W?
a. 1.4
b. 1.2
c. 1.7
d. 0.7
61. Division R of O'Murray Company has sales of $200,000, cost of goods sold of $120,000,
operating expenses of $58,000, and invested assets of $125,000. What is the rate of return on
investment for Division R?
a. 9.15%
b. 17.6%
c. 20%
d. 5.5%
62. Division R of O'Murray Company has sales of $200,000, cost of goods sold of $120,000,
operating expenses of $58,000, and invested assets of $125,000. What is the profit margin for
Division R?
a. 8.8%
b. 9.15%
c. 11%
d. 20%
63. Which of the following is not a commonly used approach to setting transfer prices?
a. Market price approach
b. Revenue price approach
c. Negotiated price approach
d. Cost price approach
64. Determining the transfer price as the price at which the product or service transferred could be
sold to outside buyers is known as the:
a. Cost price approach
b. Negotiated price approach
c. Revenue price approach
d. Market price approach
65. Materials used by Aro-Products Inc. in producing Division 3's product are currently purchased
from outside suppliers at a cost of $5 per unit. However, the same materials are available from
Division 6. Division 6 has unused capacity and can produce the materials needed by Division 3
at a variable cost of $3 per unit. A transfer price of $3.20 per unit is established, and 40,000 units
of material are transferred, with no reduction in Division 6's current sales. How much would
Division 3's income from operations increase?
a. $150,000
b. $50,000
c. $32,000
d. $72,000
Division 6's income from operations increase?
a. $8,000
b. $150,000
c. $80,000
d. $150,000
Aro-Products total income from operations increase?
a. $32,000
b. $112,000
c. $80,000
d. $150,000
68. Materials used by Bristol Company in producing Division C's product are currently purchased
Division A. Division A has unused capacity and can produce the materials needed by Division C
at a variable cost of $8.50 per unit. A transfer price of $9.50 per unit is negotiated and 30,000
units of material are transferred, with no reduction in Division A's current sales. How much
would Division C's income from operations increase?
a. $0
b. $90,000
c. $15,000
d. $60,000
would Division A's income from operations increase?
a. $0
b. $90,000
c. $30,000
d. $60,000
would Bristol's total income from operations increase?
a. $45,000
b. $120,000
c. $60,000
d. $150,000
PROBLEM
1. The budget for Department 10 of Plant M for the current month ending March 31 is as follows:
Materials $192,000
Factory wages 268,000
Supervisory salaries 57,600
Depreciation of plant and equipment 24,000
Power and light 19,200
Insurance and property taxes 14,400
Maintenance 8,640
During March, the costs incurred in Department 10 of Plant M were materials, $204,000; factory
wages, $285,000; supervisory salaries, $57,600; depreciation of plant and equipment, $24,000;
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 10 of Plant
M for the month of March.
(b) Are there any significant variances (greater than 10%) of the budgeted amounts that
should be examined by the supervisor?
ANS:
(a)
BUDGET PERFORMANCE REPORT
Supervisor, Department 10--Plant M
For Month Ended March 31, 20--
Budget Actual Over Under
Materials $192,000 $204,000 $12,000
Factory wages 268,000 285,000 $17,000
Supervisory salaries 57,600 57,600
Depreciation of plant
and equipment 24,000 24,000
Power and light 19,200 21,360 2,160
Insurance and property taxes 14,400 14,400
Maintenance 8,640 9,456 816
$583,840 $615,816 $31,976 -0-
======== ======== ======= ====
(b) The power and light expense should be examined by the supervisor.
DIF: 3 OBJ: 02
2. A department store apportions payroll costs on the basis of the number of payroll checks issued.
Accounting costs are apportioned on the basis of the number of reports. The payroll costs for the
year were $175,000 and the accounting costs for the year totaled $62,500. The departments and
the average cost of store equipment and average cost of inventory for each are as follows:
Number of Number
Payroll Checks of Reports
Department R 525 72
Department S 1,488 128
Department T 175 200
Determine the amount of (a) payroll cost and (b) accounting cost to be apportioned to each
department.
ANS:
(a)
Department
Total R S T
Number of payroll checks 2,188 525 1,488 175
Percent 100% 24% 68% 8%
Payroll cost $175,000 $42,000 $119,000 $14,000
(b)
Number of reports 400 72 128 200
Percent 100% 18% 32% 50%
Accounting cost $ 62,500 $11,250 $20,000 $31,250
DIF: 3 OBJ: 03
3. A portion of the divisional income statement for the year just ended is presented below in
condensed form.
Department F
Net sales $200,000
Cost of goods sold 120,000
Gross profit $ 80,000
Operating expenses 95,000
Loss from operations $(15,000)
========
The operating expenses of Department F include $35,000 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 amount) on the income from
operations of the business if Department F had been discontinued.
ANS:
$45,000 decrease, which is the income from operations for Department F ($200,000 net sales -
$120,000 cost of goods sold - $35,000 direct expenses).
DIF: 3 OBJ: 03
4. Some items are omitted from each of the following condensed divisional income statements of
Willis Inc.
Division L Division M Division N

Sales $ (1) $320,000 $580,000
Cost of goods sold 480,000 120,000 $ (5)
Gross profit $220,000 $ (3) $180,000
Operating expenses 95,000 160,000 $ (6)
Income from operations $ (2) $ (4) $ 75,000
======== ======== ========
(a) Determine the amount of the missing items, identifying them by number.
(b) Based on income from operations, which division is the most profitable?
ANS:
(a) (1) $700,000

(2) $125,000
(3) $200,000
(4) $ 40,000
(5) $400,000
(6) $105,000
(b) Division L
DIF: 1 OBJ: 03
5. Casey Co. has two divisions, F and G. Invested assets and condensed income statement data for
each division for the past year ended December 31 are as follows:
Division F Division G
Revenues $175,000 $112,500
Operating expenses 112,500 92,750
Service department charges 27,500 12,625
Invested assets 225,000 97,500
(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.
ANS:
(a)
Casey Co.
Divisional Income Statements
For the Year Ended December 31, 20--
Division F Division G
Revenues $175,000 $112,500
Operating expenses 112,500 92,750
Income from operations before
service department charges $ 62,500 $ 19,750
Service department charges 27,500 12,625
Income from operations $ 35,000 $ 7,125
======== ========
(b) Rate of return on investment (ROI) = Profit margin  investment turnover
ROI = Income From Operations  Sales

Sales Invested Assets
Division F = $ 35,000  $175,000

$175,000 $225,000
ROI = 20.0%  .778

ROI = 15.6%
Division G = $ 7,125  $112,500

$112,500 $ 97,500
ROI = 6.3%  1.15

ROI = 7.2%
DIF: 3 OBJ: 04
6. Data for Divisions R, S, T, U, and V are as follows:
Rate of
Income from Inv. Return Profit Invest.
Div. Sales Operations Assets on Inv. Margin Turnover
R (1) $35,000 $200,000 (2) (3) 1.6
S $455,000 (4) $284,375 16% (5) (6)
T $525,000 $73,500 (7) (8) (9) 1.2
U $800,000 (10) (11) (12) 13.0% 2.5
V (13) (14) $250,000 (15) 16.0% 2.0
(a) Determine the missing items, identifying each by number.

(b) Which division is most profitable in terms of income from operations?
(c) Which division is most profitable in terms of rate of return on investment?
ANS:
(a) (1) $320,000 ($200,000  1.6)

(2) 17.5% ($35,000/$200,000)
(3) 10.9% ($35,000/$320,000)
(4) $45,500 ($284,375  16%)
(5) 10% ($45,500/$455,000)
(6) 1.6 ($455,000/$284,375)
(7) $437,500 ($525,000/1.2)
(8) 16.8% ($73,500/$437,500)
(9) 14% ($73,500/$525,000)
(10) $104,000 ($800,000  13.0%)
(11) $320,000 ($800,000/2.5)
(12) 32.5% ($104,000/$320,000)
(13) $500,000 ($250,000  2.0)
(14) $80,000 ($500,000  16%)
(15) 32% (16%  2.0)
(b) Division U
(c) Division U
DIF: 5 OBJ: 04
7. Several items are missing from the following table of rate of return on investment and residual
income. Determine the missing items, identifying each item by the appropriate letter.
Min. Amt.
Income Rate of Min. of Income
Invested from Return Rate of from Residual
Assets Oper. on Inv. Return Oper. Income
(a) (b) (c) 16% $128,000 $10,000
$850,000 $153,000 (d) 12% (e) (f)
$825,000 (g) 20% (h) (i) $24,000
(j) $129,000 24% (k) $ 60,000 (l)
ANS:
(a) $800,000 ($128,000/16%)

(b) $138,000 ($128,000 + $10,000)
(c) 17.3% ($138,000/$800,000)
(d) 18% ($153,000/$850,000)
(e) $102,000 ($850,000  12%)
(f) $51,000 ($153,000 - $102,000)
(g) $165,000 ($825,000  20%)
(h) 17.1% ($141,000/$825,000)
(i) $141,000 ($165,000 - $24,000)
(j) $537,500 ($129,000/24%)
(k) 11.2% ($60,000/$537,500)
(l) $69,000 ($129,000 - $60,000)
DIF: 5 OBJ: 04
8. The sales, income from operations, and invested assets for each division of Jamieson Company
are as follows:
Income
from Invested
Sales Operations Assets
Division E $3,000,000 $470,000 $2,400,000
Division F 3,600,000 430,000 2,500,000
Division G 6,000,000 560,000 2,800,000
(a) Using the expanded expression, determine the profit margin, investment turnover,
and rate of return on investment for each division. Round to one decimal place.
(b) Which is (are) the most profitable per dollar invested?
ANS:
(a) Rate of Return on Investment:
ROI = Profit Margin  Investment Turnover
ROI = Income from Operations  Sales

Sales Invested Assets
Division E: ROI = $470,000  $3,000,000

$3,000,000 $2,400,000
ROI = 15.7%  1.25
ROI = 19.6%
Division F: ROI = $430,000  $3,600,000

$3,600,000 $2,500,000
ROI = 11.9%  1.44
ROI = 17.1%
Division G: ROI = $560,000  $6,000,000

$6,000,000 $2,800,000
ROI = 9.3%  2.1
ROI = 19.5%
(b) Divisions E and G are almost equally profitable.
DIF: 3 OBJ: 04
9. The sales, income from operations, and invested assets for each division of Winston Company are
as follows:
Income
from Invested
Sales Operations Assets
Division C $4,000,000 $410,000 $3,500,000
Division D 3,500,000 600,000 4,000,000
Division E 2,250,000 750,000 7,000,000
Management has established a minimum rate of return for invested assets of 10%.
(a) Determine the residual income for each division.
(b) Based on residual income, which of the divisions is the most profitable?
ANS:
(a) Division C: $60,000 ($410,000 - $350,000)

Division D: $200,000 ($600,000 - $400,000)
Division E: $50,000 ($750,000 - $700,000)
(b) Division D
DIF: 3 OBJ: 04
10. Materials used by Nead Company in producing Division A's product are currently purchased
Division B. Division B has unused capacity and can produce the materials needed by Division A
at a variable cost of $20 per unit.
(a) If a transfer price of $25 per unit is established and 60,000 units of material are
transferred, with no reductions in Division B's current sales, how much would Nead
Company's total income from operations increase?
(b) How much would the income from operations of Division A increase?
(c) How much would the income from operations of Division B increase?
(d) If the negotiated price approach is used, what would be the range of acceptable
transfer prices?
ANS:
(a) $600,000
(b) Division A would save $5 per unit on 60,000 units or $300,000.
(c) Division B would earn an additional $300,000 by selling 60,000 units at $5 above
the variable cost.
(d) $20.01 to $29.99
DIF: 1 OBJ: 05

Chapter 22-Performance Evaluation For Decentralized Operations

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Chapter 22-Performance Evaluation For Decentralized Operations

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Chapter 22—Performance Evaluation For Decentralized Operations

1. Separation of businesses into more manageable operating units is termed decentralization.

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

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1. Which of the following would be most effective in a small owner/manager-operated business?