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Hansen_CornerstonesCost_CH10

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Chapter 10—Decentralization: Responsibility Accounting, Performance Evaluation, and Transfer Pricing

MULTIPLE CHOICE

1. Responsibility accounting is defined as a system that

a. measures the results of each responsibility center and compares those results with some

measure of expected or budgeted outcome. b. defines responsibility by function only.

c. measures the results of a manager responsible for revenues and costs.

d. measures actual results against a flexible budget.

ANS: A PTS: 1 DIF: Moderate OBJ: 10-1 NAT: AACSB Reflective

2. 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.

ANS: A PTS: 1 DIF: Easy OBJ: 10-1 NAT: AACSB Reflective

3. 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

ANS: B PTS: 1 DIF: Moderate OBJ: 10-1 NAT: AACSB Reflective

4. 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.

ANS: A PTS: 1 DIF: Easy OBJ: 10-1 NAT: AACSB Reflective

5. 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

ANS: C PTS: 1 DIF: Moderate OBJ: 10-1

NAT: AACSB Reflective

6. 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

ANS: B PTS: 1 DIF: Easy OBJ: 10-1

NAT: AACSB Reflective

7. _______________ are NOT controlled by a manager of a profit center.

a. Revenues

b. Costs

c. Investments

d. Profits

ANS: C PTS: 1 DIF: Easy OBJ: 10-1

NAT: AACSB Reflective

8. 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.

ANS: D PTS: 1 DIF: Moderate OBJ: 10-1

NAT: AACSB Reflective

9. 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 thes

ANS: D PTS: 1 DIF: Moderate OBJ: 10-1

NAT: AACSB Reflective

10. 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.

ANS: A PTS: 1 DIF: Moderate OBJ: 10-1

NAT: AACSB Reflective

11. 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

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10-3

ANS: D PTS: 1 DIF: Moderate OBJ: 10-1

NAT: AACSB Reflective

12. An example of an investment center is a

a. production department.

b. company.

c. marketing department.

d. credit department.

ANS: B PTS: 1 DIF: Moderate OBJ: 10-1

NAT: AACSB Reflective

13. Responsibility accounting is a system that does NOT consider

a. responsibility.

b. accountability.

c. performance evaluation.

d. static budgeting.

ANS: D PTS: 1 DIF: Easy OBJ: 10-1

NAT: AACSB Reflective

14. ___________________ is the delegation of decision-making authority to successively lower management levels

in an organization. a. Decentralization b. Centralization c. Optimization

d. An unfavorable overhead variance

ANS: A PTS: 1 DIF: Easy OBJ: 10-2 NAT: AACSB Reflective

15. ___________________ exists when the major functions of an organization are controlled by top management.

a. Decentralization

b. Centralization

c. Optimization

d. An unfavorable overhead variance

ANS: B PTS: 1 DIF: Easy OBJ: 10-2

NAT: AACSB Reflective

16. 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 decision-making ability are more motivated.

ANS: A PTS: 1 DIF: Difficult OBJ: 10-2

NAT: AACSB Reflective

17. One of the reasons for decentralization is more timely response. This means

a. lower-level managers being more in contact with immediate operating conditions.

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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.

ANS: D PTS: 1 DIF: Difficult OBJ: 10-2

NAT: AACSB Reflective

18. 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.

ANS: B PTS: 1 DIF: Easy OBJ: 10-3 NAT: AACSB Reflective

19. 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.

ANS: C PTS: 1 DIF: Difficult OBJ: 10-3 NAT: AACSB Analytic

20. 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.

ANS: D PTS: 1 DIF: Difficult OBJ: 10-3

NAT: AACSB Analytic

21. Beta Division had the following information:

Asset base in Beta Division $400,000 Net income in Beta Division $50,000 Weighted average cost of capital 12% Target ROI 15% Margin for Beta Division 20%

What is the return on investment of Beta Division? a. 20.0% b. 12.5% c. 62.5% d. 800.0%

ANS: B

SUPPORTING CALCULATIONS: $50,000/$400,000 = 12.5%

PTS: 1 DIF: Moderate OBJ: 10-3 NAT: AACSB Analytic

22. Beta Division had the following information:

Asset base in Beta Division $400,000

Net income in Beta Division $50,000

Weighted average cost of capital 12%

Target ROI 15%

Margin for Beta Division 20%

What is the turnover ratio for Beta Division?

a. 0.200

b. 0.125

c. 0.625

d. 8.000

ANS: C

SUPPORTING CALCULATIONS:

($50,000/0.20)/$400,000 = 0.625

PTS: 1 DIF: Moderate OBJ: 10-3 NAT: AACSB Analytic

23. 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%.

ANS: A

SUPPORTING CALCULATIONS:

$250,000/$1,250,000 = 20%

PTS: 1 DIF: Easy OBJ: 10-3 NAT: AACSB Analytic

24. Parker Corporation had sales of $250,000, income of $10,000, and an asset base of $100,000. The turnover is

a. 0.04.

b. 2.50.

c. 4.00.

d. 0.25.

ANS: B

SUPPORTING CALCULATIONS:

$250,000/$100,000 = 2.5 times

PTS: 1 DIF: Easy OBJ: 10-3 NAT: AACSB Analytic

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10-6

25. Patterson 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. 150.0%.

c. 3.3%.

d. 5.0%.

ANS: D

SUPPORTING CALCULATIONS: $10,000/$200,000 = 5%

PTS: 1 DIF: Easy OBJ: 10-3 NAT: AACSB Analytic

26. The following information pertains to the three divisions of Marlow Company:

Division X

Division Y

Division Z Sales

? ? 1,250,000 Net operating income $36,000 $25,000

$75,000

Average operating assets 300,000

? ? Return on investment ? 20% 15% Margin 0.10 0.05 ? Turnover 1.5 ? ? Target ROI

15% 12% 10%

What is the margin for Division Z? a. 1.5% b. 100.0% c. 15.0% d. 6.0%

ANS: D

SUPPORTING CALCULATIONS: $75,000/$1,250,000 = 6%

PTS: 1 DIF: Moderate OBJ: 10-3 NAT: AACSB Analytic

27. Beta Division had the following information:

Asset base in Beta Division $400,000 Net income in Beta Division $50,000 Weighted average cost of capital 12% Target ROI

15% Margin for Beta Division

20%

If the asset base is decreased by $100,000, with no other changes, the return on investment of Beta Division will be

a. 100.0%.

b. 16.7%.

c. 600.0%.

d. 62.5%.

ANS: B

SUPPORTING CALCULATIONS: $50,000/($400,000 - $100,000) = 16.7%

10-7

PTS: 1 DIF: Moderate OBJ: 10-3 NAT: AACSB Analytic

28. The following information pertains to the three divisions of Marlow Company:

Division X Division Y Division Z Sales ? ? 1,250,000 Net operating income $36,000 $25,000 $75,000 Average operating assets 300,000 ? ? Return on investment ? 20% 15% Margin 0.10 0.05 ? Turnover 1.5 ? ? Target ROI 15% 12% 10%

What are the average operating assets for Division Z? a. $75,000 b. $500,000 c. $1,250,000 d. $187,500

ANS: B

SUPPORTING CALCULATIONS: $75,000/0.15 = $500,000

PTS: 1 DIF: Moderate OBJ: 10-3 NAT: AACSB Analytic

29. The following information pertains to the three divisions of Marlow Company:

What is the turnover for Division Z? a. 2.500 b. 0.150 c. 6.670 d. 1.500

ANS: A

SUPPORTING CALCULATIONS:

average operating assets $75,000/0.15 = $500,000 turnover $1,250,000/$500,000 = 2.5 times

PTS: 1 DIF: Moderate OBJ: 10-3 NAT: AACSB Analytic

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30. The following information pertains to the three divisions of Marlow Company:

Division X

Division Y

Division Z Sales

? ? 1,250,000 Net operating income $36,000 $25,000

$75,000

Average operating assets 300,000

? ? Return on investment ? 20% 15% Margin 0.10 0.05 ? Turnover 1.5 ? ? Target ROI

15% 12% 10%

What are the sales for Division Y? a. $25,000 b. $125,000 c. $500,000 d. $208,333

ANS: C

SUPPORTING CALCULATIONS: $25,000/0.05 = $500,000

PTS: 1

DIF: Moderate OBJ: 10-3

NAT: AACSB Analytic 31. The following information pertains to the three divisions of Marlow Company:

Division X

Division Y

Division Z Sales

? ? 1,250,000 Net operating income $36,000 $25,000

$75,000

Average operating assets 300,000

? ? Return on investment ? 20% 15% Margin 0.10 0.05 ? Turnover 1.5 ? ? Target ROI

15%

12%

10%

What are the average operating assets for Division Y? a. $25,000 b. $125,000 c. $5,000 d. $208,333

ANS: B

SUPPORTING CALCULATIONS: $25,000/0.20 = $125,000

PTS: 1

DIF: Moderate OBJ: 10-3 NAT: AACSB Analytic

32. If the National 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. 420.0%. c. 42.0%. d. 238.0%.

ANS: C

SUPPORTING CALCULATIONS:

10-9

4.2 ? 0.10 = .42 or 42%

PTS: 1

DIF: Moderate OBJ: 10-3 NAT: AACSB Analytic

33. 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 sam

ANS: A

SUPPORTING CALCULATIONS: [(0.30 ? 5.5) - 1.5]/1.5 = 10% increase

PTS: 1

DIF: Difficult OBJ: 10-3 NAT: AACSB Analytic

34. If the operating asset turnover ratio increased by 30 percent and the margin increased by 20 percent, the divisional

ROI

a. would increase by 56 percent.

b. would decrease by 60 percent.

c. would increase by 20 percent.

d. cannot be determined.

ANS: A

SUPPORTING CALCULATIONS: 1.30 ? 1.20 = 1.56 or a 56% increase

PTS: 1

DIF: Difficult OBJ: 10-3 NAT: AACSB Analytic

35. 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.

ANS: D

SUPPORTING CALCULATIONS: 1.50 ? 1.50 = 2.25 or 125% increase

PTS: 1

DIF: Difficult OBJ: 10-3 NAT: AACSB Analytic 36. Correll 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%

What is the return on investment for A? a. 18% b. 15% c. 20%

10-10

d. 40%

ANS: D

SUPPORTING CALCULATIONS: $40,000/$100,000 = 40%

PTS: 1 DIF: Moderate OBJ: 10-3 NAT: AACSB Analytic

37. Correll 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. $1,200,000 d. $1,300,000

ANS: D

SUPPORTING CALCULATIONS: $260,000/0.20 = $1,300,000

PTS: 1 DIF: Moderate OBJ: 10-3 NAT: AACSB Analytic

38. Correll 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. 4.00 b. 0.10 c. 0.15 d. 2.50

ANS: A

SUPPORTING CALCULATIONS: (40,000/0.10)/$100,000 = 4.00

PTS: 1 DIF: Moderate OBJ: 10-3 NAT: AACSB Analytic

39.

If the turnover increased by 30 percent and the margin decreased by 30 percent, the ROI would

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a. decrease by 9 percent.

b. increase by 69 percent.

c. increase by 91 percent.

stay the same.

ANS: A

SUPPORTING CALCULATIONS: 1.30 0.70 = .91 or a 9% decrease

PTS: 1 DIF: Difficult OBJ: 10-3 NAT: AACSB Analytic

40. 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.

ANS: A PTS: 1 DIF: Difficult OBJ: 10-3 NAT: AACSB Reflective

41. 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 measur

ANS: A PTS: 1 DIF: Difficult OBJ: 10-3 NAT: AACSB Analytic

42. The emphasis on short-run results at the expense of the long run is

a. efficient behavior.

b. effective behavior.

c. optimal behavior.

d. myopic behavior.

ANS: D PTS: 1 DIF: Easy OBJ: 10-3 NAT: AACSB Reflective

43. The following information pertains to the three divisions of Marlow Company:

Division X Division Y Division Z Sales ? ? 1,250,000 Net operating income $36,000 $25,000 $75,000

Average operating assets 300,000 ? ? Return on investment ? 20% 15% Margin 0.10 0.05 ? Turnover 1.5 ? ? Target ROI 15% 12% 10%

10-12

What is the residual income for Division X? a. $36,000 b. $45,000 c. $(9,000) d. $(36,000)

ANS: C

SUPPORTING CALCULATIONS: $36,000 - ($300,000 ? 0.15) = $(9,000)

PTS: 1 DIF: Moderate OBJ: 10-3 NAT: AACSB Analytic

44. Correll 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. $40,000 b. $25,000 c. $15,000 d. $28,000

ANS: B

SUPPORTING CALCULATIONS: $40,000 - ($100,000 ? 0.15) = $25,000

PTS: 1 DIF: Moderate OBJ: 10-3 NAT: AACSB Analytic

45. Beta Division had the following information:

Asset base in Beta Division $400,000 Net income in Beta Division $50,000 Weighted average cost of capital 12% Target ROI

15% Margin for Beta Division 20%

What is the residual income for Beta Division? a. $60,000 b. $48,000 c. $7,500 d. $(10,000)

ANS: D

SUPPORTING CALCULATIONS: $50,000 - ($400,000 ? 0.15) = $(10,000)

10-13

PTS: 1 DIF: Moderate OBJ: 10-3 NAT: AACSB Analytic

46. The Auto Division of Big 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. $360,000. c. $120,000. d. $80,000.

ANS: D

SUPPORTING CALCULATIONS:

$560,000 - ($4,000,000 ? 0.12) = $80,000

PTS: 1 DIF: Moderate OBJ: 10-3

NAT: AACSB Analytic

47. 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 incom

ANS: C PTS: 1 DIF: Moderate OBJ: 10-3

NAT: AACSB Analytic

48. Beta Division had the following information:

Asset base in Beta Division $400,000 Net income in Beta Division $50,000 Weighted average cost of capital 12% Target ROI

15% Margin for Beta Division

20%

What is EVA for Beta Division? a. $60,000 b. $48,000 c. $7,500 d. $2,000

ANS: D

SUPPORTING CALCULATIONS: $50,000 - ($400,000 ? 0.12) = $2,000

PTS: 1

DIF: Moderate OBJ: 10-3 NAT: AACSB Analytic

49. _______________ is after-tax operating profit minus the total annual cost of capital.

a. ROI

b. Residual income

c. EVA

d. Net income

ANS: C PTS: 1 DIF: Easy OBJ: 10-3

NAT: AACSB Reflective

50. Correll Company has two divisions, A and B. Information for each division is as follows:

10-14 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. $25,000

c. $15,000

d. $28,000

ANS: D

SUPPORTING CALCULATIONS:

$40,000 - ($100,000 ? 0.12) = $28,000

PTS: 1 DIF: Moderate OBJ: 10-3 NAT: AACSB Analytic

51. Correll Company has two divisions, A and B. Information for each division is as follows:

A B

a. $144,000

b. $116,000

c. $216,000

d. $44,000

ANS: B

SUPPORTING CALCULATIONS:

$260,000 - ($1,200,000 ? 0.12) = $116,000

PTS: 1 DIF: Moderate OBJ: 10-3 NAT: AACSB Analytic 52. Young Company has a tax rate of 40 percent. Information for the company is as follows:

Amount After-tax 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 cost of capital?

a. 0.1098

b. 0.2480

10-15

c. 0.0827

d. 0.0366

ANS: A

SUPPORTING CALCULATIONS:

(1/10 ? 0.048) + (3/10 ? 0.050) + (6/10 ? 0.150) = 0.1098

PTS: 1 DIF: Moderate OBJ: 10-3 NAT: AACSB Analytic

53. Young Company has a tax rate of 40 percent. Information for the company is as follows:

Amount After-tax 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 before-tax operating income is $1,500,000? a. $1,134,000 b. $402,000 c. $534,000 d. $(198,000)

ANS: D

SUPPORTING CALCULATIONS:

(1/10 ? 0.048) + (3/10 ? 0.050) + (6/10 ? 0.150) = 0.1098 0.1098 ? $10,000,000 = $1,098,000

($1,500,000 ? 0.60) - $1,098,000 = $(198,000)

PTS: 1 DIF: Difficult OBJ: 10-3 NAT: AACSB Analytic

54. 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.

ANS: B PTS: 1 DIF: Easy OBJ: 10-3 NAT: AACSB Reflective

55. Economic value added is calculated by which of the following formulas?

a. EVA = After-tax operating income + (Weighted average cost of capital ? Total capital

employed)

b. EVA = After-tax operating income * Weighted average cost of capital

c. EVA = After-tax operating income - (Weighted average cost of capital ? Total capital

employed)

d. EVA = Total capital employed - (Weighted average cost of capital ? After-tax operating

income)

ANS: C PTS: 1 DIF: Easy OBJ: 10-3

NAT: AACSB Analytic

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56. EVA encourages the right kind of behavior from divisions because of its emphasis on

a. after-tax net income.

b. total capital employed.

c. true cost of capital.

d. before-tax operating incom

ANS: C PTS: 1 DIF: Moderate OBJ: 10-3

NAT: AACSB Reflective

57. Multiple measures of performance are beneficial if they

a. are all financial measures.

b. include nonfinancial operating measures.

c. focus only on short-run factors.

d. all of these statements are tru

ANS: B PTS: 1 DIF: Moderate OBJ: 10-3 NAT: AACSB Reflective

58. 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.

ANS: D PTS: 1 DIF: Moderate OBJ: 10-4 NAT: AACSB Reflective

59. _______________ is(are) a type of fringe benefit received over and above salary.

a. Perquisites

b. Cash compensation

c. Bonus based on net income

d. EVA

ANS: A PTS: 1 DIF: Easy OBJ: 10-4 NAT: AACSB Reflective

60. _______________ is(are) the right to buy a certain number shares of a company's stock at a particular price.

a. Stock options

b. Cash compensation

c. Stock-based compensation

d. Perquisites

ANS: A PTS: 1 DIF: Easy OBJ: 10-4 NAT: AACSB Reflective

61. As a managerial reward, _______________ encourage(s) a short-term orientation.

a. cash bonuses

b. stock options

c. stock ownership

d. both a and b

ANS: D PTS: 1 DIF: Easy OBJ: 10-4

10-17

NAT: AACSB Reflective

62. Which of the following managerial rewards is NOT a short-term reward?

a. stock ownership

b. cash bonuses

c. stock options

d. both a and b

ANS: A PTS: 1 DIF: Easy OBJ: 10-4 NAT: AACSB Reflective

63. Goal congruence can be defined as

a. an incentive plan arranged so the managers? goals are allied 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.

ANS: D PTS: 1 DIF: Moderate OBJ: 10-4 NAT: AACSB Reflective

64. 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.

ANS: B PTS: 1 DIF: Moderate OBJ: 10-4 NAT: AACSB Reflective

65. 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.

ANS: D PTS: 1 DIF: Moderate OBJ: 10-4 NAT: AACSB Reflective

66. Which of the following is an economic factor affecting performance evaluation in the multinational firm?

a. currency restrictions

b. economic stability

c. impact of foreign policy

d. both a and b

ANS: D PTS: 1 DIF: Moderate OBJ: 10-4 NAT: AACSB Reflective

67. Which of the following is a political or legal factor affecting performance evaluation in the multinational firm?

a. social attitude toward industry and business

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b. literacy rate

c. effect of defense policy

d. currency restrictions

ANS: C PTS: 1 DIF: Moderate OBJ: 10-4 NAT: AACSB Reflective

68. Comparison of an international division's ROI can potentially be misleading because of

a. the absence of activity-based management.

b. differing production technologies.

c. the lack of good information.

d. differing environmental factors.

ANS: D PTS: 1 DIF: Moderate OBJ: 10-4 NAT: AACSB Reflective

69. 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.

ANS: B PTS: 1 DIF: Moderate OBJ: 10-5 NAT: AACSB Reflective

70. 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?

ANS: A PTS: 1 DIF: Moderate OBJ: 10-5 NAT: AACSB Analytic

71. _______________ is(are) the transfer price that would leave the selling division no worse off if the good is sold to

an internal division.

a. The negotiated transfer price

b. The minimum transfer price

c. The maximum transfer price

d. Both a and c

ANS: B PTS: 1 DIF: Moderate OBJ: 10-6 NAT: AACSB Reflective

72. _______________ is(are) the transfer price that would leave the buying division no worse off if an input is

purchased from an internal division. a. The negotiated transfer price b. The minimum transfer price c. The maximum transfer price d. Both a and c

ANS: C PTS: 1 DIF: Moderate OBJ: 10-6

10-19

NAT: AACSB Reflective

73. In the Ambros 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. $86

c. $83

d. $73

ANS: D

SUPPORTING CALCULATIONS:

Minimum is the price of the selling division leaving it no worse off: the variable cost of making it, or $73.

PTS: 1

DIF: Moderate OBJ: 10-6 NAT: AACSB Analytic

74. In the Ambros 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. $91

b. $90

c. $83

d. $73

ANS: A

10-20

SUPPORTING CALCULATIONS:

Maximum is the price of the buying division leaving it no worse off: the market price of $91.

PTS: 1 DIF: Moderate OBJ: 10-6 NAT: AACSB Analytic

75. In the Ambros 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. $75

b. $74

c. $68

d. $58

ANS: D

SUPPORTING CALCULATIONS:

Minimum is the price of the selling division leaving it no worse off: the variable cost of making it, or $58.

PTS: 1

DIF: Moderate OBJ: 10-6 NAT: AACSB Analytic

76. In the Ambros 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. $74

c. $68

d. $58

Hansen_CornerstonesCost_CH10

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