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Exam 12: Performance Evaluation and Decentralization

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Question 1

True/False

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In a decentralized company,overall profit margins can mask inefficiencies within the various subdivisions.

A) True
B) False

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Question 2

Multiple Choice

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Suppose the margin of 0.2 stayed the same and the turnover ratio of 4.0 increased by 10%.What would be the effect on the ROI?

A) It would decrease by 10%.
B) It would remain the same.
C) It would increase by 10%.
D) It would increase by 15%.

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

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C

Question 3

Multiple Choice

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Which of the following positive results does the use of return on investment (ROI) encourage managers to focus on?

Daytona,Inc.has a division that makes paint and another division that constructs subdivision houses.The paint division incurs the following costs for one litre of paint: $\begin{array} { l r } \text { Direct materials } & \$ 2,101.10 \\\text { Direct labour } & 1,451.45 \\\text { Variable overhead } & 1,900.90 \\\text { Fixed overhead } & 2,151.15 \\\text { Total } & \$ 7,604,60\end{array}$ The Paint Division can make 1,000,000 L per year and is at capacity.The Construction Division currently buys its paint from an outside supplier for $8.20 per litre (the same price that the Paint Division receives). A. The maximum transfer price per litre of paint is $\$\_\_\_\_$ This price is set by which of the two divisions? B. The minimum transfer price per litre of $p$ aint is $\$\_\_\_\_$ This price is set by which of the two divisions?

$\begin{array}{lrr} & \text { Division A } & \text { Division B } \\\text { Sales } & ? & 1,250,000 \\\text { Net operating income } & \$ 25,000 & \$ 75,000\\\text { Average operating assets } & ? & ? \\\text { Return on investment } & 20 \% & 15 \% \\\text { Margin } & 0.05 & ? \\\text { Tumnover } & ? & ? \\\text { Target ROI } & 12 \% & 10 \%\end{array}$ -Refer to the Figure.What is the turnover for Division B?

A segment of Syntex,Inc.manufactures and sells blankets.The various models of blankets are produced in a single factory using stable technology.They are sold by the sales department,which is also located in the factory.What centre is most probably used to account for this segment?

Why is decentralization frequently chosen by companies?

What is the definition of a testable strategy?

$\begin{array} { l r } \text { Direct materials } & \$ 0.30 \\\text { Direct labour } & 0.15 \\\text { Variable overhead } & 0.70 \\\text { Fixed overhead } & 1.00 \\\text { Total } & \$ 2.15\end{array}$ -Refer to the Figure.Assume that Sophistosand and Videostuff have agreed on a transfer price of $2.20.What is the total benefit for Sophistosand?

A production department within the factory,such as assembly,is an example of a profit centre.

Select the appropriate definition for each of the items listed below. -The ratio of operating income to sales.

$\begin{array} { l r } \text { Direct materials } & \$ 0.20 \\\text { Direct labour } & 0.70 \\\text { Variable overhead } & 0.10 \\\text { Fixed overhead } & 0.23 \\\text { Total } & \$ 1.23\end{array}$ -Refer to the Figure.Assume that Corrugated,Inc.allows division managers to negotiate the transfer price.The Box Division is producing 400,000 boxes.Suppose the Box Division and the Candy Division agree to transfer boxes.What would be the floor of the bargaining range and which division sets it?

SkyJet Airways has three divisions,the Western Division,the Eastern Division,and the Northern Division.The manager of the Western Division had wanted to purchase replacement airplanes for the division.However,he decided against it because,although revenues would increase and the new planes would be less expensive to operate,the initial cost of the planes was quite large.What centre is most probably used to account for the Western Division?

What is the term for the number of units of output that can be produced in a given period of time?

$\begin{array} { l l } \text { Operating income } & \$ 60,000 \\\text { Sales } & \$ 240,000 \\\text { Beginning operating assets } & \$ 440,000 \\\text { Ending operating assets } & \$ 450,000\end{array}$ -Refer to the Figure.What was Condor's turnover ratio last year?

$\begin{array} { l r } \text { Direct materials } & \$ 0.20 \\\text { Direct labour } & 0.70 \\\text { Variable overhead } & 0.10 \\\text { Fixed overhead } & 0.23 \\\text { Total } & \$ 1.23\end{array}$ -Refer to the Figure.Assume that Corrugated,Inc.mandates that any transfers take place at full manufacturing cost.What would be the transfer price if the Box Division transferred boxes to the Candy Division?

What is the term for the practice of delegating decision-making authority to the lower levels of management in a company?

When a product is transferred at market price,the transfer will optimize both divisional and company-wide profits.

Suppose the operating asset turnover ratio increased by 35% and the margin increased by 25%.What would be the effect on the divisional ROI?

Which Balanced Scorecard perspective defines the customer and market segments in which the business unit will compete?