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Exam 9: Responsibility Accounting

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Question 41

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Decentralization encourages upper-level management to concentrate on short-term decisions.

A) True
B) False

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Question 42

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A cost-based transfer price should be based on standard unit costs,not actual costs.

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B) False

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Question 43

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An investment center of Lannigan Company reported operating income of $330,000 on total operating assets of $2,600,000 during the current year.The company has established a target ROI of 13% for the investment center.Last year,the investment center's ROI was 12.2%. Required: Calculate the return on investment for the investment center for the current year.Compare its performance with both the performance from the previous year and the target ROI.

Which of the following is not a characteristic of an effective responsibility accounting system?

A tool that is often used to depict the lines of authority and responsibility within a firm is:

In responsibility accounting systems,managers never are held responsible for items over which they have less than absolute control.

The Cineplex Movie Theater has invested in a snack bar for its store,where individual pizzas would be prepared and sold.The investment cost the company $45,000.The company expects a sales volume for the new product to be 12,000 pizzas a year.Variable materials,preparation,and marketing costs are expected to be $1.50 per unit and fixed costs are estimated at $15,000 a year.Based on a desired 12% ROI,what should Cineplex charge as the selling price per pizza?

Mitchell Company has two divisions,Division A and Division B.Division A makes a product that Division B could use in making one of its products.Why do the managers of both divisions care about the amount of the transfer price?

Howard Company provided the following selected information about its consumer products division for the current year: $\begin{array} { l l } \text { Desired ROI } & 12 \% \\\text { Net Income } & \$ 150,000 \\\text { Residual Income } & \$ 30,000\end{array}$ Based on this information,the division's investment amount was:

The preferred method for setting transfer prices generally is some form of:

A major benefit of a decentralized organization is that:

The New Products Division of Testar Company had operating income of $8,000,000 and operating assets of $44,800,000 during the current year.The New Products Division has developed a potential new product that would require $8,500,000 in operating assets and would be expected to provide $1,400,000 in operating income each year.Testar has set a target return on investment (ROI) of 16% for each of its divisions.Assuming that the new product is put into production,calculate the residual income for the division.

For Year 1,Division C of Deerfield Company reported operating assets of $8,800,000,revenues of $6,600,000,and operating expenses of $5,760,000.The company has established a target return on investment (ROI)of 10% for the division. Required: 1)Calculate the Year 1 ROI for the division.Did the division achieve its target ROI for the year? 2)For Year 2,Division C managers expect that its operating assets will stay at about the same level as for Year 1.Variable expenses for Year 1 were $3,960,000,and the remaining expenses were fixed.The managers expect that the contribution margin ratio for Year 2 will be the same as for Year 1 and that the amount of fixed expenses will not change.To what level must sales increase in Year 2 to achieve the target ROI?

Indicate whether each of the following statements is true or false. Use of residual income to evaluate managers of an investment center may avoid some of the suboptimization that can occur with use of return on investment as a performance measure.______ Residual income is stated as a ratio or percentage.______ One disadvantage with residual income as a measure of performance is that it causes smaller divisions to appear to do better than larger divisions.______ A balanced score card includes various nonfinancial performance measures as well as financial performance measures.______ The balanced scorecard is a holistic approach to evaluating management and division performance.______

Which of the following should not be included in the investment base used to compute residual income?

All of the following are characteristics that are required for effective responsibility accounting except:

When a market-based transfer price is not possible,a transfer price imposed by upper management should preserve a sense of fairness among the divisions of the company affected by the transfer.

A reporting unit of a decentralized business that controls identifiable revenue and/or expense items is known as a(n) :

Estes Company has two operating divisions,A and B.The following information is provided for Division A: $\begin{array}{lrr} \text {Unit selling price } &\$350\\ \text { Unit variable costs} &\$200\\ \text { Unit fixed costs} &\$70\\\end{array}$ Division B uses the type of product produced by Division A and has approached Division A about buying the product internally.Division B is currently paying $300 to purchase the product from an outside source.If Division A sells internally,it can save $10 per unit in variable costs.Assuming that Division A has sufficient excess capacity to produce all of the units requested by Division B,which of the following is the lowest price Division A should consider for the transfer?

Ormand Organic Grocery has invested in a yogurt stand for its store.The investment cost the company $100,000.Variable materials,preparation,and marketing costs are expected to be $0.60 per unit and fixed costs are estimated at $6,000 a year.If actual sales were 20,000 servings,what would the ROI be using the sales price of $1.80?