Should assets be measured at historical cost or current cost

ACCOUNTING

Multiple Choice

Should assets be measured at historical cost or current cost? This question is considered part of which step in designing an accounting-based performance measure?

a. Choose performance measures that align with top management's financial goals

b. Choose the time horizon of each performance measure

c. Choose a definition for each performance measure

d. Choose a measurement alternative for each performance measure

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A problem with rewarding managers only on the basis of residual income

ACCOUNTING

Multiple Choice

A problem with rewarding managers only on the basis of residual income

a. is that residual income is difficult to measure.

b. is that on occasion the items in the residual income calculation are not quantifiable.

c. is that residual income can depend on items over which the manager has little control.

d. include all of the above.

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What are Bleach's and Cleanser's residual incomes based on book values, respectively

ACCOUNTING

Multiple Choice

Ruth Cleaning Products manufactures home cleaning products. The company has two divisions, Bleach and Cleanser. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 20x3:


ASSETS

INCOME


Book value

Current value

Book value

Current value

Bleach

$225,000

$300,000

$150,000

$155,000

Cleanser

$450,000

$250,000

$100,000

$105,000

The company is currently using a 15% required rate of return.


What are Bleach's and Cleanser's residual incomes based on book values, respectively?

a. $116,250; $32,500

b. $110,000; $67,500

c. $67,500; $110,000

d. $37,500; $116,250

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In performance evaluations

ACCOUNTING

Multiple Choice

In performance evaluations

a. the performance of the division prior to the manager assuming control should be considered.

b. economic conditions for the specific industry should not be considered.

c. to have an effective and fair evaluation, a manager should be evaluated over several time periods.

d. both (a) and (c) are correct.

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1. Which of the following statements is true

ACCOUNTING

Multiple Choice

Which of the following statements is true?

a. The economic, legal, political, social, and cultural environments differ across countries.

b. Governments in some countries may impose controls and limit selling prices of a company's products.

c. Because of advances in telecommunications and transportation, the availability of materials and skilled labor does not differ significantly across countries.

d. Both (a) and (b) are correct.

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If a company is a multinational company with operations in several different countries, one way to achieve comparability of historical-cost based ROIs for facilities in different countries is

ACCOUNTING

Multiple Choice

If a company is a multinational company with operations in several different countries, one way to achieve comparability of historical-cost based ROIs for facilities in different countries is

a. restate the results of operations using the cash basis method of accounting.

b. use GAAP for all reporting and calculations.

c. restate the results of all operations in dollars.

d. all of the above would achieve comparability.

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The cost today of purchasing an asset identical to the one currently held is called

ACCOUNTING

Multiple Choice

The cost today of purchasing an asset identical to the one currently held is called

a. an actual cost.

b. a current cost.

c. a dual cost.

d. a fixed cost.

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What are Bleach's and Cleanser's return on investment based on current values, respectively

ACCOUNTING

Multiple Choice

Ruth Cleaning Products manufactures home cleaning products. The company has two divisions, Bleach and Cleanser. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 20x3:


ASSETS

INCOME


Book value

Current value

Book value

Current value

Bleach

$225,000

$300,000

$150,000

$155,000

Cleanser

$450,000

$250,000

$100,000

$105,000

The company is currently using a 15% required rate of return.


What are Bleach's and Cleanser's return on investment based on current values, respectively?

a. 0.22; 0.67

b. 0.42; 0.52

c. 0.52; 0.42

d. 0.67; 0.22

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What are Bleach's and Cleanser's return on investment based on book values, respectively

ACCOUNTING

Multiple Choice

Ruth Cleaning Products manufactures home cleaning products. The company has two divisions, Bleach and Cleanser. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 20x3:


ASSETS

INCOME


Book value

Current value

Book value

Current value

Bleach

$225,000

$300,000

$150,000

$155,000

Cleanser

$450,000

$250,000

$100,000

$105,000

The company is currently using a 15% required rate of return.


What are Bleach's and Cleanser's return on investment based on book values, respectively?

a. 0.22; 0.67

b. 0.42; 0.52

c. 0.52; 0.42

d. 0.67; 0.22

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What is the EVA for Wichita

ACCOUNTING

Multiple Choice

Waldorf Company has two sources of funds: long-term debt with a market and book value of $10 million issued at an interest rate of 12%, and equity capital that has a market value of $8 million (book value of $4 million). Waldorf Company has profit centers in the following locations with the following operating incomes, total assets, and total liabilities. The cost of equity capital is 12%, while the tax rate is 25%.


Operating

Income

Assets

Current

Liabilities

St. Louis

$ 960,000

$ 4,000,000

$ 200,000

Cedar Rapids

$1,200,000

$ 8,000,000

$ 600,000

Wichita

$2,040,000

$12,000,000

$1,200,000


What is the EVA for Wichita?

a. $450,000

b. $1,530,000

c. $414,360

d. $1,115,640

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What is the EVA for Cedar Rapids

ACCOUNTING

Multiple Choice

Waldorf Company has two sources of funds: long-term debt with a market and book value of $10 million issued at an interest rate of 12%, and equity capital that has a market value of $8 million (book value of $4 million). Waldorf Company has profit centers in the following locations with the following operating incomes, total assets, and total liabilities. The cost of equity capital is 12%, while the tax rate is 25%.


Operating

Income

Assets

Current

Liabilities

St. Louis

$ 960,000

$ 4,000,000

$ 200,000

Cedar Rapids

$1,200,000

$ 8,000,000

$ 600,000

Wichita

$2,040,000

$12,000,000

$1,200,000


What is the EVA for Cedar Rapids?

a. $135,580

b. $220,000

c. $234,000

d. $305,000

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What is the EVA for St. Louis

ACCOUNTING

Multiple Choice

Waldorf Company has two sources of funds: long-term debt with a market and book value of $10 million issued at an interest rate of 12%, and equity capital that has a market value of $8 million (book value of $4 million). Waldorf Company has profit centers in the following locations with the following operating incomes, total assets, and total liabilities. The cost of equity capital is 12%, while the tax rate is 25%.


Operating

Income

Assets

Current

Liabilities

St. Louis

$ 960,000

$ 4,000,000

$ 200,000

Cedar Rapids

$1,200,000

$ 8,000,000

$ 600,000

Wichita

$2,040,000

$12,000,000

$1,200,000


What is the EVA for St. Louis?

a. $255,740

b. $327,460

c. $392,540

d. $720,000

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A negative feature of defining investment by excluding the portion of total assets employed that are financed by short-term creditors is

ACCOUNTING

Multiple Choice

A negative feature of defining investment by excluding the portion of total assets employed that are financed by short-term creditors is

a. current liabilities are sometimes difficult to define.

b. short-term debt is always more expensive to finance than long-term debt.

c. this method encourages managers to use an excessive amount of short-term debt.

d. this method encourages managers to use an excessive amount of long-term debt.

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The after-tax average cost of all the long-term funds used by a corporation equals

ACCOUNTING

Multiple Choice

The after-tax average cost of all the long-term funds used by a corporation equals

a. economic value added.

b. return on investment.

c. return on equity.

d. weighted-average cost of capital.

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After-tax operating income minus the after-tax weighted-average cost of capital multiplied by total assets minus current liabilities equals

ACCOUNTING

Multiple Choice

After-tax operating income minus the after-tax weighted-average cost of capital multiplied by total assets minus current liabilities equals

a. return on investment.

b. residual income.

c. economic value added.

d. weighted-average cost of capital.

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Which division has the best return on investment and which division has the best residual income figure, respectively

ACCOUNTING

Multiple Choice

The Bandage Medical Supply Company has two divisions that operate independently of one another. The financial data for the year 20x3 reported the following results:


North South

Sales $3,000,000 $2,500,000

Operating income 750,000 550,000

Taxable income 650,000 375,000

Investment 6,000,000 5,000,000


The company's desired rate of return is 10%. Income is defined as operating income.


Which division has the best return on investment and which division has the best residual income figure, respectively?

a. North, North

b. South, South

c. North, South

d. South, North

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What are the respective residual incomes for the North and South Divisions

ACCOUNTING

Multiple Choice

The Bandage Medical Supply Company has two divisions that operate independently of one another. The financial data for the year 20x3 reported the following results:


North South

Sales $3,000,000 $2,500,000

Operating income 750,000 550,000

Taxable income 650,000 375,000

Investment 6,000,000 5,000,000


The company's desired rate of return is 10%. Income is defined as operating income.


What are the respective residual incomes for the North and South Divisions?

a. $30,000 and $50,000

b. $150,000 and $30,000

c. $150,000 and $50,000

d. $50,000 and a negative $150,000

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What are the respective return-on-investment ratios for the North and South Divisions

ACCOUNTING

Multiple Choice

The Bandage Medical Supply Company has two divisions that operate independently of one another. The financial data for the year 20x3 reported the following results:


North South

Sales $3,000,000 $2,500,000

Operating income 750,000 550,000

Taxable income 650,000 375,000

Investment 6,000,000 5,000,000


The company's desired rate of return is 10%. Income is defined as operating income.


What are the respective return-on-investment ratios for the North and South Divisions?

a. 0.110 and 0.125

b. 0.108 and 0.075

c. 0.125 and 0.110

d. 0.050 and 0.150

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Using residual income as a measure of performance rather than return on investment promotes goal congruence because

ACCOUNTING

Multiple Choice

Using residual income as a measure of performance rather than return on investment promotes goal congruence because

a. residual income places importance on the reduction of underperforming assets.

b. residual income calculates a percentage return rather than an absolute return.

c. residual income concentrates on maximizing an absolute amount of dollars.

d. residual income concentrates on maximizing the return on sales

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A company which favors the residual income approach

ACCOUNTING

Multiple Choice

A company which favors the residual income approach

a. wants managers to concentrate on maximizing an absolute amount of dollars.

b. wants managers to concentrate on maximizing a percentage return.

c. wants managers to maximize the investment turnover ratio.

d. wants managers to maximize return on sales.

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A problem with utilizing residual income is that

ACCOUNTING

Multiple Choice

A problem with utilizing residual income is that

a. a corporation with a high investment turnover ratio always has a higher residual income than a corporation with a smaller investment turnover ratio.

b. a corporation with a high return on sales always has a higher residual income than a corporation with a smaller return on sales.

c. A corporation with a larger dollar amount of assets is likely to have a higher residual income than a corporation with a smaller dollar amount of assets.

d. none of the above are correct.

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Costs recognized in particular situations that are not recognized by accrual accounting procedures are

ACCOUNTING

Multiple Choice

Costs recognized in particular situations that are not recognized by accrual accounting procedures are

a. opportunity costs.

b. imputed costs.

c. cash accounting costs.

d. none of the above.

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What is the Alpha Division's return on sales

ACCOUNTING

Multiple Choice

The top management at Munchie Company, a manufacturer of computer games, is attempting to recover from a flood that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:


Alpha Division Beta Division Gamma Division

Sales $2,500,000 (a) $1,150,000

Net operating income $1,500,000 $650,000 $ 575,000

Operating assets (b) (c) $ 766,667

Return on investment 0.25 0.15 (d)

Return on sales (e) 0.10 0.5

Investment turnover (f) (g) 1.5


What is the Alpha Division's return on sales?

a. 0.25

b. 0.42

c. 0.60

d. 0.75

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What is the Gamma Division's return on investment

ACCOUNTING

Multiple Choice

The top management at Munchie Company, a manufacturer of computer games, is attempting to recover from a flood that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:


Alpha Division Beta Division Gamma Division

Sales $2,500,000 (a) $1,150,000

Net operating income $1,500,000 $650,000 $ 575,000

Operating assets (b) (c) $ 766,667

Return on investment 0.25 0.15 (d)

Return on sales (e) 0.10 0.5

Investment turnover (f) (g) 1.5


What is the Gamma Division's return on investment?

a. 0.25

b. 0.42

c. 0.60

d. 0.75

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What is the value of the operating assets belonging to the Beta Division

ACCOUNTING

Multiple Choice

The top management at Munchie Company, a manufacturer of computer games, is attempting to recover from a flood that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:


Alpha Division Beta Division Gamma Division

Sales $2,500,000 (a) $1,150,000

Net operating income $1,500,000 $650,000 $ 575,000

Operating assets (b) (c) $ 766,667

Return on investment 0.25 0.15 (d)

Return on sales (e) 0.10 0.5

Investment turnover (f) (g) 1.5


What is the value of the operating assets belonging to the Beta Division?

a. $4,333,333

b. $5,952,380

c. $6,500,000

d. $7,151,800

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What is the value of the operating assets belonging to the Alpha Division

ACCOUNTING

Multiple Choice

The top management at Munchie Company, a manufacturer of computer games, is attempting to recover from a flood that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:


Alpha Division Beta Division Gamma Division

Sales $2,500,000 (a) $1,150,000

Net operating income $1,500,000 $650,000 $ 575,000

Operating assets (b) (c) $ 766,667

Return on investment 0.25 0.15 (d)

Return on sales (e) 0.10 0.5

Investment turnover (f) (g) 1.5


What is the value of the operating assets belonging to the Alpha Division?

a. $4,333,333

b. $6,000,000

c. $6,500,000

d. $7,151,800

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What were the sales for the Beta Division

ACCOUNTING

Multiple Choice

The top management at Munchie Company, a manufacturer of computer games, is attempting to recover from a flood that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:


Alpha Division Beta Division Gamma Division

Sales $2,500,000 (a) $1,150,000

Net operating income $1,500,000 $650,000 $ 575,000

Operating assets (b) (c) $ 766,667

Return on investment 0.25 0.15 (d)

Return on sales (e) 0.10 0.5

Investment turnover (f) (g) 1.5


What were the sales for the Beta Division?

a. $4,333,333

b. $5,952,380

c. $6,500,000

d. $7,151,800

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What is the Cyclotron Division's return on investment

ACCOUNTING

Multiple Choice

The Cybertronics Corporation reported the following information for its Cyclotron Division:



Revenues $1,000,000

Operating costs 600,000

Taxable income 200,000

Operating assets 500,000



Income is defined as operating income.



What is the Cyclotron Division's return on investment?

a. 0.2

b. 0.4

c. 0.5

d. 0.8

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What is the Cyclotron Division's return on sales

ACCOUNTING

Multiple Choice

The Cybertronics Corporation reported the following information for its Cyclotron Division:



Revenues $1,000,000

Operating costs 600,000

Taxable income 200,000

Operating assets 500,000



Income is defined as operating income.



What is the Cyclotron Division's return on sales?

a. 0.2

b. 0.4

c. 0.5

d. 0.6

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What is the Cyclotron Division's investment turnover ratio

ACCOUNTING

Multiple Choice

The Cybertronics Corporation reported the following information for its Cyclotron Division:



Revenues $1,000,000

Operating costs 600,000

Taxable income 200,000

Operating assets 500,000



Income is defined as operating income.



What is the Cyclotron Division's investment turnover ratio?

a. 2.00

b. 3.33

c. 2.50

d. 0.80

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Thacker Company has two regional offices. The data for each is as follows

ACCOUNTING

Multiple Choice

Thacker Company has two regional offices. The data for each is as follows:

Maryland New York

Revenues $ 580,000 $ 596,000

Operating assets 4,800,000 9,000,000

Net operating income 2,016,000 4,860,000


What is the return on investment for the New York Division?

a. 0.42.

b. 0.54

c. 0.96

d. 4.12

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Wacker Company has two regional offices. The data for each is as follows

ACCOUNTING

Multiple Choice

Wacker Company has two regional offices. The data for each is as follows:

Maryland New York

Revenues $ 580,000 $ 596,000

Operating assets 4,800,000 9,000,000

Net operating income 2,016,000 2,400,000


What is the Maryland Division's return on investment?

a. 0.42

b. 0.54.

c. 0.96.

d. 4.12.

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The Alpha Beta Corporation had the following information for 20x3

ACCOUNTING

Multiple Choice

The Alpha Beta Corporation had the following information for 20x3:

Revenue $ 900,000

Operating expenses 670,000

Total assets 1,150,000


What is the return on investment?

a. 10%

b. 20%

c. 25%

d. 78.2%

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During the past twelve months, the Zenith Corporation had a net income of $39,200

ACCOUNTING

Multiple Choice

During the past twelve months, the Zenith Corporation had a net income of $39,200. What is the return on investment if the amount of the investment is $280,000?

a. 10%

b. 12%

c. 14%

d. 16%

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During the past twelve months, the Aaron Corporation had a net income of $50,000

ACCOUNTING

Multiple Choice

During the past twelve months, the Aaron Corporation had a net income of $50,000. What is the amount of the investment if the return on investment is 20%?

a. $100,000

b. $200,000

c. $250,000

d. $500,000

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Return on investment can be increased by

ACCOUNTING

Multiple Choice

Return on investment can be increased by

a. increasing operating assets.

b. decreasing operating assets.

c. decreasing revenues.

d. both (b) and (c).

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The return on investment is usually considered the most popular approach to incorporating the investment base into a performance measure because

ACCOUNTING

Multiple Choice

The return on investment is usually considered the most popular approach to incorporating the investment base into a performance measure because

a. it blends all the ingredients of profitability into a single percentage.

b. once determined, there is no need to use it with other measures of performance.

c. it is similar to the company's price earnings ratio in that a corporation's return on investment appears every day in The Wall Street Journal.

d. of both (a) and (c).

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Managers usually use the term return on investment to evaluate

ACCOUNTING

Multiple Choice

Managers usually use the term return on investment to evaluate

a. the performance of a subdivision.

b. a potential project.

c. the performance of a subunit.

d. both (a) and (c).

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Which of the following statements about designing an accounting-based performance measure is FALSE

ACCOUNTING

Multiple Choice

Which of the following statements about designing an accounting-based performance measure is FALSE?

a. The steps may be followed in a random order.

b. The issues considered in each step are independent.

c. Management's beliefs are present during the analyses.

d. Behavioral criteria are important when evaluating the steps.

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Should assets be defined as total assets or net assets

ACCOUNTING

Multiple Choice

Should assets be defined as total assets or net assets? This question is considered part of which step in designing an accounting-based performance measure?

a. Choose performance measures that align with top management's financial goals.

b. Choose the time horizon of each performance measure.

c. Choose a definition for each performance measure.

d. Choose a measurement alternative for each performance measure.

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Does operating income best measure a subunit's financial performance? This question is considered part of which step in designing an accounting-based performance measure

ACCOUNTING

Multiple Choice

Does operating income best measure a subunit's financial performance? This question is considered part of which step in designing an accounting-based performance measure?

a. Choose performance measures that align with top management's financial goals.

b. Choose the time horizon of each performance measure.

c. Choose a definition for each performance measure.

d. Choose a measurement alternative for each performance measure.

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An example of a performance measure with a long-run time horizon

ACCOUNTING

Multiple Choice

An example of a performance measure with a long-run time horizon

a. is direct materials efficiency variances.

b. is overhead spending variances.

c. is number of new patents developed.

d. include all of the above measures.

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Customer-satisfaction measures are an example of

ACCOUNTING

Multiple Choice

Customer-satisfaction measures are an example of

a. goal-congruence approach.

b. balanced scorecard approach.

c. financial report scorecard approach.

d. investment success approach.

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A report that measures financial and nonfinancial performance measures for various organization units in a single report is called a(n)

ACCOUNTING

Multiple Choice

A report that measures financial and nonfinancial performance measures for various organization units in a single report is called a(n)

a. balanced scorecard.

b. financial report scorecard.

c. imbalanced scorecard.

d. unbalanced scorecard.

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Examples of "cooking the books" are understated assets and overstated liabilities

ACCOUNTING

True or False

Examples of "cooking the books" are understated assets and overstated liabilities

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Evaluating an executive's performance using the annual return on investment would sharpen an executive's long-run focus

ACCOUNTING

True or False

Evaluating an executive's performance using the annual return on investment would sharpen an executive's long-run focus

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Another term for benchmarking is a relative performance evaluation

ACCOUNTING

True or False

Another term for benchmarking is a relative performance evaluation

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Moral hazard describes contexts in which an employee prefers to exert less effort than the effort that the owner wants because the employee's effort cannot be accurately monitored and enforced

ACCOUNTING

True or False

Moral hazard describes contexts in which an employee prefers to exert less effort than the effort that the owner wants because the employee's effort cannot be accurately monitored and enforced

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An important consideration in designing compensation arrangements is the tradeoff between creating incentives and imposing risks

ACCOUNTING

True or False

An important consideration in designing compensation arrangements is the tradeoff between creating incentives and imposing risks

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One way to achieve greater comparability of historical cost-based ROIs for a company's foreign division is to restate performance in dollars

ACCOUNTING

True or False

One way to achieve greater comparability of historical cost-based ROIs for a company's foreign division is to restate performance in dollars

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Comparing the performance of divisions of a multinational company operating in different countries is difficult due to the differences in economic, legal, political, social, and cultural environments

ACCOUNTING

True or False

Comparing the performance of divisions of a multinational company operating in different countries is difficult due to the differences in economic, legal, political, social, and cultural environments

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Current cost return on investment is a better measure of the current economic returns from an investment than historical cost return on investment

ACCOUNTING

True or False

Current cost return on investment is a better measure of the current economic returns from an investment than historical cost return on investment

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Companies that adopt economic value added define investment as total assets employed minus current liabilities

ACCOUNTING

True or False

Companies that adopt economic value added define investment as total assets employed minus current liabilities

Click here for the SOLUTION

To evaluate overall aggregate performance, return on investment and residual income measures are more appropriate than return on sales

ACCOUNTING

True or False

To evaluate overall aggregate performance, return on investment and residual income measures are more appropriate than return on sales

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Economic value added, unlike residual income, charges managers for the costs of their investments in long-term assets and working capital

ACCOUNTING

True or False

Economic value added, unlike residual income, charges managers for the costs of their investments in long-term assets and working capital

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Goal congruence is more likely to be promoted by using return on investment rather than residual income as a measure of a subunit's managerial performance

ACCOUNTING

True or False

Goal congruence is more likely to be promoted by using return on investment rather than residual income as a measure of a subunit's managerial performance

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The objective of maximizing return on investment may induce managers of highly profitable divisions to reject projects that from the viewpoint of the overall organization should be accepted

ACCOUNTING

True or False

The objective of maximizing return on investment may induce managers of highly profitable divisions to reject projects that from the viewpoint of the overall organization should be accepted

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Imputed costs are costs recognized in particular situations that are not usually recognized by accrual accounting procedures

ACCOUNTING

True or False

Imputed costs are costs recognized in particular situations that are not usually recognized by accrual accounting procedures

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The three alternatives for increasing return on investment include increasing assets such as receivables, increasing revenues, and decreasing costs. (In all cases assume that all other items stay the same.)

ACCOUNTING

True or False

The three alternatives for increasing return on investment include increasing assets such as receivables, increasing revenues, and decreasing costs. (In all cases assume that all other items stay the same.)

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Investment turnover is calculated by dividing investments by revenues

ACCOUNTING

True or False

Investment turnover is calculated by dividing investments by revenues

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Return on investment is also called the accrual accounting rate of return

ACCOUNTING

True or False

Return on investment is also called the accrual accounting rate of return

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A major weakness of comparing two companies using only operating incomes as the basis of comparison is this method ignores differences in the size of the investment required to earn the operating income

ACCOUNTING

True or False

A major weakness of comparing two companies using only operating incomes as the basis of comparison is this method ignores differences in the size of the investment required to earn the operating income

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Some companies present financial and nonfinancial performance measures for various organization units in a single report called the " balanced scorecard."

ACCOUNTING

True or False

Some companies present financial and nonfinancial performance measures for various organization units in a single report called the " balanced scorecard."

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Many common performance measures, such as customer satisfaction, rely on internal financial accounting information

ACCOUNTING

True or False

Many common performance measures, such as customer satisfaction, rely on internal financial accounting information

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Soft Cushion Company is highly decentralized

ACCOUNTING

Multiple Choice

Soft Cushion Company is highly decentralized. Each division is empowered to make its own sales decisions. The Assembly Division can purchase stuffing, a key component, from the Production Division or from external suppliers. The Production Division has been the major supplier of stuffing in recent years. The Assembly Division has announced that two external suppliers will be used to purchase the stuffing at $20 per pound for the next year. The Production Division recently increased its unit price to $40. The manager of the Production Division presented the following information -- variable cost $32 and fixed cost $8 -- to top management in order to attempt to force the Assembly Division to purchase the stuffing internally. The Assembly Division purchases 20,000 pounds of stuffing per month.

What would be the monthly operating advantage (disadvantage) of purchasing the goods internally, assuming the external supplier increased its price to $50 per pound and the Production Division is able to utilize the facilities for other operations, resulting in a monthly cash-operating savings of $30 per pound?

a. $1,000,000

b. $360,000

c. $(240,000)

d. $(400,000)

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Section 482 of the U.S. Internal Revenue Code governing the taxation of multinational transfer pricing recognizes that transfer prices can be

ACCOUNTING

Multiple Choice

Section 482 of the U.S. Internal Revenue Code governing the taxation of multinational transfer pricing recognizes that transfer prices can be

a. market based.

b. negotiated.

c. cost-plus based.

d. both (a) and (c).

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The seller of Product A has no idle capacity and can sell all it can produce at $20 per unit. Outlay cost is $4

ACCOUNTING

Multiple Choice

The seller of Product A has no idle capacity and can sell all it can produce at $20 per unit. Outlay cost is $4. What is the opportunity cost, assuming the seller sells internally?

a. $4

b. $16

c. $20

d. $24

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The minimum transfer price equals

ACCOUNTING

Multiple Choice

The minimum transfer price equals

a. opportunity costs less the additional outlay costs.

b. opportunity costs times 125% plus the additional outlay costs.

c. opportunity costs divided by the additional outlay costs.

d. incremental costs plus opportunity costs.

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Which of the different transfer-pricing methods preserves sub-unit autonomy

ACCOUNTING

Multiple Choice

Which of the different transfer-pricing methods preserves sub-unit autonomy?

a. Market-based transfer pricing

b. Cost-based transfer pricing

c. Negotiated transfer pricing

d. Both (a) and (c)

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Which of the following transfer-pricing methods always achieves goal congruence

ACCOUNTING

Multiple Choice

Which of the following transfer-pricing methods always achieves goal congruence?

a. A market-based transfer price

b. A cost-based transfer price

c. A negotiated transfer price

d. Full-cost plus a standard profit margin

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An advantage of a negotiated transfer price is

ACCOUNTING

Multiple Choice

An advantage of a negotiated transfer price is

a. the close relationship between the negotiated price and the market price.

b. the negotiated transfer price preserves divisional autonomy.

c. the negotiations usually do not require much time and energy.

d. both (b) and (c).

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Dual pricing is not widely used in practice because

ACCOUNTING

Multiple Choice

Dual pricing is not widely used in practice because

a. the manager of the supplying division does not have sufficient incentive to control costs.

b. it increases goal congruence.

c. managers are not insulated from the frictions of the market place.

d. of both (b) and (c).

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The transfer-pricing method that reduces the goal-congruence problems associated with a pure cost-plus-based transfer-pricing method is

ACCOUNTING

Multiple Choice

The transfer-pricing method that reduces the goal-congruence problems associated with a pure cost-plus-based transfer-pricing method is

a. dual pricing.

b. market pricing.

c. single pricing.

d. both (a) and (b).

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In analyzing transfer prices

ACCOUNTING

Multiple Choice

In analyzing transfer prices,

a. the buyer will not willingly purchase a product for less than the incremental costs incurred to manufacture the product internally.

b. the seller will not willingly sell a product for less than the incremental costs incurred to make the product.

c. the buyer will willingly pay more than the ceiling transfer price.

d. the buyer will not pay less than the ceiling transfer price.

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An advantage of using budgeted costs for transfer pricing among divisions is

ACCOUNTING

Multiple Choice

An advantage of using budgeted costs for transfer pricing among divisions is

a. overall corporate profitability is usually higher.

b. it usually provides a basis for optimal decision making.

c. the divisions know the transfer price in advance.

d. it promotes subunit autonomy.

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Crush Company makes internal transfers at 160% of full cost

ACCOUNTING

Multiple Choice

Crush Company makes internal transfers at 160% of full cost. The Soda Refining Division purchases 40,000 containers of carbonated water per day, on average, from a local supplier, who delivers the water for $40 per container via an external shipper. In order to reduce costs, the company located an independent supplier in Illinois who is willing to sell 40,000 containers at $30 each, delivered to Crush Company's Shipping Division in Missouri. The company's Shipping Division in Missouri has excess capacity and can ship the 40,000 containers at a variable cost of $4.50 per container. What is the total cost of purchasing the water from the Illinois supplier and shipping it to the Soda Division?

a. $1,200,000

b. $1,380,000

c. $1,600,000

d. $180,000

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Crush Company makes internal transfers at 180% of full cost

ACCOUNTING

Multiple Choice

Crush Company makes internal transfers at 180% of full cost. The Soda Refining Division purchases 30,000 containers of carbonated water per day, on average, from a local supplier, who delivers the water for $30 per container via an external shipper. In order to reduce costs, the company located an independent supplier in Missouri who is willing to sell 30,000 containers at $20 each, delivered to Crush Company's Shipping Division in Missouri. The company's Shipping Division in Missouri has excess capacity and can ship the 30,000 containers at a variable cost of $2.50 per container. What is the total cost to Crush Company if the carbonated water is purchased from the local supplier?

a. $ 900,000

b. $1,200,000

c. $1,501,000

d. $1,620,000

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When companies do not want to use market prices or find it too costly, they typically use _______________prices, even though suboptimal decisions may occur

ACCOUNTING

Multiple Choice

When companies do not want to use market prices or find it too costly, they typically use _______________prices, even though suboptimal decisions may occur.

a. average-cost

b. full-cost

c. long-run cost

d. short-run average cost

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Cost-based transfer prices are helpful

ACCOUNTING

Multiple Choice

Cost-based transfer prices are helpful

a. when a market exists for the product.

b. when a price is easy to obtain.

c. when the product is unique.

d. for all of the above.

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When an industry has excess capacity, market prices may drop well below their historical average

ACCOUNTING

Multiple Choice

When an industry has excess capacity, market prices may drop well below their historical average. If this drop is temporary, it is called

a. distress prices.

b. dropped prices.

c. low-average prices.

d. substitute prices.

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Optimal corporate decisions do NOT result

ACCOUNTING

Multiple Choice

Optimal corporate decisions do NOT result

a. when goods or services are transferred at market prices.

b. when goods or services are transferred at full-cost prices.

c. when goods or services are transferred at variable-cost prices.

d. for either (b) or (c).

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A benefit of using a market-based transfer price is

ACCOUNTING

Multiple Choice

A benefit of using a market-based transfer price is

a. the profits of the transferring division are sacrificed for the overall good of the corporation.

b. the profits of the division receiving the products are sacrificed for the overall good of the corporation.

c. the economic viability and profitability of each division can be evaluated individually.

d. none of the above.

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Transferring products or services at market prices generally leads to optimal decisions when

ACCOUNTING

Multiple Choice

Transferring products or services at market prices generally leads to optimal decisions when

a. the market for the intermediate product is perfectly competitive.

b. the interdependencies of the subunits are minimal.

c. there are no additional costs or benefits to the company in buying or selling in the external market.

d. all of the above are needed for optimal decisions.

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Which of the following formulas correctly reflects the company's operating income

ACCOUNTING

Multiple Choice

Division A sells soybean paste internally to Division B, which in turn, produces soybean burgers that sell for $5 per pound. Division A incurs costs of $0.75 per pound while Division B incurs additional costs of $2.50 per pound.

Which of the following formulas correctly reflects the company's operating income?

a. $5.00 - ($0.75 + $2.50) = $1.75

b. $5.00 - ($1.25 + $2.50) = $1.25

c. $5.00 - ($0.75 + $3.75) = $0.50

d. $5.00 - ($0.25 + $1.25 + $3.50) = 0

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What is Division A's operating income per pound, assuming the transfer price of the soybean paste is set at $1.25 per pound

ACCOUNTING

Multiple Choice

Division A sells soybean paste internally to Division B, which in turn, produces soybean burgers that sell for $5 per pound. Division A incurs costs of $0.75 per pound while Division B incurs additional costs of $2.50 per pound.

What is Division A's operating income per pound, assuming the transfer price of the soybean paste is set at $1.25 per pound?

a. $0.500

b. $0.875

c. $1.250

d. $1.625

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If the Assembly Division sells 100,000 pairs of shoes at a price of $60 a pair to customers, what is the operating income of both divisions together

ACCOUNTING

Multiple Choice

Calculate the Division operating income for the BetaShoe Company which manufacturers only one type of shoe and has two divisions, the Sole Division, and the Assembly Division. The Sole Division manufactures soles for the Assembly Division, which completes the shoe and sells it to retailers. The Sole Division "sells" soles to the Assembly Division. The market price for the Assembly Division to purchase a pair of soles is $20. (Ignore changes in inventory.) The fixed costs for the Sole Division are assumed to be the same over the range of 40,000-100,000 units. The fixed costs for the Assembly Division are assumed to be $7 per pair at 100,000 units.


Sole's costs per pair of soles are:

Direct materials $4

Direct labor $3

Variable overhead $2

Division fixed costs $1


Assembly's costs per completed pair of shoes are:

Direct materials $6

Direct labor $2

Variable overhead $1

Division fixed costs $7


If the Assembly Division sells 100,000 pairs of shoes at a price of $60 a pair to customers, what is the operating income of both divisions together?

a. $4,400,000

b. $3,400,000

c. $3,000,000

d. $2,600,000

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Assume the transfer price for a pair of soles is 180% of total costs of the Sole Division and 40,000 of soles are produced and transferred to the Assembly Division

ACCOUNTING

Multiple Choice

Calculate the Division operating income for the BetaShoe Company which manufacturers only one type of shoe and has two divisions, the Sole Division, and the Assembly Division. The Sole Division manufactures soles for the Assembly Division, which completes the shoe and sells it to retailers. The Sole Division "sells" soles to the Assembly Division. The market price for the Assembly Division to purchase a pair of soles is $20. (Ignore changes in inventory.) The fixed costs for the Sole Division are assumed to be the same over the range of 40,000-100,000 units. The fixed costs for the Assembly Division are assumed to be $7 per pair at 100,000 units.


Sole's costs per pair of soles are:

Direct materials $4

Direct labor $3

Variable overhead $2

Division fixed costs $1


Assembly's costs per completed pair of shoes are:

Direct materials $6

Direct labor $2

Variable overhead $1

Division fixed costs $7


Assume the transfer price for a pair of soles is 180% of total costs of the Sole Division and 40,000 of soles are produced and transferred to the Assembly Division. The Sole Division's operating income is

a. $320,000

b. $360,000

c. $400,000

d. $440,000

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Calculate and compare the difference in overall corporate net income between Scenario A and Scenario B if the Assembly Division sells 100,000 pairs of shoes for $60 per pair to customers

ACCOUNTING

Multiple Choice

Calculate the Division operating income for the BetaShoe Company which manufacturers only one type of shoe and has two divisions, the Sole Division, and the Assembly Division. The Sole Division manufactures soles for the Assembly Division, which completes the shoe and sells it to retailers. The Sole Division "sells" soles to the Assembly Division. The market price for the Assembly Division to purchase a pair of soles is $20. (Ignore changes in inventory.) The fixed costs for the Sole Division are assumed to be the same over the range of 40,000-100,000 units. The fixed costs for the Assembly Division are assumed to be $7 per pair at 100,000 units.


Sole's costs per pair of soles are:

Direct materials $4

Direct labor $3

Variable overhead $2

Division fixed costs $1


Assembly's costs per completed pair of shoes are:

Direct materials $6

Direct labor $2

Variable overhead $1

Division fixed costs $7


Calculate and compare the difference in overall corporate net income between Scenario A and Scenario B if the Assembly Division sells 100,000 pairs of shoes for $60 per pair to customers.

Scenario A: Negotiated transfer price of $15 per pair of soles

Scenario B: Market-based transfer price

a. $500,000 more net income under Scenario A

b. $500,000 of net income using Scenario B

c. $100,000 of net income using Scenario A.

d. none of the above

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What is the transfer price per pair of shoes from the Sole Division to the Assembly Division per pair of soles if the transfer price per pair of soles is 125% of full costs

ACCOUNTING

Multiple Choice

Calculate the Division operating income for the BetaShoe Company which manufacturers only one type of shoe and has two divisions, the Sole Division, and the Assembly Division. The Sole Division manufactures soles for the Assembly Division, which completes the shoe and sells it to retailers. The Sole Division "sells" soles to the Assembly Division. The market price for the Assembly Division to purchase a pair of soles is $20. (Ignore changes in inventory.) The fixed costs for the Sole Division are assumed to be the same over the range of 40,000-100,000 units. The fixed costs for the Assembly Division are assumed to be $7 per pair at 100,000 units.


Sole's costs per pair of soles are:

Direct materials $4

Direct labor $3

Variable overhead $2

Division fixed costs $1


Assembly's costs per completed pair of shoes are:

Direct materials $6

Direct labor $2

Variable overhead $1

Division fixed costs $7


What is the transfer price per pair of shoes from the Sole Division to the Assembly Division per pair of soles if the transfer price per pair of soles is 125% of full costs?

a. $10

b. $12.50

c. $13

d. $15

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What is the transfer price per pair of soles from the Sole Division to the Assembly Division if the method used to place a value on each pair of soles is 180% of variable costs

ACCOUNTING

Multiple Choice

Calculate the Division operating income for the BetaShoe Company which manufacturers only one type of shoe and has two divisions, the Sole Division, and the Assembly Division. The Sole Division manufactures soles for the Assembly Division, which completes the shoe and sells it to retailers. The Sole Division "sells" soles to the Assembly Division. The market price for the Assembly Division to purchase a pair of soles is $20. (Ignore changes in inventory.) The fixed costs for the Sole Division are assumed to be the same over the range of 40,000-100,000 units. The fixed costs for the Assembly Division are assumed to be $7 per pair at 100,000 units.


Sole's costs per pair of soles are:

Direct materials $4

Direct labor $3

Variable overhead $2

Division fixed costs $1


Assembly's costs per completed pair of shoes are:

Direct materials $6

Direct labor $2

Variable overhead $1

Division fixed costs $7


What is the transfer price per pair of soles from the Sole Division to the Assembly Division if the method used to place a value on each pair of soles is 180% of variable costs?

a. $14.40

b. $12.60

c. $16.20

d. $28.80

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What is the market-based transfer price per pair of soles from the Sole Division to the Assembly Division

ACCOUNTING

Multiple Choice

Calculate the Division operating income for the BetaShoe Company which manufacturers only one type of shoe and has two divisions, the Sole Division, and the Assembly Division. The Sole Division manufactures soles for the Assembly Division, which completes the shoe and sells it to retailers. The Sole Division "sells" soles to the Assembly Division. The market price for the Assembly Division to purchase a pair of soles is $20. (Ignore changes in inventory.) The fixed costs for the Sole Division are assumed to be the same over the range of 40,000-100,000 units. The fixed costs for the Assembly Division are assumed to be $7 per pair at 100,000 units.


Sole's costs per pair of soles are:

Direct materials $4

Direct labor $3

Variable overhead $2

Division fixed costs $1


Assembly's costs per completed pair of shoes are:

Direct materials $6

Direct labor $2

Variable overhead $1

Division fixed costs $7


What is the market-based transfer price per pair of soles from the Sole Division to the Assembly Division?

a. $10

b. $16

c. $20

d. $26

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Assume 200 barrels are transferred from the Production Division to the Refining Division for a transfer price of $6 per barrel

ACCOUNTING

Multiple Choice

Dakoil Corporation has two divisions, Refining and Production. The company's primary product is Enkoil Oil. Each division's costs are provided below:


Production: Variable costs per barrel of oil $ 3

Fixed costs per barrel of oil $ 2

Refining: Variable costs per barrel of oil $10

Fixed costs per barrel of oil $12


The Refining Division has been operating at a capacity of 40,000 barrels a day and usually purchases 25,000 barrels of oil from the Production Division and 15,000 barrels from other suppliers at $20 per barrel.


Assume 200 barrels are transferred from the Production Division to the Refining Division for a transfer price of $6 per barrel. The Refining Division sells the 200 barrels at a price of $40 each to customers. What is the operating income of both divisions together?

a. $2,400

b. $2,600

c. $3,600

d. $6,800

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What is the transfer price per barrel from the Production Division to the Refining Division, assuming the method used to place a value on each barrel of oil is 110% of full costs

ACCOUNTING

Multiple Choice

Dakoil Corporation has two divisions, Refining and Production. The company's primary product is Enkoil Oil. Each division's costs are provided below:


Production: Variable costs per barrel of oil $ 3

Fixed costs per barrel of oil $ 2

Refining: Variable costs per barrel of oil $10

Fixed costs per barrel of oil $12


The Refining Division has been operating at a capacity of 40,000 barrels a day and usually purchases 25,000 barrels of oil from the Production Division and 15,000 barrels from other suppliers at $20 per barrel.


What is the transfer price per barrel from the Production Division to the Refining Division, assuming the method used to place a value on each barrel of oil is 110% of full costs?

a. $5.50

b. $22.00

c. $24.20

d. $29.70

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What is the transfer price per barrel from the Production Division to the Refining Division, assuming the method used to place a value on each barrel of oil is 180% of variable costs

ACCOUNTING

Multiple Choice

Dakoil Corporation has two divisions, Refining and Production. The company's primary product is Enkoil Oil. Each division's costs are provided below:


Production: Variable costs per barrel of oil $ 3

Fixed costs per barrel of oil $ 2

Refining: Variable costs per barrel of oil $10

Fixed costs per barrel of oil $12


The Refining Division has been operating at a capacity of 40,000 barrels a day and usually purchases 25,000 barrels of oil from the Production Division and 15,000 barrels from other suppliers at $20 per barrel.


What is the transfer price per barrel from the Production Division to the Refining Division, assuming the method used to place a value on each barrel of oil is 180% of variable costs?

a. $5.40

b. $9.00

c. $18.00

d. $23.40

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Negotiated transfer prices are often employed when

ACCOUNTING

Multiple Choice

Negotiated transfer prices are often employed when

a. market prices are stable.

b. market prices are volatile.

c. market prices change by a regular percentage each year.

d. goal congruence is not a major objective.

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A transfer-pricing method leads to goal congruence when

ACCOUNTING

Multiple Choice

A transfer-pricing method leads to goal congruence when

a. managers always act in their own best interest.

b. managers act in their own best interest and the decision is in the long-term best interest of the manager's subunit.

c. managers act in their own best interest and the decision is in the long-term best interest of the company.

d. managers act in their own best interest and the decision is in the short-term best interest of the company.

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Transfer prices should be judged by

ACCOUNTING

Multiple Choice

Transfer prices should be judged by

a. whether they promote goal congruence.

b. whether they promote the balanced scorecard method.

c. whether they promote a high level of subunit autonomy in decision making.

d. both (a) and (c).

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A product may be passed from one subunit to another subunit in the same organization

ACCOUNTING

Multiple Choice

A product may be passed from one subunit to another subunit in the same organization. The product is known as

a. an interdepartmental product.

b. an intermediate product.

c. a subunit product.

d. a transfer product.

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The benefits of a decentralized organization are greater when a company

ACCOUNTING

Multiple Choice

The benefits of a decentralized organization are greater when a company

a. is large and unregulated.

b. is facing great uncertainties in their environment.

c. has few interdependencies among division.

d. is all of the above

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An area which is usually appropriate for decentralized decision making is

ACCOUNTING

Multiple Choice

An area which is usually appropriate for decentralized decision making is

a. sources of supplies and materials.

b. long-term financing.

c. product advertising.

d. both (a) and (c).

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Which of the following statements is FALSE

ACCOUNTING

Multiple Choice

Which of the following statements is FALSE?

a. There is a cause-and-effect relationship between the cost driver and the level of activity

b. Fixed costs have cost drivers over the short run

c. Over the long run all costs have cost drivers

d. Volume of production is a cost driver of direct manufacturing costs

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