CH 23 - Decentralized Organizations

profit center

a business segment whose manager has control over cost and revenue but has no control over investments in operating assets

cost center

a business segment whose manager has control over cost but has no control over revenue or investments in operating assets

profit margin

net income divided by sales

The costs of services charged to a profit center on the basis of its use of those services are

Service department charges

Which of the following would be considered a cost center at a car dealership?

accounting department

Responsibility accounting reports for profit centers will include

revenues

The investment turnover is the ratio of

sales to invested assets

Residual Income

the net operating income that an investment center earns above the minimum required return on its operating assets

Heart Company has two divisions. Division A is interested in purchasing 10,000 units from Division B. Capacity is available for Division B to produce these units. The per-unit market price is $30 per unit, with a variable cost of $25. The manager of Division A has offered to purchase the units at $22 per unit. In an effort to make this transfer price beneficial for the company as a whole, what is the range of prices that should be used during negotiations between the two divisions?

$25-30

The magnolia Company's division A has income from ops of $80,000 and assets of $400,000. The minimum acceptable rate of return on assets is 12%. What is the residual income for the division

$32000

Advantages of Decentralization

-frees top management time -supports use of expert knowledge -improves customer relations -provides training -improves motivation and retention

Disadvantages of Decentralization

-lower-level managers may make decisions without seeing the "big picture" -may be a lack of coordination among autonomous managers -lower-level manager's objectives may not be those of the organization -may be difficult to spread innovative ideas in the organization

What is the Rate of Return (ROI) of a an investment that earns a profit of $100 and has a cost of $100?

100%

Paduka Industries has several divisions. The Eastern Division has $350,000 of invested assets, income from operations of $200,000, and residual income of $151,000. Determine the minimum acceptable rate of return on divisional assets.

14%

Mason Corporation had $650,000 in invested assets, sales of $700,000, income from operations amounting to $99,000, and a desired minimum rate of return of 15%. The profit margin is

14.1%

Mason Corporation had $650,000 in invested assets, sales of $700,000, income from operations amounting to $99,000, and a desired minimum rate of return of 15%. The residual income for Mason is

1500

Miller's Quarter Horse Company has sales of $4,500,000. It also has invested assets of $2,500,000 and operating expenses of $3,800,000. The company has established a minimum rate of return of 7%..What is Miller's Rate of return on Invesment?

28%

Materials used by Jefferson Company in producing the Division C's product are currently purchased from outside suppliers at a cost of $10 per unit. However, the same materials are available from Division A. Division A has unused capacity and can produce the materials needed by Division C at a variable cost of $8.50 per unit. A transfer price of $9.50 per unit is negotiated and 25,000 units of material are transferred, with no reduction in Division A's current sales.How much will Jefferson's total income from operations increase?

37500

Miller's Quarter Horse Company has sales of $4,500,000. It also has invested assets of $2,500,000 and operating expenses of $3,800,000. The company has established a minimum rate of return of 7%.. What is Miller's residual income?

525000

Materials used by Square Yard Products Inc. in producing Division 3's product are currently purchased from outside suppliers at a cost of $5 per unit. However, the same materials are available from Division 6. Division 6 has unused capacity and can produce the materials needed by Division 3 at a variable cost of $3 per unit. A transfer price of $3.20 per unit is established, and 40,000 units of material are transferred, with no reduction in Division 6's current sales. How much will Division 3's income from ops increase?

72000

investment center

A responsibility center that incurs costs, generates revenues, and has control over decisions regarding the assets available for use.

DuPont Formula

An expanded expression of return on investment determined by multiplying the profit margin by the investment turnover.

All of the following are advantages of decentralization except

Each decentralized operation purchases its own assets and pays for operating costs.

. The South Department of a company has the option to purchase 15,000 units of materials from outside suppliers for $20 per unit or from the company's North Department, which sells the products for $15 per unit to outsiders. The North Department currently produces and sells 40,000 units but has capacity to produce 60,000 units. The department incurs variable costs of $5 per units and total fixed costs of $25,000. Determine the change in income for each department using the Cost approach using the variable product cost per unit

North $0 increase in profit, South $225,000 decrease in costs

The South Department of a company has the option to purchase 15,000 units of materials from outside suppliers for $20 per unit or from the company's North Department, which sells the products for $15 per unit to outsiders. The North Department currently produces and sells 40,000 units but has capacity to produce 60,000 units. The department incurs variable costs of $5 per unit and total fixed costs of $25,000. Determine the change in income for each department using the Market price method

North $150,000 increase in profit, South $75,000 decrease in costs

The South Department of a company has the option to purchase 15,000 units of materials from outside suppliers for $20 per unit or from the company's North Department, which sells the products for $15 per unit to outsiders. The North Department currently produces and sells 40,000 units but has capacity to produce 60,000 units. The department incurs variable costs of $5 per units and total fixed costs of $25,000. Determine the change in income for each department using the Negotiated price of $17.50

North $187,500 increase in profit, South $37,500 decrease in costs

Investment Turnover

The efficiency with which a company generates sales from its available assets; computed as sales divided by average invested assets.

Which of the following is a measure of a cost center manager's performance?

budget performance report

Businesses that are separated into two or more manageable units in which managers have authority and responsibility for operations are said to be

decentralized

A production manager identifies ways to increase profits by increasing revenue or decreasing costs, which may include retiring out-of-date machinery and acquiring newer models. Is this an example of a cost center, profit center, or investment center manager?

investment center

The best measure of managerial efficiency in the use of investments in assets is

investment turnover

Which of the following would be considered a controllable cost?

labor

Determining the transfer price as the price at which the product or service transferred could be sold to outside buyers is known as the

market price approach

Two divisions of the Oregano Company (Divisions TX and OY) have the same profit margins. Division TX's investment turnover is larger than that of Division OY (1.2 to 1.0). Income from operations for Division TX is $55,000, and income from operations for Division OY is $43,000. Division TX has a higher return on investment than Division OY by

using its assets more efficiently in generating sales