Chapter 13

Which of the following performance measures is (are) used to evaluate the financial success or failure of investment centers?

All of the above measures are used except "C."

Which of the following elements is not used in the calculation of economic value added for an investment center

An investment center's return on investment

Which of the following elements is not used when calculating the weighted-average cost of capital?

Before-tax cost of debt capital

Which of the following is not considered in the calculation of divisional ROI?

Earnings velocity

Which of the following measures of performance is, in part, based on the weighted-average cost of capital?

Economic value added (EVA

Which of the following describes the goal that should be pursued when setting transfer prices

Establish incentives for autonomous division managers to make decisions that are in the overall organization's best interests (i.e., goal congruence).

Which of the following transfer-pricing methods can lead to dysfunctional decision-making behavior by managers?

Full cost

What practice is present when divisional managers throughout an organization work together in an effort to achieve the organization's goals?

Goal congruence.

Consider the following statements about residual income: I. Residual income incorporates a firm's cost of acquiring investment capital. II. Residual income is a percentage measure, not a dollar measure. III. If used correctly, residual income may result in division managers making decisions that are in their own best interest and not in the best interest of the entire firm.

I only.

Consider the following statements about goal congruence:

I, II,

Which of the following is used in the calculation of both return on investment and residual income?

Invested capital

Which of the following is the correct mathematical expression for return on investment?

Sales margin x capital turnover

Which of the following is the correct mathematical expression to derive a company's capital turnover?

Sales revenue ÷ invested capital

48. Thurmond, Inc., has two divisions, one located in New York and the other located in Arizona. New York sells a specialized circuit to Arizona and just recently raised the circuit's transfer price. This price hike had no effect on the volume of circuits transferred nor on Arizona's option of acquiring the circuit from either New York or from an external supplier. On the basis of this information, which of the following statements is most correct?

The profit reported by New York will increase, the profit reported by Arizona will decrease, and Thurmond's profit will be unaffected.

All of the following actions will increase ROI except:

a decrease in the number of units sold

A general calculation method for transfer prices that achieves goal congruence begins with the additional outlay cost per unit incurred because goods are transformed and then

adds the opportunity cost per unit to the organization because of the transfer

Transfer prices can be based on

all of the above

Given that ROI measures performance over a period of time, invested capital would most appropriately be figured by using

average assets

When an organization allows divisional managers to be responsible for short-term loans and credit, the division's invested capital should be measured by

average total assets minus average current liabilities.

A division's return on investment may be improved by increasing

capital turnover or sales margin.

The ROI calculation will indicate

how effectively a company used its invested capital.

The basic idea behind residual income is to have a division maximize its:

income in excess of a corporate imputed interest charge.

ROI is most appropriately used to evaluate the performance of:

investment center managers

A company's sales margin:

is computed by dividing sales revenue into income.

The biggest challenge in making a decentralized organization function effectively is:

obtaining goal congruence among division managers.

To partially eliminate the problems that are associated with the short-term focus of return on investment, residual income, and EVA, the performance of a division's major investments is commonly evaluated through

postaudits

The income calculation for a division manager's ROI should be based on:

profit margin controllable by the division manager

Sunrise Corporation has a return on investment of 15%. A Sunrise division, which currently has a 13% ROI and $750,000 of residual income, is contemplating a massive new investment that will (1) reduce divisional ROI and (2) produce $120,000 of residual income. If Sunrise strives for goal congruence, the investment:

should be acquired because it produces $120,000 of residual income for the division

The Fitzhugh Division of General Enterprises has a negative residual income of $540,000. Fitzhugh's management is contemplating an investment opportunity that will reduce this negative amount to $400,000. The investment:

should be pursued because it is attractive from both the divisional and corporate perspectives

Suddath Corporation has no excess capacity. If the firm desires to implement the general transfer-pricing rule, opportunity cost would be equal to:

the contribution margin forgone from the lost external sale

Capital turnover shows:

the number of sales dollars generated by each dollar of capital investment

The amounts charged for goods and services exchanged between two divisions are known as

transfer prices.

Tulsa Corporation has excess capacity. If the firm desires to implement the general transfer-pricing rule, opportunity cost would be equal to

zero