Adaptive Study Plan
Which of the following is an advantage of decentralization?
Decentralization of operations improves creativity and customer relations.
Which of the following statements is true if variable product cost per unit is used under the cost price approach to set transfer prices?
If variable product cost per unit is used under the cost price approach to set transfer prices, fixed factory overhead cost is excluded from transfer price.
The Alpha Division of Blue Orchid Inc. purchases materials to be used in production from an outside supplier for $30 per unit. The same materials are produced by the Beta Division. Beta Division incurs variable costs of $15 per unit. Currently, Beta Division is able to sell only 290,000 units to outside buyers out of 360,000 units produced. In this situation, if a transfer price of $27 per unit is established between the two divisions and 70,000 units of materials are transferred to Alpha Division, by what amount would Beta Division's operating income increase?
Increase in Beta Division's operating income = (Transfer price - Variable cost per unit) × Units transferred = ($27 - $15) × 70,000 units = $840,000
Which of the following is a disadvantage of the net present value method?
It assumes that cash flows can be reinvested at the minimum desired rate of return.
which of the following statements is true about the internal rate of return (IRR) method?
It uses present value concepts to compute the rate of return from a capital investment proposal based on its expected net cash flows.
Which of the following is a qualitative consideration that influences capital investment analysis?
Manufacturing productivity
The partial present value of an annuity of $1 is given below. Calculate the present value of $40,000 to be received annually for three years if interest is compounded at the rate of 15%. Year 15% 1 0.87 2 1.626 3 2.283 4 2.855
Present value = Amount to be received annually for 3 years × Present value of an annuity of $1 to be received for 3 years= $40,000 × 2.283 = $91,320
Which of the following is the formula to compute present value factor of an annuity of $1 according to the internal rate of return method?
Present value factor of an annuity of $1 = Amount to be invested ÷ Equal annual net cash flows
At the end of the current year, Chestnut Inc. reported the following information: Sales $450,000 Operating income $150,000 Average total assets $520,000 Average stockholders' equity $330,000 Calculate the profit margin of Chestnut. (Round the answer to two decimal places.)
Profit margin = Operating income ÷ Sales = $150,000 ÷ $450,000 = 33.33%
The number of sales returns is a performance metric for _____.
customer service
Profit margin and investment turnover are performance metrics for _____.
financial
The return on stockholders' equity can be expressed as a product of profit margin, asset turnover, and:
financial leverage.
When the net present value is positive, the present value index will be:
greater than one.
In the net present value method, a project is accepted if the present value of cash inflows is:
greater than the amount to be invested.
The number of patents applied for during a year is a performance metric for _____.
growth
The time value of money concept recognizes that an amount of cash invested today:
has the potential to earn income and also increase in value over time.
The increase in general price levels in a rapidly growing economy is called:
inflation.
The number of rejected sales orders is a performance metric for _____.
internal processes
In the capital rationing process, the alternative proposals that survive the initial screening are further analyzed using the
internal rate of return method
A(n) _____ manager has the responsibility and the authority to make decisions that affect not only costs and revenues, but also the assets invested in the center.
investment center
Under the _____, the transfer price is the price at which the product or service transferred could be sold to outside buyers.
market price approach
The _____ allows managers to agree among themselves on a transfer price.
negotiated price approach
A(n) _____ manager has the responsibility and authority for making decisions that affect revenues and costs but does not make decisions concerning the fixed assets invested in the center.
profit center
Operating income divided by sales is _____.
profit margin
The DuPont formula views the return on investment as the product of:
profit margin and investment turnover.
At the end of the capital rationing process, unfunded proposals are:
rejected and alternative proposals are screened.
Since investment center managers have the responsibility and the authority to make decisions that affect not only costs and revenues, but also the assets invested in the center, _____ is used as a performance measure to evaluate their performance.
residual income
In the capital rationing decision process, alternative proposals are initially screened by establishing minimum standards using:
the average rate of return method.
The two capital investment evaluation methods that consider the time value of money concept are:
the internal rate of return method and the net present value method.
The return on investment is useful because:
the three factors subject to control by divisional managers (revenues, expenses, and invested assets) are considered.
Which of the following would lead to an initially rejected proposal being reconsidered in the capital rationing decision process?
A proposal that provides a qualitative benefit
Which of the following expenses is considered a controllable expense by profit center managers?
A utility expense
Which of the following statements is true of cost centers?
Cost centers may vary in size from a small department to an entire manufacturing plant.
Iguana Inc.'s purchasing department has incurred an expense of $120,000 for the year ended December 31, 20Y7. If the purchasing department receives 40,000 purchase requisitions throughout the year, calculate the purchasing charge rate.
Purchasing charge rate = Service department expense / Total service department usage = $120,000 / 40,000 purchase requisitions = $3 per purchase requisition
Which of the following formulas is used to calculate the rate of return on investment?
Rate of return on investment = Operating income / Invested assets
_____ is the excess of operating income over a minimum acceptable operating income.
Residual income
Kangaroo Paw Inc. has an operating income of $54,000, invested assets of $450,000, and sales of $650,000. Calculate Kangaroo Paw's return on investment.
Return on investment = Operating income / Invested assets = $54,000 / $450,000 = 12%
Which of the following is the DuPont formula for return on stockholders' equity?
Return on stockholders' equity = Operating Income ÷ Average Stockholders' Equity
Which of the following is the formula for calculating service department charge rate?
Service department charge rate = Service department expense / Total service department usage
Which of the following capital investment evaluation methods is categorized under methods that do not use present values?
The average rate of return method
Which of the following capital investment analysis methods ranks proposals based on the cash flows over their complete useful life, even if the project lives are not the same?
The internal rate of return method
Which of the following capital investment evaluation methods uses present values?
The internal rate of return method
Which of the following is true of investment centers?
These are responsibility centers that have responsibility over revenue, costs, and investment in assets.
Which of the following expenses is considered to be an indirect expense to a profit center?
a legal fee
Garnet Inc. is considering the purchase of a piece of equipment or a new dumper. The expected useful life of the equipment is 10 years and is 5 years for the dumper. Garnet will compare the proposals by:
adjusting the useful life of the equipment to 5 years.
Sales divided by average total assets is _____.
asset turnover
The primary accounting tools for planning and controlling costs for a cost center are:
budgets and budget performance reports.