Ch 10 Decentralization Performance and Transfer Pricing

A responsibility center in which a manager is responsible for both revenues and costs is called the

cost center.

investment center.

revenue center.

profit center.

profit center.

A responsibility center in which a manager is responsible for revenues, costs, and investments is called the

cost center.

investment center.

revenue center.

profit center.

investment center.

Which of the following is a performance measure for profit center managers?

Current ratio

Accounts receivable turnover

Operating income

Return on investment

Operating income

Which of the following is an advantage of decentralization?

It provides less access to local information which leads to the best decision.

It works as motivation to segment managers.

It helps the central management to focus on the operating decisions of various divisions.

It reduces the competition among divisions.

It works as motivation to segment managers

A mechanism that allows managers at lower levels to make and implement key decisions pertaining to their areas of responsibility is called

discretionary decision making.

decentralized decision making.

hypothetical decision making.

consolidated decision making.

decentralized decision making.

Which of the following helps in evaluating the performance of a profit center?

The annual employee salaries recorded in the income statements

The unit's net margin, measured on income statements

The current assets reported on the balance sheet

The long-term investments reported on the balance sheet

The unit's net margin, measured on income statements

Josiah is looking at his division's earnings before interest and income taxes. What is he looking at?

Operating income

Return on investment

Operating assets

Margins

Operating income

Outcult Outboards, a company that sells and repairs engines for boats, has beginning assets of $275,000 and ending assets of $350,000. Its operating income is $75,000. What is the return on investment (ROI)?

24%

Which of the following statements is true of return on investment (ROI)?

It is the most common measure of performance for a cost center.

It refers to earnings before interest and income taxes.

It is the difference between operating income and the dollar return required.

It is used by stockholders to indicate the health of a company.

It is used by stockholders to indicate the health of a company.

Wendy is the manager at a large energy company. She is given the option to purchase a certain number of shares of the company's stock. This opportunity is only available for a short length of time, and the shares are offered at a particular price. The right to make this purchase is known as

margin call.

residual income.

a stock option.

a perquisite.

a stock option.

Mahogany, Inc., manufactures a component in Division A and sells it to Division B at a transfer price of $30 per unit. Which of the following is an impact of transfer price on the receiving division (Division B)?

It increases the return on investment of Division B.

It decreases the current liabilities of Division B.

It increases the costs of Division B.

It decreases the acceptable rate of return of Division B.

It increases the costs of Division B.

Which of the following statements is true of a perquisite?

It is a type of fringe benefit received over and above salary.

It is an increment in salary of an employee that is linked with his or her performance.

It is the ratio of operating income to average operating assets.

It is the difference between sales and average operating assets.

It is a type of fringe benefit received over and above salary.

A manager's evaluation at a multinational corporation (MNC) should not include factors over which he or she exercises no control, such as

the profitability of the firm.

currency fluctuations.

total assets of the firm.

divisional performance.

currency fluctuations.

A manager's evaluation should not include factors over which he or she exercises no control, such as currency fluctuations, income taxes, and so on.

If transfer pricing impacts divisional behavior, which of the following does it affect?

Operating income

Cost of materials

Turnover

Level of profits

Level of profits

Which of the following statements is true about transfer prices?

Transfer prices are the prices charged for goods produced by one multinational firm to another multinational firm.

Transfer prices are the expenses incurred for transferring goods from a factory to a customer's location.

Transfer prices are the expenses incurred for transferring goods from one division to another division.

Transfer prices are the prices charged for goods produced by one division and transferred to another.

Transfer prices are the prices charged for goods produced by one division and transferred to another.

Which of the following transfer prices allowed by the Internal Revenue Service (IRS) for a multinational corporation is equal to the sales price received by the reseller less an appropriate markup?

Comparable uncontrolled price

Negotiated transfer price

Resale price

Cost-plus price

Resale price

Theta, Inc., has a number of divisions, including Division Gamma, a manufacturer of mother boards, and Division Beta, a manufacturer of desktop computers. Division Gamma manufactures Model MB-04 that can be used by Division Beta in its desktops. The market price of MB-04 is $75, and the cost information is as follows:

Variable manufacturing cost per unit $40

Fixed cost per unit 10

Variable selling overhead per unit 10

Total cost $60

Determine the minimum transfer price per unit of MB-04 that can be set by Division Gamma when Theta, Inc., allows negotiated transfer pricing. Assume that Gamma Division can avoid $10 of selling overhead by selling MB-04 to Division Beta.

$65 per unit

$40 per unit

$75 per unit

$55 per unit

$65 per unit

75 - 10 = $65

Which of the following identifies the maximum price that a division that is buying would be willing to pay and the minimum price that a division selling would be willing to accept?

Market-based transfer price

Full-cost transfer price

Variable cost plus fixed fee transfer price

opportunity cost transfer price

opportunity cost transfer price

Which of the following statements is true if Division X manufactures and transfers a component to Division Z at its cost of $20?

The revenue of Division Z will increase.

The costs of Division X will increase.

The overall profit of the company will not change.

The return on investment of Division Z will not change.

The overall profit of the company will not change.

Autonomy in the conduct of managers' daily business is an example of

stock-based compensation.

noncash compensation.

income-based compensation.

cash compensation.

noncash compensation.

Which of the following statements is true about the transfer price charged by one division to another division of a company?

It affects the income statement of the transferring division and the balance sheet of the receiving division.

It affects the revenues of the transferring division and the costs of the receiving division.

It affects the costs of the transferring division and the revenues of the receiving division.

It affects the balance sheet of the transferring division and the income statement of the receiving division.

It affects the revenues of the transferring division and the costs of the receiving division.

Transfer pricing affects the revenues of the transferring division and the costs of the receiving division. The profitability, return on investment, and managerial performance evaluation of both divisions are affected by transfer pricing.

Which of the following is affected by the transfer price charged by one division to another?

Divisional profitability

Divisional fixed cost

Divisional noncurrent assets

Divisional production expenses

Divisional profitability

Cash compensation includes

salaries and bonuses.

stock dividends and gains.

stock options and right shares.

perquisites and profit shares.

salaries and bonuses.

Which of the following transfer pricing approaches can provide perverse incentives and distort performance measures?

Market-based transfer pricing

Variable cost plus fixed fee transfer pricing

Opportunity cost transfer pricing

Full-cost transfer pricing

Full-cost transfer pricing

Energy for All has several divisions, including the Solar Division, a manufacturer of solar panels, and the Wind Division, a manufacturer of wind turbines. The Solar Division manufactures the Home Lite that can be used by the Wind Division in a bundled product that provides both solar and wind power to customers. The market price of Home Lite is $550, and the cost information is as follows:

Variable manufacturing cost per unit $300

Fixed cost per unit 50

Variable selling overhead per unit 50

Total cost $400

Determine the minimum transfer price per unit of Home Lite that can be set by the Solar Division when Energy for All allows negotiated transfer pricing. Assume that the Solar Division would avoid the selling overhead because it is selling within the company.

$500 per unit

$450 per unit

$150 per unit

$250 per unit

$500 per unit

market - selling = minimum transfer price

550 - 50 = 500

An advantage of negotiated transfer prices is that, through them, there is a chance that a company will

comply with the three criteria of goal congruence, autonomy, and accurate performance evaluation.

accurately measure managerial performance.

spend time managing other activities necessary to the success of the division.

enable top management to take other actions to discourage the use of private information for exploitive purposes.

comply with the three criteria of goal congruence, autonomy, and accurate performance evaluation.

Which of the following identifies the maximum price that a division that is buying would be willing to pay and the minimum price that a division selling would be willing to accept?

Full-cost transfer price

Opportunity cost transfer price

Variable cost plus fixed fee transfer price

Market-based transfer price

Opportunity cost transfer price

Cadmium, Inc., has two divisions, Division Nickel and Division Barium. Division Nickel manufactures Product A that can be used by Division Barium in manufacturing its final product. The cost information of Product A per unit is as follows:

Direct materials$ 4.00

Direct labor 3.50

Variable overhead 4.50

Fixed overhead 3.00

Total cost$15.00

If Cadmium, Inc., has a transfer pricing policy that requires transfer at full product cost, what would the transfer price be?

$15.00 per unit

$12.00 per unit

$8.00 per unit

$7.50 per unit

$15.00 per unit

A full-cost transfer price includes all the costs incurred to manufacture a product.

_____ can be a beneficial transfer pricing approach so long as the fixed fee is negotiable.

Negotiated transfer pricing

Full-cost transfer pricing

Variable cost plus fixed fee

Full cost plus markup

Variable cost plus fixed fee

Like full cost plus markup, variable cost plus fixed fee can be a useful transfer pricing approach provided that the fixed fee is negotiable.