CHAPTER 10:
DIVISIONAL PERFORMANCE MEASUREMENT
Multiple Choice
c
1. Both ROI and RI can be used for performance evaluation of
a. cost centers.
b. profit centers.
c. investment centers.
d. all of the above.
b
2. The best transfer price is usually
a. actual cost plus a percentage markup.
b. a reliable market price.
c. budgeted full cost plus a percentage markup.
d. budgeted variable cost plus a percentage markup.
d
3. This year Division A made sales to Division B at a higher transfer price
than was used last year. All other things equal, which of the following
is true?
a. A's profit this year should be about the same as last year.
b. B's profit this year should be about the same as last year.
c. The company's total profit should be higher this year than last year.
d. The company's total profit should be about the same this year as last
year.
b
4. Goal congruence is especially relevant to all of the following EXCEPT
a. setting transfer prices for an artificial profit center.
b. quoting prices for outside customers of an investment center.
c. selecting costs to be included in performance reports.
d. setting transfer prices for an investment center.
d
5. For a division, ROI
a. is usually less than ROI for the company as a whole.
b. eliminates the distortion that cost allocation can produce in other
measures of performance.
c. usually cannot be computed if divisional assets are valued at their
replacement costs.
d. is a performance measure inferior, for some purposes, to residual
income.
a
6. Divisional ROI is usually
a. higher than that for the company as a whole.
b. lower than that for an outside company operating in the same
industry.
c. lower than return on sales for the division.
d. lower than that for the enterprise as a whole.
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c
7. Divisional profits should
a. exclude revenues and expenses related to dealings with other
divisions within the same enterprise.
b. be computed so that the total profits of all the divisions equals the
total profit for the company.
c. be based on the principle of controllability.
d. be based on cash flows rather than accrual basis accounting.
c
8. Divisional profit
a. is computed in essentially the same way as is income for the company
as a whole.
b. should include a deduction for an appropriate share of the company's
common costs.
c. normally includes the results of intracompany sales.
d. is not affected by depreciation methods.
d
9. Using replacement costs for assets in computing ROI and RI
a. is prohibited because it violates generally accepted accounting
principles.
b. will increase both ROI and RI for a division.
c. is unfair to divisional managers.
d. is less popular than the use of book values in those computations.
c 10. Using residual income for evaluating performance
a. penalizes managers whose segments have low ROIs.
b. penalizes managers of relatively large segments.
c. encourages managers to maximize dollars of profit after a required
ROI has been achieved.
d. encourages managers to maximize ROI for the company.
c 11. Which item is usually NOT relevant to a decision by a divisional manager
to reduce a transfer price to meet a price offered to another division
by an outside supplier?
a. Opportunity cost.
b. Variable manufacturing costs.
c. Fixed divisional overhead.
d. The price offered by the outside supplier.
c 12. Division A earns $6,000 on an investment of $36,000. On an investment
of $84,000, Division B earns $12,000. Which of the following is true?
a. Division A's profits are too low.
b. If there are further costs that are common to both divisions, the
total company's ROI is probably greater than 15%.
c. If the minimum desired ROI is 10%, Division A's residual income is
lower than that of Division B.
d. ROI for Division B is greater than ROI for Division A.
d 13. Which equation describes ROI? (I = investment, S = sales, and
N = income)
a. S/I
b. S/I x N
c. S/I x S/N
d. N/S x S/I
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a 14. Which equation describes residual income? (I = investment, N = income,
and K = minimum required ROI)
a. N - (K x I)
b. (K x I) - N
c. N/I - K
d. (K x I) - (N/I)
c 15. If Division C has a 10% return on sales, income of $10,000, and an
investment turnover of 4 times, its sales are
a. $10,000.
b. $40,000.
c. $100,000.
d. $400,000.
b 16. If Division C has a 10% return on sales, income of $10,000, and an
investment turnover of 4 times, divisional investment is
a. $10,000.
b. $25,000.
c. $40,000.
d. $100,000.
c 17. If Division C has a 10% return on sales, income of $10,000, and an
investment turnover of 4 times, its ROI is
a. 5000%.
b. 100%.
c. 40%.
d. 10%.
b 18. If a division's ROI and the minimum required ROI are the same, the
division's residual income is
a. positive.
b. zero.
c. negative.
d. none of the above.
a 19. If residual income for Division Q of Company Z is negative, which of the
following is true?
a. Q's ROI is less than Z's minimum required ROI.
b. Q's ROI equals Z's minimum required ROI.
c. Q's ROI is higher than Z's minimum required ROI.
d. None of the above.
b 20. Market-based transfer prices are best for
a. the company when the selling division is operating below capacity.
b. the company when the selling division is operating at capacity.
c. the buying division if it is operating at capacity.
d. the buying division.
d 21. The worst transfer-pricing method is to base the prices on
a. market prices.
b. budgeted variable costs.
c. budgeted total costs.
d. actual total costs.
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d 22. All other things remaining constant, if a division doubles its
investment turnover, its ROI will
a. decrease.
b. remain constant.
c. increase.
d. double.
c 23. Residual income
a. is always the best measure of divisional performance.
b. is not as good a measure of performance as ROI.
c. overcomes some of the problems associated with ROI.
d. cannot be used by divisions that deal with others in the same
company.
b 24. If two divisions earn the same ROI and RI, which of the following is
true?
a. Their managers must be about equally skillful.
b. Their incomes and investments must be the same.
c. Both divisions are doing as well as they should be.
d. All of the above.
c 25. Which of the following is most likely to be included in calculating
divisional profit?
a. Interest on corporate debt.
b. Income taxes.
c. Sales to other divisions within the company.
d. A share of corporate administration expenses.
b 26. If sales increase, while income and investment remain constant, which of
the following is true?
a. Investment turnover decreases.
b. ROS decreases.
c. ROI increases.
d. ROI could increase or decrease.
c 27. Compared to a jewelry store, a supermarket has
a. higher margin and higher turnover.
b. higher margin and lower turnover.
c. lower margin and higher turnover.
d. lower margin and lower turnover.
c 28. If income increases while sales and investment remain constant, which of
the following is true?
a. Investment turnover increases.
b. ROS decreases.
c. ROI increases.
d. ROI could increase or decrease.
a 29. Which transfer price is ideal for the company when the selling division
is at capacity?
a. Market price.
b. Incremental cost.
c. Budgeted full cost.
d. Actual variable cost plus a percentage profit.
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c 30. From the standpoint of the company, the important question in transfer
pricing is
a. what is fair to the divisions.
b. how to determine the profit of the divisions.
c. whether or not the transfer should take place.
d. when the transfer should be made.
d 31. The ROI of Division A relative to that of Division B can be influenced
by
a. the industry in which each division operates.
b. the transfer price used for sales to Division B.
c. the tax structures of the countries in which the divisions operate.
d. all of the above.
c 32. Considering liabilities in computing divisional investment
a. encourages managers of divisions to pay their bills faster.
b. discourages managers of divisions from acquiring long-term financing.
c. raises divisional ROI above what it would otherwise be.
d. is a bad managerial practice.
d 33. Interdivisional sales
a. lower the company's public image.
b. minimize income taxes.
c. are ignored when computing divisional ROI.
d. do none of the above.
a 34. Which of the following is true about transfer
divisions located in different countries?
a. They should consider the tax structures in
b. They are usually set by the governments of
c. They cannot affect the total income of the
d. All of the above.
prices for sales between
the two countries.
the two countries.
company.
d 35. Multinational companies face special problems in which of the following
areas of managerial practice?
a. Performance evaluation.
b. Transfer prices.
c. Allocating common costs.
d. All of the above.
b 36. Which of the following describes the computation of ROI?
a. Return on Sales x Investment
b. Investment Turnover x Return on Sales
c. Income - (Investment x Minimum RI)
d. Sales x Investment Turnover
b 37. If the investment turnover increased by 20% and ROS decreased by 30%,
the ROI would
a. increase by 20%.
b. decrease by 16%.
c. increase by 4%.
d. none of the above.
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b 38. Scottso Division has the following results for the year:
Revenues
Variable expenses
Fixed expenses
$1,080,000
440,000
400,000
Total divisional assets are $1,600,000. The company's minimum required
rate of return is 14 percent. Residual income for Scottso is
a. $(64,000).
b. $16,000.
c. $151,200.
d. $224,000.
c 39. Scottso Division has the following results for the year:
Revenues
Variable expenses
Fixed expenses
$1,080,000
440,000
400,000
Total divisional assets are $1,600,000. The company's minimum required
rate of return is 14 percent. Return on investment for Scottso is
a. 54%.
b. 18%.
c. 15%.
d. 10%.
b 40. Monrovia Division has net income of $240,000 on sales of $3,200,000. If
the investment is $1,600,000 what is ROS?
a. 15.0%
b. 7.5%
c. 10.0
d. 2.0
c 41. Scottso Division has the following results for the year:
Revenues
Variable expenses
Fixed expenses
$1,080,000
440,000
400,000
Total divisional assets are $1,600,000. The company's minimum required
rate of return is 14 percent. Return on sales for Scottso is
a. 1.5%.
b. 15.0%.
c. 22.2%.
d. 67.5%.
d 42. Monrovia Division has net income of $240,000 on sales of $3,200,000. If
the investment is $1,600,000 what is asset turnover?
a. 15.0%
b. 7.5%
c. 10.0
d. 2.0
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a 43. Monrovia Division has net income of $240,000 on sales of $3,200,000. If
the investment is $1,600,000 what is ROI?
a. 15.0%
b. 7.5%
c. 10.0
d. 2.0
b 44. Alcatraz Division of XYZ Corp. sells 80,000 units of part X to the
outside market. Part X sells for $40, has a variable cost of $22, and a
fixed cost per unit of $10. Alcatraz has a capacity to produce 100,000
units per period. Capone Division currently purchases 10,000 units of
part X from Alcatraz for $40. Capone has been approached by an outside
supplier willing to supply the parts for $36. What is the effect on
XYZ's overall profit if Alcatraz REFUSES the outside price and Capone
decides to buy outside?
a. no change
b. $140,000 decrease in XYZ profits
c. $80,000 decrease in XYZ profits
d. $40,000 increase in XYZ profits
a 45. Alcatraz Division of XYZ Corp. sells 80,000 units of part X to the
outside market. Part X sells for $40, has a variable cost of $22, and a
fixed cost per unit of $10. Alcatraz has a capacity to produce 100,000
units per period. Capone Division currently purchases 10,000 units of
part X from Alcatraz for $40. Capone has been approached by an outside
supplier willing to supply the parts for $36. What is the effect on
XYZ's overall profit if Alcatraz ACCEPTS the outside price and Capone
continues to buy inside?
a. no change
b. $140,000 decrease in XYZ profits
c. $80,000 decrease in XYZ profits
d. $40,000 increase in XYZ profits
c 46. If the investment turnover decreased by 20% and ROS decreased by 30%,
the ROI would
a. increase by 30%.
b. decrease by 20%.
c. decrease by 44%.
d. none of the above.
c 47. If the investment turnover increased by 10% and ROS increased by 20%,
the ROI would
a. increase by 10%.
b. increase by 20%.
c. increase by 30%.
d. increase by 32%.
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b 48. Durand Division has the following results for the year:
Revenues
Net income
$470,000
130,000
Total divisional assets are $625,000. The company's minimum required
rate of return is 12 percent. Residual income for Durand is
a. $3,760.
b. $55,000.
c. $73,600.
d. cannot be determined without further information.
c 49. Durand Division has the following results for the year:
Revenues
Net income
$470,000
130,000
Total divisional assets are $625,000. The company's minimum required
rate of return is 12 percent. Return on investment for Durand is
a. 9.0%.
b. 18.3%.
c. 20.8%.
d. 27.7%.
d 50. Durand Division has the following results for the year:
Revenues
Net income
$470,000
130,000
Total divisional assets are $625,000. The company's minimum required
rate of return is 12 percent. Return on sales for Durand is
a. 9.0%.
b. 18.3%.
c. 20.8%.
d. 27.7%.
True-False
F
1. Multinational companies cannot use transfer prices.
T
2. Long-term debt is seldom considered in determining divisional ROI.
F
3. The measure most commonly used for evaluating divisional performance is
investment turnover.
T
4. Allocating all common assets, liabilities, and costs to divisions does
not affect the ROI of the company as a whole.
T
5. Using residual income as a criterion for evaluating divisional
performance requires that the company establish a minimum desired rate
of return on investment.
F
6. Return on investment is the product of return on sales and inventory
turnover.
140
F
7. Return on investment for a multidivision company will be lower than the
ROI for the division with the lowest ROI.
T
8. Transfer prices equal to market prices are least appropriate when the
selling division has excess productive capacity.
F
9. Multinational companies must use transfer prices based on actual costs.
F 10. Return on investment is defined as net income divided by stockholders'
equity.
Problems
1. The following information is available about the status and operations of
A-Klop Company, which has a minimum required ROI of 15%. ANSWER EACH ITEM
INDEPENDENTLY OF THE OTHERS.
Division
Division
A
B
------------------Divisional investment
$ 500,000
$1,500,000
Divisional profit
$ 150,000
$ 540,000
Divisional sales
$1,000,000
$3,600,000
a. Compute ROI for Division A.
b. Compute residual income for Division B.
c. Division A could increase its profit by $40,000 by increasing its
investment by $150,000. Compute its total residual income.
d. Division A could increase its return on sales by one percentage point,
while keeping the same total sales and investment. Compute its ROI.
e. Division B could reduce its investment so that its asset turnover
increased by one time, while holding total sales constant. Compute its
ROI.
SOLUTION:
a. ROI for A:
30%
($150,000/$500,000)
b. RI for B: $315,000
[$540,000 - ($1,500,000 x 15%)]
c. RI for A:
[$150,000 + $40,000 - 15% x ($500,000 + $150,000)]
$92,500
d. ROI for A: 32% [$150,000/$1,000,000 = 15% ROS + 1% = 16%, turnover = 2
($1,000,000/$500,000), so 16% x 2 = 32%]
e. ROI for B: 51% [$3,600,000/1,500,000 = 2.4 times + 1 = 3.4 times x ROS of
15% ($540,000/$3,600,000) = 51%]
141
2. Division A of Getz Company expects the following results. ANSWER EACH
QUESTION INDEPENDENTLY.
To Division B
To Outsiders
-----------------------Sales (40,000 x $10)
$400,000
(40,000 x $12)
$480,000
Variable costs at $6
240,000
240,000
--------------Contribution margin
$160,000
$240,000
Fixed costs, all common, allocated
on the basis of relative units
120,000
120,000
--------------Profit
$ 40,000
$120,000
========
=======
Division B has the opportunity to buy its needs for 40,000 units from an
outside supplier at $8 each.
a. Division A refuses to meet the $8 price, sales to outsiders cannot be
increased, and Division B buys from the outside supplier. Compute the
effect on the income of Getz.
b. Division A cannot increase its sales to outsiders, does meet the $8
price, and Division B continues to buy from A. Compute the effect on
the income of Getz.
c. Suppose that Division A could sell the 40,000 units now taken by
Division B to outsiders at $9 each without disturbing sales at the
regular $12 price. Division B buys outside at $8 and Division A
increases its outside sales. Find the effect on the income of Getz.
SOLUTION:
a. Getz's income: Decreases $80,000
variable cost)]
b. Getz's income:
[40,000 units x ($8 outside price - $6
No change
c. Getz's income: $40,000 increase
($360,000 added revenue from outsiders $320,000 paid to the outsider by B)
3. The following information relates to Zimmer Division of Purdy Inc. Purdy's
desired ROI for its segments is 20%.
Sales
$2,000,000
Direct fixed costs
300,000
Variable costs
Investment
1,500,000
500,000
a. Find Zimmer's ROI.
b. Find Zimmer's residual income.
SOLUTION:
a. ROI:
40%
[($2,000,000 - $1,500,000 - $300,000)/$500,000]
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b. RI: $100,000
[$200,000 - ($500,000 x 20%)]
4. Bayfield Division of Ashland Inc. has a capacity of 200,000 units and
expects the following results.
Sales (160,000 units at $4)
Variable costs, at $2
Fixed costs
Income
$640,000
(320,000)
(260,000)
-------$ 60,000
========
Washburn Division of Ashland Inc. currently purchases 50,000 units of a
part for one of its products from an outside supplier for $4 per unit.
Washburn's manager believes he could use a minor variation of Bayfield's
product instead, and offers to buy the units from Bayfield at $3.50.
Making the variation desired by Washburn would cost Bayfield an additional
$0.50 per unit and would increase Bayfield's annual cash fixed costs by
$20,000. BAYFIELD'S MANAGER AGREES TO THE DEAL OFFERED BY WASHBURN'S
MANAGER.
a. Find the effect of the deal on Washburn's income and circle the correct
direction. (increase
decrease
none)
b. Find the effect of the deal on Bayfield's income and circle the correct
direction. (increase
decrease
none)
c. Find the effect of the deal on the income of Ashland Inc. and circle the
correct direction. (increase
decrease
none)
SOLUTION:
a. Washburn's income,
+ $25,000
[50,000 x ($4 - $3.50)]
b. Bayfield's income, + $10,000 {50,000 x ($3.50 - $2 - $0.50) - [lost
contribution margin of 10,000 x ($4 - $2)] - $20,000 new fixed costs}
c. Ashland's income, + $35,000 ($25,000 + $10,000)
5. Crosby Division has the following information for the most recent period:
Divisional income
Divisional investment
Divisional sales
$ 1,500,000
$ 6,500,000
$12,000,000
Crosby has a minimum required return of 18%.
a. Compute Crosby's return on investment.
b. Compute Crosby's investment turnover.
c. Compute Crosby's residual income.
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d. Compute Crosby's return on sales.
SOLUTION:
a. ROI: 23.1%
b. IT: 1.85
($1,500,000/$6,500,000)
($12,000,000/$6,500,000)
c. RI: $330,000
d. ROS: 12.5%
[$1,500,000 - (18% x $6,500,000)]
($1,500,000/$12,000,000)
6. The following information is available about the status and operations of
Stills Company, which has a minimum required ROI of 20%. ANSWER EACH ITEM
INDEPENDENTLY OF THE OTHERS.
Divisional investment
Divisional profit
Divisional sales
Division
A
-------$400,000
$120,000
$800,000
Division
B
---------$1,250,000
$ 580,000
$2,600,000
a. Compute ROI for Division B.
b. Compute residual income for Division A.
c. Division B could increase its profit by $80,000 by increasing its
investment by $300,000. Compute its total residual income.
d. Division A could increase its return on sales by one percentage point,
while keeping the same total sales. Compute its ROI.
e. Division A could increase its sales so that its asset turnover increased
by one time, while holding total assets constant. Compute its ROI.
SOLUTION:
a. ROI for B:
46.4%
b. RI for A: $20,000
c. RI for B:
$350,000
($580,000/$1,250,000)
[$120,000 - ($400,000 x 20%)]
[$580,000 + $80,000 - 20% x ($1,250,000 + $300,000)]
d. ROI for A: 32%
[$120,000/$800,000 = 15% ROS + 1% = 16%, turnover = 2
($800,000/$400,000), so 16% x 2 = 32%]
e. ROI for A: 45% [$800,000/400,000 = 2 times + 1 = 3 times x ROS of 15%
($120,000/$800,000) = 45%]
144
7. Division A of Nash Company expects the following results. ANSWER EACH
QUESTION INDEPENDENTLY.
To Division B
To Outsiders
-----------------------Sales (5,000 x $60)
$300,000
(25,000 x $72)
$1,800,000
Variable costs at $36
180,000
900,000
---------------Contribution margin
$120,000
$ 900,000
Fixed costs, all common, allocated
on the basis of relative units
60,000
300,000
---------------Profit
$ 60,000
$ 600,000
========
==========
Division B has the opportunity to buy its needs for 5,000 units from an
outside supplier at $45 each.
a. Division A refuses to meet the $45 price, sales to outsiders cannot be
increased, and Division B buys from the outside supplier. Compute the
effect on the income of Nash.
b. Division A cannot increase its sales to outsiders, does meet the $45
price, and Division B continues to buy from A. Compute the effect on
the income of Nash.
c. Suppose that Division A could sell the 5,000 units now taken by Division
B to outsiders at $57 each without disturbing sales at the regular $72
price. Division B buys outside at $45 and Division A increases its
outside sales. Find the effect on the income of Nash.
SOLUTION:
a. Nash's income: Decreases $45,000
variable cost)]
b. Nash's income:
[5,000 units x ($45 outside price - $36
No change
c. Nash's income: $60,000 increase ($285,000 added revenue from outsiders $225,000 paid to the outsider by B)
8. The following information relates to Bradley Division of Allen Company.
Allen's minimum cost of capital for its segments is 15%.
Sales
$4,000,000
Direct fixed costs 1,800,000
Variable costs
Investment
1,400,000
4,800,000
a. Find Bradley's ROI.
b. Find Bradley's economic value added.
SOLUTION:
a. ROI:
16.7%
[($4,000,000 - $1,400,000 - $1,800,000)/$4,800,000]
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b. EVA: $80,000
[$800,000 - ($4,800,000 x 15%)]
9. Rosalie Division of Lachene Inc. has a capacity of 100,000 units and
expects the following results for.
Sales (90,000 units at $30)
Variable costs, at $20
Fixed costs
Income
$2,700,000
(1,800,000)
(700,000)
--------$ 200,000
==========
Katarina Division of Lachene Inc. currently purchases 20,000 units of a
part for one of its products from an outside supplier at $32 per unit.
Katarina's manager believes he could use a minor variation of Rosalie's
product instead, and offers to buy the units from Rosalie at $26. Making
the variation desired by Katarina would cost Rosalie an additional $5 per
unit and would increase Rosalie's annual cash fixed costs by $80,000.
ROSALIE'S MANAGER AGREES TO THE DEAL OFFERED BY KATARINA'S MANAGER.
a. Find the effect of the deal on Katarina's income and circle the correct
direction. (increase
decrease
none)
b. Find the effect of the deal on Rosalie's income and circle the correct
direction. (increase
decrease
none)
c. Find the effect of the deal on the income of Lachene Inc. and circle the
correct direction. (increase
decrease
none)
SOLUTION:
a. Katarina's income,
+ $120,000
[20,000 x ($32 - $26)]
b. Rosalie's income, - $160,000 {20,000 x ($26 - $20 - $5) - [lost
contribution margin of 10,000 x ($30 - $20)] - $80,000 new fixed costs)}
c. Lachene's income, - $40,000 ($120,000 - $160,000)
10. Young Division has the following information for the most recent period:
Divisional income
Divisional investment
Divisional sales
$ 11,000,000
$ 85,000,000
$100,000,000
Young has a minimum required return of 15%
a. Compute Young's return on investment.
b. Compute Young's investment turnover.
c. Compute Young's residual income.
d. Compute Young's return on sales.
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SOLUTION:
a. ROI: 12.9%
b. IT: 1.18
($11,000,000/$85,000,000)
($100,000,000/$85,000,000)
c. RI: ($1,750,000)
d. ROS: 11.0%
[$11,000,000 - (15% x $85,000,000)]
($11,000,000/$100,000,000)
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