Horngren Ima16 Tif 10 GE

Introduction to Management Accounting, 16e, Global Edition (Horngren)
Chapter 10 Management Control in Decentralized Organizations
10.1 Questions
1) The concentration of decision-making authority only at the highest levels of the organization is called
________.
A) management by objective
B) balanced scorecard
C) decentralization
D) centralization
Answer: D
Diff: 1
LO: 10-1
AACSB: Reflective thinking skills
Learning Outcome: None
2) All of the following are disadvantages of decentralization EXCEPT for ________.

A) Local managers make decisions that are not in the organization's best interests.
B) Managers spend time negotiating transfer prices for goods and services transferred between divisions
and segments.
C) Local managers duplicate services.
D) Local managers have more authority and greater levels of job satisfaction.
Answer: D
Diff: 2
LO: 10-1
3) Which of the following statements is NOT a benefit of decentralization?

A) Lower-level managers are able to make faster and better decisions on local decisions than higher-level
managers.
B) By delegating decision-making authority to local managers, higher-level managers free up time to deal
with larger issues and fundamental strategy.
C) Local managers can develop management skills.
D) Managers in decentralized units may spend time negotiating transfer prices for goods transferred
between units.
Answer: D
Diff: 2
LO: 10-1
1
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4) Decentralization is more successful in organizations when ________.
A) multiple segments buy from the same outside suppliers
B) multiple segments sell to the same customers
C) there are frequent purchases and sales made between segments of the organization
D) an organization's segments are relatively independent of each other
Answer: D
Diff: 2
LO: 10-1
5) ________ is the delegation of decision-making power to segment managers of an organization.

A) Goal congruence
B) Segment autonomy
C) Managerial effort
D) Segment contribution
Answer: B
Diff: 1
LO: 10-1
6) Decentralization may increase a firm's costs because ________.

A) lower level managers duplicate services that may be less expensive if centralized
B) information costs rise as top management needs additional reports to learn about decentralized units
C) lower level managers may make decisions that are not in the best interests of the firm as a whole
D) all of the above
Answer: D
Diff: 2
LO: 10-1
7) The lower in the organization that authority is delegated, the greater the decentralization.
Answer: TRUE
Diff: 2
LO: 10-1
8) Segment autonomy means that the activities of segment managers are directed by top managers.
Answer: FALSE
Diff: 1
LO: 10-1
2
9) When compared to a decentralized organization, there are really no advantages to a centralized
organization.
Answer: FALSE
Diff: 1
LO: 10-1
10) Some level of decentralization in an organizational structure creates benefits for most organizations.
Answer: TRUE
Diff: 1
LO: 10-1
11) Higher-level managers have the best information concerning local conditions.
Answer: FALSE
Diff: 1
LO: 10-1
12) Local managers in decentralized organizations tend to duplicate services that may be less expensive if
centralized.
Answer: TRUE
Diff: 1
LO: 10-1
13) The costs of accumulating and processing information frequently decline under decentralization.
Answer: FALSE
Diff: 2
LO: 10-1
14) Managers in decentralized units may waste time negotiating with other units about goods or services
one unit transfers to the other.
Answer: TRUE
Diff: 2
LO: 10-1
3
15) Decentralization is more popular in nonprofit organizations than in profit-seeking organizations.
Answer: FALSE
Diff: 1
LO: 10-1
16) Decentralization is most successful when an organization's segments are relatively independent of
one another.
Answer: TRUE
Diff: 2
LO: 10-1
17) If the segments in a firm buy from the same outside suppliers all the time, they are good candidates
for decentralization.
Answer: FALSE
Diff: 1
LO: 10-1
18) A disadvantage of decentralization in organizations is higher overhead costs due to duplication.

Answer: TRUE
Diff: 2
LO: 10-1
10.2 Questions
1) The management control system should be designed to achieve the best possible alignment between
________ and ________.
A) cost centers; profit centers
B) local managers' decisions; upper managers' bonuses
C) employee behavior; agency theory
D) local managers' decisions; the actions upper management seeks
Answer: D
Diff: 2
LO: 10-2
4
2) Which of the following statements about management control systems is FALSE?
A) In designing management control systems, top managers must consider the system's impact on the
employee behavior desired by the organization.
B) The management control system should be designed to achieve the best possible alignment between
managerial effort and goal congruence.
C) The design of a management control system should consider the responsibilities of managers and the
amount of autonomy they have.
D) Profit-center managers always have more decentralized decision-making authority than cost-center
managers.
Answer: D
Diff: 2
LO: 10-2
3) Profit-center managers always have more decentralized decision-making authority than cost-center
managers.
Answer: FALSE
Diff: 2
LO: 10-2
4) In designing management control systems, top managers should consider the system's impact on the
behavior of employees.
Answer: TRUE
Diff: 1
LO: 10-2
10.3 Questions
1) Managers' incentives for performance are defined as the ________.

A) relationship between cost and perceived benefit
B) relationship between goal congruence and managerial effort
C) rewards for managerial effort and actions
D) influence of uncontrollable factors on a manager's performance
Answer: C
Diff: 2
LO: 10-3
5
2) Organizations should choose performance metrics that improve the alignment of managerial incentives
with ________.
A) managerial effort
B) organizational objectives
C) ethical behavior
D) agency theory
Answer: B
Diff: 1
LO: 10-3
3) In agency theory, risk to the manager is defined as ________.

A) probability that a desired outcome will not be achieved
B) possibility that performance will be measured inaccurately
C) probability that an undesirable outcome will be achieved
D) the influence of uncontrollable factors on a manager's performance
Answer: D
Diff: 2
LO: 10-3
4) An ideal performance metric would measure and reward the manager for ________ factors, and neither
reward nor punish the manager for ________ factors.
A) allocated; unallocated
B) controllable; uncontrollable
C) unallocated; allocated
D) uncontrollable; controllable
Answer: B
Diff: 1
LO: 10-3
5) Which of the following statements is FALSE about performance metrics?

A) The cost benefit criterion leads companies to rely on imperfect, low-cost performance metrics.
B) The more a manager's reward depends on a performance metric, the more incentive the manager has
to take actions to maximize that measure.
C) Top management should define the performance metric to promote goal congruence and base enough
reward on it to achieve managerial effort.
D) The more uncontrollable factors affect a manager's reward, the less risk the manager bears.
Answer: D
Diff: 2
LO: 10-3
6
6) According to agency theory, employment contracts will balance three factors that include ________.
A) cost-benefit, risk and uncontrollable factors
B) goal congruence, incentive and risk
C) cost of measuring performance, cost-benefit and risk
D) incentive, risk and cost of measuring performance
Answer: D
Diff: 1
LO: 10-3
7) Incentives do not increase managerial effort toward goal congruence.

Answer: FALSE
Diff: 2
LO: 10-3
8) Performance-based rewards can be monetary or nonmonetary.

Answer: TRUE
Diff: 1
LO: 10-3
9) According to agency theory, employment contracts will balance three factors that include risk,
incentive and the cost of measuring performance.
Answer: TRUE
Diff: 2
LO: 10-3
10) The greater the influence of noncontrollable factors on responsibility center results, the more
problems there are in using the results to measure and reward a manager's performance.
Answer: TRUE
Diff: 2
LO: 10-3
11) Companies must pay managers more if the managers bear more risk, assuming the managers are risk
averse.
Answer: TRUE
Diff: 2
LO: 10-3
7
10.4 Questions
1) In return on investment calculations, we should measure invested capital ________ because ________.
A) at the end of the period; it is easiest
B) at the end of the period; income is measured at the end of the period
C) at the beginning of the period; it is a lead indicator
D) as an average for the period under review; income is measured over a period of time
Answer: D
Diff: 1
LO: 10-4
Learning Outcome: Discuss and calculate various performance measures used by management such as
ROI, residual income and balanced scorecards
2) Julie Company's revenues for the year are $300 and average invested capital for the year is $240.
Expenses are currently 50% of revenues. Julie Company's current return on investment is ________.
A) 50%
B) 62.5%
C) 80%
D) 100%
Answer: B
Diff: 1
LO: 10-4
AACSB: Analytic skills
3) Maury Company's revenues are $300 for the year. Average invested capital for the year is $240.
Expenses are currently 84% of revenues. If Maury Company can reduce its expenses to 70% of revenues,
return on investment will be ________.
A) 20%
B) 37.5%
C) 70%
D) 93.75%
Answer: B
Diff: 1
LO: 10-4
8
4) Sterling Company's revenues are $300 for the year. Average invested capital for the year is $240.
Expenses are currently 70% of revenues. If Sterling Company can reduce its average invested capital by
25%, return on investment will be ________.
A) 18.75%
B) 50.00%
C) 75.00%
D) 93.75%
Answer: B
Diff: 1
LO: 10-4
5) The following information is available for the Stanley Company:
Sales for year $1,000,000

Average invested capital for year $312,500
Return on investment 20%
What is the operating income?

A) $62,500
B) $100,000
C) $312,500
D) $687,500
Answer: A
Diff: 1
LO: 10-4
9
6) The following information is available for the Thompson Company:

What is the capital turnover ratio?

A) 0.10
B) 0.35
C) 0.50
D) 2.00
Answer: D
Diff: 1
LO: 10-4
7) The following information is available for the Paul Ryan Company:
Sales for year $150,000

What is the return on sales?

A) 10.00%
B) 10.42%
C) 62.50%
D) 100.00%
Answer: B
Diff: 1
LO: 10-4
8) ________ is a measure of income divided by the investment required to obtain that income.
A) Return on sales
B) Capital turnover
C) Return on investment
D) Residual income
Answer: C
Diff: 1
LO: 10-4
10
9) Return on investment can be computed as ________ times ________.
A) residual income; capital turnover
B) return on assets; asset turnover
C) return on sales; capital turnover
D) net income; cost of capital
Answer: C
Diff: 1
LO: 10-4
10) A decrease in either capital turnover or return on sales, without changing the other, will also ________
the ________.
A) decrease; gross book value of long-term assets
B) decrease; return on investment
C) decrease; cost of capital
D) decrease: net book value of long-term assets
Answer: B
Diff: 2
LO: 10-4
11) Operating income divided by sales is ________.

A) residual income
B) capital turnover
C) return on investment
D) return on sales
Answer: D
Diff: 1
LO: 10-4
12) Residual income is defined as ________.

A) sales less operating expenses
B) operating income divided by revenue
C) net operating profit after tax less a capital charge
D) net operating profit after tax
Answer: C
Diff: 2
LO: 10-4
11
13) The following information pertains to the Vertigo Company:
Total assets $150,000

Total current liabilities $110,000
Total expenses $70,000
Total liabilities $115,000
Total revenues $80,000
Return on sales equals ________.

A) 12.5%
B) 50.0%
C) 75.0%
D) 133.0%
Answer: A
Diff: 1
LO: 10-4
14) Economic profit is ________ less ________.

A) net operating profit; capital charge
B) residual income; capital charge
C) income before interest expense and taxes; capital charge
D) income before interest expense but after taxes; capital charge
Answer: D
Diff: 2
LO: 10-4
12
15) Gonzalez Company reports the following information:
Net operating income after taxes $200,000

Before-tax operating income $300,000
Average invested capital $500,000
After-tax cost of capital 10%
What is the residual income for Gonzalez Company?

A) $30,000
B) $50,000
C) $150,000
D) $250,000
Answer: C
Diff: 2
LO: 10-4
16) Garcia Company reports the following information:
Net operating income after taxes $100,000

Before-tax operating income $300,000
What is the residual income for Garcia Company?

A) $30,000
B) $50,000
C) $250,000
D) $450,000
Answer: B
Diff: 2
LO: 10-4
13
17) Sanchez Company reports the following information:
Net operating profit after taxes $500,000

Adjusted net operating profit after taxes $670,000
Adjusted average invested capital $700,000
The adjusted figures reflect adjustments used by Stern Stewart & Company. What is the EVA for Sanchez
Company?
A) $430,000
B) $450,000
C) $600,000
D) $620,000
Answer: C
Diff: 2
LO: 10-4
18) Gokey Company reports the following information:

Adjusted net operating profit after taxes $570,000
Adjusted average invested capital $700,000
The adjusted figures reflect adjustments used by Stern Stewart & Company. What is the EVA for Gokey
Company?
A) $330,000
B) $340,000
C) $500,000
D) $510,000
Answer: C
Diff: 2
LO: 10-4
14
19) Which of the following adjustments to after-tax operating income is used to approximate cash income
for EVA?
A) expensing research and development costs
B) using LIFO inventory method
C) deducting after tax interest expense
D) using taxes paid rather than tax expense
Answer: D
Diff: 2
LO: 10-4
20) Juan Company's after-tax operating income was $882 million. Average total assets were $5,900 million
and average total stockholders' equity was $4,050 million. Juan Company's cost of capital was 10%. Juan
Company uses total assets as the measure of invested capital. What is Juan Company's residual income?
A) $187 million
B) $292 million
C) $477 million
D) $667 million
Answer: B
Diff: 2
LO: 10-4
21) To calculate economic value added, several adjustments are made to after tax operating profit that
include ________ and ________.
A) the use of LIFO inventory valuation; capitalization of research and development costs
B) taxes paid rather than tax expense; capitalization of research and development costs
C) the use of average cost inventory valuation; current costs of fixed assets
D) the use of LIFO inventory valuation; current costs of fixed assets
Answer: B
Diff: 2
LO: 10-4
15
22) The following information pertains to Sanjay Company:

Invested capital is defined as total assets. What is the capital turnover?

A) 0.40
B) 0.63
C) 1.79
D) 2.00
Answer: D
Diff: 2
LO: 10-4
23) The following information pertains to Kumperor Company:
Average total assets $100,000

Invested capital is defined as total assets. What is the return on investment?

A) 20%
B) 60%
C) 70%
D) 160%
Answer: A
Diff: 2
LO: 10-4
16
24) The following information pertains to Singh Company:
Average total assets $50,000

Invested capital is defined as total assets. The capital charge is 10%. What is the residual income?
A) $1,600
B) $10,000
C) $15,000
D) $20,000
Answer: B
Diff: 2
LO: 10-4
25) The following information pertains to Garcia Company:

Invested capital is defined as total assets minus current liabilities. The after-tax cost of capital is 20%.
What is the residual income?
A) $2,000
B) $4,000
C) $12,000
D) $20,000
Answer: A
Diff: 2
LO: 10-4
17
26) The following information pertains to Arnez Company:

Invested capital is defined as total assets minus current liabilities. The after-tax cost of capital is 10%.
What is the economic profit?
A) $8,000
B) $20,000
C) $40,000
D) $50,000
Answer: A
Diff: 2
LO: 10-4
27) When measuring invested capital for purposes of calculating return on investment, managers in
practice predominantly use ________.
A) net book value at current cost
B) net book value at historical cost
C) gross book value at historical cost
D) gross book value at replacement cost
Answer: B
Diff: 2
LO: 10-4
28) Historical cost is widely used for asset valuation in calculating return on investment because
________.
A) it reports the replacement cost of long-term assets
B) it is more subjective than other approaches
C) it requires additional data collection
D) the cost of obtaining additional data exceeds the benefit
Answer: D
Diff: 2
LO: 10-4
18
29) The following information is available for Arnett Company:
Current assets $100,000 Current liabilities $75,000

Property, plant and Long-term liabilities 100,000
equipment 150,000 Stockholders' equity 125,000
Other assets 50,000 Total liabilities and
Total assets $300,000 stockholders' equity $300,000
Invested capital is defined as total assets. Net operating income is $60,000. What is ROI?
A) 20%
B) 30%
C) 50%
D) 120%
Answer: A
Diff: 2
LO: 10-4
30) The following information is available for Pohler Company:

Invested capital is defined as total assets. Before-tax operating profit is $175,000. After-tax operating profit
is $125,000. The after-tax cost of capital is 10%. What is economic profit?
A) $95,000
B) $125,000
C) $145,000
D) $175,000
Answer: A
Diff: 2
LO: 10-4
19
31) The following information is available for Applegate Company:

Invested capital is defined as total assets less current liabilities. The after-tax operating income is $150,000.
The after-tax cost of capital is 20%. The before-tax operating income is $200,000. What is the residual
income?
A) $90,000
B) $120,000
C) $125,000
D) $175,000
Answer: C
Diff: 2
LO: 10-4
32) Return on investment equals operating income divided by investment.

Answer: TRUE
Diff: 1
LO: 10-4
33) Return on sales can be computed by multiplying return on investment by the capital turnover.
Answer: FALSE
Diff: 2
LO: 10-4
34) Return on investment equals return on sales divided by capital turnover.

Answer: FALSE
Diff: 1
LO: 10-4
20
35) Return on sales equals revenue divided by income.
Answer: FALSE
Diff: 1
LO: 10-4
36) Capital turnover equals revenue divided by invested capital.

Answer: TRUE
Diff: 1
LO: 10-4
37) Return on sales can be increased by increasing expenses.

Answer: FALSE
Diff: 2
LO: 10-4
38) Capital turnover can be increased by decreasing investment.

Answer: TRUE
Diff: 2
LO: 10-4
39) Increasing capital turnover is one of the advantages of implementing the JIT philosophy.
Answer: TRUE
Diff: 1
LO: 10-4
40) EVA equals adjusted after-tax operating income minus capital turnover.
Answer: FALSE
Diff: 2
LO: 10-4
21
41) EVA uses after-tax numbers for operating income.
Answer: TRUE
Diff: 2
LO: 10-4
42) In general, use of economic profit or EVA will promote goal congruence and lead to better investment
decisions than the use of ROI.
Answer: TRUE
Diff: 2
LO: 10-4
43) Possible definitions of invested capital for purposes of calculating return on investment include total
assets and total stockholders' equity.
Answer: TRUE
Diff: 1
LO: 10-4
44) The proponents of gross book value for purposes of calculating return on investment maintain that it
facilitates comparisons between years and between plants or divisions.
Answer: TRUE
Diff: 2
LO: 10-4
45) The rate of return on net book value for equipment decreases as the equipment ages.
Answer: FALSE
Diff: 2
LO: 10-4
22
46) Managers evaluated using net book value for plant assets will tend to replace assets sooner than
managers evaluated using gross book value.
Answer: FALSE
Diff: 2
LO: 10-4
47) The use of net book value for plant assets promotes a more conservative approach to asset
replacement when compared to gross book value.
Answer: TRUE
Diff: 2
LO: 10-4
48) Selected data for two divisions of the Royal Company are given below:
South North
Division Division
Net sales for year $4,000,000 $7,000,000
Average total assets for year $2,000,000 $2,000,000
Operating income before taxes for year $360,000 $420,000
Tax rate 20% 20%
Average after-tax cost of capital 10% 12%
Required:
A) Compute the ROI for each division. Income is defined as operating income after taxes.
B) Based on the ROI, which division manager should receive a bonus? Bonuses are awarded if ROI equals
or exceeds 15 percent.
C) Compute the residual income for each division. Invested capital is defined as total assets.
D) Based on the residual income, which division manager should receive a bonus? Bonuses are awarded
if residual income is greater than $100,000.
Answer: A) South Division: 14.4% = ($360,000 × 80%) / $2,000,000
North Division: 16.8% = ($420,000 × 80%) / $2,000,000
B) North Division
C) South Division: $88,000 = ($360,000 × 80%) - (10% × $2,000,000)
North Division: $96,000 = ($420,000 × 80%) - (12% × $2,000,000)
D) Neither division manager.
Diff: 2
LO: 10-4
23
49) The following information is available for the Tyson Company:

Return on investment for year 25%
Required:
A) Compute capital turnover.
B) Compute operating income.
C) Compute return on sales.
Answer: A) 2.0 = $1,000,000/$500,000
B) $125,000 = 25% × $500,000
C) 12.5% = $125,000 / $1,000,000
Diff: 2
LO: 10-4
24
50) Hudson Company has two divisions. The following information is available:
North Division South Division

Revenue for year $300,000 $500,000
Operating income before taxes
for year $100,000 $90,000
Average invested capital for year $100,000 $200,000
Invested capital at end of year $200,000 $300,000
Tax rate 30% 30%
After-tax cost of capital for year 20% 15%
Required:
1. Using operating income after taxes as the income measure, compute the following for each division:
A) Return on investment.
B) Return on sales
C) Capital turnover
D) Residual income
2. Which division is more successful? Why?
Answer:
1.
A) North Division: $70,000/$100,000 = 70%
South Division: $63,000/$200,000 = 31.5%
B) North Division: $70,000/$300,000 = 23.3%
South Division: $63,000/$500,000 = 12.6%
C) North Division: $300,000/$100,000 = 3
South Division: $500,000/$200,000 = 2.5
D) North Division: $70,000 - (20% × $100,000) = $50,000
South Division: $63,000 - (15% × $200,000) = $33,000
2. The North Division has a higher ROI and a larger residual income.
Diff: 2
LO: 10-4
25
10.5 Questions
1) When a company uses economic profit as a performance metric, managers have an incentive to invest
only in projects ________.
A) earning less than the return on investment of the segment or division
B) earning more than the return on investment of the segment or division
C) earning more than the cost of capital of the segment or division
D) earning less than the cost of capital of the segment or division
Answer: C
Diff: 2
LO: 10-5
2) When a company uses return on investment as a performance metric, managers have an incentive to
invest only in projects ________.
A) that increase the return on investment of the segment or division
B) that decrease the return on investment of the segment or division
C) that have a return on investment that exceeds the cost of capital of the segment or division
D) that have a return on investment that is less than the cost of capital of the segment or division
Answer: A
Diff: 2
LO: 10-5
3) Brady Division has operating income of $200,000 for the year ending December 31, 2011. Average
invested capital is $1,000,000 and the weighted-average cost of capital is 10%. The division is considering
a new investment that would cost $500,000 and earn 15% annually. If return on investment is the
performance metric, should the manager of the Brady Division accept the new investment?
A) No, because the return on investment of the division decreases with the new investment.
B) No, because the return on investment of the division increases with the new investment.
C) Yes, because the return on investment of the division decreases with the new investment.
D) Yes, because the return on investment of the division increases with the new investment.
Answer: A
Diff: 3
LO: 10-5
26
4) Wisconsin Division has operating income of $40,000 for the year ending December 31, 2011. Average
invested capital is $800,000 and the weighted-average cost of capital is 10%. The division is considering a
new investment that would cost $800,000 and earn 7% annually. If return on investment is the
performance metric, should the manager of the Wisconsin Division accept the new investment?
C) Yes, because the return on investment of the division decreases with the new investment.
Answer: D
Diff: 3
LO: 10-5
5) Bombard Division has operating income of $200,000 for the year ending December 31, 2011. Average
invested capital is $1,000,000 and the weighted-average cost of capital is 10%. The division is considering
a new investment that would cost $500,000 and earn 15% annually. If economic profit is the performance
metric, should the manager of the Bombard Division accept the new investment?
C) Yes, because the economic profit of the division increases with the new investment.
Answer: C
Diff: 3
LO: 10-5
6) Wendell Division has operating income of $40,000 for the year ending December 31, 2011. Average
invested capital is $800,000 and the weighted-average cost of capital is 10%. The division is considering a
new investment that would cost $800,000 and earn 7% annually. If economic profit is the performance
metric, should the manager of the Wendell Division accept the new investment?
B) No, because the economic profit for the investment is negative.
C) Yes, because the economic profit for the investment is positive.
Answer: B
Diff: 3
LO: 10-5
27
7) Use of ________ in evaluating capital investment projects will promote goal congruence and lead to
better decisions than using ________.
A) return on investment; economic profit
B) economic profit; contribution by segment
C) contribution controllable by division manager; contribution by segment
D) economic profit, return on investment
Answer: D
Diff: 3
LO: 10-5
8) Evaluation of capital investments based on economic profit motivates managers to invest in projects
that ________ because those investments increase the division's economic profit.
A) earn a return in excess of the project's return on investment
B) earn a return in excess of the segment's return on investment
C) earn a return in excess of the cost of capital
D) earn a return in excess of the segment's net income
Answer: C
Diff: 3
LO: 10-5
9) Why do some companies prefer the use of economic profit over return on investment in decision-
making?
A) The calculations for economic profit are easier.
B) The data needed to calculate return on investment are not always available.
C) Return on investment can motivate managers to make investment decisions that are not in the best
interests of the company as a whole.
D) The concept behind economic profit is more logical.
Answer: C
Diff: 2
LO: 10-5
28
10) From the view of the company as a whole, managers should accept investment projects that earn
more than the ________. ________ should not be used for investment decisions.
A) return on investment; Return on sales
B) return on sales; Capital turnover
C) cost of capital; Return on investment
D) capital turnover; Return on sales
Answer: C
Diff: 2
LO: 10-5
11) The following information pertains to a segment of the Moore Company. Invested capital is defined as
total assets. The weighted average cost of capital is 10%. The ROI of the segment before the project is 20%.
The ROI of the segment after the project is 18%. The manager is evaluated based on the segment's ROI. A
project earning a ROI of 12% should be ________.
A) accepted
B) rejected
C) compared to the company's ROI
D) compared to the company's residual income
Answer: B
Diff: 2
LO: 10-5
12) The following information pertains to a segment of the Marian Company. Invested capital is defined
as total assets. The weighted average cost of capital is 10%. The ROI of the segment before the project is
20%. The ROI of the segment after the project is 18%. The manager is evaluated based on the segment's
economic profit. A project earning a ROI of 12% should be ________.
A) accepted
B) rejected
C) compared to the company's ROI
D) compared to the company's residual income
Answer: A
Diff: 2
LO: 10-5
29
13) Selected data for two divisions of the Ramble Company are given below:
South Division North Division

Net sales $4,000,000 $7,000,000
Average total assets $2,000,000 $2,000,000
Net operating income after taxes $360,000 $420,000
Average plant assets $950,000 $800,000
Average cost of capital 10% 12%
Each division is considering a capital investment of $1,000,000. The annual return on the capital
investment is 11%. Invested capital is defined as total assets.
Required:
A) The South Division's manager is evaluated using residual income. Should South Division accept the
capital investment? Why?
B) The North Division's manager is evaluated using residual income. Should North Division accept the
capital investment? Why?
C) The South Division's manager is evaluated using return on investment. Should South Division accept
the capital investment? Why?
Answer:
A) Yes, the manager should accept the investment because residual income from the investment is
positive. Residual income = $110,000 - $100,000= $10,000
Return on investment = 11% × $1,000,000 = $110,000
Cost of capital = 10% × $1,000,000 = $100,000
B) No, the manager should not accept the investment because residual income from the investment is
negative. Residual income = $110,000 - $120,000 = $(10,000)
Return on investment = 11% × $1,000,000 = $110,000
Cost of capital = 12% × $1,000,000 = $120,000
C) No, the manager should not accept the capital investment. The return on investment declines to 15.6
percent with the capital investment from 18 percent without the capital investment.
($360,000 + $110,000) / ($2,000,000 + $1,000,000) = 15.7%
$360,000 / $2,000,000 = 18%
Diff: 3
LO: 10-5
30
10.6 Questions
1) What does a decentralized company expect from its transfer pricing system?
A) to increase the transferring segment's profits only
B) to increase the buying segment's profits only
C) to increase the company's overall profits only
D) to increase the transferring segment's profits and the company's overall profits
Answer: D
Diff: 2
LO: 10-6
2) In companies with segment autonomy, who determines the transfer price for internal sales and
purchases of products?
A) all segment managers
B) segment mangers involved in transfer
C) upper management
D) outside suppliers
Answer: B
Diff: 2
LO: 10-6
3) Which of the following statements about the establishment of transfer prices for internal sales and
purchases between segments is FALSE?
A) In decentralized organizations, transfer pricing policy sometimes leads to dysfunctional decisions.
B) There is seldom a perfect transfer pricing policy.
C) Organizations use a variety of methods to determine transfer prices.
D) In centralized organizations, segment managers set transfer prices.
Answer: D
Diff: 2
LO: 10-6
4) Transfer prices are ________.

A) revenues of the segment producing the transferred product
B) costs of the segment acquiring the transferred product
C) costs of the segment producing the transferred product
D) revenues of the segment producing the transferred product and costs of the segment acquiring the
transferred product
Answer: D
Diff: 2
LO: 10-6
31
5) A transfer price exists when two segments of the same organization sell ________.
A) a product to the same customer
B) a product to each other
C) a product in a foreign country
D) the same service to customers
Answer: B
Diff: 1
LO: 10-6
6) Transfer prices are the amounts charged by one segment of an organization for a product that it
supplies to an outside firm.
Answer: FALSE
Diff: 1
LO: 10-6
7) The transfer price is revenue to the acquiring segment, and it is a cost to the segment producing the
product.
Answer: FALSE
Diff: 1
LO: 10-6
10.7 Questions
1) If capacity constraints prevent a segment from meeting internal and external demand for a product, the
opportunity cost of selling internally equals ________.
A) the variable cost of producing the product
B) the controllable costs of producing the product
C) the contribution margin the producing segment could have received from selling in the external
market rather than the internal market
D) the variable cost plus the avoidable fixed cost of producing the product
Answer: C
Diff: 2
LO: 10-7
32
2) Division AA does not have excess capacity to produce Product XX. The division can sell Product XX for
$10 per unit outside the company. Variable costs are $6 per unit. Division BB wants to purchase Product
XX from Division AA to use in Product ZZ. The selling price of Product ZZ is $25 per unit and variable
costs to finish the product after the transfer are $12 per unit. An outside supplier will sell Product XX for
$12 per unit. What is the minimum transfer price for Division AA?
A) $4 per unit
B) $6 per unit
C) $10 per unit
D) $12 per unit
Answer: C
Diff: 3
LO: 10-7
3) Division South does not have excess capacity to produce Product Y. The division can sell Product Y for
$10 per unit outside the company. Variable costs are $6 per unit. Division North wants to purchase
Product Y from Division South to use in Product ZZ. The selling price of Product ZZ is $25 per unit and
variable costs to finish the product after the transfer are $12 per unit. An outside supplier will sell Product
Y for $12 per unit. What is the maximum price Division North will pay for Product Y?
A) $12 per unit
B) $13 per unit
C) $25 per unit
D) none of the above
Answer: A
Diff: 3
LO: 10-7
4) Division West does not have excess capacity to produce Product XX. The division can sell Product XX
for $10 per unit outside the company. Variable costs are $6 per unit. Division East wants to purchase
Product XX from Division West to use in Product ZZ. The selling price of Product ZZ is $25 per unit and
variable costs to finish the product after the transfer are $12 per unit. An outside supplier will sell Product
XX for $11 per unit. What is the maximum price Division East will pay for Product XX?
A) $11 per unit
B) $12 per unit
C) $13 per unit
D) none of the above
Answer: A
Diff: 3
LO: 10-7
33
5) Division Big does have excess capacity to produce Product XX. The division can sell Product XX for $10
per unit outside the company. Variable costs are $6 per unit. Division Small wants to purchase Product
XX from Division Big to use in Product ZZ. The selling price of Product ZZ is $25 per unit and variable
costs to finish the product after the transfer are $12 per unit. An outside supplier will sell Product XX for
$12. What is the minimum transfer price for Division Big?
A) $4 per unit
B) $6 per unit
C) $10 per unit
D) $12 per unit
Answer: B
Diff: 3
LO: 10-7
6) A variable-costing transfer pricing system is appropriate when there is ________.

A) constrained capacity for the selling segment
B) constrained capacity for the buying segment
C) excess capacity for the selling segment
D) excess capacity for the buying segment
Answer: C
Diff: 3
LO: 10-7
7) If a selling segment has excess capacity, the opportunity cost of selling a product internally equals
________.
A) the variable costs of producing the product
B) the contribution margin the producing segment could have received from selling in the external
market rather than the internal market
C) the variable costs plus the avoidable fixed costs of producing the product
D) zero
Answer: D
Diff: 2
LO: 10-7
34
8) What is the general rule for determining transfer prices on transferred products between segments of a
company? The transfer price equals ________ plus ________.
A) fixed costs; opportunity costs
B) outlay cost; sunk cost
C) outlay cost; variable cost
D) outlay cost; opportunity cost
Answer: D
Diff: 2
LO: 10-7
9) North Division sells a part internally to South Division. South Division uses the part to produce
inexpensive products sold at discount stores. North Division incurs costs of $1.50 per part, while South
Division incurs additional costs of $4.80 per product. North Division sells the part to South Division for
$2.00 per part. The final product is sold to external customers for $8.00 each. Which of the following
formulas correctly reflects the company's operating income?
A) $8.00 - $1.50 - $4.80 - $2.00 = $(0.30)
B) $8.00 - $1.50 - $4.80 = $1.70
C) $8.00 - $4.80 -$2.00 = $1.20
D) $8.00 - $1.50 = $6.50
Answer: B
Diff: 2
LO: 10-7
10) High Division sells a part internally to Low Division. Low Division uses the part to produce
inexpensive products sold at discount stores. High Division incurs costs of $1.50 per part, while Low
Division incurs additional costs of $4.80 per product. High Division sells the part to Low Division for
$2.00 per part.
Low Division can purchase the part from an outside supplier for $1.00 per part, but does not accept the
offer. The final product is sold to external customers for $8.00 each. Which of the following formulas
correctly reflects the company's operating income?
A) $8.00 - $1.50 - $4.80 - $2.00 - $1.00 = $(1.30)
B) $8.00 - $1.50 - $4.80 = $1.70
C) $8.00 - $4.80 - $2.00 = $1.20
D) $8.00 - $1.50 = $6.50
Answer: B
Diff: 2
LO: 10-7
35
11) There is(are) ________ goal(s) of transfer pricing systems. There is no universally ________ transfer
price.
A) multiple; maximum
B) one; maximum
C) multiple; optimal
D) one; optimal
Answer: C
Diff: 2
LO: 10-7
12) The West and East Divisions are divisions in the same company. Currently the East Division buys a
part from West Division for $384 per unit. The West Division wants to increase the price of the part it sells
to East Division by $96 to $480. The manager of the East Division has stated that he cannot pay that much
insofar as the division's profit goes below zero. The manager of the East Division can buy the part from
an outside supplier for $440 per unit. The cost data pertaining to the part is supplied by the West
Division:
Direct materials $136

Direct labor 200
Variable overhead 40
Fixed overhead 42
If West Division does not produce the parts for the East Division, it will be able to avoid one-third of the
fixed manufacturing overhead costs. The West Division has excess capacity but no alternative uses for the
facilities. From the standpoint of the company as a whole, should the East Division buy the part from the
West Division or the outside supplier?
A) East Division should buy the part from the West Division because the company's profit will be $14.00
per unit larger.
B) East Division should buy the part from the West Division because the company's profit will be $40.00
per unit larger.
C) East Division should buy the part from the West Division because the company's profit will be $50.00
per unit larger.
D) East Division should buy from an outside supplier at $440 per unit.
Answer: C
Diff: 2
LO: 10-7
36
13) The South and North Divisions are divisions in the same company. Currently the North Division buys
a part from South Division for $384 per unit. The South Division wants to increase the price of the part it
sells to North Division by $96 to $480. The manager of the North Division has stated that he cannot pay
that much insofar as the division's profit goes below zero. The manager of the North Division can buy the
part from an outside supplier for $448 per unit. The cost data pertaining to the part is supplied by the
South Division:
Direct materials $136.00

Direct labor 200.00
Variable overhead 40.00
Fixed overhead 38.40
If South Division does not produce the parts for the North Division, it will be able to avoid one-third of
the fixed manufacturing overhead costs. The South Division has excess capacity but no alternative uses
for the facilities. North Division will sell the finished product with the part (from South Division) for
$1,000 after incurring additional processing costs of $600. What is the maximum transfer price per unit
that North Division should pay for the part?
A) $388.80
B) $400.00
C) $448.00
D) $480.00
Answer: B
Diff: 2
LO: 10-7
37
14) The West and East Divisions are divisions in the same company. Currently the East Division buys a
part from West Division for $384 per unit. The West Division wants to increase the price of the part it sells
to East Division by $96 to $480. The manager of the East Division has stated that he cannot pay that much
insofar as the division's profit goes below zero. The manager of the East Division can buy the part from
an outside supplier for $448 per unit. The cost data pertaining to the part is supplied by the West
Division:
Direct materials $136

Direct labor 200
Variable overhead 40
Fixed overhead 42
If West Division does not produce the parts for the East Division, it will be able to avoid one-third of the
fixed manufacturing overhead costs. The West Division has excess capacity but no alternative uses for the
facilities. West Division normally sells the part outside the company for $400 per unit. What is the
minimum transfer price per unit that West Division should charge East Division?
A) $376
B) $390
C) $400
D) $448
Answer: B
Diff: 2
LO: 10-7
15) If there is a competitive market for the product being transferred internally, using the ________ as the
transfer price will lead to ________.
A) full cost; goal congruence
B) variable cost; goal congruence
C) full cost plus profit; goal congruence
D) market price; goal congruence
Answer: D
Diff: 2
LO: 10-7
38
16) Assuming a company uses a cost-based pricing system for transfer pricing, which of the following
items would NOT be used?
A) variable-costing only
B) full-costing plus profit only
C) full-costing only
D) fixed-costing only
Answer: D
Diff: 2
LO: 10-7
17) Capricorn Company's records reveal the following:
Division X
Market price of finished component to outsiders $32 per unit
Variable costs per component $24 per unit
Division Y
Sale price of finished product $42 per unit
Variable costs:
Division X (1 component) ?
Division Y Assembly 9 per unit
Division Y Packaging 4 per unit
Division Y wants to buy the component from Division X. The variable costs of Division Y will be incurred
whether it buys the component from Division X or from an outside supplier. Division Y can buy the
component for $30 per unit from an outside supplier. Division X has no excess capacity. What is the
highest price per unit that Division Y should pay to Division X for the components?
A) $22 per unit
B) $29 per unit
C) $30 per unit
D) $32 per unit
Answer: B
Diff: 2
LO: 10-7
39
18) Maralee Company's records reveal the following:
Division X
Division Y
Variable costs:
Division X (1 component) ?
whether it buys the component from Division X or from an outside supplier. Assume Division X is
working at full capacity; there is no excess capacity. Division Y can buy the component from an outside
supplier for $32 per unit. What is the lowest transfer price per unit Division X should accept from
Division Y for the component?
A) $8 per unit
B) $22 per unit
C) $24 per unit
D) $32 per unit
Answer: D
Diff: 2
LO: 10-7
40
19) Bernice Company's records reveal the following:
Division X
Division Y
Variable costs:
Division X(1 component) ?
whether it buys the component from Division X or from an outside supplier. Assume Division X has
excess capacity. Division Y can buy the component from an outside supplier for $32 per unit. What is the
lowest transfer price per unit at which Division X would be willing to sell to Division Y?
A) $8
B) $22
C) $24
D) $32
Answer: C
Diff: 2
LO: 10-7
41
20) Helen Company's records reveal the following:
Division A
Market price of finished part to outsiders $75 per unit
Variable costs per part $51 per unit
Division B
Sale price of finished product per unit $105 per unit
Variable costs:
Division A (1 part) ?
Division B Processing 27 per unit
Division B Selling 12 per unit
Division B wants to buy the part from Division A. The variable costs of Division B will be incurred
whether it buys the part from Division A or from an outside supplier. Division B can buy the parts from
an outside supplier at $70 per unit. Division A has no excess capacity. What is the highest price that
Division B should pay to Division A for the parts per unit?
A) $51
B) $66
C) $70
D) $75
Answer: B
Diff: 2
LO: 10-7
42
21) Campbell Company's records reveal the following:
Division A
Division B
Variable costs:
Division A(1 part) ?
whether it buys the part from Division A or from an outside supplier. Assume Division A is working at
full capacity, and there is no excess capacity. Division B can buy the parts from an outside supplier at $70
per unit. What is the lowest transfer price per unit Division A should accept from Division B?
A) $24
B) $66
C) $70
D) $74
Answer: D
Diff: 2
LO: 10-7
43
22) Dersey Company's records reveal the following:
Division A
Division B
Variable costs:
Division A(1 part) ?
whether it buys the part from Division A or from an outside supplier. Division A has excess capacity.
Division B can buy the part for $75 per unit from an outside supplier. What is the lowest transfer price
per unit Division A will accept from Division B?
A) $24
B) $50
C) $66
D) $75
Answer: B
Diff: 2
LO: 10-7
23) ________ is an approach for establishing a market-based transfer price.

A) Full cost plus a normal profit markup
B) External market price less selling and delivery costs saved from selling internally
C) External market price plus a profit markup
D) Variable cost plus unavoidable fixed cost
Answer: B
Diff: 1
LO: 10-7
24) If market prices are not available for transfer prices, most companies use ________ transfer prices.
A) negotiated
B) average
C) cost-based
D) activity-based
Answer: C
Diff: 2
LO: 10-7
44
25) Cost-based transfer prices are easy to implement but can lead to ________ decisions.
A) questionable
B) negotiated
C) dysfunctional
D) autonomous
Answer: C
Diff: 1
LO: 10-7
26) A general rule for transfer pricing is that the transfer price should equal the sum of outlay cost and
opportunity cost.
Answer: TRUE
Diff: 2
LO: 10-7
27) When determining a transfer price, outlay cost is often the variable cost for producing the item
transferred.
Answer: TRUE
Diff: 2
LO: 10-7
28) In cases of constrained capacity, the opportunity cost of transferring a product internally is zero.
Answer: FALSE
Diff: 2
LO: 10-7
29) Dysfunctional decisions are decisions that conflict with organizational goals and objectives.
Answer: TRUE
Diff: 2
LO: 10-7
30) It is recommended that standard costs be used instead of actual costs for cost-based transfer prices.
Answer: TRUE
Diff: 2
LO: 10-7
45
31) If actual costs are used for transfer pricing by a selling division, the selling division has little incentive
to control costs.
Answer: TRUE
Diff: 2
LO: 10-7
32) A full-cost transfer price can potentially create dysfunctional decisions.

Answer: TRUE
Diff: 2
LO: 10-7
33) The time and effort spent negotiating a transfer price between a company's divisions adds nothing
directly to the profits of a company.
Answer: TRUE
Diff: 2
LO: 10-7
46
34) Collier Products has a Valve Division that manufactures and sells a standard valve. The Valve
Division has a capacity of 100,000 units. The variable costs per unit are $16. The fixed costs per unit are $9,
based on the capacity of 100,000 units. None of the fixed costs are avoidable. The selling price to outside
customers in the intermediate market are $30 per unit.
The Pump Division wants to purchase the valve from the Valve Division for one of its pumps. The Pump
Division is currently purchasing 10,000 valves per year from an overseas supplier at a cost of $29 per
valve. The selling price of the completed pump is $100 per unit and the costs to complete the pump are
$60 per unit, excluding the valve purchased from the other division.
Required:
A) Assume the Valve Division has ample idle capacity to produce the 10,000 valves for the Pump
Division. What should be the transfer price between the two divisions? Give a range. Determine the
minimum transfer price for the Valve Division and the maximum transfer price for the Pump Division.
B) Assume the Valve Division does not have idle capacity to produce the valves for the Pump Division. It
is selling all that it can produce to outside customers in the intermediate market. What should be the
transfer price between the two divisions? Give a range. Determine the minimum transfer price for the
Valve Division and the maximum transfer price for the Pump Division. Will a transfer occur?
C) Assume the Valve Division does not have idle capacity to produce the valves for the Pump Division. It
is selling all that it can produce to outside customers in the intermediate market. Now assume the Valve
Division saves $3.00 per unit by selling internally. What should be the transfer price between the two
divisions? Give a range. Determine the minimum transfer price for the Valve Division and the maximum
transfer price for the Pump Division.
Answer:
A) $16 per unit to $29 per unit. $16 is the minimum transfer price for the Valve Division and represents
the outlay cost. The opportunity cost is zero because there is idle capacity. $29 is the maximum transfer
price for the Pump Division and represents the minimum of $29 and $40. ($40 = $100 - $60)
B) No transfers will be made. The Valve Division will want to sell at $30 per unit, which is the minimum
transfer price. The Pump Division can purchase the valves at $29 per unit externally, which is the
maximum transfer price.
C) $27 per unit to $29 per unit. The minimum transfer price for the Valve Division will be $30 minus $3.00
= $27. The maximum transfer price for the Pump Division will be the lower of $29 and $40.
Diff: 3
LO: 10-7
47
10.8 Questions
1) Multinational companies use transfer prices to minimize worldwide income taxes, ________ and
________.
A) tariffs; financial restrictions imposed by U.S. government
B) tariffs; import duties
C) financial restrictions imposed by U.S. government; import duties
D) foreign bribes; import duties
Answer: B
Diff: 2
LO: 10-8
2) ABC Division is in the United States with high income tax rates. ABC Division produces a component
for the Spain Division in a low income-tax-rate country. What transfer price should ABC Division set for
the component sold to the Spain Division to minimize taxes?
A) ABC Division should set a high transfer price to maximize profits.
B) ABC Division should set a low transfer price to maximize profits.
C) ABC Division should set a high transfer price to minimize taxes.
D) ABC Division should set a low transfer price to minimize taxes.
Answer: D
Diff: 3
LO: 10-8
3) The variable cost of Part X is $50 per unit and the full cost of the part is $80 per unit. The part is
produced in Portugal and transferred to a plant in the United States. Portugal has a 10% income tax rate.
The United States has a 50% income tax rate and an import duty equal to 10% of the price of the item. Part
X can be transferred at full cost or variable cost. Assume Part X is transferred at full cost. By using full
cost instead of variable cost for the transfer price, the income tax effect per unit in Portugal is ________.
A) a decrease in tax by $3 per unit
B) an increase in tax by $3 per unit
C) a decrease in tax by $15 per unit
D) an increase in tax by $15 per unit
Answer: B
Diff: 2
LO: 10-8
48
produced in Country Z and transferred to a plant in Country B. Country Z has a 10% income tax rate.
Country B has a 50% income tax rate and an import duty equal to 10% of the price of the item. Part X can
be transferred at full cost or variable cost. Assume Part X is transferred at full cost. By using full cost
instead of variable cost for the transfer price, the income tax effect per unit in Country B is ________.
A) a decrease in tax by $9 per unit
B) an increase in tax by $9 per unit
C) a decrease in tax by $15 per unit
D) an increase in tax by $15 per unit
Answer: C
Diff: 2
LO: 10-8
produced in Country Z and transferred to a plant in Country B. Country Z has a 10% income tax rate.
Country B has a 50% income tax rate and an import duty equal to 10% of the price of the item. Part X can
be transferred at full cost or variable cost. Assume Part X is transferred at full cost. By using full cost
instead of variable cost for the transfer price, the net savings is ________.
A) $3 per unit
B) $6 per unit
C) $9 per unit
D) $15 per unit
Answer: C
Diff: 2
LO: 10-8
6) Multinational companies use transfer pricing to minimize their worldwide income taxes, duties and
tariffs.
Answer: TRUE
Diff: 2
LO: 10-8
7) For multinational companies, worldwide income taxes do not influence the setting of transfer prices.
Answer: FALSE
Diff: 2
LO: 10-8
49
8) In a multinational setting, low transfer prices generally lead to low import duties.
Answer: TRUE
Diff: 2
LO: 10-8
9) U.S. multinational companies must follow the Internal Revenue Code when setting transfer prices.
Answer: TRUE
Diff: 2
LO: 10-8
10.9 Questions
1) The joint formulation by a manager and his or her superior of a set of goals and plans for achieving the
goals for a forthcoming period is known as ________.
A) capital budgeting
B) managerial effort
C) management control system
D) management by objectives
Answer: D
Diff: 1
LO: 10-9
2) Which of the following types of organizations can use management by objectives?

A) profit-seeking organizations only
B) nonprofit organizations only
C) universities, hospitals and churches only
D) all of the above
Answer: D
Diff: 1
LO: 10-9
3) A management by objectives approach uses responsibility center budgets.

Answer: TRUE
Diff: 2
LO: 10-9
50

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Introduction to Management Accounting, 16e, Global Edition (Horngren)

Chapter 10 Management Control in Decentralized Organizations

2) All of the following are disadvantages of decentralization EXCEPT for ________.

3) Which of the following statements is NOT a benefit of decentralization?

5) ________ is the delegation of decision-making power to segment managers of an organization.

6) Decentralization may increase a firm's costs because ________.

18) A disadvantage of decentralization in organizations is higher overhead costs due to duplication.

1) Managers' incentives for performance are defined as the ________.

3) In agency theory, risk to the manager is defined as ________.

5) Which of the following statements is FALSE about performance metrics?

7) Incentives do not increase managerial effort toward goal congruence.

8) Performance-based rewards can be monetary or nonmonetary.

5) The following information is available for the Stanley Company:

Sales for year $1,000,000

What is the operating income?

Sales for year $1,000,000

What is the capital turnover ratio?

7) The following information is available for the Paul Ryan Company:

Sales for year $150,000

What is the return on sales?

11) Operating income divided by sales is ________.

12) Residual income is defined as ________.

Total assets $150,000

Return on sales equals ________.

14) Economic profit is ________ less ________.

Net operating income after taxes $200,000

What is the residual income for Gonzalez Company?

16) Garcia Company reports the following information:

Net operating income after taxes $100,000

What is the residual income for Garcia Company?

Net operating profit after taxes $500,000

18) Gokey Company reports the following information:

Net operating profit after taxes $400,000

Total assets $50,000

Invested capital is defined as total assets. What is the capital turnover?

23) The following information pertains to Kumperor Company:

Average total assets $100,000

Invested capital is defined as total assets. What is the return on investment?

Average total assets $50,000

25) The following information pertains to Garcia Company:

Total assets $50,000

Total assets $150,000

Current assets $100,000 Current liabilities $75,000

30) The following information is available for Pohler Company:

Current assets $100,000 Current liabilities $75,000

Current assets $100,000 Current liabilities $175,000

32) Return on investment equals operating income divided by investment.

34) Return on investment equals return on sales divided by capital turnover.

36) Capital turnover equals revenue divided by invested capital.

37) Return on sales can be increased by increasing expenses.

38) Capital turnover can be increased by decreasing investment.

Sales for year $1,000,000

North Division South Division

South Division North Division

4) Transfer prices are ________.

6) A variable-costing transfer pricing system is appropriate when there is ________.

Direct materials $136

Direct materials $136.00

Direct materials $136

17) Capricorn Company's records reveal the following:

14) Economic profit is less .