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Exam 9: Responsibility Accounting

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Question 71

Multiple Choice

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The Cineplex Movie Theater has invested in a snack bar for its store, where individual pizzas would be prepared and sold. The investment cost the company $45,000. The company expects a sales volume for the new product to be 12,000 pizzas a year. Variable materials, preparation, and marketing costs are expected to be $1.50 per unit and fixed costs are estimated at $15,000 a year. Based on a desired 12% ROI, what should Cineplex charge as the selling price per pizza?

A) $3.00
B) $2.75
C) $5.20
D) $3.20

E) C) and D)
F) B) and C)

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Question 72

Multiple Choice

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Fairpoint Products provided the following selected information about its consumer products division for the current year: Based on this information, the division's investment amount was: $\begin{array} { | l | l r | } \hline \text { Desired ROI } & & 8 \% \\\hline \text { Net Income } & \$ & 100,000 \\\hline \text { Residual Income } & \$ & 60,000 \\\hline\end{array}$

A) $500,000.
B) $1,250,000.
C) $750,000.
D) $2,000,000.

E) A) and B)
F) None of the above

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Question 73

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Belfield Corporation includes two divisions, Motor Division and Lawnmower Division. The Motor Division makes specialized motors, including one that could be used by the Lawnmower Division. Costs for the motor are: variable costs, $16; fixed costs, $20. The Motor Division has capacity to make 20,000 of the motors, and it is operating at capacity. It sells the motors to other companies for $52 each. If a sale was made to the Lawnmower Division, variable costs would be reduced by $4 per motor on those units. The Lawnmower Division needs 8,000 motors per year, and it has been purchasing them from another company for $45 each.Required: 1) If a transfer were to occur between Motor Division and Lawnmower Division, what is the maximum that Lawnmower Division should be willing to pay for the motors? 2) If a transfer were to occur between Motor Division and Lawnmower Division, what is the minimum price that Motor Division should be willing to accept? 3) Do you recommend that a transfer occur between Motor Division and Lawnmower Division? If the transfer did occur, what would be the effect on the overall profits of Belfield Corporation?

A restaurant that is part of a retail store and managed by the retail manager would most likely be classified as a cost center.

Select the incorrect statement concerning responsibility reports.

The preferred method for establishing transfer prices for transactions between divisions of the same firm is to base the transfer price on some form of competitive market price.

When using residual income as a project-screening tool, management should accept a project if the residual income is:

Decentralization encourages upper level management to concentrate on short-term decisions.

The Family Restaurant chain had a 12% return on a $60,000 investment in new ovens. The investment resulted in increased sales and an increase in income that was 3% of the increase in sales. The increase in sales was:

Packrall Company makes computer chips. Curtis is manager of the company's maintenance department. Because his maintenance technicians are so well trained in maintaining expensive and sensitive circuit board stamping equipment, Curtis has been authorized to contract to perform maintenance for outside customers. In this company, the maintenance department is likely organized as:

A disadvantage of decentralization is that it fails to motivate managers to improve the productivity of their division.

Responsibility reports should be simple, show variances between the budgeted and actual amounts of controllable revenue and expense items, and be timely.

An organizational unit of a business that incurs costs and generates revenues is known as a(n) :

The Electronics Division of Anton Company reports the following results for the current year: Anton Company has set a target return on investment (ROI) of 11% for the Electronics Division. The Electronic Division's return on investment is: $\begin{array} { | l | l r | } \hline \text { Revenues } & \$ & 800,000 \\\hline \text { Operating expenses } & \$ & 720,000 \\\hline \text { Operating income } & \$ & 144,000 \\\hline \text { Operating assets } & \$ & 1,200,000 \\\hline\end{array}$

For Year 1, one division of Apex Company reported operating assets of $5,000,000 and operating income of $750,000. Apex has established a target return on investment (ROI) of 14% for the division.Required: 1) Calculate the division's ROI for Year 1. Did it achieve the target set by the company? 2) Assuming that operating assets for Year 2 increase by 10%, by how much would operating income have to increase to reach the target of 14%?

A decentralized company should try to minimize autonomy among the managers of its divisions and departments.

Payne Company reported the following information for the current year: The company's residual income was: $\begin{array} { | l | l r | } \hline \text { Sales } & \$ & 1,600,000 \\\hline \text { Average Operating Assets } & \$ & 500,000 \\\hline \text { Desired ROI } & & 14 \% \\\hline \text { Net Income } & \$ & 85,000 \\\hline\end{array}$

The kind of responsibility center that would be evaluated by comparing income on assets to the amount of assets invested is:

A reporting unit of a decentralized business that controls identifiable revenue and/or expense items is known as a(n) :

Which of the following would increase residual income? (Assume all other things are equal)