Chapter 10 Practice Questions
Rina Dhillon
Practice Questions
- A local chain electronics store does not allow its store or district managers to make important decisions about their stores. The main role of store managers is to supervise employees and make sure day-to-day transactions run smoothly while district managers supervise store managers and report profitability data back to top-level management. Not allowing store or district managers decision-making authority is most likely to be found in which type of organisation?
a. Segmented b. Centralised c. Desegmented d. Decentralised - Which of the following statements regarding the structure of organisations is false?
a. When decision-making authority is spread among too many managers, managers may become so concerned with their own area of responsibility that they lose sight of the company’s overall focus. b. In a decentralised organisation, decision-making authority is confined to top-level management. c. In a decentralised organisation, there may be a lack of coordination and communication between segments. d. Decentralisation may make it difficult for managers to share unique and innovative ideas. - Which of the following is often not a disadvantage of decentralisation?
a. Decreased job satisfaction for lower-level managers. b. Lack of coordination and communication between segments. c. Lack of company focus as lower-level managers may make decisions that benefit their own particular segment. d. Higher training costs for lower-level managers. - ‘Responsibility accounting’ is the concept that says:
a. managers should be held entirely responsible for all investment decisions that impact the particular segment in which they are in charge. b. managers should be held responsible for only those things under their control. c. managers should never be held entirely responsible for things that happen within the particular segment of which they are in charge. d. managers should be responsible for both revenues and costs of their particular segment. - The manager of a profit centre should not be responsible for which of the following types of decisions?
a. Deciding which supplier should be used for the purchase of direct materials. b. Establishing the number of employees that will need to work each day. c. Deciding whether or not their segment should purchase additional machinery. d. Deciding whether or not to accept a special order from a customer. - Which of the following would be the best measure of performance for a profit centre?
a. Residual income b. Return on investment (ROI) c. Segment margin d. Economic value added (EVA) - In the decision-making process, which of the following situations would be best addressed by managers using a segmented income statement rather than a contribution margin format income statement?
a. The decision on whether or not a one-time special order for a customer should be accepted b. The calculation of the break-even point for the upcoming month c. The decision on whether or not an entire product line should be discontinued d. The decision on whether or not to process a product further or sell ‘as is’ - Costs that cannot be traced or reasonably allocated to a particular segment are called:
a. variable costs. b. common costs. c. segment costs. d. fixed costs. - Ecovacs Products has two product lines: R-100 and R-200. Revenue and cost information for each of the product lines are as follows:
R-100 R-200 Selling price per unit $45 $60 Variable costs per unit 15 24 Traceable fixed expenses $250000 $360000 Ecovacs has common fixed expenses of $250 000 per year. Last year, the company produced and sold 30 000 units of R-100 and 20 000 units of R-200.
What is the segment margin of the R-100 product line?
a. $650 000 b. $900 000 c. $525 000 d. $400 000 - Refer to Q9 data:What is the segment margin ratio of the R-200 product line?
a. 50 per cent b. 30 per cent c. 60 per cent d. 20 per cent - Refer to Q9 data:What is the company’s overall net income?
a. $1 260 000 b. $ 510 000 c. $1 010 000 d. $ 760 000 - When defining net operating income for return on investment (ROI) purposes, which of the following items should not be included?
a. Sales revenue b. Cost of goods sold c. Interest expense d. Salaries expense - Hardcastle Ltd had sales of $3 000 000 and net operating income of $800 000. Operating assets during the year averaged $1 500 000. The manager of Hardcastle is considering the purchase of a new machine, which is expected to increase average operating assets by 5 per cent. If the new machine is purchased, the company’s new return on investment (ROI) would be:
a. 190.5 per cent b. 52.5 per cent c. 196.9 per cent d. 50.8 per cent - Which of the following statements comparing ROI and residual income is correct?
a. ROI is more useful as a performance measure for a single investment centre. b. Residual income is a better comparative measure than ROI. c. ROI and residual income are equally good performance measures for a single investment centre. d. Residual income is more useful as a performance measure for a single investment centre. - Covid Pharmaceuticals has the following information available for one of its divisions in the current year:
Sales revenue $6000000 Operating expenses 3800000 Average operating assets 2000000 Duncan requires each of its divisions to generate a minimum return of 25 per cent. What is this division’s residual income?
a. $ 200 000 b. $1 450 000 c. $1 700 000 d. $5 500 000 - ABS Pty Ltd has the following information available for one of its divisions:
Average operating assets $5000000 Return on investment (ROI) 40% Sales $8000000 If ABS requires a minimum return on its investments of 25 per cent, what is their residual income?
a. $1 950 000 b. $4 500 000 c. $6 750 000 d. $ 750 000 - Which of the following forms of manager compensation most likely encourages managers to take a long-term view of how their performance ties in with the long-term goals of a company?
a. Year-end cash bonus b. Base salary c. Share options d. Use of a company car - Which of the following statements about management compensation is correct?
a. Compensating managers with year-end cash bonuses always motivates managers to do what is best for the company as a whole. b. From a manager’s standpoint, cash compensation is always preferable over share-based compensation. c. Manager compensation should always be either cash-based or share-based. d. Share-based manager compensation does not guarantee a future cash benefit to managers. - Which of the following statements about the balanced scorecard approach is true?
a. It helps management focus on only non-financial measures of performance. b. It helps management focus on critical success factors that may be financial and non-financial in nature. c. It helps management ignore short-term operating performance in favour of long-term operating performance. d. It helps management focus on only financial measures of performance. - Which of the following statements about the balanced scorecard approach is false?
a. It requires managers to focus on financial measures more than non-financial measures. b. It looks at performance from the following perspectives: financial, customer, internal business, and learning and growth. c. It helps balance short-term operating performance with long-term strategies. d. It recognises that traditional measures of performance are often not adequate to fully assess a company’s performance.
Solutions:
- b
- b
- a
- b
- c
- c
- c
- b
- a – Contribution margin = (45-15) x 30000= 900000 less traceable fixed costs $250000 = $650000
- b – Contribution margin = (60-24) x 20000= 720000 less traceable fixed costs $360000 = $360000; Ratio = $360000/Sales = $360000/(60×20000) = 0.3 or 30%
- d – from 9 and 10, segment margin for R-100 is $650000 and R-200 is $360000. Overall company margin = $650000+$360000= $1010000 less common fixed costs of $250000 = $760000 net income of Company
- c
- d – ROI = Net income / Average operating assets = 800000/(1500000×1.05 due to 5% increase) = 50.8% (rounded up)
- d
- c – RI = Actual return – expected return (calculated as Average operating assets x minimum rate of return) = (6000000-3800000) – (2000000 x 0.25) = 1700000
- d – Given the question tells us what ROI is and we know ROI = Net Income / Average Operating Assets , substituting we will have 40% = X/$5M. When we solve for X, it is = $2M. RI = Actual return – expected return (calculated as Average operating assets x minimum rate of return) = $2M – (5000000 x 0.25) = $750000
- c
- d
- b
- a