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True or false: 1. Relevant costs are expected future costs that differ among alternatives. 2. Myopic behavior occurs when a manager chooses to increase his performance in the short run in a way that reduces his performance in the long-run by a larger amount. 3. A cost may be relevant for one decision, but not relevant for another decision. 4. When there are alternative uses for a division’s production capacity, the opportunity cost of the capacity is relevant. 5. Centralization is the delegation of decision making authority to lower level managers and employees within an organization. 6. An agency problem arises when the agent can perform better by taking actions that reduce the principle’s economic performance. 7. When activities are particularly difficult (or costly) to measure the best mechanism for motivating goal congruent performance on these activities in the levers of control model is diagnostic control. 8. Compared to explicit contracts, implicit contracts are more limited in scope because they require objective measurement that is intended to stand up in a court of law. 9. A strength of return on investment (ROI) is that it motivates managers whose annual bonus is based on ROI emphasize long-term strategic goals. 10. Compared to the case in which there is not a market price available, establishing a fair transfer price is more difficult when there is an external market for the product or service being transferred. 11. A plastic dashboard is produced by the parts division and used by the assembly division within a corporation that produces recreational vehicles. The parts division currently has a large amount of excess capacity. In this situation, the assembly division manager must rely on the honesty of the parts division manager in sharing his private information about his division’s costs to identify the minimum transfer price. 12. The Titanic hit an iceberg and sank. Assuming tax considerations are ignored, the ship’s book value is a. a relevant cost b. a sunk cost c. an opportunity cost d. a discretionary cost e. an outlay cost 13. If a firm is at full capacity, the minimum transfer price must cover a. only variable labor and material costs associated with the special order. b. total variable costs associated with the special order. c. variable and sunk manufacturing cost associated with the special order. d. variable costs and incremental fixed costs associated with the special order. 14. _______________ are NOT controlled by the manager of a profit center. a. Revenues b. Costs c. Investments d. e. Profits All of the above are controlled by the manager of a profit center. 15. Which of the following is most likely to be an investment center? a. a marketing department b. a division of a large corporation c. a personnel department d. an accounting department e. All of the above are equally likely to be investment centers. 16. Which of the following is NOT a reason for decentralization? a. Decentralized managers tend to be more myopic than centralized managers. b. Decentralized managers have better access to information. c. Centralized management can spend more time focusing on strategic planning and decision making. d. Decentralized managers can make decisions on a more timely basis. e. Lower-level managers are often more knowledgeable about their task than central managers. 17. Which of the following is NOT a goal of responsibility accounting a. Implementing and evaluating strategy at decentralized levels of an organization b. Treating the organization as a undivided system or whole c. Performance evaluation d. Gathering information e. All of the above are goals of responsibility accounting 18. In which of the following organizational structures do mid and lower-level managers have two bosses? a. Functional structure b. Multidivisional structure c. Matrix structure d. Network structure 19. Which of the following options arranges the types of task interdependence in an increasing order? a. Pooled, sequential, reciprocal b. Sequential, pooled, reciprocal c. Reciprocal, pooled, sequential d. Reciprocal, sequential, pooled 20. Economic theories, such as agency theory, make all but which of the following assumptions about human motivation? a) People are motivated by monetary incentives b) People are basically honest and ethical c) People will not work harder unless they are paid more d) Accurately measuring people’s performance is critical to motivating them 21. What is the difference between absolute performance measures and relative performance measures? a) Absolute measures depend on how well others perform and relative measures depend on a performance standard. b) Absolute measures depend on how well others perform and relative measures depend on meeting a performance target. c) Absolute measures depend on how your performance ranks against others and relative measures do not. d) Absolute measures depend on reaching a target or goal and relative measures depend on how well performance ranks compared to your peers. 22. Which of the following is a subjective form of performance evaluation? a) A supervisor’s evaluation of her employee b) A decision to promote an employee c) A team member’s evaluation of the performance of another member of the team d) An employee’s decision to act ethically to protect his reputation e) All of the above. 23. Which of the following is NOT an advantage of ROI? a. It encourages managers to pay careful attention to the relationships among sales, expenses, and investment b. It encourages managers of departments with high ROIs to invest in lower ROI projects that are beneficial to the company as a whole. c. It encourages efficiency d. It discourages investment in unproductive operating assets e. All of the above are advantages of ROI 24a. Compare and contrast the economic and behavioral models of motivation. For example, what three behavioral factors are important to motivating YOU above and beyond economic factors? 24b. What are the four components of the balanced scorecard? What are the four components of the levers of control model? How are the two models similar? How do they differ? Which one is best? 24c. What is budget slack? How can it influence a company’s competitiveness? 24d. Why is preparing a cash budget important? 24e. What is a death spiral? When does it occur? How can companies avoid it? 25. When there is an outside perfectly competitive market for the intermediate product or service to be transferred and the selling division does not have excess capacity, the most appropriate transfer price is a. Market price b. Normal cost c. Variable cost d. Full cost (variable + fixed cost) e. Full cost plus a negotiated markup 26. Which of the following is NOT an objective of transfer pricing? a. Transferring products at prices that would be paid in a perfectly competitive market. b. Treating the buying and selling divisions as if they are autonomous. c. Treating the buying and selling divisions as cost centers. d. Separately measuring the performance of the buying and the selling divisions. Please use the following information to answer questions 27 and 28. Flowers For Everyone is considering replacing its existing delivery van with a new one. The new van can offer considerable savings in operating costs. Information about the existing van and the new van follow: Original cost Annual operating cost Accumulated depreciation Current salvage value of the existing van Remaining life10 years Salvage value in 10 years Annual depreciation Existing van $100,000 $ 35,000 $ 60,000 $ 45,000 10 years $ 0 $ 4,000 New van $180,000 $ 20,000 - - 10 years $ 0 $ 18,000 27. Relevant costs for this decision include: a) the original cost of the existing van b) accumulated depreciation c) the current salvage value d) the salvage value in 10 years 28. Sunk costs for this decision include (assuming no tax effects): a) the cost of the new van b) annual deprecation on the existing van c) annual deprecation on the new van d) None of these answers are correct. Please use the following information to answer questions 29 and 30. Atlantic Appliance Company manufactures 12,000 units of part AA77 annually. The part is used in the production of one of Atlantic’s products. The following unit cost information is available for part AA77: Direct Materials $ 12 Direct Labor 8 Unit-Related Overhead 4 Batch-Related Overhead 5 Product-Sustaining Overhead 2 Facility-Sustaining 2 Allocated Corporate Overhead __5 $ 38 A potential supplier has offered to manufacture this part for Atlantic Appliance for $30 per unit. If Atlantic outsources the production of part AA77, 50% of batch-related and 80% of product-sustaining activity resources can be eliminated. Furthermore, the production facility now being used to produce this part can be used for a fast-growing new product line that would otherwise require the use of a neighboring facility at a rental cost of $20,000 per year. 29. Based on the data available, should Atlantic Company outsource the part? 30. What other factors should Atlantic consider before making a final decision? Please use the following information to answer questions 31 and 32. Helmer's Rockers manufactures two models, Standard and Premium. Weekly demand is estimated to be 100 units of the Standard Model and 70 units of the Premium Model. The following per unit data apply: Sales Variable costs Fixed costs Number of machine-hours required Standard $60 42 100,000 3 Premium $70 50 150,000 4 31. If there are only 496 machine-hours available per week, how many rockers of each model should Jim Helmer produce to maximize profits? a) 100 units of Standard and 49 units of Premium b) 72 units of standard and 70 units of Premium c) 100 units of Standard and 70 units of Premium d) 85 units of Standard and 60 units of Premium 32. If there are only 600 machine-hours available per week, how many rockers of each model should Jim Helmer produce to maximize profits? a) 100 units of Standard and 49 units of Premium b) 72 units of Standard and 70 units of Premium c) 100 units of Standard and 70 units of Premium d) 85 units of Standard and 60 units of Premium The following information is to be used for questions 33 and 34. Selected data for Deck Company’s Dream Division for 2008 follows: Sales $1,000,000 Variable costs 600,000 Traceable fixed costs 100,000 Average invested capital 800,000 Opportunity cost of capital 15% Current liabilities 50,000 33. Dream Division’s return on investment for 2008 is a. 31.25% b. 37.5% c. 40% d. 50% 34. Dream Division’s residual income for 2008 is a. $300,000 b. $250,000 c. $180,000 d. $130,000 35. Alpha Co. had $250,000 in assets and $500,000 in sales January 1 2010. In June the company purchased a division. Below is information for the company dated December 31 2010: Alpha Co. Sales $2,500,000 Variable costs $875,000 Traceable fixed costs $1,500,000 Operating assets $500,000 Minimum rate of return 10% What is the return on investment (ROI) for the Alpha Co. in 2010? a. 33% b. 25% c. 20% d. 13% e. 6% Please use the following information to answer questions 36 and 37. Financial information for the Lafayette Division of Auto Products Inc. for 2009 is as follows: Revenues Operating income Average assets $35,000,000 2,400,000 15,000,000 36. How much would the Lafayette Division need to increase operating income to achieve a target ROI of 18%? a) $150,000 b) $300,000 c) $450,000 d) $600,000 37. How much would the Lafayette Division need to reduce costs to achieve a target ROI of 20%? a) $150,000 b) $300,000 c) $450,000 d) $600,000 Please use the following information to answer questions 38 – 40. The Kelly Division of Zimmer Company sells all of its output to the Finishing Division of the company. The only product of the Kelly Division is chair legs that are used by the Finishing Division. Kelly Division is currently operating at capacity. There is an open market for the chair legs at a price of $20 per leg. Each chair completed by the Finishing Division requires 4 legs. Production quantity and cost data for 2001 are as follows: Chair legs (units) 30,000 Direct materials $135,000 Direct labor $90,000 Factory overhead (25% variable) $90,000 Variable selling costs (if sold to outside customers) $1.50 per leg 38. What is the maximum price Finishing is willing to pay? 39. What is the minimum price Kelly is willing to accept? 40. Now assume that capacity is 60,000 legs, and that in addition to the 30,000 sold to Finishing Kelly sells 15,000 to the outside market. Finishing comes to Kelly with a special offer to buy 10,000 more legs at a price of $14.00 per leg. Should Kelly accept this special offer? Please use the following information to answer questions 41, 43, and 43. 41. For initiative 1 and 2, what are the productivity ratios for material? a) 0.5 and 1.30 b) 1.30 and 1.63 c) 2.5 and 3.25 d) 3.25 and 1.00 e) 1.00 and 2.17 42. What is PQ * price for initiatives 1 and 2? a) $767,000 b) $735,000 c) $717,000 d) $707,000 e) $701,000 43. What is the profitability of imitative 2? a) <$15,000> b) $12,000 c) $100,000 d) $272,000 e) $382,000 Year before Quantities: initiatives Initiative 1 Initiative 2 Output 50,000 65,000 65,000 Labor hours 100,000 50,000 40,000 Material - pounds 20,000 20,000 65,000 Energy - Kwh. 50,000 30,000 50,000 Input prices: Labor hours $ 2.00 $ 2.50 Material - pounds $ 6.25 $ 7.00 Energy - Kwh. $ 3.50 $ 4.00 Formula Sheet Return on investment (ROI) = pretax operating income / average assets = asset turnover x profit margin Asset turnover = sales / average assets Profit margin (or return on sales) = pretax operating income / sales Residual income (RI) = pretax operating income - [required rate of return x Ave assets] Economic value added (EVA) = After-tax operating income – [weighted average cost of capital* x average assets] * WACC is after-tax Productivity ratio = output / input Profit-linked productivity measure = Σ (PQ x price) - (AQ x price) PQ = Current period output / base period productivity ratio

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1. Relevant costs are expected future costs that differ among alternatives. T

2. Myopic behavior occurs when a manager chooses to increase his performance in the short run in a way that reduces his performance in the long-run by a larger amount. T

3. A cost may be relevant for one decision, but not relevant for another decision. T

4. When there are alternative uses for a division’s production capacity, the opportunity cost of the capacity is relevant. T

5. Centralization is the delegation of decision making authority to lower level managers and employees within an organization. F

6. An agency problem arises when the agent can perform better by taking actions that reduce the principle’s economic performance. T

7. When activities are particularly difficult (or costly) to measure the best mechanism for motivating goal congruent performance on these activities in the levers of control model is diagnostic control. F...
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