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Investment Center

The document discusses various concepts related to decentralization and performance measurement in organizations. It provides true/false statements about investment centers, residual income, decentralization advantages and disadvantages, and performance measures like income from operations. It also includes multiple choice questions about cost centers, return on investment disadvantages, effective structures for small businesses, decentralization disadvantages, and ROI measure disadvantages.

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KARL PASCUA
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30 views2 pages

Investment Center

The document discusses various concepts related to decentralization and performance measurement in organizations. It provides true/false statements about investment centers, residual income, decentralization advantages and disadvantages, and performance measures like income from operations. It also includes multiple choice questions about cost centers, return on investment disadvantages, effective structures for small businesses, decentralization disadvantages, and ROI measure disadvantages.

Uploaded by

KARL PASCUA
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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In an investment center, the manager has the responsibility and the authority to make decisions that

affect not only costs and revenue but also the plan assets invested in the center. - TRUE

The major advantage of residual income as a performance measure is that it gives considerations to
not only a minimum rate of return on investment but also the total magnitude of income from
operations earned by each division. . - TRUE

The primary disadvantage of decentralized operations is that decisions made by one manager may
affect other managers in such a way that the profitability of the entire company may suffer. - TRUE

One of the advantages of decentralization is that delegating authority to managers closest to the
operation always results in better decisions. . - FALSE

The major shortcoming of income from operations as an investment center performance measure is
that it ignores the amount of revenues earned by the center. FALSE

The manager of the furniture department of a leading retailer does not control the salaries of
departmental personnel. . - FALSE

It is beneficial for two related companies to use the cost price approach for transfer pricing when both
of the companies operate as cost centers and are not concerned with the revenue. FALSE

Under the negotiated price approach, the transfer price is the price at which the product or service
transferred could be sold to outside buyers. FALSE

JetSky Airways has three division, the Western Division, the Eastern Division, and the Northern
Division. The manager of the Western Division had wanted to purchase replacement airplanes for the
division. However, he decided against it because, although revenues would increase and the new
planes would be less expensive to operate, the initial cost of the planes was quite large. The Western
Division is most probably accounted for as a(n)

- Cost center
- Revenue center
- Investment center
- Profit center

Which of the following is a disadvantage of a focus on return on investment?

- It can encourage managers to cut inventories and reduce overall investment.


- It can produce a narrow focus on divisional profitability at the expense of profitability
for the overall firm
- It can encourage managers to focus on the long run at the expense of the short run
- It can encourage managers to focus on cost cutting efforts

Which of the following would be most effective in a small owner/manager operated business.

- Investment centers
- Centralization
- Cost Centers
- Profit Center
Which of the following is NOT a disadvantage of decentralized operation?

- Top management freed from everyday tasks to do strategic planning


- Duplication of operations
- Price cutting by departments that are competing in the same product market
- Competition among managers decreases profits

Which of the following is not a disadvantage of the ROI performance measure?

- It encourage managers t focus on the long run rather than the short run
- It encourage myopic behavior
- All these are disadvantages of ROI measure
- It discourages managers from investing in projects that would decrease divisional ROI but
increase the profitability of the company as a whole.

Two divisions of Central Company (Division X and Y) have the same profit margin. Division’s X
investment turnover is larger than that of Division Y( 1.2 to 1.0). Income from operations for Division X
is 50,000 and income from operations for Division Y is 38,000. Division X has a higher return on
investment than Division Y by:

- Comparing income from operations


- Applying a negotiated price measure
- Using its asset more efficiently in generating sales
- Using income from operations as a performance measure

All of the following are advantages of decentralization except:

- Decentralized managers can respond quickly to customer satisfaction and quality service
- Each decentralized operation purchases their own assets and pays for operating costs
- Managers make better decisions when closer to the operation of the company
- Expertise in all areas of the business is difficult, decentralization makes it better to delegate
certain responsibilities

In evaluating the profit center manager, the income from operations should be compared:

- To the total company earnings per share


- Across profit centers
- To the competition’s net income
- To historical performance or budget

For higher levels of management, responsibility accounting reports:

- Are more detailed than for lower levels of management


- Are rarely provided or reviewed
- Are more summarized than for lower levels of management
- Contain about the same level of detail as reports for lower levels of management

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