Ch 12

Question 1

Decentralization

Answer 1

achieved by creating units called divisions.

Pepsi also makes division in gatorade, frito lay, pepsi, quaker

Question 2

Responsibility center

Answer 2

a segement of business whose manager is accountable for specified sets of activities.

Question 3

4 Major types of responsibility

Answer 3

1) Cost Center- manager is responsible only for cost.
2) Revenue Center- Manager is responsible only for sales, or revenue.
3) Profit center- Manager is responsible for both revenues and costs.
4) Investment center- Management is responsible for revenues, costs, and investments

Question 4

3 methods to evaluate division performance

Answer 4

Return on Investment (ROI)
Residual Income (RI)
Economic Value Added (EVA)

Question 5

Return on Investment (ROI)

Answer 5

• ROI is the profit earned per dollar of investment
• ROI is the most common measure of performance for and investment center.

ROI= OI / Avg Operating Assets

-avg operating assest= (Beg. assests + End. Assets) / 2

ROI- Margin x Turnover

Turnover= Sales/ Avg operating assets

Question 6

Advantages of ROI

Answer 6

• Encourages managers to focus on the relationship among sales, expenses and investment.
• Encourages manager to focus on cost efficiency.
• encourages managers to focus on operating asset efficiency.

Question 7

Disadvantages of ROI

Answer 7

• encourages managers to focus on short run

- discourages managers from investing in projects that would decrease the division ROI

Question 8

Residual Income (RI)

Answer 8

Residual Income- difference between OI and the minimum dollar return required on a companys operating assets.

RI= OI - (min rate of return x Avg operating assets)

Question 9

Economic Value Added (EVA)

Answer 9

EVA= After Tax OI - (Actual % Cost of capital x Total Capital employed)