Chapter 10 - Performance Evaluation

Question 0

Residual Income

Answer 0

Dollar value that represents money leftover if investment is made.

RI = Income - (CoC% or Required Rate of Return x Investment)*

*Decision is black and white (Positive RI is good, negative RI is bad)

Question 1

Return on Investment

Answer 1

Represented as a percentage, calculated as Income/Investment (or assets)*

*Decisions based on ROI are a gray area, compare to previous ROI on prior investments. (GPA Example)

Question 2

Transfer Pricing

Answer 2

Refers to the assignment of sales price between different segments of the same company. There are four types of pricing methods.

Variable, Cost, Cost-Plus, and Market
*When considering profit of company as a whole, ignore transfer costs and use initial variable cost and ignore transfer price.

Question 3

Variable Cost Based Transfer Pricing

Answer 3

Method where separate division of parent company is charged just the variable cost to transfer goods.

*Lowest acceptable price if there is excess availability

Question 4

Cost Based Transfer Pricing

Answer 4

Method where separate division of parent company is charged total cost (including fixed costs) to transfer goods between segments.

Question 5

Cost-Plus Transfer Pricing

Answer 5

Method where separate division of parent company is charged the total cost, plus an associated mark up (% of TC) to transfer goods between segments.

Question 6

Market Based Transfer Pricing*

Answer 6

• Used when there is no excess availability for goods being transfered.
• Highest price a segment will pay
• Same price consumers are charged for good outside of company

Question 7

If given segment margin income statement when evaluating performance

Answer 7

Find ROI by calculating CM - Direct FC as Income then divide by investment.