Chapter 23 - Performance Evaluation For Decentralized Operations

The profit center income statement should include only controllable revenues and expenses because a profit center is responsible for generating its own revenues and managing its own expenses. Controllable revenues are the revenues that the profit center has direct control over, such as sales revenue from its own products or services. Controllable expenses are the expenses that the profit center can influence or manage, such as salaries, marketing expenses, or supplies. Including only controllable revenues and expenses in the income statement allows the profit center to measure its performance accurately and assess its ability to generate profits independently.

A decentralized business organization is one in which major planning and operating decisions are delegated to lower-level managers and employees, rather than being made solely by top management. This allows for greater autonomy and decision-making power at lower levels of the organization, leading to increased efficiency and responsiveness.

The investment turnover ratio is calculated by dividing sales by average invested assets. In this case, the sales are $1,210,000 and the invested assets are $1,100,000. Therefore, the investment turnover ratio is $1,210,000 / $1,100,000 = 1.1. This means that for every dollar invested, Espinosa Corporation generated $1.1 in sales.

The rate of return on investment is calculated by multiplying the profit margin by the investment turnover. In this case, the profit margin is 15% and the investment turnover is 1.2. Multiplying these two values together gives us a rate of return on investment of 18%.

The statement is true because rate of return on investment, residual income, and income from operations are indeed three commonly used measures of investment center performance. Rate of return on investment is a measure of profitability that calculates the return on the investment made in the center. Residual income measures the profit generated by the center after deducting the cost of capital. Income from operations is a measure of the center's operating profit, which indicates its ability to generate revenue from its operations.

The DuPont formula is a financial ratio that measures the return on equity (ROE) of a business. It is calculated by multiplying the profit margin, asset turnover, and equity multiplier ratios. It does not use non-financial information to measure performance, but rather focuses on financial metrics. Therefore, the statement that the DuPont formula uses non-financial information to measure the performance of a business is false.

The profit margin is calculated by dividing the income from operations by the sales and multiplying by 100. In this case, the income from operations is $242,000 and the sales are $1,210,000.

Profit Margin = (Income from Operations / Sales) * 100
Profit Margin = ($242,000 / $1,210,000) * 100
Profit Margin = 0.2 * 100
Profit Margin = 20%

Therefore, the profit margin for Espinosa Corporation is 20%.

An investment center has the most authority and responsibility among the given options. This is because an investment center is responsible for both generating profits and managing the invested capital. It has the authority to make decisions regarding investments, pricing, cost control, and resource allocation. The performance of an investment center is evaluated based on both profitability and return on investment, making it a key area of responsibility for managers.

Customer retention rate is a good example of a non-financial performance measure because it focuses on the ability of a company to retain its existing customers over a specific period of time. Unlike financial measures such as residual income or income from operations, customer retention rate provides insights into the effectiveness of a company's customer relationship management strategies and its ability to satisfy and retain customers. This measure is important for businesses as it indicates customer loyalty and the potential for future revenue growth. Investment turnover, on the other hand, is a financial measure that assesses the efficiency of a company's investment in its assets.

The rate of return on investment (ROI) is calculated by dividing the net income by the invested assets and multiplying by 100. In this case, the net income can be calculated by subtracting the cost of goods sold and operating expenses from the sales. Therefore, the net income is $750,000 - $450,000 - $228,000 = $72,000. The ROI is then ($72,000 / $300,000) * 100 = 24%.

Decentralization allows decision-making authority to be distributed among different managers, which provides them with an opportunity to gain valuable experience and develop their skills. By making decisions on their own, managers can learn to analyze situations, make judgments, and take responsibility for their actions. This hands-on experience can enhance their managerial abilities and prepare them for higher-level positions in the future. Therefore, decentralized decision making is considered an advantage as it provides excellent training for managers.

The revenues for Division B can be calculated by subtracting the cost of goods sold from the income from operations. In this case, the income from operations is $150,000 and the cost of goods sold is $2,266,000. By subtracting the cost of goods sold from the income from operations, we get $150,000 - $2,266,000 = $2,816,000. Therefore, the correct answer is $2,816,000.

The primary responsibility accounting report for a cost center is not the income statement. Responsibility accounting involves assigning responsibility for costs and revenues to specific individuals or departments within an organization. The primary responsibility accounting report for a cost center is typically a cost report, which provides information on the costs incurred by the cost center. The income statement, on the other hand, provides information on the revenues and expenses of the entire organization. Therefore, the correct answer is false.

Residual income is calculated by subtracting the minimum required return on invested assets from the income from operations. In this case, the minimum rate of return is 15% of $550,000, which is $82,500. The income from operations is $99,000, so the residual income is $99,000 - $82,500 = $16,500.

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