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CHAPTER 12 PERFORMANCE EVALUATIONAND DECENTRALIZATION DISCUSSION QUESTIONS 1. In centralized decision making, decisions are made at the very top level, and lower-level managers are responsible for implementing these decisions. For decentralized decision making, decisions are made and implemented by lower-level managers. 2. Decentralization is the delegation of decision- making authority to lower levels. 3. Reasons for decentralization include access to local information, cognitive limitations, more timely responses, focusing of central manage- ment, training, and motivation. 4. Margin reveals how much sales revenue re- mains as operating income (after subtracting expenses). Turnover reveals how many sales dollars result from each dollar invested in op- erating assets. Margin = Operating income/Sales and Turnover = Sales/Average operating assets. By breaking ROI into margin and turnover, more information is available to assess performance. Knowledge of margin and turnover gives more insight into why the ROI may change from one period to the next. 5. ROI (1) encourages managers to pay atten- tion to the relationships among sales, ex- penses, and investment; (2) encourages cost efficiency; and (3) discourages excessive in- vestment in operating assets. Increased profit- ability can be achieved (all else being equal) by increasing revenues, decreasing ex- penses, or lowering investment. 6. Residual income is equal to operating income minus the minimum cost of capital multiplied by the average operating assets. EVA (eco- nomic value added) requires the company to calculate its actual cost of capital and use it as the minimum cost of capital in the residual in- come calculation. In addition, EVA always uses after-tax income. 7. Yes, residual income and EVA can be negat- ive. This means that the company earned less than its minimum cost of capital or, in the case of EVA, its actual cost of capital. 8. A transfer price is the price charged for goods that are transferred from one division to an- other. 9. One policy is a market price where the trans- fer price equals the price at which the product would sell in a competitive market outside of the organization. A second policy is a cost- based price where the transfer price equals some measure of the product’s cost plus a markup above cost. A third policy is a negoti- ated price where the transfer price equals an amount that is negotiated between the buyer and seller of the product. 10. The Balanced Scorecard is a strategic man- agement system that defines a strategic- based responsibility accounting system. It translates an organization’s mission and strategy into operational objectives and per- formance measures for four different per- spectives: the financial perspective, the cus- tomer perspective, the internal business pro- cess perspective, and the learning and growth (infrastructure) perspective. 11.
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