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Chapter 24: Q7RQ (page 1355)
What is a responsibility center?
Responsibility center refers to the section or unit of an organization responsible for specific tasks assigned to the same.
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Explain the difference between a lag indicator and a lead indicator.
Management by exception is a term often used in performance evaluation. Describe management by exception and how it is used in the evaluation of cost, revenue, and profit centers.
Question: How is RI calculated?
Decentralization divides company operations into various reporting units. Most decentralized subunits can be described as one of four different types of responsibility centers.
Requirements
1. Explain why companies decentralize. Describe some typical methods of decentralization.
2. List the four most common types of responsibility centers, and describe their responsibilities.
Using ROI and RI to evaluate investment centers
Tiger Paints is a national paint manufacturer and retailer. The company is segmented into five divisions: Paint Stores (branded retail locations), Consumer (paint sold through home improvement stores), Automotive (sales to auto manufacturers), International, and Administration. The following is selected divisional information for its two largest divisions: Paint Stores and Consumer:
Net Sales Revenue Operating Income Average Total Assets
Paint Stores\( 4,000,000 \) 476,000 $ 1,420,000
Consumer 1,300,000 196,000 1,585,000
Management has specified a 19% target rate of return.
Requirements
1. Calculate each division鈥檚 ROI. Round all of your answers to four decimal places.
2. Calculate each division鈥檚 profit margin ratio. Interpret your results.
3. Calculate each division鈥檚 asset turnover ratio. Interpret your results.
4. Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results.
5. Calculate each division鈥檚 RI. Interpret your results, and offer a recommendation for any division with negative RI.
6. Describe some of the factors that management considers when setting its minimum target rate of return.
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