Concept Introduction:
Cost center:
Cost center incurs costs and does not generate the revenue directlyInvestment Center:
Investment center takes care of revenue, cost and investment
Profit Center:
Profit center generate revenue and incur expenses
Return on investment (ROI):
Return on investment is a profitability ratio that represents the percentage return on the investment made. It is calculated by dividing the Net Income by the Average total assets. The formulas to calculate the ROI are as follows:
Or
To Indicate:
How return on investment helps in comparing the divisions of decentralized companies
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Survey of Accounting (Accounting I)
- How does using the return on investment facilitate comparability between divisions of decentralized companies?arrow_forwardHow does using the return on investment facilitate comparability between divisions of decentralized companies?arrow_forward(a) Explain how return on investment might lead a divisional manager to reject new investments that could be profitable for the company as a whole. (b) How can this disadvantage be overcome?arrow_forward
- Explain the benefits of a residual income structure within an investment center framework. It may help to think of an example using an existing company.arrow_forwardWhat is the major shortcoming of using operating income as a performance measure for investment centers?arrow_forwardWhat is customer value? How is customer value related to a cost leadership strategy? To a differentiation strategy? To strategic positioning?arrow_forward
- Which of the following is a disadvantage of outsourcing? A. freeing up capacity B. freeing up capital C. transferring production and technology risks D. limiting ability to upsize or downsize productionarrow_forwardDifferentiate between centralized and decentralized operations. In a decentralized company in which the divisions are organized as investment centers, how could a division be considered the least profitable even though it earned the largest amount of income from operations? Why would a firm use a balanced scorecard in evaluating divisional performance?arrow_forwardWhich of the following describes the goal that should be pursued when setting transfer prices? Allow top management to become actively involved when calculating the proper dollar amounts. Minimize opportunity costs. Maximize profits of the buying division. Establish incentives for autonomous division managers to make decisions that are in the overall organization's best interests (i.e., goal congruence). Maximize profits of the selling division.arrow_forward
- Discuss the types of transfer pricing policy available to a company and explain why a company needs to consider the motivational impact on the managers of its divisions when setting the transfer price.arrow_forwardIn a business where the divisions are organized as investment centers, discuss how a division that generates the largest dollar amount of profit among all divisions, could be considered the least profitableamong all divisions?arrow_forwardWhat transfer price, or range of prices, would ensure goal congruence among the division managers? Show your calculations.arrow_forward
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