A profit center manager has the responsibility and authority for making decisions that affect revenues and costs and, thus, profits. The manager of a profit center does not make decisions concerning the fixed assets invested in the center. Responsibility accounting for profit centers such as the Audit Division and Tax Division take the form of income statements, which should include only controllable revenues and controllable expenses. Although it is not technically a decentralized unit, BOR CPAs, Inc. as a whole may be considered as an investment center. Thus, Mr. Bailey is also interested in evaluating the performance of the company as a whole. Two performance measures that are used at the investment center level are return on investment and residual income. Mr. Bailey would like to use the DuPont formula, composed of profit margin and investment turnover, to break down the return on investment, in order to evaluate each division. At the company level, Mr. Bailey would like to use return on investment to evaluate the overall performance of the company and its investment decisions with regard to each division. Answer the following questions (1) and (2). 1. What is the most likely reason Mr. Bailey chose the DuPont formula to evaluate the divisions? Mr. Bailey would like to analyze differences in the return on investment across divisions. Mr. Bailey wants to focus on whether the profit centers are spending in accordance with their budgets. Mr. Bailey believes that the investment turnover will provide a good assessment of each division’s profitability. 2. What is the most likely reason Mr. Bailey chose return on investment to evaluate the company as a whole? Mr. Bailey is using non-financial performance measures. Mr. Bailey would like to determine which division has the highest net income. Return on investment will allow Mr. Bailey to measure the income (return) on each dollar invested in the divisions, and decide where to invest additional assets or expand operations.

A profit center manager has the responsibility and authority for making decisions that affect revenues and costs and, thus, profits. The manager of a profit center does not make decisions concerning the fixed assets invested in the center. Responsibility accounting for profit centers such as the Audit Division and Tax Division take the form of income statements, which should include only controllable revenues and controllable expenses. Although it is not technically a decentralized unit, BOR CPAs, Inc. as a whole may be considered as an investment center. Thus, Mr. Bailey is also interested in evaluating the performance of the company as a whole. Two performance measures that are used at the investment center level are return on investment and residual income. Mr. Bailey would like to use the DuPont formula, composed of profit margin and investment turnover, to break down the return on investment, in order to evaluate each division. At the company level, Mr. Bailey would like to use return on investment to evaluate the overall performance of the company and its investment decisions with regard to each division. Answer the following questions (1) and (2). 1. What is the most likely reason Mr. Bailey chose the DuPont formula to evaluate the divisions? Mr. Bailey would like to analyze differences in the return on investment across divisions. Mr. Bailey wants to focus on whether the profit centers are spending in accordance with their budgets. Mr. Bailey believes that the investment turnover will provide a good assessment of each division’s profitability. 2. What is the most likely reason Mr. Bailey chose return on investment to evaluate the company as a whole? Mr. Bailey is using non-financial performance measures. Mr. Bailey would like to determine which division has the highest net income. Return on investment will allow Mr. Bailey to measure the income (return) on each dollar invested in the divisions, and decide where to invest additional assets or expand operations.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Although it is not technically a decentralized unit, BOR CPAs, Inc. as a whole may be considered as an investment center. Thus, Mr. Bailey is also interested in evaluating the performance of the company as a whole. Two performance measures that are used at the investment center level are return on investment and residual income.

Mr. Bailey would like to use the DuPont formula, composed of profit margin and investment turnover, to break down the return on investment, in order to evaluate each division. At the company level, Mr. Bailey would like to use return on investment to evaluate the overall performance of the company and its investment decisions with regard to each division.

Answer the following questions (1) and (2).

1. What is the most likely reason Mr. Bailey chose the DuPont formula to evaluate the divisions?

Mr. Bailey would like to analyze differences in the return on investment across divisions.

Mr. Bailey wants to focus on whether the profit centers are spending in accordance with their budgets.

Mr. Bailey believes that the investment turnover will provide a good assessment of each division’s profitability.

2. What is the most likely reason Mr. Bailey chose return on investment to evaluate the company as a whole?

Mr. Bailey is using non-financial performance measures.

Mr. Bailey would like to determine which division has the highest net income.

Return on investment will allow Mr. Bailey to measure the income (return) on each dollar invested in the divisions, and decide where to invest additional assets or expand operations.

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