Question

Johnson Company buys and resells a consumer product. Daniel is the manager of East Store of the company. He is authorized to make all sales-related decisions (such as prices, sales mix, advertising, promotion, etc.) and merchandise purchasing decisions (such as supplier selection, negotiating purchase prices, etc.). But he has no decision rights on purchasing or selling operating assets other than merchandise. Daniel is the manager of a(n):

	A.	profit center
	B.	operations center
	C.	revenue center
	D.	discretionary cost center
	E.	investment center

Residual income is the difference between:

	A.	after-tax income and the minimum required income
	B.	gross margin and (interest plus taxes)
	C.	contribution margin and the average operating assets.
	D.	after-tax income of current year and that of previous year.
	E.	total income and income available to creditors.

A division is evaluated on ROI, based on ending balances for investment base. The manager has an incentive to:

	A.	dispose of assets early in a year and do not acquire assets for years.
	B.	acquire assets late a year and dispose them late in the same year
	C.	acquire assets early in a year and dispose of them late in the same year.
	D.	dispose assets late in a year and do not acquire assets for years.
	E.	keep acquiring assets without disposing any.

Answer 1

Q1

The answer is (A) Profit Center

Since the manager here as authority to both sales as well as merchandise purchases, both of the components ultimately connects to profits/(loss) in the enterprise. A profit center manager is responsible for both revenues and cost and therefore for profits.

Q2

The answer is (A) after tax income and minimum required income.

Residual Income is the excess income earned over the minimum return required in the business. Residual Income is the difference of Net Operating Profits (after tax) NOPAT over minimum return over the capital invested in the business.

Q3

The anwer is (C) Acquire the assets early in a year and dispose of them late in same year.

Ending balances for the investments while computing the return on investment (ROI) might encourage managers to acquire assets early in the year and dispose of assets late in the year.