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Managerial: Accounting by Elizabeth Davis, Charles E. Davis

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10

DECENTRALIZATION AND PERFORMANCE EVALUATION

After studying this chapter, you should be able to meet the following learning objectives (LO).

  1. Identify the difference between a cost center, a profit center, and an investment center. (Unit 10.1)
  2. Prepare a segment margin income statement and evaluate a segment's financial performance. (Unit 10.2)
  3. Evaluate an operating segment or project using return on investment. (Unit 10.3)
  4. Evaluate an operating segment or project using residual income and economic value added. (Unit 10.4)
  5. Calculate the minimum transfer price between divisions that maximizes corporate income. (Appendix)

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The Pitch

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Monica Waltrip, vice president of Centex Yarns' Nylon Fibers division, answered the telephone. It was CEO James Cameron. “Monica, I just got the latest corporate income statement. Your division is showing a loss for the third straight year. I think I've given you plenty of time to turn things around, so we need to meet at 1:00 to make some hard decisions about the division's viability.” All Monica could manage to reply was, “I'll be there.”

Monica knew she was going to be in the hot seat. Yes, the division had shown a loss on the corporate income statement for the past three years, but she and her team had worked hard to improve operations. Sales were ...

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