Multiple Choice
Which of the following terms refers to price reductions made from the list price of a product when calculating net sales?
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4. Merchandising Operations
Net Sales
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The performance evaluation of a cost center is typically based on its:
A
ability to control costs
B
return on investment
C
amount of profit earned
D
total net sales generated
Verified step by step guidance1
Understand the concept of a cost center: A cost center is a department or unit within an organization that does not directly generate revenue but incurs costs while supporting the organization's operations. Examples include HR, IT, and maintenance departments.
Recognize the primary focus of a cost center: Since cost centers do not generate revenue, their performance is evaluated based on their ability to control and minimize costs while maintaining efficiency and effectiveness in their operations.
Eliminate irrelevant options: 'Return on investment,' 'amount of profit earned,' and 'total net sales generated' are metrics typically used for profit centers or investment centers, not cost centers. These metrics are tied to revenue generation and profitability, which are not applicable to cost centers.
Focus on the correct metric: The ability to control costs is the most relevant performance evaluation criterion for a cost center. This involves assessing how well the cost center manages its budget and reduces unnecessary expenses while maintaining operational quality.
Conclude the reasoning: Based on the above analysis, the correct answer is 'ability to control costs,' as it aligns with the fundamental purpose and evaluation criteria of a cost center.
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