Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
12–36
EXERCISES
163. Smith Division produces soap and reported sales of $540,000, which generated a net
income after tax deduction of $77,900 for 2017. The division did not incur any interest
expenditure during the year. Smith Division’s invested capital for the year amounted to
$820,000. Smith’s parent corporation has a required rate of return equal to 10 percent
and a cost of capital of 8 percent. How is the division performing if it is evaluated using
return on investment?
Answer
164. Floyd Productions’ West Division reported sales of $280,000 and net income totaling
$58,800. The invested capital in West Division is $336,000. Calculate West Division’s
profit margin, investment turnover, and return on investment.
Answer
165. For fiscal year 2017, Regency Division of Florida Malls had income as follows:
Sales revenue $43,000,000
Expenses:
Cost of goods sold $28,400,000
Selling and administrative expense 5,600,000
Interest expense 1,100,000 35,100,000
Income before taxes 7,900,000
Income tax expense 2,765,000
Net income $ 5,135,000
The Regency Division’s total assets were $89,000,000 and its current liabilities totaled
$3,200,000 with $700,000 of these being interest-bearing. The company has a required
rate of return of 9 percent and a cost of capital of 7.2 percent. Calculate NOPAT,
invested capital, and return on investment for Regency Division and comment on the
company’s performance.
Answer
Chapter 12 Decentralization and Performance Evaluation
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166. The chief operating officer (COO) of the DeSoto Corporation is considering the effect of
depreciation on the return on investment of one of its divisions. In the most recent year,
the division had net operating profit after taxes totaling $1,377,000 and the invested
capital was $16,200,000. The COO has determined that total assets will decline each
year by 6 percent due to depreciation of plant and equipment, but NOPAT will remain
relatively constant.
a. Calculate return on investment for each of the next three years considering the
change in value of the assets.
b. Explain why evaluation in terms of return on investment may lead managers to
delay purchases of equipment that, in the long-run, will be needed to remain
competitive.
Answer
167. Consider the following information for South Coast Division of the Lacy’s Department
Stores for 2018 and 2017.
2018 2017
Total assets $24,000,000 $21,600,000
Noninterest-bearing current liabilities 1,600,000 2,100,000
Interest-bearing current liabilities 800,000 500,000
Sales 44,800,000 42,900,000
Interest expense 1,100,000 1,400,000
Net income 3,596,000 3,707,400
Tax rate 40% 40%
a. Compute return on investment for both years.
b. Break the return on investment down into profit margin and investment turnover.
c. Comment on the change in financial performance between 2017 and 2018.
Answer
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
12–38
168. Cowell Enterprises has two divisions. Its Seaboard Division has $800,000 in invested
capital. Its sales totaled $1,440,000 in a year when NOPAT was $123,120. Calculate the
division’s profit margin, investment turnover, and return on investment.
Answer
169. Loyalty Company has net income of $150,000, $100,000 in interest expense, an income
tax rate of 35 percent, and a cost of capital of 14 percent. It has total assets of
$1,525,000, with noninterest-bearing current liabilities of $275,000. Calculate NOPAT
and residual income for Loyalty.
Answer
170. Information for the Container Division of Advanced Disposal for a recent year is given
below:
Sales $30,000,000
Interest expense 4,000,000
Net income 2,000,000
Total assets 80,000,000
Noninterest-bearing current liabilities 20,000,000
Interest-bearing current liabilities 1,000,000
Cost of capital 11%
Required rate of return 13%
Income tax rate 30%
Calculate the following amounts for Container Division:
a. NOPAT
b. Invested capital
c. Return on investment
d. Residual income
Answer
Chapter 12 Decentralization and Performance Evaluation
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171. Sanford Division of Shoebox Enterprises compiled the following information concerning
its performance in a recent year:
Total assets $5,200,000
Noninterest-bearing current liabilities 240,000
Sales 4,100,000
Interest expense 90,000
Net income 480,000
Cost of capital 8.5%
Required rate of return 9.8%
Income tax rate 30%
How much wealth did Sanford Division add to Shoebox Enterprises’ shareholder value?
172. Top management of the Luxor Corp. is trying to construct a performance evaluation
system to use to evaluate each of its three divisions. Financial data are as follows:
Granite Marble Porcelain
Total assets $830,000 $3,700,000 $4,200,000
Noninterest-bearing current liabilities 40,000 650,000 200,000
NOPAT 102,700 259,250 500,000
Income tax rate 40% 40% 40%
Cost of capital 7% 8% 9%
Required rate of return 10% 12% 11%
How will the divisions be ranked (from best to worst performance) if the evaluation is
based on ‘profit’ compared to return on investment? Under which evaluation method is
management more likely to overinvest? Under which method is more likely to
underinvest?
Answer
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
12–40
173. Consider the following data, which relate to the two divisions of Office Products.
West Division East Division
Total assets $51,000,000 $28,000,000
Noninterest-bearing current liabilities 6,000,000 3,500,000
NOPAT 12,000,000 5,020,000
Cost of capital 8% 10%
Compare the two divisions in terms of return on investment and residual income. In the
past year, which division has created the most wealth for Office Product’s shareholders?
Answer
174. The Pastry Division of Cinotti’s Bakery reported NOPAT totaling $512,000 in 2019. This
included $330,000 in research and development costs for 2019. Additionally, research
and development in 2018 and 2017 were, respectively, $280,000 and $240,000.
Invested capital at the end of 2019 totaled $5,400,000. The company is subject to a 30%
income tax rate. Cinotti capitalizes and amortizes intangible assets over 4 years. The
company’s cost of capital is 7 percent and its required rate of return is 8 percent. How
much is EVA for 2019?
Answer
Chapter 12 Decentralization and Performance Evaluation
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175. The Knob Division of Barnett Brass has NOPAT of $42,000. The company’s cost of
capital is 5.5 percent, its required rate of return is 8.4 percent. The division’s invested
capital totals $560,000. How much is the division’s residual income?
Answer
176. For fiscal year 2017, the Pharmacy Division of Halgreen RX reported net income totaling
$6,000,000. Its interest expense was $1,000,000, and the income tax rate was 40
percent. The total assets of the Pharmacy Division were $68,000,000, and total current
liabilities were $7,000,000 with $3,200,000 being interest-bearing. The company’s cost
of capital is 8 percent and its required rate of return is 9 percent. Calculate NOPAT,
invested capital, and residual income for the Pharmacy Division and comment on the
division’s contribution to the company’s performance.
Answer
177. Walk-In Care Center is a division of Shands Corporation and is organized as an
investment center. In the past year, the Care Center reported an after-tax income of
$760,000. Total interest expense was $70,000, and the center’s income tax rate is 35
percent. Its assets totaled $12,000,000, noninterest-bearing current liabilities were
$900,000, and interest-bearing current liabilities totaled $600,000. Shands has
established a required rate of return of 9 percent, while its cost of capital is 6.4 percent.
Calculate the residual income generated by Walk-In Care Center.
Answer
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
12–42
*178. Windsor Medical Services has two outpatient clinics and a pathology laboratory, which
are organized as separate profit centers. When the pathology laboratory conducts tests
ordered by the clinics, the clinics are charged the basic market price of the tests. The
managers of the clinics object to this practice and argue that because they are all part of
the same company, they should be charged for the cost of the procedures rather than
market price. Support the use of market prices or cost-based prices for charging clinics
for tests performed by the pathology laboratory.
Answer
179. Good Buy Electronics is considering a plan by which its managers will be evaluated and
rewarded based on a measure of economic value added. Before adopting the plan,
management wants you to calculate the projected amount of EVA for 2019, based on
financial forecasts and prior financial data, as follows:
Total assets $57,000,000
Noninterest-bearing current liabilities 20,000,000
Sales 120,000,000
Net income 5,800,000
Interest expense 1,200,000
Research and development 2,400,000
Income tax rate 35%
Cost of capital 7%
Required rate of return 9%
Research and development expenditures in 2017 and 2018 were $1,200,000 and
$2,100,000, respectively. Research and development is amortized over a three-year life.
a. Explain why it is important to capitalize research and development if managers
are rewarded based on EVA.
b. Calculate forecasted EVA for 2019.
Chapter 12 Decentralization and Performance Evaluation
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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
12–44
180. Stand Up Comics operates comedy clubs in in several states. The following financial
information is available for 2019 and 2018.
2019 2018
Income from operations $ 900,000 $ 850,000
Net income 537,420 507,000
Interest expense 6,000 5,000
Total assets 4,000,000 3,500,000
Noninterest-bearing current liabilities 290,000 280,000
Research & development costs 200,000 160,000
Income tax rate 40% 40%
Required rate of return 7% 6.5%
Cost of capital 5% 4%
Intangibles are amortized over 4 years. Although net income has increased by 6 percent,
a shareholder evaluating the company’s financial performance asserts that, financial
performance has decreased in 2019. Support this assertion with appropriate calculations
of economic value added.
Answer
Chapter 12 Decentralization and Performance Evaluation
12–45
CHALLENGE EXERCISES
181. CocaCola has 3 divisions. It uses a 10.9 percent required rate of return. Its Dasani
Division has an invested capital amounting to $998,000 and reported profits of $122,000
during the current year. The division manager is considering whether expanding the
shipping docks at an estimated cost of $182,000 will enhance the division. The
expansion is expected to increase annual income by an estimated $18,100.
a. Calculate the Dasani Division’s ROI if the docks are expanded.
b. What will the Dasani Division’s manager most likely do if he is evaluated using
ROI? Briefly justify why the manager will take that action.
182. Outkast Division of Music, Inc. has a 5.5 percent cost of capital and a 25 percent income
tax rate. The company compiled the following information for Outkast Division in 2017:
Total assets
Net income
Sales
Current liabilities, interest bearing
Current liabilities, non-interest bearing
Interest expense
a. Name and calculate the two components of ROI.
b. Show how the components in part A can be used together to calculate ROI.
c. Interpret your answer to part b.
Answer
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
12–46
183. LB Division of BulbCo had net income totaling $56,700, sales totaling $650,000, no
interest cost, and a 30 percent income tax rate for 2017. Invested capital totals
$540,000. BulbCo’s required rate of return is 8 percent and its cost of capital is 6
percent. The 2017 ROI of LB Division is 10.5 percent. LB Division is considering an
investment in a new machine on January 1, 2018 that will generate additional annual
sales of $76,000 and additional annual operating expenses (other than depreciation)
totaling $39,000. The cost of the new machine is $140,000 with an estimated salvage
value of $15,000 at the end of its 5-year estimated life. LB will pay cash for the machine.
a. Calculate NOPAT for 2018 if LB Division acquires the new machine.
b. Assuming no change in original operations, determine the 2018 return on
investment if LB buys the machine.
c. If LB Division’s manager is evaluated on ROI, will he accept the project? Briefly
justify your response.
184. Frigate Co. compiled the following information concerning its West Division for 2018:
Sales revenue
$10,500,000
Research and development costs
$940,000
Invested capital
12,900,000
Current liabilities-interest bearing
210,000
NOPAT
870,000
Current liabilities-non-interest
bearing
320,000
R&D costs incurred by West Division during 2017 totaled $700,000. The company’s
notes indicate its amortization policy is 5 years. Frigate has a 7.8 percent cost of
capital, a 9.1 percent required rate of return, and a 32 percent income tax rate.
a. How much is EVA for the West Division for 2018?
b. What information is provided by Frigate’s EVA for 2018?
Chapter 12 Decentralization and Performance Evaluation
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Answer
185. The Florida Division is being evaluated by upper management of the parent company,
Assistance Corporation. The following amounts were determined for Florida Division for
2017:
Residual income $333,600
Return on investment 10.6%
Economic value added $464,760
Interpret each of the three amounts as it applies to Florida Division for 2017.
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
12–48
SHORT-ANSWER ESSAYS
186. List and briefly describe the advantages and disadvantages of decentralization for an
organization.
187. What are the differences between cost centers, profit centers, and investment centers?
Answer
188. How is return on investment (ROI) calculated? List two actions that a manager could
take to increase its return on investment.
Answer
Chapter 12 Decentralization and Performance Evaluation
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189. Explain why net interest is added back to net income to get NOPAT.
190. What is economic value added and why is it superior to other performance measures?
Answer
191. What are the four dimensions of the balanced scorecard?
*192. There are a number of alternative methods for determining a transfer price. Which
method typically motivates the best decisions? Why?
Answer