Operating income
$ 43,200
Beginning assets were $279,500 and ending assets were $296,500.
A.
Average operating assets were $__________________.
B.
Margin was __________________.
C.
Turnover was __________________.
D.
Return on investment was __________________%.
4. Given the following information for the Reardon Division:
Asset base
$500,000
Sales Revenues
$725,000
Expenses
$662,500
Required:
A.
What are the margin, turnover, and ROI for Reardon Division?
B.
Reardon has an option to make an additional investment that would add $100,000 to
the asset base. It would generate an additional $50,000 in sales revenue and no
additional expenses. What would be the effect on margin, turnover and ROI?
C.
Another option (independent of alternative B) for Reardon is to run an advertising
campaign that would require additional advertising expenses of $37,500, but the best
estimate is the campaign would generate an additional $75,000 of revenue. What would
be the effect on margin, turnover and ROI?
ANS:
Asset base
Revenue
Expenses
Operating Income
(Revenue − Expense)
Margin
(Operating Income/Revenue)
Turnover
(Revenue/Asset Base)
ROI
(Operating Income/Asset Base)
A.
Average operating assets = ($279,500 + $296,500)/2 = $288,000
B.
Margin = $43,200/$180,000 = 0.24 or 24%
C.
Turnover = $180,000/$288,000 = 0.625
ROI = 0.24 0.625 = 0.15 or 15%
5. Provide the missing data in the following situations:
Phi
Delta
Theta
Division
Division
Division
Sales
$ (A)
$250,000
$ (G)
Operating assets
$ (B)
$ (D)
$800,000
Net operating income
$400,000
$10,000
$144,000
Margin
0.08
(E)
0.12
Turnover
(C)
(F)
1.5
Return on investment
16%
10%
(H)
ANS:
$400,000/A = 0.08
$400,000/B = 0.16
C = $5,000,000/$2,500,000 = 2.0
$10,000/D = 0.10
E = $10,000/$250,000 = .04 or 4%
F = $250,000/$100,000 = 2.5 times
$144,000/G = 0.12
0.12 1.5 = .18 or 18%
Figure 12-7
Monfett Manufacturing earned operating income last year as shown in the following income statement:
Sales
$620,000
Cost of goods sold
$316,000
Gross margin
$304,000
Selling and administrative expense
$219,000
Operating income
$85,000
Less: Income taxes (at 40%)
$34,000
Net income
$51,000
At the beginning of the year, the value of operating assets was $263,000. At the end of the year, the
value of operating assets was $336,000. Monfett Manufacturing requires a minimum rate of return of
15%. Total capital employed equal $350,000 and actual cost of capital is 6%.
6. Refer to Figure 12-7. Calculate the following:
A. Average operating assets
B. Margin
C. Turnover
D. Return on investment
(Carry computations out to two decimal places.)
7. Refer to Figure 12-7. Calculate the following:
A. Residual income
B. EVA
Residual income = operating income – (minimum rate of return x average operating assets)
$85,000 – (15% x $299,500) = $40,075
Average operating assets = (Beginning assets + ending assets)/2
($263,000 + $336,000)/2 = $299,500
B.
Margin = Operating income/Sales
$85,000/$620,000 = .14 or 14%
Turnover = Sales/Average operating assets
$620,000/$299,500 = 2.07
ROI = Margin x Turnover
.14 x 2.07 = 0.29
8. Red Earth Company has two divisions, the Okla Division and the Homa Division. Last year, the Okla
Division earned $66,000 using average operating assets of $550,000. Last year, the Homa Division
earned $260,000 using average operating assets of $2,000,000. Minimum required rate of return for
Red Earth is 9%.
A.
For the Okla Division, residual income is __________________.
B.
For the Homa Division, residual income is __________________.
Now assume that the minimum required rate of return for Red Earth is 12%.
C.
For the Okla Division, residual income is __________________.
D.
For the Homa Division, residual income is __________________.
Residual income = $66,000 − (0.09 $550,000) = $16,500
Residual income = $260,000 − (0.09 $2,000,000) = $80,000
Residual income = $66,000 − (0.12 $550,000) = $0
Residual income = $260,000 − (0.12 $2,000,000) = $20,000
9. The Southern Division of Jenkins Company had income of $48,300, average assets of $345,000 and
sales of $241,500. The minimum rate of return for Jenkins Company is 12%.
A.
What is margin for the Southern Division?
B.
What is turnover for the Southern Division?
C.
What is ROI for the Southern Division?
D.
What is residual income for the Southern Division?
A.
Margin = $48,300/$241,500 = 0.2 or 20%
B.
Turnover = $241,500/$345,000 = 0.7
ROI = 0.20 0.7 = 0.14 or 14%
Residual income = $48,300 − (0.12 $345,000) = $6,900
10. Dixie Company has the following data for 2011:
Division A
Division B
Sales
$400,000
$300,000
Contribution margin
$160,000
$125,000
Operating income
$80,000
$30,000
Average operating assets
$320,000
$200,000
Cost of capital
15%
15%
Dixie Company has a target ROI of 20%.
Required: Calculate the following amounts for each division:
A.
Margin ratio
B.
Turnover ratio
C.
ROI
D.
Residual income
E.
EVA
11. Paige Inc. has a division that makes paint and another division that constructs subdivision houses. The
paint division incurs the following costs for one gallon of paint:
Direct materials
$1.10
Direct labor
1.45
Variable overhead
0.90
Fixed overhead
1.15
Total
$4.60
A.
Margin ratio = $80,000/$400,000 = .20 or 20%
B.
Turnover ratio = $400,000/$320,000 = 1.25
ROI = 0.20 1.25 = 25%
Residual income = $80,000 − 0.20($320,000) = $16,000
EVA = $80,000 − 0.15($320,000) = $32,000
A.
Margin ratio = $30,000/$300,000 = .10 or 10%
B.
Turnover ratio = $300,000/$200,000 = 1.50
ROI = 0.10 1.50 = 15%
Residual income = $30,000 − 0.20($200,000) = $(10,000)
EVA = $30,000 − 0.15($200,000) = $0
The Paint Division can make 1,000,000 gallons per year, and is at capacity. The Construction Division
currently buys its paint from an outside supplier for $5.20 per gallon (the same price that the Paint
Division receives).
A.
The maximum transfer price per gallon of paint is $__________________; this price is
set by which of the two divisions?
B.
The minimum transfer price per gallon of paint is $__________________; this price is
set by which of the two divisions?
12. Paige Inc. has a division that makes paint and another division that constructs subdivisions. The paint
division incurs the following costs for one gallon of paint:
Direct materials
$1.10
Direct labor
1.45
Variable overhead
0.90
Fixed overhead
1.15
Total
$4.60
The Paint Division can make 1,000,000 gallons per year, and expects to produce 800,000 gallons next
year. The Construction Division currently buys 200,000 gallons of paint from an outside supplier for
$5.30 per gallon (the same price that the Paint Division receives).
A.
The maximum transfer price per gallon of paint is $__________________.
B.
The minimum transfer price per gallon of paint is $__________________.
C.
Assume that the transfer takes place at $5 per gallon; calculate the amount by which
each of the following will be better off with the transfer than without it.
Paint Division $__________________
Construction Division $__________________
Paige Inc.,as a whole $__________________
A.
$5.30 (market price)
B.
$3.45 (variable cost per gallon)
Paint Division benefit = ($5.00 − $3.45) 200,000 = $310,000
Construction Division benefit = ($5.30 − $5.00) 200,000 = $60,000
A.
$5.20; construction division
B.
$5.20; paint division
13. Paige Inc. has a division that makes paint and another division that constructs subdivisions. The paint
division incurs the following costs for one gallon of paint:
Direct materials
$1.10
Direct labor
1.45
Variable overhead
0.90
Fixed overhead
1.15
Total
$4.60
The Paint Division can make 1,000,000 gallons per year, and expects to produce 1,000,000 gallons
next year. The construction division currently buys 200,000 gallons of paint from an outside supplier
for $5.20 per gallon (the same price that the Paint Division receives).
A.
The maximum transfer price per gallon of paint is $__________________.
B.
The minimum transfer price per gallon of paint is $__________________.
C.
Does it matter whether or not the two divisions transfer?
A.
$5.20 (market price)
B.
$5.20 (market price)
C.
No, it doesn’t matter since the appropriate transfer price is equal to the market price.
14. The Dear Division of Zimmer Company sells all of its output to the Finishing Division of the
company. The only product of the Dear Division is chair legs that are used by the Finishing Division.
The retail price of the legs is $20 per leg. Each chair completed by the Finishing Division requires four
legs. Production quantity and cost data for 2011 are as follows:
Chair legs
30,000
Direct materials
$135,000
Direct labor
$ 90,000
Overhead (25% is variable)
$ 90,000
Required: Compute the transfer price for a chair leg using:
A.
market price.
B.
variable product costs plus a fixed fee of 20%.
C.
full cost plus 20% markup.
D.
variable costs.
A.
Figure 12-8
Bostonian Inc. has a number of divisions, including Delta Division and ListenNow Division. The
ListenNow Division owns and operates a line of MP3 players. Each year the ListenNow Division
purchases component AZ in order to manufacture the MP3 players. Currently it purchases this
component from an outside supplier for $6.50 per component. The manager of the Delta Division has
approached the manager of the ListenNow Division about selling component AZ to the ListenNow
Division. The full product cost of component AZ is $3.10. The Delta Division can sell all of the
components AZ it makes to outside companies for $6.50. The ListenNow Division needs 18,000
component AZs per year; the Delta Division can make up to 60,000 components per year.
15. Refer to Figure 12-8.
Required:
A. Which division sets the maximum transfer price? Which division sets the minimum transfer price?
B. Suppose the company policy is that all transfer take place at full cost. What is the transfer price?
16. Refer to Figure 12-8. Assume that the company policy is that all transfer prices are negotiated by the
divisions involved.
Required:
A. What is the maximum transfer price? Which division sets it?
B. What is the minimum transfer price? Which division sets it?
C. If the transfer takes place, what will be the transfer price?
17. Refer to Figure 12-8. Although the Delta Division has been operating at capacity (60,000
components per year), it expects to produce and sell only 45,000 components for $6.50 each next year.
The Delta Division incurs variable costs of $1.50 per component. The company policy is that all
transfer prices are negotiated by the divisions involved.
Required:
A. What is the maximum transfer price? Which division sets it?
B. What is the minimum transfer price? Which division sets it?
C. Suppose that the two divisions agree on a transfer price of $5.75. What is the change in operating
income for the Delta Division? For the ListenNow Division? For Bostonian Inc. as a whole?
18. Each month, the vacuum cleaner manufacturing cell has 800 hours of time available. During that time,
the cell could have manufactured up to 2,400 vacuums; but only 1,600 vacuums were actually
manufactured. Calculate the following:
A.
Theoretical cycle time in minutes.
B.
Theoretical velocity per hour.
C.
Actual cycle time in minutes.
D.
Actual velocity per hour.
A.
Theoretical cycle time = 800 (60 minutes)/2,400 = 20 minutes/vacuum
B.
Theoretical velocity = 2,400 vacuums/800 hours = 3 vacuums per hour
C.
Actual cycle time = 800 (60 minutes)/1,600 = 30 minutes/vacuum
D.
Actual velocity =1600 vacuums/800 hours = 2 vacuums per hour
19. The pager manufacturing cell has 1,200 hours of time available per quarter. The cell could make 7,200
pagers but only made 6,000 during that time. Calculate the following:
A.
Theoretical cycle time in minutes.
B.
Theoretical velocity per hour.
C.
Actual cycle time in minutes.
D.
Actual velocity per hour.
E.
MCE is __________________ % (round your answer two digits).
ANS:
A.
Theoretical cycle time = 1,200(60 minutes)/7,200 = 10 minutes/pager
C.
Actual cycle time = 1,200(60 minutes)/6,000 = 12 minutes/pager
D.
Actual velocity = (60 minutes/1 hour)/(12 minutes/pager) = 5 pagers per hour
E.
MCE = 10/12 = 0.8333 or 83.33%
Figure 12-6.
The First National Bank has a mortgage loan office with conversion cost of $73,950 per month. There
are five employees who each work 170 hours per month. Last month, 1,020 loan applications were
processed, but the staff believes that system improvements could lead to the processing of as many as
1,700 per month.
20. Refer to Figure 12-6. Calculate the following:
A.
Actual cycle time in minutes.
B.
Theoretical cycle time in minutes.
C.
Actual velocity per hour.
D.
Theoretical velocity per hour.
21. Refer to Figure 12-6. Calculate the following:
A.
Conversion cost in minutes.
B.
Theoretical conversion cost per unit.
C.
Actual conversion cost per unit.
D.
How much more is the department spending per application than it should be if perfect
efficiency could be attained?
A.
Conversion cost = $73,950/[5(170)(60)] = $1.45 per minute
Theoretical conversion cost per unit = $1.45/minute 30 minutes/application = $43.50
per application
Actual conversion cost per unit = $1.45/minute 50 minutes/application = $72.50 per
application
be.
22. Marshal Company has the following data for one of its manufacturing plants:
Maximum units produced in a quarter = 425,000 units
Actual units produced in a quarter = 354,500 units
Productive hours in one quarter = 35,450 hours
Required:
A. Computer the theoretical cycle time (in minutes).
A.
Actual cycle time = [5(170)(60)]/1,020 = 50 minutes/application
B.
Theoretical cycle time = [5(170)(60)]/1,700 = 30 minutes/application
C.
Actual velocity = 60/50 = 1.2 applications per hour
D.
Theoretical velocity = 60/30 = 2 applications per hour
B. Computer the actual cycle time (in minutes).
C. Compute the theoretical velocity in units per hour.
D. Compute the actual velocity in units per hour.
ESSAY
You decide
1. Explain the differences between centralized and decentralized decision making. Also list some of the
reasons why a company would choose to decentralize.
2. What are the advantages and disadvantages of return on investment (ROI)?
(35,450 hours x 60 minutes per hour)/354,500 units = 6.00 minutes per unit
60 minutes per hour/5 minutes per unit = 12 units per hour
60 minutes per hour/6 minutes per unit = 10 units per hour
3. How is EVA (Economic Value Added) different from standard residual income calculations?
4. The Glass Division of a company makes glass vases which have the following unit costs:
Direct materials
$0.20
Direct labor
0.35
Variable overhead
0.15
Fixed overhead
1.30
Selling commission
0.50
The Florist Division of the company sells cut flowers and uses the glass vases. The Florist Division
uses 10,000 vases per year and currently buys them from an outside supplier for $4 each. The Glass
Division produces and sells 100,000 glass vases per year and sells them on the outside market for $4
each. Vases sold outside incur the sales commission; this commission would not be paid on internal
transfers. The Glass Division and the Florist Division managers just met and agreed on a transfer price
of $3.75 per vase. Is this a good idea for each division? Explain.
5. Describe the four perspectives of the Balanced Scorecard.