Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
78.
Business units
(a) Define what is meant by each of the following: profit center, investment center, and
cost center. Your answer should make clear the distinction between each of these types of
centers.
(b) Briefly describe the criteria used to evaluate each of the three types of centers listed in
part a.
79.
Accounting terminology
Listed below are seven technical accounting terms introduced or emphasized in this
chapter:
Each of the following statements may (or may not) describe one of these technical terms.
In the space provided beside each statement, indicate the accounting term described, or
answer "None" if the statement does not correctly describe any of the terms.
____ (a) Costs that jointly benefit several responsibility centers of the business and that do
not vary significantly with changes in sales volume.
____ (b) The amount charged by a responsibility center for the goods it sells to another
responsibility center.
____ (c) Used to evaluate the performance of a manager based solely on revenue and costs
under the manager's control.
____ (d) A responsibility center of a business that may be evaluated by the return earned
on assets.
____ (e) The subtotal in a responsibility income statement that is most useful in evaluating
the short-term effects of various marketing strategies on profitability.
22-40
80.
Preparation of responsibility income statements
Hal-Marts, Inc. has two sales departments: equipment and clothing. During February, these
two departments reported the following operating results:
In addition, fixed costs common to both departments amounted to $54,400.
Complete the following responsibility income statement for Hal-Marts, Inc. Follow the
contribution margin approach, and show percentages as well as dollar amounts. Conclude
your income statement with the company's income from operations. (Round your
percentage computations to nearest whole percent)
22-42
81.
Responsibility income statement-preparation
Gameland Village is segmented into two sales departments: software and video games.
During April, these two departments reported the following operating results:
In addition, fixed costs common to both departments amounted to $42,000.
Complete the following segmented income statement for Gameland Village. Follow the
contribution margin approach, and show percentages as well as dollar amounts. Conclude
your income statement with the company's income from operations.
22-44
82.
Using a responsibility income statement
Shown below is the current monthly income statement of Metro Video, by profit centers:
On the basis of this information, compute the increase in monthly income from operations
that may be expected to result from each of the following actions:
(a) Spending $5,000 per month in advertising is expected to increase sales in the
Equipment Sales Department by 35%. $________________
(b) Closing the Equipment Sales Department and allowing the Video Rentals Department
to expand is expected to increase the revenue of the Video Rentals Department by
$105,000 per month. This action also is expected to increase fixed costs traceable to the
Video Rentals Department by $40,000 per month. $_______________
83.
Responsibility income statements
Identify and discuss briefly the two concepts generally used in assigning costs to
responsibility centers of a business.
84.
Responsibility income statement
Classico's Pizza, a chain of pizza parlors, views each branch location as an investment
center. The local branch reported the following results for the current year:
Compute the following measures for this investment center:
(a) Contribution margin: $_______________
(b) Contribution margin ratio: _______________%
(c) Responsibility margin: $_______________
(d) Increase in annual responsibility margin that would be expected to result from a 10%
increase in sales volume: $_______________
85.
Old Jeans, Inc. has two divisions or profit centers, one makes regular fit jeans and the other
makes relaxed fit jeans. The information for the two centers follows:
There are also common fixed costs of $27,500.
Required:
Prepare a responsibility income statement by profit center and in total.
86.
Responsibility income statement-cost classification
Milton's, a large department store, prepares income statements by sales department.
These statements follow the contribution margin approach, showing contribution margin
and responsibility margin for each profit center as well as monthly income from operations
for the store. Indicate the classification of each of the costs listed below by inserting the
appropriate code letters in the space provided.
Costs
____ (a) The cost of merchandise sold in the Women's Sportswear Department.
____ (b) Advertising a sale in the Housewares Department (classify as a fixed cost).
____ (c) Depreciation on equipment used in the Automotive Service Department.
____ (d) Depreciation on the store's heating and air conditioning system.
____ (e) Monthly salary of the manager of the Toy Department.
____ (f) Sales taxes collected from customers and paid to local tax authorities.
____ (g) Monthly salaries of store security guards.
87.
Evaluation of responsibility centers
Shown below are the current-year data for two investment centers of Chelsea Trading, Inc.
The total assets utilized by each of these investment centers during the year amount to
$1,500,000:
(a) Compute the following measures for each investment center:
(b) Assume that a $3,000 monthly expenditure for advertising could increase the monthly
sales of either investment center by $20,000. Which center should the company advertise
to receive the maximum benefit from its advertising expenditure? Center _________. Explain
your reasoning:
88.
Transfer prices and cash flow
Satellite Products, Inc. owns two subsidiaries, Saturn Systems and Neptune Audio. Saturn
supplies printed circuit boards used by Neptune Audio in its state of the art stereo radio.
Neptune receives 20,000 boards from Saturn annually. Each radio produced requires a
single board. The market price of these boards is $40. Their total variable cost of
production is $20. The market price of the radios is $105. The unit variable cost of the radio
is $30 excluding the cost of the circuit board.
Saturn Systems is currently operating at full capacity of 35,000 boards per year (including
those transferred to Neptune Audio). Demand for the boards is strong and all 35,000 could
be sold to outside customers. Saturn uses the full market price as the transfer price
charged to Neptune Audio.
The manager of Neptune Audio argues that Saturn Systems benefits from intercompany
transfers because of reduced advertising and other selling costs. Thus, he wants to
negotiate a lower transfer price of $35.
Required:
1. Calculate the contribution margins for the two subsidiaries using the $40 transfer price.
2. Recalculate the contribution margins at the $35 price suggested by the manager of
Neptune Audio. What effect would the change in transfer price have on the company as a
whole?
3. Suppose that Neptune Audio operates in a country that imposes a 40% tax rate on
corporate income. Saturn Systems is located in a country where the tax rate is only 10%.
What would you recommend regarding the transfer price charged by Saturn for the boards
transferred to Neptune?
