65. When comparing two different investment alternatives, which of the following measures for each alternative
would be the best to use?
66. Grayson & Sons, a local car dealership, has three separate divisions: car repair, new car sales, and used car
sales. The company has decided to implement a new system for evaluating the performance of its three division
managers and the bonuses they receive. The following information is available with respect to each division for
the current year:
Car Repair
New Car Sales
Used Car Sales
Operating income
$2,000,000
$ 8,000,000
$3,000,000
Operating assets
3,000,000
18,000,000
8,000,000
In order to receive a bonus, a division manager must have an ROI greater than 50% and residual income in excess of $1,400,000. If management uses
a minimum required rate of return of 18%, which division manager(s) would be eligible to receive a bonus?
67. Which of the following situations is most likely to pose a problem for companies that use return on
investment (ROI) as a measure of a manager’s performance?
68. Which of the following forms of manager compensation most likely encourages managers to take a long–
term view of how their performance ties in with the long-term goals of a company?
69. Which of the following statements about managerial compensation is correct?
70. Which of the following statements about stock-based managerial compensation is correct?
71. “Transfer pricing” refers to:
72. The most important goal of transfer pricing should be to:
73. Assuming an outside market exists, the maximum transfer price a selling division should charge a buying
division should be:
74. The minimum transfer price a selling division should charge a buying division should be:
75. Which of the following statements regarding transfer pricing is false?
76. Shane Products
Shane Products manufactures and sells sportswear and sports equipment. The apparel division incurs the
following costs for the production of a single t-shirt when 6,000 shirts are produced each year:
Direct materials
$1.25
Direct labor
1.00
Variable overhead
.75
Fixed overhead
.50
Total cost
$3.50
The company sells the t-shirts to retail stores for $7.50. The sports equipment division is doing a promotion whereby each customer that purchases a
tennis racket during the month of May receives a free t-shirt. The sports equipment division would like to purchase these shirts from the t-shirt
division.
Refer to the Shane Products information above. Assuming the t-shirt division has excess capacity and there would be no contribution margin lost on
outside sales if they sell to the sports equipment division, the minimum transfer price that should be charged is:
77. Shane Products
Shane Products manufactures and sells sportswear and sports equipment. The apparel division incurs the
following costs for the production of a single t-shirt when 6,000 shirts are produced each year:
Direct materials
$1.25
Direct labor
1.00
Variable overhead
.75
Fixed overhead
.50
Total cost
$3.50
The company sells the t-shirts to retail stores for $7.50. The sports equipment division is doing a promotion whereby each customer that purchases a
tennis racket during the month of May receives a free t-shirt. The sports equipment division would like to purchase these shirts from the t-shirt
division.
Refer to the Shane Products information above. Assuming the t-shirt division is at full capacity, what price should they charge such that no
additional losses will be incurred if they sell the shirts to the sports equipment division?
78. Pearson Inc.
Pearson Inc. produces and sells a variety of household cleaning supplies and equipment including vacuum
cleaners and carpet cleaner both of which are sold separately in stores. The carpet cleaning division incurs the
following costs for the production of a single bottle of carpet cleaner when 600,000 bottles are produced each
year:
Direct materials
$1.30
Direct labor
.50
Variable overhead
.25
Fixed overhead
.30
Total cost
$2.35
The company sells the bottles to retail stores for $5.00 per bottle. The vacuum division is doing a promotion whereby each customer that purchases a
vacuum cleaner during the month of December receives a free bottle of carpet cleaner. The vacuum division would like to purchase these bottles
from the carpet cleaning division.
Refer to the Pearson Inc. information above. Assuming the carpet cleaning division has excess capacity and there would be no contribution margin
lost on outside sales if they sell to the vacuum division, the minimum transfer price that should be charged is:
79. Pearson Inc.
Pearson Inc. produces and sells a variety of household cleaning supplies and equipment including vacuum
cleaners and carpet cleaner both of which are sold separately in stores. The carpet cleaning division incurs the
following costs for the production of a single bottle of carpet cleaner when 600,000 bottles are produced each
year:
Direct materials
$1.30
Direct labor
.50
Variable overhead
.25
Fixed overhead
.30
Total cost
$2.35
The company sells the bottles to retail stores for $5.00 per bottle. The vacuum division is doing a promotion whereby each customer that purchases a
vacuum cleaner during the month of December receives a free bottle of carpet cleaner. The vacuum division would like to purchase these bottles
from the carpet cleaning division.
Refer to the Pearson Inc. information above. Assuming the carpet cleaning division is at full capacity, what price should they charge such that no
additional losses will be incurred if they sell the bottles to the vacuum division?
80. The Green Division can sell its products to an outside market for $20 per unit. The division’s variable
manufacturing costs are $7 per unit, and fixed manufacturing costs are $2 per unit. If the division is operating at
full capacity, the opportunity cost of transferring units internally at the minimum transfer price is:
81. The Automotive Division can sell one of its products to an outside market for $55 per unit. The division’s
variable manufacturing costs are $14 per unit, and fixed manufacturing costs are $6 per unit. If the division is
operating at full capacity, the opportunity cost of transferring units internally at the minimum transfer price is:
82. What is the main difference between centralized and decentralized organizations?
83. What are two advantages of decentralization?
84. What are two disadvantages of decentralization?
85. What is the main idea underlying responsibility accounting?
86. How do the roles of cost center managers, revenue center managers, profit center managers, and investment
center managers differ?
87. Describe and explain the two types of fixed costs classifications that are found when a company prepares a
segmented income statement as opposed to a variable costing income statement.
88. The manager of a local retail store tells you that, “An unprofitable segment should always close.” Do you
agree or disagree with this statement and why?
89. What is a “value chain” and how does it affect segment performance analysis?
90. What does the ratio return on investment (ROI) measure and what are some possible ways it can be
computed?
91. Austin Inc. has a return on investment (ROI) of 10.2%. The company’s margin was 60% and its turnover
was 17.
How do margin and turnover relate back to ROI and what kinds of information do each of them provide?
92. Which two items are typically omitted from “net operating income” for return on investment (ROI)
purposes. Why are these two items omitted?
93. What is residual income and how is it computed? Is it better for residual income to be high or low?
94. The manager of a local department store, Nelda Smith, has just been informed that she will start being
evaluated on the basis of her segment’s ROI in relation to the ROI values of other department stores owned by
her employer. Give three ways she can increase her segment’s ROI?
95. What is economic value added (EVA)? What does it attempt to measure and what is the formula?
96. Under what type of situation would return on investment (ROI) be a better performance measure than
residual income and vice versa?
97. What is a potential disadvantage of using ROI as a performance measure for management?
98. When should residual income not be used to compare the performance of two investment centers?
99. What are the three types of compensation that managers typically receive?
100. What is a “stock option” and does it always have value?
101. What are the three basic approaches to establishing transfer prices?
102. What is “transfer pricing” and what are some of its goals?
103. Bauer Enterprises Ltd. has two product lines: B-40 and B-100. Revenue and cost information for each of
the product lines for 2008 are as follows:
B-40
B-100
Selling price per unit
$30
$50
Variable costs per unit
12
24
Traceable fixed expenses
$20,000
$50,000
In 2008, Bauer had common fixed expenses of $80,000, and the company produced and sold 10,000 units of B-40 and 8,000 units of B-100.
Required: Prepare a segmented income statement with a column for each product line and the total company.
104. Amber Products Inc. has two product lines: A-100 and A-200. Revenue and cost information for each of
the product lines for 2008 are as follows:
A-100
A-200
Selling price per unit
$60
$45
Variable costs per unit
25
15
Traceable fixed expenses
$40,000
$30,000
In 2008, Amber had common fixed expenses of $50,000, and the company produced and sold 4,000 units of A-100 and 6,000 units of A-200.
Required: Prepare a segmented income statement with a column for each product line and the total company.
Amber Products Inc.
Segmented Income Statements
For the year ended 12/31/2008
Total Company
A-100
A-200
Sales revenue
$510,000
$240,000
$270,000
Less: Variable costs
190,000
100,000
90,000
Contribution margin
$320,000
$140,000
$180,000
Less: Traceable fixed expenses
70,000
40,000
30,000
Less: Common fixed expenses
50,000
Net income
$200,000
Bauer Enterprises Ltd.
Segmented Income Statements
For the year ended 12/31/2008
Total Company
B-40
B-100
Sales revenue
$700,000
$300,000
$400,000
Less: Variable costs
312,000
120,000
192,000
Contribution margin
$388,000
$180,000
$208,000
Less: Traceable fixed expenses
70,000
20,000
50,000
Segment margin
$318,000
$160,000
$158,000
Less: Common fixed expenses
80,000
Net income
$238,000
105. Fun Treats Inc. sell a variety of drink and food products including juice and ice cream. The segmented
income statements for these two products are as follows:
Juice
Ice Cream
Sales
$500,000
$600,000
Variable expenses
200,000
300,000
Contribution margin
300,000
300,000
Traceable fixed expense
100,000
100,000
Segment margin
$200,000
$200,000
The company’s management is considering a special advertising campaign that will run on a Saturday morning when many children are watching
television. The advertising campaign is expected to cost $25,000 and only one product can be featured. In-house marketing studies show that the
campaign could increase sales of the juice division by $100,000 or increase sales of the ice cream division by $100,000.
The marketing supervisor has decided that since both products have the same segment margin, the company will be equally as well off regardless of
which product is featured.
Required:
A.
Do you agree or disagree with the marketing supervisor? Why or why not.
B.
Which product do you feel should be featured? Show calculations to support your answer.
division is featured rather than the ice cream division. The following shows why this is:
Therefore, the company would be better off by $10,000 if the juice division was featured instead of the ice cream division.
106. Ramsey Automotive Ltd. had sales of $2,000,000 and net operating income of $600,000 last year.
Operating assets last year averaged $1,000,000. The company’s manager is considering the purchase of a new
machine which is expected to increase average operating assets by 6%.
Required: Calculate the company’s new ROI if the new machine is purchased.
107. Vance Inc. requires all of its divisions to maintain a return on investment (ROI) of at least 45%. The
manager of one of the divisions expects the division’s net operating income to be $400,000 and its sales to be
$2,000,000.
Required: Calculate the division’s required average operating assets in order to achieve the minimum ROI.
108. Hedding Inc. has two divisions: classic and modern. In the most recent year, the classic division reported
sales of $900,000 and an asset turnover of 4.0. The rate of return on average invested assets was 16%.
Required: What was the classic division’s margin?
109. Thompson Ltd. has a division that generated $5,000,000 in sales and operating income of $1,000,000 on
average operating assets of $2,800,000. The company’s management team expects division managers to
generate sufficient income to guarantee a minimum return of 15 percent.
Required:
A.
What is the division’s residual income?
B.
What is the division’s return on investment (ROI)?
RI = $1,000,000 – ($2,800,000 ´ 15%)
RI = $1,000,000 – $420,000
B.
ROI = Net operating income ¸ Average operating assets
ROI = $1,000,000 ¸ $2,800,000
110. Mahim Products has a division that generated $10,000,000 in sales and operating income of $1,700,000 on
average operating assets of $6,000,000. The company’s management team expects division managers to
generate sufficient income to guarantee a minimum return of 30 percent.
Required:
A.
What is the division’s residual income?
B.
What is the division’s return on investment (ROI)?
111. Jordan Products manufactures and sells sports apparel and sports accessories including water goggles. The
accessory division incurs the following costs for the production of a pair of water goggles when 3,000 units are
produced each year:
Direct materials
$ .40
Direct labor
.25
Variable overhead
1.00
Fixed overhead
.50
Total cost
$2.15
The goggles sell for a retail price of $8.00 per pair. The sports apparel division is doing a promotion whereby each customer that purchases a
swimsuit during the month of May receives a free pair of goggles. The apparel division would like to purchase these goggles from the accessory
division.
Required:
A.
Calculate the minimum transfer price the accessory division should charge the apparel division if the accessory division has excess
capacity and there would be no contribution margin lost on outside sales if they sell to the apparel division.
B.
Calculate the minimum transfer price the accessory division should charge the apparel division if the accessory division does not have
excess capacity and they do not wish to incur additional losses if they sell to the apparel division.
A.
If excess capacity exists, the accessory division should charge enough to cover their variable costs. In this case, variable costs equal
A.
RI = Net operating income – (Average operating assets ´ Minimum required rate of return)
RI = $1,700,000 – ($6,000,000 ´ 30%)
RI = $1,700,000 – $1,800,000
RI = $(100,000)
ROI = Net operating income ¸ Average operating assets
ROI = $1,700,000 ¸ $6,000,000
ROI = 28.3%
112. Sauls Products manufactures and sells women’s apparel and accessories including sun glasses. The
accessory division incurs the following costs for the production of a pair of sun glasses when 10,000 units are
produced each year:
Direct materials
$2.00
Direct labor
1.00
Variable overhead
1.25
Fixed overhead
1.00
Total cost
$5.25
The sunglasses sell for a retail price of $30.00 per pair. The women’s apparel division is doing a promotion whereby each customer that purchases
two swimsuits during the month of May receives a free pair of sunglasses. The apparel division would like to purchase these sunglasses from the
accessory division.
Required:
A.
Calculate the minimum transfer price the accessory division should charge the apparel division if the accessory division has excess
capacity and there would be no contribution margin lost on outside sales if they sell to the apparel division.
B.
Calculate the minimum transfer price the accessory division should charge the apparel division if the accessory division does not have
excess capacity and they do not wish to incur additional losses if they sell to the apparel division.
A.
If excess capacity exists, the accessory division should charge enough to cover their variable costs. In this case, variable costs equal
B.
If excess capacity does not exist, the accessory division should charge the full market price to the apparel division or else there would