Use the following to answer questions 61-66:
Chocolate Enterprise is a multi-division company. The current ROI for Chocolate Enterprise as a whole is 11%,
and Chocolate Enterprise has a minimum required rate of return on all investments of 10%. The most successful
division within Chocolate Enterprise is the Boxed Candy division. Currently the boxed candy division has total
assets of $2,000,000 with operating income of $400,000. The manger of the Boxed Candy division is
considering the purchase of a small company called Truffles Inc. The purchase of Truffles Inc. will require an
investment of $800,000 and with the synergy between the two companies will increase the Boxed Candy
Division operating income by $76,000. Bonuses in all the Chocolate Enterprise Divisions are awarded to
mangers with increasing ROI’s.
Hilton – Chapter 18
61. The ROI for the Boxed Candy Division, before the proposed purchase of Truffles Inc. is:
62. The ROI for the Boxed Candy Division, after the purchase of Truffles Inc. would be:
63. The Residual Income for the Boxed Candy Division, before the purchase of Truffles Inc. would be:
64. The Residual Income for the Boxed Candy Division, after the purchase of Truffles Inc. would be:
65. If the Boxed Candy Division purchases Truffle, Inc., and income increases as expected, what will happen to
the ROI of Chocolate Enterprise?
66. Given the current bonus structure within Chocolate Enterprise and assuming the managing of the Boxed
Candy Division is a self maximizing individual, you would expect the Boxed Candy Division to:
67. The Gold Division of the Currency Company has net income in the amount of $500,000, an average total
asset base of $3,000,000 and residual income of $50,000. The imputed interest would be
AACSB: Analytic
AICPA BB: Critical Thinking; Resource Management
AICPA FN: Measurement; Reporting
Difficulty: Medium
Hilton – Chapter 18 #67
Learning Objective: 6
Use the following to answer questions 68 & 69 :
The Mercury Division of Planet Enterprises had pre-tax income of $1,500,000. Total assets were $13,000,000
while current liabilities were $3,000,000. The weighted average cost of capital is 10.0%. The tax rate for Planet
Enterprises is 25%
Hilton – Chapter 18
68. What is the EVA for the Mercury Division?
69. What is the ROI for the Mercury Division?
70. Which of the following is not a benefit of decentralization?
71. Which of the following is not a cost of decentralization?
72. Which of the following is considered a responsibility center?
73. Use of activity–based responsibility accounting leads to which of the following questions about the activity?
74. Which of the following is not used to evaluate investment center performance?
75. Which of the following is not a possible measure of divisional invested capital?
76. Last year Buchanan Company‘s divisional operating income was $400,000. The investment for the year was
$5,000,000. What is the return on investment?
77. There are five common types of responsibility centers listed below. Briefly describe each and give an
example.
Cost Center
Discretionary Cost Center
Revenue Center
Profit Center
Investment Center
78. What is meant by the hierarchy of performance reports?
79. Briefly discuss the possible measures that can be used for divisional invested capital.
80. Briefly describe the advantages and disadvantages of using net book value as a measure of invested capital.
81. Eiffel Inc. has two divisions it treats as investment centers. The results for last year were as follows:
Required: Compute the following amounts for each division:
1) Return on investment, desired rate of return is 11%
2) Residual income, desired rate of return is 18%
3) Capital turnover, desired rate of return is 25%
4) Sales margin, desired rate of return is 10%
82. You are given partial information for three investment centers of Carter Co. Find the missing information.
83. Engels, Inc. has the following data available for two of its divisions for last year:
The imputed interest for Marx Inc. is 24%.
The tax rate for Marx Inc. is 18%.
Required:
(1) Compute the following for each division
(a) Sales margin
(b) Capital turnover
(c) ROI
(d) Residual income
(e) EVA, (Assume there are no current liabilities)
(2) Briefly discuss which division appears most successful and why?
84. What are advantages and disadvantages of ROI and residual income as performance measures?
85. Briefly describe EVA.
86. Discuss the problems involved in measuring investment center income for evaluating the performance of the
investment center and evaluating the center’s manager.
87. Traffic Services Company has recently expanded by acquiring two smaller companies in the transportation
industry. Prior to these acquisitions, Traffic Services used a centralized style of organization because it was
small enough that the top management team was heavily involved in the day-to-day activities of the firm. Ms.
Causeway, the CEO, feels that this style is no longer suitable to the larger, more diverse organization.
She has hired a consultant to help her and her management team create a new structure which, when developed
on paper, will be described to the affected employees and their inputs will be sought. Since no one in the
company knows much about management styles, Ms. Causeway felt this would be an efficient way to get the
ball rolling but realized the consultants would not have the specialized knowledge about her company plus the
two acquisitions.
One of the first things she feels she will need to do is explain the benefits of decentralization that will accrue to
both the company and the affected employees. She asks you, as the consultant, to provide her with a general list
of advantages of decentralization that she will tailor to her company before presenting it.
88. Ladue, Inc. has used a decentralized form of organizational structure for the past five years. The controller,
Ms. Trevino, has noticed that some of the divisions are still using fixed assets that are fully depreciated and that
there has been little acquisition activity in these divisions. Coupled with this are very high ROIs, especially
when compared to the other divisions that seem to have a regular program of disposition and replacement of
fixed assets.
She takes her concerns and observations to the Financial Vice President who says he will review her findings
and look into the problem.
Required:
1) What are the potential negative effects of decentralization?
2) Specifically discuss the issues involved in suboptimization.
89. Mr. Chang is the production V.P. of Katrina Company. It is the beginning of the month and he storms into
the controllers department, clutching a large folder of reports. “Why am I getting so many reports? I don’t need
them nor do I want all the details. I’ve delegated responsibility to my managers so I don’t have to worry about
details. You’ve got to do something about this, Juan.”
Juan, the controller, starts to think about the problem that seems to have come about as the company
decentralized with many layers of responsibility. He has a vague memory of something he learned from his old
cost accounting class and has called you, his former professor, for some advice or suggestions in order to reduce
the paper flow.
Required: Briefly describe the concept of the hierarchy of performance reports.
90. Ricardo, Inc. is just starting up. The management team has decided from the beginning that decentralization
was the preferred organizational style and has made this clear in all interviews and discussions with potential
employees. Mr. Pangea, the CEO, is unsure about the best way to evaluate his division managers. He has heard
the terms return on investment, residual income, economic value added, and flexible budgets but wants to know
the pros and cons of each.
Required: Briefly describe ROI, residual income, EVA and other approaches to performance evaluation. Bring
in, where appropriate, how to calculate the measure and problem areas in the development of some of the
numbers.
91. Mrs. Young is the manager of the Children‘s Toy division of Ferguson Corporation. Every year she just
misses the cut off established by the company for the awarding of bonuses. She is concerned inasmuch as she
believes she is running her division effectively and her income has been increasing slowly but steadily over the
years she has been with the company.
She knows that the company uses ROI as the performance measure to evaluate divisions and begins to study the
formula to see what she should do to improve the ROI for her division.
Required: Briefly discuss several ways to improve ROI.
92. Decentralization is lauded as important to good management. But it is not without its problems. What are
the advantages and disadvantages of decentralization? How do ROI, Residual Income and EVA affect these
issues?