Chapter 23(8): Performance Evaluation for Decentralized Operations
177.
Using the data below for the Ace Guitar Company, determine the divisional income from operations for the A
and
B regions.
A Region
B Region
Sales
$500,000
$900,000
Cost of goods sold
200,000
300,000
Selling expenses
150,000
275,000
Service department expenses:
Purchasing
$90,000
Payroll accounting
30,000
Allocate service department expenses proportional to the sales of each region. Round percentage of sales
allocation to one decimal place.
178.
Piano Company’s costs were over budget by $47,000. The Piano Company is divided in two regions. The first
region’s costs were over budget by $5,000. Determine the amount that the second region’s cost was over or under
budget.
179.
Xang Company’s costs were over budget by $46,000. The Xang Company is divided in two regions. The
first
region’s costs were over budget by $7,000.
Determine the amount that the second region’s cost was over or under budget.
180.
Using the data from the Terrace Industries, determine the divisional income from operations for Districts 1 & 2.
District 1
District 2
Sales
$300,000
$600,000
Cost of goods sold
120,000
150,000
Selling expenses
55,000
75,000
Service department expenses:
Purchasing
$70,000
Payroll accounting
80,000
Allocate service department expenses proportional to the sales of each district.
181. A department store apportions payroll costs on the basis of the number of payroll checks issued. Accounting costs
are
apportioned on the basis of the number of reports. The payroll costs for the year were $231,000, and the
accounting
costs for the year totaled $75,500. The departments and the number of payroll checks and accounting
reports for each
are as follows:
Number of
Payroll Checks
Number
of Reports
Department R
483
70
Department S
1,470
85
Department T
147
345
Determine the amount of (a) payroll cost and (b) accounting cost to be apportioned to each department.
Number of payroll checks
Payroll cost
Number of reports
Accounting cost
182.
Some items are omitted from each of the following condensed divisional income statements of Demi Inc.
Eastern Division
Western Division
Central Division
Sales
$ (a)
$420,000
$580,000
Cost of goods sold
480,000
120,000
(e)
Gross profit
$230,000
$ (c)
$200,000
Operating expenses
95,000
160,000
(f)
Income from operations
$ (b)
$ (d)
$ 75,000
(a)
Determine the amount of the missing items, identifying them by letter (a–f).
(b)
Based on income from operations, which division is the most profitable?
(a)
(a)
(b)
(c)
$300,000
(d)
(e)
(b)
183.
The following financial information was summarized from the accounting records of Buddy Corporation for
the
current year ended December 31:
Beagle
Division
Dalmatian
Division
Corporate
Total
Cost of goods sold
$47,200
$30,270
Direct operating expenses
27,000
20,400
Net sales
99,000
87,000
Interest expense
$ 2,040
General overhead
18,160
Income tax
4,700
Calculate:
(a)
The gross profit for the Dalmatian Division.
(b)
The income from operations from the Dalmatian Division.
(c)
The gross profit for the Beagle Division.
(d)
The income from operations from the Beagle Division.
(e)
The net income for the Buddy Corporation.
184.
Using the data below for the Coffee & Cocoa Company,
(a)
determine the divisional income from operations for the three regions by allocating
the
service department expenses proportional to the sales of the regions.
(b)
determine the increase or decrease in net income if C Region did not operate.
A Region
B Region
C Region
Sales
$600,000
$900,000
$300,000
Cost of goods sold
200,000
350,000
190,000
Selling expenses
150,000
275,000
100,000
Service department
expenses:
Purchasing
120,000
Payroll accounting
80,000
185.
Bentz Co. has two divisions, A and B. Invested assets and condensed income statement data for each division for
the year ended December 31, are as follows:
Division A
Division B
Revenues
$190,000
$125,500
Operating expenses
112,500
92,750
Service department charges
29,500
12,625
Invested assets
225,000
99,000
(a)
Prepare condensed income statements for the past year for each division.
(b)
Using the DuPont formula, determine the profit margin, investment
turnover,
and rate of return on investment for each division. Round the
profit margin
percentage to two decimal places and investment turnover to
four decimal
places.
Revenues
Operating expenses
Income from operations before
Service department charges
Income from operations
(ROI) = Profit margin × Investment turnover
ROI = Income from operations × Sales
Division A = $48,000 × $190,000
ROI = 25.26% × 0.8444
ROI = 21.3%
Division B = $20,125 × $125,500
ROI = 16.04% × 1.2677
ROI = 20.3%
186.
The Magnolia Company’s Division A has income from operations of $80,000 and assets of $400,000. The
minimum
acceptable rate of return on assets is 12%. What is the residual income for the division?
187.
Ralston Company has income from operations of $75,000, invested assets of $360,000, and sales of $790,000.
Use the DuPont formula to calculate the rate of return on investment, and show (a) the profit margin, (b) the
investment turnover, and (c) rate of return on investment. Round the profit margin percentage to two
decimal
places and the investment turnover to three decimal places.
188.
The Creative Division of the Barry Company reported the following results for December:
Invested assets
$1,200,000
Profit margin
25%
Return on investment
30%
Based on this information, what were sales?
189.
Data for Divisions A, B, C, D, and E are as follows:
Div.
Sales
Income from
Operations
Inv.
Assets
Rate of
Return
on Inv.
Profit
Margin
Invest.
Turnover
A
(a)
$35,000
$200,000
(b)
(c)
1.6
B
$455,000
(d)
$284,375
16%
(e)
(f)
C
$525,000
$73,500
(g)
(h)
(i)
1.2
D
$800,000
(j)
(k)
(l)
13.0%
2.5
E
(m)
(n)
$250,000
(o)
16.0%
2.0
(a)
Determine the missing items, identifying each by letter (a–o).
(b)
Which division is most profitable in terms of income from operations?
(c)
Which division is most profitable in terms of rate of return on investment?
Round percentage and turnover values to one decimal point.
190.
Several items are missing from the following table of rate of return on investment and residual income.
Determine
the missing items, identifying each item by the appropriate letter (a–l). Round percentage values to
one decimal
point
Division
Invested
Assets
Income
from
Oper.
Rate of
Return
on Inv.
Min.
Rate of
Return
Min. Amt.
of Income
from
Oper.
Residual
Income
East
(a)
(b)
(c)
16%
$128,000
$10,000
West
$850,000
$153,000
(d)
12%
(e)
(f)
North
$825,000
(g)
20%
(h)
(i)
$24,000
South
(j)
$129,000
24%
(k)
$60,000
(l)
191.
The sales, income from operations, and invested assets for each division of Grosbeak Company are as follows:
Sales
Income from
Operations
Invested
Assets
Division E
$5,000,000
$550,000
$2,400,000
Division F
4,800,000
860,000
2,500,000
Division G
7,000,000
860,000
2,900,000
(a)
Using the DuPont formula, determine the profit margin, investment turnover,
and rate of return on investment for each division. Round profit margin
percentage to two decimal places, investment turnover to four decimal
places,
and rate of return on investment to one decimal place.
(b)
Which division is the most profitable per dollar invested?
Rate of return on investment:
ROI = Profit margin × Investment turnover
ROI = Income from operations × Sales
Division E:
ROI = $550,000 × $5,000,000
ROI = 11.00% × 2.0833
ROI = 22.9%
Division F:
ROI = $860,000 × $4,800,000
ROI = 17.92% × 1.92
ROI = 34.4%
Division G:
ROI = $860,000 × $7,000,000
ROI = 12.29% × 2.4138
ROI = 29.7%
192.
The sales, income from operations, and invested assets for each division of Wren Company are as follows:
Sales
Income from
Operations
Invested
Assets
Division C
$5,000,000
$630,000
$4,000,000
Division D
6,800,000
760,000
3,900,000
Division E
3,750,000
750,000
7,500,000
Management has established a minimum rate of return for invested assets of 8%.
(a)
Determine the residual income for each division.
(b)
Based on residual income, which of the divisions is the most profitable?
Division C:
Division D:
Division E:
$750,000 – ($7,500,000 × 8%) = $150,000
193.
Paduka Industries has several divisions. The Eastern Division has $350,000 of invested assets, income from
operations of $200,000, and residual income of $151,000. Determine the minimum acceptable rate of return
on
divisional assets.
194.
The Bottlebrush Company has income from operations of $60,000, invested assets of $345,000, and sales of
$786,000. Use the DuPont formula to calculate the rate of return on investment, and show (a) the profit margin,
(b)
the investment turnover, and (c) rate of return on investment. Round the profit margin percentage to two
decimal
places and the investment turnover to three decimal places.
195.
Miller’s Quarter Horse Company has sales of $4,500,000. It also has invested assets of $2,500,000 and operating
expenses of $3,800,000. The company has established a minimum rate of return of 7%.
(a)
What is Miller’s profit margin?
(b)
What is the investment turnover?
(c)
What is the rate of return on investment?
(d)
What is Miller’s residual income?
196.
Division G of Elephant Preservation Inc. has sales of $895,000, cost of goods sold of $475,000, operating
expenses
of $79,500, and invested assets of $750,000.
Calculate:
(a)
The rate of return on investment for Division G.
(b)
The profit margin for Division G.
(c)
The investment turnover for Division G.
197.
The sales, income from operations, invested assets, and residual income for each division of Marcus Company
are
as follows:
Sales
Income
from
Operations
Invested
Assets
Residual
Income
Division X
$5,000,000
$645,000
$4,100,000
$235,000
Division Y
6,800,000
777,000
4,000,000
377,000
Division Z
3,750,000
760,000
7,600,000
0
Determine the minimum rate of return for invested assets.
198.
Materials used by Best Bread Company in producing Division A’s product are currently purchased from
outside
suppliers at a cost of $30 per unit. However, the same materials are available from Division B.
Division B has
unused capacity and can produce the materials needed by Division A at a variable cost of $20
per unit.
(a)
If a transfer price of $25 per unit is established and 60,000 units of material are
transferred,
with no reductions in Division B’s current sales, how much would Best Bread
Company’s
total income from operations increase?
(b)
Assuming transfer price of $25 per unit is established and 60,000 units of material are
transferred, with no reductions in Division B’s current sales, how much would the
income
from operations of Division A increase?
(c)
Assuming transfer price of $25 per unit is established and 60,000 units of material are
transferred, with no reductions in Division B’s current sales, how much would the
income
from operations of Division B increase?
(d)
If the negotiated price approach is used, what would be the range of acceptable transfer
prices?
199.
The materials used by the Hibiscus Company’s Division A are currently purchased from an outside supplier at
$55
per unit. Division B is able to supply Division A with 20,000 units at a variable cost of $42 per unit. The two
divisions have recently negotiated a transfer price of $48 per unit for the 20,000 units. (a) By how much will
each
division’s income increase as a result of this transfer? (b) What is the total increase in income for Hibiscus
Company?
200.
The materials used by the Holly Company‘s Division A are currently purchased from an outside supplier. Division
B
is able to supply Division A with 20,000 units at a variable cost of $42 per unit. The normal price that Division
B
normally sells its units is $53 per unit. What is the range of transfer prices within which the two division
managers
should negotiate?
201.
Materials used by the Layton Company‘s Division 1 are currently purchased from outside supplier at $58 per
unit.
Division 2 is able to supply Division 1 with 22,000 units at a variable cost of $46 per unit. The two
divisions have
recently negotiated a transfer price of $50 per unit for the 20,000 units.
(a)
By how much will each division’s income increase as a result of this transfer?
(b) What is the total increase in income for Layton?
Chapter 23(8): Performance Evaluation for Decentralized Operations
Match each of the following phrases as describing (a) an advantage, (b) a disadvantage, or (c) neither of
decentralization.
a.
Advantage of decentralization
b.
Disadvantage of decentralization
c.
Neither an advantage or disadvantage
DIFFICULTY: Moderate
Bloom’s: Remembering
LEARNING OBJECTIVES: ACCT.WARD.16.24-01 – 24–01
ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 – Budgeting and Responsibility
ACCT.IMA.09 – Performance Measurement
BUSPROG: Analytic
202.
Responsibilities delegated to unit managers
203.
Internal price wars
204.
Operational issues are made by managers closest to the operations
205.
Separate office staff
206.
Separate sales forces
Chapter 23(8): Performance Evaluation for Decentralized Operations
An activity base is used to charge service department expenses. Match each of the following activity bases
with
the appropriate department (a-h).
a.
Purchasing
b.
Payroll accounting
c.
Human resources
d.
Maintenance
e.
Information systems
f.
Marketing
g.
President’s Office
h.
Transportation
DIFFICULTY: Moderate
Bloom’s: Remembering
LEARNING OBJECTIVES: ACCT.WARD.16.24-03 – 24–03
ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 – Budgeting and Responsibility
ACCT.IMA.09 – Performance Measurement
BUSPROG: Analytic
207.
Number of work orders
208.
Number of employees
209.
Number of payroll checks
210.
Number of purchase requisitions
211.
Allocated equally among divisions
212.
Number of advertising campaigns
213.
Number of miles
214.
Number of computers in department
Match each definition that follows with the term (a-e) it defines.
a.
Controllable revenues
b.
Profit margin
c.
Investment turnover
d.
Rate of return on investments
e.
Residual income
DIFFICULTY: Moderate
Bloom’s: Remembering
LEARNING OBJECTIVES: ACCT.WARD.16.24-04 – 24–04
ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 – Budgeting and Responsibility
ACCT.IMA.09 – Performance Measurement
BUSPROG: Analytic
215.
Income from operations minus minimum acceptable income from operations
216.
Income from operations divided by invested assets
217.
Ratio of income from operations to sales
218.
Earned by profit centers
219.
Ratio of sales to invested assets