Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
62) Batman Abstract Company has three divisions that operate autonomously. Their results for 2009 are
as follows:
Riddler
Joker
Penguin
Sales
$5,000,000
$7,000,000
$10,000,000
Contribution margin
1,440,000
1,700,000
3,500,000
Operating income
1,000,000
1,750,000
2,520,000
Investment base
9,000,000
10,000,000
14,000,000
The company’s desired rate of return is 20%.
Required:
a. Compute each division’s ROI.
b. Compute each division’s residual income.
c. Rank each division by both ROI and residual income.
Riddler
Joker
Penguin
Investment base
$9,000,000
$10,000,000
$14,000,000
Minimum rate
$1,800,000
$2,000,000
$2,800,000
Income
$1,000,000
$1,750,000
$2,520,000
Minimum return
1,800,000
2,000,000
2,800,000
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
63) Hargrave Products has three divisions which operate autonomously. Their results for 2010 were as
follows:
East West International
Sales $30,000,000 $40,000,000 $50,000,000
Cost of goods sold $15,000,000 25,000,000 37,000,000
Operating income 4,500,000 4,750,000 5,000,000
Investment base 30,000,000 30,500,000 31,000,000
The company’s desired rate of return is 15 percent.
Required:
a. Compute each division’s ROI. Round to three decimal places.
b. Compute each division’s residual income.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
64) Kase Tractor Company allows its divisions to operate as autonomous units. The operating data for
2009 follow:
Plows
Tractors
Combines
Revenues
$2,250,000
$500,000
$4,800,000
Accounts receivable
800,000
152,500
1,435,000
Operating assets
1,000,000
400,000
1,750,000
Net operating income
220,000
60,000
480,000
Taxable income
165,000
90,000
385,000
Required:
a. Compute the return on sales for each division
b. Compute the return on investment for each division.
c. Which division manager is doing best? Why?
d. What other factors should be included when evaluating the managers?
For parts (b) and (c) income is defined as operating income.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
65) An art distribution company has three divisions which operate autonomously. Their results for 2010
were as follows:
R-division J-division G-division
Sales $5,000,000 $7,000,000 $10,000,000
Contribution margin 1,440,000 1,700,000 3,500,000
Operating income 1,000,000 1,750,000 2,520,000
Investment base 9,000,000 10,000,000 14,000,000
The company’s desired rate of return is 20 percent.
Required:
a. Compute each division’s ROI.
b. Compute each division‘s residual income.
c. Rank each division by both ROI and residual income.
d. Which division had the best performance in 2011? Why?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
66) Museum Corporation uses the investment centre concept for the museums that it manages. Select
operating data for three of its museums for 2011 are as follows:
Montreal Toronto Vancouver
Revenue $300,000 $375,000 $450,000
Total assets 150,000 125,000 175,000
Net operating income 25,500 28,000 29,500
Required:
a. Compute the return on investment for each division.
b. Which museum manager is doing best based only on ROI? Why?
c. What other factors should be included when evaluating the managers?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
67) The Coffee Division of Canadian Products is planning the 2011 operating budget. Average total assets
of $1,500,000 will be used during the year and unit selling prices are expected to average $100 each.
Variable costs of the division are budgeted at $400,000 while fixed costs are set at $250,000. The
company’s required rate of return is 18 percent.
Required:
a. Compute the volume necessary to achieve a 20 percent ROI.
b. The division manager receives a bonus of 50 percent of the residual income. What is his anticipated
bonus for 2011 assuming he achieves the targeted operating income in part a. and the required return is
based on 18%?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
68) LaserLife Printer Cartridge Company is a decentralized organization with several autonomous
divisions. The division managers are evaluated, in part, on the basis of the change in their return on
invested assets. Operating results for the Packer Division for 2011 are budgeted as follows:
Sales $5,000,000
Less variable costs 2,500,000
Contribution margin $2,500,000
Less fixed expenses 1,800,000
Net operating income $700,000
Total assets for the division are currently $3,600,000. For 2011 the division can add a new product line for
an investment of $600,000. The new product line will generate sales of $1,600,000 and will incur fixed
expenses of $600,000 annually. Variable costs of the new product will average 60 percent of selling price.
Required:
a. What is the effect on ROI of accepting the new product line?
b. If the company’s required rate of return is 6 percent, and residual income is used to evaluate
managers, would this encourage the division to accept the new product line? Explain and show
computations.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
69) Capital Investments has three divisions. Each division’s required rate of return is 15 percent. Planned
operating results for 2011 are:
Division Operating income Investment
A $15,000,000 $100,000,000
B 25,000,000 125,000,000
C 11,000,000 50,000,000
The company is planning an expansion requiring each division to increase its investments by $25,000,000
and its income by $4,500,000.
Required:
a. Compute the current ROI for each division.
b. Compute the current residual income for each division.
c. Rank the divisions according to their current ROIs and residual incomes.
d. Determine the effects after adding the new project to each division’s ROI and residual income.
e. Which Divisions are pleased with the addition and which ones are unhappy assuming the managers
are evaluated on a combination of ROI and residual income? Is a combination of ROI and residual income
appropriate for the divisions?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
70) Kase Tractor Company allows its divisions to operate as autonomous units. The tax rate is 35% and
other operating data for the past year follow:
Plows Tractors Combines
Revenues $2,250,000 $500,000 $4,800,000
Accounts receivable 800,000 152,500 1,435,000
Total assets 1,000,000 400,000 1,750,000
Operating income 220,000 60,000 480,000
WACC 11.5% 11.5% 11.5%
Required:
a. Compute the return on investment for each division.
b. Compute the EVA for each division
c. What other ratio could be calculated for performance evaluation?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
71) Provide the missing data for the following situations:
Red White Blue
Division Division Division
Sales $? $10,000,000 $?
Net operating income $200,000 $400,000 $288,000
Total assets $? $? $1,600,000
Return on investment 0.16 0.10 ?
Return on sales 0.04 ? 0.12
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
72) Coptermagic Company supplies helicopters to corporate clients. Coptermagic has two sources of
funds: long term debt with a market and book value of $32 million issued at an interest rate of 10%, and
equity capital that has a market value of $18 million (book value of $8 million). The cost of equity capital
for Coptermagic is 15%, and its tax rate is 30%. Coptermagic has profit centres in four divisions that
operate autonomously. The company’s results for the past year are as follows:
Operating
Income
Assets
Current
Liabilities
Brandon
$1,750,000
$11,500,000
$2,500,000
Hamilton
2,400,000
9,000,000
3,500,000
Penticton
4,675,000
27,500,000
9,500,000
Halifax
4,200,000
25,000,000
8,000,000
Required:
a. Compute Coptermagic’s weighted average cost of capital.
b. Compute each division’s Economic Value Added.
c. Rank the divisions by EVA.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
73) Last year Reynolds Ltd. reported the following results:
Sales
$1,450,000
Cost of Goods
Sold
$870,000
Operating
Expenses
$230,000
Assets
$2,187,500
Required:
a. Using the DuPont method, calculate the company’s return on investment for the year just ended.
b. Assuming the company’s sales and assets remain the same as last year, by how much would the
gross margin percentage have to increase to achieve a 20% return on investment?
c. Assume the company sets a minimum required return of 13%, what would the residual income be?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
74) Chaucer Ltd. has current assets of $450,000 and capital assets of $630,000. Its budgeted production
volume for the next fiscal year is 200,000 units. Fixed costs are projected at $400,000 and variable unit
costs for the one product produced total $5/unit. The company defines ROI as Operating Income/Total
Assets and its required rate of return is 14%.
Required:
a. What selling price should Chaucer charge for its product if it wishes to achieve a 25% ROI? What is
the operating income at this price?
b. The general manager for Chaucer receives a bonus equal to 12% of the residual income for the period.
Calculate the amount of the bonus assuming the selling price calculated in part a).
c. Prepare a brief memo to the President of Chaucer outlining the advantages and disadvantages of ROI
and Residual Income. Include your recommendations for the most appropriate method for calculating the
bonus.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
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Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
75) Randall Ltd. reported the following results for its two divisions:
Division A
2011
2012
Sales
$260,000
$260,000
Operating
Income
$19,240
$18,460
Investment
$98,000
$96,000
Division B
2011
2012
Sales
$416,000
$416,000
Operating
Income
$30,784
$29,536
Investment
$192,400
$192,400
Required:
a. Using the DuPont method, calculate the return on investment for each division for each year.
b. Comment on the performance of each division.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
76) The following table presents information related to three divisions of Bacchus Ltd.:
Alpha Division
Beta Division
Delta Division
Sales
$12,000,000
E
I
Operating
Income
$2,640,000
F
$450,000
Profit Margin
A
24%
25%
Asset Turnover
B
G
1.2 times
ROI
C
19.2%
J
Investment
$6,600,000
H
K
Residual
Income
D
$138,000
L
The company’s required rate of return is 10%.
Required:
Solve for the unknowns.
Alpha Division
Beta Division
Delta Division
Sales
$12,000,000
Income
$2,640,000
$450,000
Profit Margin
Asset Turnover
B = 1.818
1.2 times
ROI
19.2%
Investment
$6,600,000
Residual
Income
$138,000
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
77) Stratton Industries has two divisions. These divisions reported the following results for the year just
ended:
Division 1
Division 2
Operating
Income
$840,000
$180,000
Assets
$4,200,000
$750,000
Required.
a. Calculate the ROI for each division. Which division would you consider to be the most successful?
Why?
b. Now assume that the company requires a 14% minimum rate of return. Calculate the residual income
for each division. Which division would you consider to be the most successful? Why?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
78) The executive vice president of Wicker Pen Company wants to establish an accounting-based
performance measurement system for the company’s new plant. The company has an accounting
information system sufficient to support a fairly sophisticated performance measurement system. The
new plant is going to be considered an investment centre since its products will be marketed differently
from others the company currently sells and it has no internal dealings with other plants within the
company.
Required:
What are some of the key steps that should be undertaken in the establishment of a performance
measurement system based on the Performance Measures Decision Process Model?
79) R & D Storage is a small, but diversified, moving and storage company. In recent years its corporate
income has declined to unacceptable levels. To change the direction of the company, the board of
directors hired a new chief executive officer. She is currently considering three alternative ways as to how
division managers are rewarded for their performance. They are; ROI, RI, and EVA.
Required:
Evaluate the CEO’s plans by comparing the similarities and differences of the three methods.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
80) The economic value added concept has attracted considerable attention in recent years. Explain the
attractiveness of this number as a measure of performance.
81) Companies are increasingly using nonfinancial measures to evaluate performance. Why? Since these
numbers do not come from the company’s financial records, why are they used?
24.2 Evaluate current-cost and historical-cost asset measurement methods.
1) Current cost is the cost of purchasing an asset today identical to the one currently held.
2) The timing of feedback depends on the level of management that receives the information and on the
complexity of the organization’s information technology.
3) Current cost return on investment is a better measure of the current economic returns from an
investment than historical cost return on investment.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
4) Using gross book value as an investment base will result in a lower ROI than using net book value as
an investment base.
5) One way to achieve greater comparability of historical-cost based ROIs is to restate performance in
dollars.
Use the information below to answer the following question(s).
The following data are available for a foundry operation started as a new company four years ago when
the construction cost index was 125:
Current liabilities
$170,000
Operating income
$176,200
NBV long-term assets (end year 3)
$687,500
Current assets
$300,000
Gross book value *
$1,100,000
Estimated total useful life *
8 years
Age of assets *
4 years
Construction cost index end of year 4
150
* = long-term assets at historical cost
6) What is the NBV of the long-term assets at current cost at the end of year 4?
A) $660,000
B) $800,000
C) $960,000
D) $1,180,000
E) $1,760,000