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Chapter 24 - Performance Measurement and Responsibility Accounting
Exercise 24-8 (15 minutes)
1.
Return on
2. The recommendation is to pursue Location B because its return on
investment (assets) is 18%, compared to 16% at Location A. Moreover,
given the normal return of 18% for this chain, only Location B meets this
hurdle.
This exercise should caution students to think beyond financial
numbers alone. Some students may discuss the need to look at the
Exercise 24-9 (20 minutes)
(1)
Investment center Income Average assets
Return on
investment
Sporting Goods............2,040,000 12,000,000 17%
Comment: The electronics division is the superior investment center on the
basis of the investment center return on investment (assets).
Exercise 24-9 (continued)
(2)
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Education.
Chapter 24 - Performance Measurement and Responsibility Accounting
Investment Center Electronics
Sporting
Goods
Net income.................... $2,880,000 $2,040,000
Target net income
(1,920,000
Comment: The electronics department is the superior investment center on
the basis of investment center residual income.
(3) The electronics department should accept the new opportunity, since it
will generate residual income of 3% (15% - 12%) of the investment’s
invested assets.
Exercise 24-10 (15 minutes)
Investment Center Income Sales Profit margin
Electronics....................$2,880,000 $40,000,000 7.20%
Sporting Goods............2,040,000 20,000,000 10.20%
Investment Center Sales Average assets
Investment
turnover
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Education.
Chapter 24 - Performance Measurement and Responsibility Accounting
Exercise 24-11 (20 minutes)
(1)
Investment center
Operating
income Average assets*
Return on
investment
Beverage....................... $349 $2,628 13.28%
Cheese........................... 634 4,428 14.32%
(2)
Investment center
Operating
income Sales Profit margin
*Beginning plus ending invested assets, divided by 2. Rounded to the nearest dollar.
Exercise 24-12 (10 minutes)
($ millions) Beverage Cheese
Operating income......... $349 $634
Target net income
$2,628* x 7%...............
(184)
*Average invested assets. Computed as beginning plus ending invested assets, divided by two,
and rounded to nearest dollar.
Exercise 24-13 (15 minutes)
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Education.
Chapter 24 - Performance Measurement and Responsibility Accounting
Investment center
Operating
income Sales Profit margin
Americas....................... $22,817 $62,739 36.4%
Exercise 24-14 (20 minutes)
1. Return on investment = $1,000,000/$12,500,000 = 8%
2. Profit margin = $1,000,000/$5,000,000 = 20%
3. Predicted 2016 sales = $5,000,000 x 120% = $6,000,000
4. Predicted 2016 investment turnover = $6,000,000/$12,500,000 = 0.48
Exercise 24-15 (20 minutes)
1. F 8. P
Exercise 24-16 (15 minutes)
Part 1
24-1428
Education.
Chapter 24 - Performance Measurement and Responsibility Accounting
Move time................................................................................... 3.2 days
Wait time..................................................................................... 5.0 days
Manufacturing cycle time......................................................... 15.0 days
Part 2
Manufacturing cycle efficiency (6.0 days/ 15.0 days)............ 0.40
This means that Oakwood is spending 40% of its time in value-added
activities, and 60% of its time on non-value-added activities.
Part 3
If move time is reduced by 1.2 days and wait time is reduced by 2.8 days,
manufacturing cycle time will be reduced to 11.0 days. Manufacturing
cycle efficiency will be 0.545, computed as 6.0 days divided by 11.0 days.
Exercise 24-17 (15 minutes)
Part 1
Process time..............................................................................16.0 hours
Inspection time.......................................................................... 3.5 hours
Exercise 24-17 (continued)
Part 2
Manufacturing cycle efficiency (16.0 hours/ 50.0 hours)...... 0.32
activities, and 68% of its time on non-value-added activities.
Part 3
To increase the manufacturing cycle efficiency to 0.80 Best Ink needs to
reduce the total manufacturing cycle time to 20 hours without changing the
process time (16 hours/ 0.80 = 20 hours). To do this, they must reduce the
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Exercise 24-18A (15 minutes)
1. If the trailer division is currently operating at full capacity, its manager
2. If the trailer division is currently producing 20,000 trailers and the
assembly division will order 15,000 more trailers, the Trailer division will
have excess capacity. In this case the range of acceptable transfer prices
Exercise 24-18A (continued)
3. The trailer division would prefer a transfer price of $140 per trailer, since
it provides a $60 ($140 - $80) contribution margin per trailer. At a transfer
price of $80 the trailer division reports a contribution margin of $0 per
trailer. Conversely, the assembly division manager prefers a transfer price
of $80, since it provides a contribution margin of $120 ($200 - $80) per
Exercise 24-19B (20 minutes)
Preliminary calculations
Land cost .......................................................................$4,000,000
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Education.
Chapter 24 - Performance Measurement and Responsibility Accounting
Improvements ................................................................ 3,500,000
Total cost of lots ............................................................$7,500,000
Lots Quantity Price Total
Allocated cost—value basis of allocation: $7,500,000
Market % of Allocated Average
Value Total Cost Lot Cost
Canyon section............ $24,750,000 60% $4,500,000 $10,000
Exercise 24-20B (25 minutes)
Preliminary calculations
Lobster cost (2,400 lbs. x $4.50)......................$10,800
Labor cost.......................................................... 1,800
* Quantities are computed as:
52% x 2,400 lbs. = 1,248 lbs.
22% x 2,400 lbs. = 528 lbs.
Allocated cost—value basis allocation: $12,600
Market % of Allocated Cost
Parts Value Total Cost per lb.
Lobster tails.....................$26,208 78.0% $9,828 $7.875
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Education.
Chapter 24 - Performance Measurement and Responsibility Accounting
(1) Cost of goods sold
Parts Quantity (given) Cost Total
Lobster tails............................ 1,096 lbs. $7.875 $ 8,631
(2) Cost of ending inventory
Parts Quantity Cost Total
Lobster tails............................ 152 lbs.* $7.875 $ 1,197
Lobster flakes......................... 204 lbs.** 5.250 1,071
Note: Cost of goods sold ($10,332) plus cost of ending inventory
($2,268) equals the total cost of $12,600.
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