SOLUTIONS TO EXERCISES
Ex. 22.1 a.
b.
g
. Variable costs
Traceable fixed costs
Cost-plus transfer price
g
Ex. 22.4
Ex. 22.5
Dollars Percent of
Sales Dollars Percent of
Sales Dollars Percent of
Sales
$ 1,400,000 100 $ 800,000 100 $ 600,000 100
590,000 42 320,000 40 270,000 45
Student responses will differ. Below are some suggested measures:
–Country level investment center measures:
• Capital budgeting (activities/growth in the investment center)
• Return on invested capital (standard measure for an investment center)
Entire Company Routers Line
Gemini’s responsibility income statement is shown below:
HEPRAS INCORPORATED
Responsibility Income Statement
For the Current Month
Switches Line
Ethernet
Sales
Variable costs
Ex. 22.6
Store 3. The effect of an advertising campaign upon operating income is determined by
comparing the cost of the advertising ($15,000 per month) with the additional contribution
Store 1. The contribution that each store makes toward common costs and toward the
profitability of Drexel-Hall is measured by responsibility margin—that is, revenue less all costs
Store 2. The effectiveness of the store manager’s strategies are best evaluated by looking at the
relationship of revenue to expenses under the manager’s direct control. This relationship is
Ex. 22.8
11,400$ 11,100 13,500 36,000$ 15,000 21,000$
Strategy 1: Advertise the name Drexel-Hall:
Expected increase (decrease) in monthly contribution margin:
Store 1: ($228,000 × 5% increase)
Store 2: ($222,000 × 5% increase)
Although these division managers’ arguments have been frequently repeated, that
does not make them wrong. The point is that Harry’s response is not appropriate.
The total variable costs incurred in Repairs is $8,000. Twenty-five percent of
$8,000 = $2,000 is revenue from the Sales Department. This $2,000 is included in
both revenues and variable costs for the Repairs department and does not generate
any contribution margin. As a result, the total sales revenue for the Repairs
Ex. 22.11
Ex. 22.12
Entire UK Mexican
Com
p
an
y
Division Division
Ex. 22.14
Ex. 22.13 (continued): Using a transfer price of 750,000, the tax liability for each division
and for the company as a whole:
Student responses will vary, but here is one organizational design:
Jasper Golf Resort*
SOLUTIONS TO PROBLEMS SET A
20 Minutes, Easy PROBLEM 22.1A
CHOCOLATIERS COMPANY
a. CHOCOLATIERS COMPANY
Responsibility Income Statement
For the Current Month
Entire Company Solid Chocolate Powdered Chocolate
Dollars Percent Dollars Percent Dollars Percent
Sales 1,720,000$ 100 850,000$ 100 870,000$ 100
Variable costs 859,000 50 467,500 55 391,500 45
b.
According to the analysis in part a, the Powdered Chocolate product line is more profitable.
30 Minutes, Medium PROBLEM 22.2A
REGAL FLAIR ENTERPRISES
a. Responsibility income statement:
Entire Company Jewelry Line Apparel Line
Dollars Percent Dollars Percent Dollars Percent
For the Current Month
Responsibility Income Statement
REGAL FLAIR ENTERPRISES
PROBLEM 22.2A
REGAL FLAIR ENTERPRISES (concluded)
b.
Recommendations on increased advertising:
It appears that increasing advertising expenditures on apparel will increase the profitability
of the business, but spending the proposed amount to advertise jewelry would reduce
profitability.
a. Responsibility income stateme
n
Entire Company Commercial Sales Division Home Products Division
Dollars Percent Dollars Percent Dollars Percent
Sales 2,400,000$ 100.0 1,500,000$ 100.0 900,000$ 100.0
GIANT CHEF EQUIPMENT COMPANY
Responsibility Income Statement
For June