Atkinson, Solutions Manual t/a Management Accounting, 6E
– 444 –
increase in return on investment
Return on investment = (return on sales) (investment turnover).
11–46 (a) Return on investment = income/investment
(b)
Division income
$420,000
Cost of capital:
10% × division investment
140,000
Residual income
$280,000
11–47 The response is problematic and reflects the respondent’s image of different
jewelry business. The business strategy in a grocery business is to promote sales
11–48 Recall that the productivity ratio is output divided by input. Consider
processing a side of beef. The input is the weight of the side of beef. If the
the productivity ratio will assess the skill used to turn the side of beef into
finished products. In general, whenever skill is involved in turning raw
potential given the quality of the inputs.
Chapter 12: Financial Control
– 445 –
11–49 Residual income income – required return on investment
11–50
Golfing
Line
Ski
Line
Football
Line
Income
$3,500,000
$7,800,000
$1,700,000
Investment
$35,000,000
$50,000,000
$23,000,000
Required return
@ 10%
$3,500,000
$5,000,000
$2,300,000
Residual income
$0
$2,800,000
($600,000)
assumptions were used. There should be a determination of whether this is an
unusual year or an average year. If the income numbers seem hard and the
PROBLEMS
11–51 One interpretation, with reasoning, is given for each of the following items.
(b) The role is to provide profits to the store by providing customers with the
services (food and how it is presented) and controlling the costs associated
– 446 –
(c) The role is to provide a range and quality of services that meet customer
requirements while controlling costs. This is probably a cost center since
demand.
(e) The role is to minimize the cost of the customer services provided while
performing them properly (quality) and when they are required (service).
indeterminable effect on demand.
(g) The role is to provide a reasonable return on investment to the parent by
providing customers with desired products and controlling the costs
associated with providing those goods. This is at a minimum a profit
level significantly.
11–52 One of the first questions to ask is whether there is any purpose served by
allocating factory building depreciation space to the individual cost centers. If
One purpose of allocating these costs might be to motivate the cost center
should serve some desired decision-making purpose or motivate some desired
behavior.
Chapter 12: Financial Control
– 447 –
11–53 (a) This question is intended to explore the respondent’s understanding of
controllable and uncontrollable cost. The example provided should be
that absenteeism costs are uncontrollable while others will argue that they
are controllable through proper human resource practices.
transaction, where the cost is variable, into a contractual transaction
where the cost is fixed.
11–54
(a)
Product Line
1
2
3
Total
Revenue
$7,160,000
$1,900,000
$4,200,000
$13,260,000
Variable costs
4,296,000
950,000
1,680,000
6,926,000
Contribution margin
2,864,000
950,000
2,520,000
6,334,000
Other costs
859,200
237,500
693,000
1,789,700
Segment margin
2,004,800
712,500
1,827,000
4,544,300
Allocated avoidable
costs
349,000
156,000
698,000
1,203,000
Income
$1,655,800
$556,500
$1,129,000
$3,341,300
Unallocated costs
801,300
Company profit
$2,540,000
institution, the need for checking accounts may draw customers to the
institution; if the financial institution does not offer checking accounts,
customers may take all their business elsewhere. As another example,
consider the role of a restaurant in a large hotel. On the surface, restaurants
– 448 –
11–55 Such a search should locate many useful illustrations. As of February 2010, a
PDF file on RadioShack® Corporation’s decision to close some
gross margin per square foot of shelf space to evaluate the performance of its
11–56 Transfer prices based on market prices invite, and in many cases are designed to
invite, comparisons with the costs of outside suppliers. Given cost, reliability,
agencies are required to sell their services to the government as if they were
independent outside suppliers.
outside printer to print classified government documents or contract with a gang
of hooligans to provide security services), then the outsider supplier should be
used.
11–57 (a) Most commentators on transfer price state flatly that, if a market price is
available, that is the price the organization should use to price internal
organization wishes to maintain the credibility, the motivational effect,
and the economic insights of transfer pricing, it must allow the selling
outside) for the boards.
Chapter 12: Financial Control
– 449 –
too low. Second, the programming division can try to improve its
efficiency so that its programming costs are less than $75 per unit. Third,
Motivationally, it would appear most desirable to require that the
programming division pay $625 per board. The resulting losses would
disincentives for appropriate action in this setting.
11–58 (a)
%15
000,000,4$
000,600$
Investment
Income
ROI
(b)
%44.14
000,500,4$
000,650$
Investment
Income
ROI
(d) A variety of changes are possible. For example, the manager could receive a
flat bonus upon achieving a target ROI or target residual income. Another
alternative is to base the manager’s compensation on a combination of
financial and nonfinancial measures. Current–period actions that decrease the
information about the current period’s success in generating both current
financial performance and growth options for the future.
Atkinson, Solutions Manual t/a Management Accounting, 6E
– 450 –
11–59 (a)
Net Book Value (The franchise cost is fully amortized.)
)000,10$1($
000,000,3$
book valueNet
Income
investmenton Return
Historical Cost
)000,100$000,10$000,000,5($
000,000,3$
cost Historical
Income
investmenton Return
= 58.71%
Economic value added = Income – Required return on investment
Historical Cost
11–60 In this setting, economic value added requires that the bank can compute the
revenue, costs, assets, and asset values associated with each product line. This
For example, consider the profitability associated with the provision of safety
credit card, a checking account, a safety deposit box and direct payment
Chapter 12: Financial Control
– 451 –
when the staff are also engaged in other activities. Finally, the cost of long-term
11–61 This is a terrible idea. Economic value added analysis is useful to identify the
economic benefits of an existing investment—it is not intended to assess a
should be evaluated using economic value added, and the manager should be
evaluated using budgets or benchmarking the manager’s performance to
comparable organizations.
11–62 No. The reported results might be soft numbers resting on subjective
allocations. Moreover, there may be a high degree of interaction between the
manufacturing business and installing business. If the product has an excellent
Atkinson, Solutions Manual t/a Management Accounting, 6E
– 452 –
11–63Note: The solution below draws on net present value analysis, which is covered
in other courses but not in this book.
(a)
Strathcona Paper
Year
Outflow
Savings
Depreciation
0
50,000,000
0
0
1
0
16,000,000
10,000,000
2
0
16,000,000
10,000,000
3
0
16,000,000
10,000,000
4
0
16,000,000
10,000,000
5
0
16,000,000
10,000,000
Year
Taxes
NCF
PV
0
0
(50,000,000)
(50,000,000)
1
2,100,000
13,900,000
12,410,714
2
2,100,000
13,900,000
11,080,995
3
2,100,000
13,900,000
9,893,745
4
2,100,000
13,900,000
8,833,701
5
2,100,000
13,900,000
7,887,233
Net present value
$106,388
(b) The manager is evaluated based on the after–tax return on investment of
assets managed. The current investment base is $50,000,000 and the
to $10,900,000 = ($7,000,000 + $16,000,000 – $10,000,000 –
$2,100,000) and the new investment level will increase to $90,000,000 =