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463
E14–12
a. 1.50 = 12% ÷ 8%
E14–13
a. Return on Investment = Profit Margin × Investment Turnover
Return on Investment = Operating Income
Sales × AssetsInvested
Sales
b. The profit margin would increase from 16% to 17%, the investment turnover
would remain unchanged, and the return on investment would increase from
19.2% to 20.4%, as shown below.
Return on Investment = Profit Margin × Investment Turnover
E14–14
a. Return on Investment = Operating Income
Revenues × AssetsInvested
Revenues
Studio Entertainment: $1,973
$6,838 × $6,838
$15,334
b. The four sectors are different from each other. Media Networks combines a
good profit margin with an average investment turnover. Media Networks is
465
E14–15
a. 16% ($400,000 ÷ $2,500,000)
466
E14–16
a. (a) $1,200,000 ($6,000,000 × 20%)
b. California Division: $450,000 [$1,200,000 – ($7,500,000 × 10%)]
Texas Division: $490,000 [$840,000 – ($3,500,000 × 10%)]
c. (1) The Texas Division has the highest return on investment (24%).
467
E14–17
a. Increase in Kaufman Manufacturing’s
Operating Income =Market
Price –Variable Cost
per Unit × Units
Transferred
E14–18
a. Increase in Kaufman Manufacturing’s
Operating Income =Market
Price –Variable Cost
per Unit × Units
Transferred
b. Increase in the Appliance Division’s
Operating Income =Market
Price –Transfer
Price × Units
Transferred
c. Increase in the Electronics
Division’s Operating Income =Transfer
Price –Variable Cost
per Unit × Units
Transferred
d. Any transfer price will cause the total income of the company to increase, as
long as the supplier division’s capacity is used toward making materials for
products that are ultimately sold to the outside. However, transfer prices
469
PROBLEMS
P14–1
1. SNEED INDUSTRIES COMPANY
Budget Performance Report—Director, Crane Division
For the Month Ended August 31, 20Y6
Over (Under)
Budget Actual Budget Budget
Customer service salaries ....... $ 250,000 $ 368,000 $118,000 $ —
2. The customer service and marketing salaries are significantly over budget.
The director should investigate the cause of these results. One possibility is
470
P14–2
1.
A-ONE FREIGHT INC.
Divisional Income Statements
For the Quarter Ended December 31, 20Y3
Air Rail Truck
Revenues ............................................................ $5,000,000 $6,000,000 $ 9,000,000
Supporting schedules:
Service department charge rates for the two service departments, Customer
Support and Legal, are determined as follows:
Air Rail Truck Total
Number of customer contacts ...... 1,500 4,500 16,000 22,000
471
P14–2, Concluded
2. The CEO evaluates the three divisions using operating income as a percent of
revenues (profit margin). This measure is calculated for the three divisions as
3. To: CEO
The method used to evaluate the performance of the divisions should be ree-
valuated. The present method identifies the amount of operating income per
472
P14–3
1. HIGH COUNTRY FOODS INC.
Divisional Income Statements
For the Year Ended June 30, 20Y7
Frozen
Breakfast Bakery Foods
Division
Division Division
Sales .................................................... $39,600,000 $ 18,500,000 $24,000,000
2. Return on Investment = Profit Margin × Investment Turnover
Return on Investment = Operating Income
Sales × AssetsInvested
Sales
Frozen Foods Division: ROI = $1,920,000
$24,000,000 × $24,000,000
$16,000,000
