CHAPTER 11 Performance Evaluation and Decentralization
E 11-35
1. The maximum transfer price, set by the Motel Division, is $40.
3. Benefit to Furniture Division:
Revenue ($35 × 10,000) $350,000
Less: Variable cost ($14 × 10,000) 140,000
Benefit $210,000
Benefit to Motel Division:
E 11-36 (Appendix)
1. Theoretical Cycle Time = (10,000 hours × 60 minutes per hour)/50,000 units
= 12 minutes per unit
2. Actual Cycle Time = (10,000 hours × 60 minutes per hour)/40,000 units
= 15 minutes per unit
r
4. Actual Velocity = 60 minutes per hour/15 minutes per unit
= 4 units per hou
r
E 11-37 (Appendix)
1. Theoretical Cycle Time = (30,000 hours × 60 minutes per hour)/90,000 units
= 20 minutes per unit
3. Theoretical Velocity = 60 minutes per hour/20 minutes per unit
= 3 units per hou
r
= 2.5 units per hou
r
CHAPTER 11 Performance Evaluation and Decentralization
E 11-38 (Appendix)
1. Processing Time = Theoretical Cycle Time = 9 minutes per unit
Nonprocessing Time =
A
ctual Cycle Time – Theoretical Cycle Time
= 15 minutes – 9 minutes = 6 minutes per unit
E 11-39 (Appendix)
1. Processing Time = Theoretical Cycle Time = 10 minutes per unit
Nonprocessing Time =
A
ctual Cycle Time – Theoretical Cycle Time
= 16 minutes – 10 minutes = 6 minutes per unit
CHAPTER 11 Performance Evaluation and Decentralization
P 11-40
1. a. ROI of Division without Radio = $725,000/$3,625,000 = 0.20, or 20%
b. ROI of the Radio Project = $640,000/$4,000,000 = 0.16, or 16%
2. a. Residual Income of Division without Radio = $725,000 – (0.12 × $3,625,000)
= $290,000
b. Residual Income of the Radio Project = $640,000 – (0.12 × $4,000,000)
= $160,000
3. This depends on whether Leslie’s division is evaluated on the basis of ROI
or on the basis of residual income. Overall division ROI will decrease; so if
ROI is the basis for evaluation, she will decline the investment. On the othe
r
PROBLEMS
CHAPTER 11 Performance Evaluation and Decentralization
P 11-41
1. Year 1 Year 2 Year 3
ROI………………………………………
…
8.00% 6.97% 6.30%
Margin……………………………………
…
12.00% 11.00% 10.50%
Turnover…………………………………
…
0.67 0.63 0.60
3. Operating assets: $15,000,000 × 0.80 = $12,000,000
$945,000
$12,000,000
$945,000
$9,000,000
$9,000,000
$12,000,000
The ROI increased because assets decreased.
Margin: 10.5%
7.88%ROI:
=
=0.75Turnover:
=
CHAPTER 11 Performance Evaluation and Decentralization
P 11-42
2. With Ai
With With Both Neithe
r
Conditione
r
Turbocharge
r
Investments Investment
3. The manager will choose the turbocharger, but not the air conditioner.
4. a. = $4,425,000 – (0.14 × $29,650,000)
= $274,000
b. Residual Income with Turbocharge
r
= $4,417,080 – (0.14 × $29,440,000)
= $295,480
c. Residual Income with Both = $4,507,080 – (0.14 × $30,190,000)
5. a. Residual Income with Air Conditione
r
= $4,425,000 – (0.10 × $29,650,000)
= $1,460,000
b. Residual Income with Turbocharge
r
= $4,417,080 – (0.10 × $29,440,000)
= $1,473,080
c. Residual Income with Both = $4,507,080 – (0.10 × $30,190,000)
= $1,488,080
d. Residual Income with Neither = $4,335,000 – (0.10 × $28,900,000)
= $1,445,000
Residual Income with Air Conditioner
CHAPTER 11 Performance Evaluation and Decentralization
P 11-43
1. $310,000/$3,000,000 = 0.1033, or 10.33%
Because ROI with investment is larger than ROI without it, the manager will
approve the investment.
5. EVA without Investment = $310,000 – (0.07 × $3,000,000) = $100,000
EVA with Investment = $367,500 – (0.07 × $3,500,000) = $122,500
EVA has increased with the investment, so the manager would approve
the investment.
3.
2
0.105, or 10.5%
*
$600,000 + $400,000
$3,000,000 + $500,000*
$310,000 + $57,500 =
CHAPTER 11 Performance Evaluation and Decentralization
P 11-44
1. Lorne should not reduce the price charged to Rosario if he can sell all he produces.
It does not matter whether the two divisions trade internally or not.
2. The minimum price is $53, and the maximum is $75. Yes, Lorne should consider the
transfer, since his income will increase by $59,500 [3,500 × ($70 – $53)].
P 11-45
1. Model SC67 Company
Sales……………………………
…
$260,000 $1,680,000 $1,940,000
V
ariable expenses…………… 160,000 920,000 1,080,000
Contribution margin……
…
$100,000 $ 760,000 $ 860,000
2. The transfer price should be the market price of $12. This is the minimum price for
the Components Division and the maximum price for the PSF Division.
4. All 40,000 units of Component Y34 will be sold externally at the market price of $12
per unit.
5. Sales……………………………… $480,000
V
Component Y34
CHAPTER 11 Performance Evaluation and Decentralization
P 11-46
1. Minimum: $26
Maximum: $31
3. New minimum: $27
New maximum: $32
or full cost plus 47.5% [($29.50 – $20.00)/$20.00]
$27 + $32
2
= $29.50
CHAPTER 11 Performance Evaluation and Decentralization
P 11-47 (Appendix)
$2,700,000
600,000
= $4.50 per minute
Theoretical Conversion Cost per Unit = $4.50 × 30
= $135
3. An incentive exists to reduce product cost by reducing cycle time. For example,
current cycle time is 40 minutes per unit. If cycle time could be reduced to 30
P 11-48 (Appendix)
1. a. Customer
b. Internal business process
c. Financial
d. Financial
e. Learning and growth
k. Financial
2. Answers will vary.
Financial—contribution margin by product
Customer—number of complaints
Internal business process—number of accidents per month
Learning and growth—hours of continuing education provided per month
1.
=Theoretical Rate
CHAPTER 11 Performance Evaluation and Decentralization
P 11-49 (Appendix)
1,000 repairs
500 hours
=30 minutes
1. = 2 per hour
=
=
Theoretical Velocity
Theoretical Cycle Time 60 minutes per hou
r
2 repairs per hour
CHAPTER 11 Performance Evaluation and Decentralization
Case 11-50
$
1,870,000
$15,600,000
$
2. Jason is definitely facing an ethical dilemma. While it is true that the sales and
expense projections are estimates, they are the best ones available to him. If
he uses a sales revenue projection from the top end of the range, he will be
deliberately basing the ROI estimate on a highly unlikely sales figure. Sales
and expense projections are not fantasy figures. They are supposed to be
management’s best estimate of what will actually happen. If Jason prepares
the report in accordance with Mel’s desires, he will be knowingly fabricating data.
3. Jason should prepare the report using the figures he thinks are most descriptive of
the project’s potential. He should feel free to include information about the predicted
range of sales and to point out any other information that reflects favorably on the
project. If Mel continues to pressure Jason, then Jason might consider looking for
another job.
CASE
1. ROI Based on Initial Estimates =
=
0.1199, or 11.99%