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CHAPTER 23 Performance Evaluation for Decentralized Operations
Prob. 23–1A (FIN MAN); Prob. 8–1A (MAN)
1.
Over Under
Budget Actual Budget Budget
Customer service salaries $ 390,600 $ 500,040 $109,440
Insurance and property taxes 81,900 79,440 $ 2,460
2. The customer service and marketing salaries are significantly over budget. The
director should investigate the cause of these results. One possibility is that the
PROBLEMS
E-NET COMPANY
Budget Performance Report—Director, Consumer Products Division
For the Month Ended January 31, 2014
23-21
CHAPTER 23 Performance Evaluation for Decentralized Operations
Prob. 23–2A (FIN MAN); Prob. 8–2A (MAN)
1.
West Central
Revenues $1,032,000 $1,872,000
Operating expenses 618,240 1,166,940
Income from operations before service
Supporting schedules:
Service department charge rates for the two service departments, Customer
Support and Legal, are determined as follows:
West Central Total
Number of customer contacts…
…
6,000 9,000 20,000
TRAXONIA RAILROAD INC.
Divisional Income Statements
For the Quarter Ended December 31, 2014
East
East
$870,000
563,300
5,000
23-22
CHAPTER 23 Performance Evaluation for Decentralized Operations
Prob. 23–2A (FIN MAN); Prob. 8–2A (MAN) (Concluded)
2. The CEO evaluates the three divisions using income from operations as a
percent of revenues (profit margin). This measure is calculated for the three
divisions as follows:
3. To: CEO
The method used to evaluate the performance of the divisions should be
reevaluated. The present method identifies the amount of income from
operations per dollar of earned revenue. However, this company requires a
23-23
CHAPTER 23 Performance Evaluation for Decentralized Operations
Prob. 23–3A (FIN MAN); Prob. 8–3A (MAN)
1.
Fee revenue
Mutual Fund Division:
Electronic Brokerage Division:
$268,800 $3,360,000
$3,360,000 $1,120,000
Investment Banking Division:
$820,800 $4,560,000
$4,560,000 $3,800,000
ROI = ×
2. Rate of Return
on Investment = Profit Margin × Investment Turnover
E.F. LYNCH COMPANY
Divisional Income Statements
For the Year Ended June 30, 2014
Mutual
Fund
Electronic
Brokerage
Division Division
$4,140,000 $3,360,000 $4,560,000
Investment
Banking
Division
=
Rate of Return
on Investment
ROI = ×
Income from Operations
×
Sales Invested Assets
Sales
23-24
CHAPTER 23 Performance Evaluation for Decentralized Operations
Prob. 23–3A (FIN MAN); Prob. 8–3A (MAN) (Concluded)
3. Per dollar of invested assets, the Electronic Brokerage Division is the most
profitable of the three divisions. Assuming that the rates of return on
investments do not change in the future, an expansion of the Electronic
Brokerage Division will return 24 cents (24%) on each dollar of invested assets,
23-25
CHAPTER 23 Performance Evaluation for Decentralized Operations
Prob. 23–4A (FIN MAN); Prob. 8–4A (MAN)
2.
Sales
$2,905,000
Proposal 3
$3,500,000
Sales
=Sales ×
Profit Margin × Investment Turnover
MAXELL MANUFACTURING INC.—COMMERCIAL DIVISION
Estimated Income Statements
Rate of Return
on Investment
Invested Assets
Rate of Return
on Investment
Proposal 1
For the Year Ended December 31, 2014
Proposal 2
1. =
$3,500,000
Income from Operations
5
23-26
CHAPTER 23 Performance Evaluation for Decentralized Operations
Prob. 23–4A (FIN MAN); Prob. 8–4A (MAN) (Concluded)
$980,000 $3,500,000
$3,500,000 $4,375,000
$406,700 $2,905,000
$2,905,000 $1,162,000
5.
3. = Profit Margin × Investment Turnover
ROI =
Sales
= ×
Sales
Income from Operations
Invested Assets
×
×
Rate of Return
on Investment
Rate of Return
on Investment
Rate of Return
on Investment
= Profit Margin × Investment Turnover
Proposal 2:
Proposal 3:
ROI =
23-27
CHAPTER 23 Performance Evaluation for Decentralized Operations
Prob. 23–5A (FIN MAN); Prob. 8–5A (MAN)
1.
Sales
$250,000 $2,500,000
$2,500,000 $1,250,000
$357,000 $2,550,000
$2,550,000 $2,125,000
Business Consumer
Division Division
Sales
Income from Operations
×
ROI ×
Sales
Invested Assets
=Business Division:
×
$2,500,000
Rate of Return
on Investment
2. = Profit Margin × Investment Turnover
Rate of Return
on Investment
Consumer Division: ROI =
PAVONE COMPANY
Divisional Income Statements
For the Year Ended December 31, 2014
$2,550,000
=
23-28
CHAPTER 23 Performance Evaluation for Decentralized Operations
Prob. 23–5A (FIN MAN); Prob. 8–5A (MAN) (Concluded)
4. On the basis of income from operations, the Consumer Division generated
$107,000 ($357,000 – $250,000) more income from operations than did the
Business Division. However, income from operations does not consider the
amount of invested assets in each division. On the basis of the rate of return on
23-29
CHAPTER 23 Performance Evaluation for Decentralized Operations
Prob. 23–6A (FIN MAN); Prob. 8–6A (MAN)
1. No. When unused capacity exists in the supplying division (the Consumer
2. The Consumer Division’s income from operations would increase by $31,680:
Increase in Consumer Variable
(Supplying) Division’s Transfer Cost Units
Income from Operations = Price – per Unit × Transferred
$31,680 =($115 –$104) × 2,880
23-30
CHAPTER 23 Performance Evaluation for Decentralized Operations
Prob. 23–6A (FIN MAN); Prob. 8–6A (MAN) (Continued)
3.
Consumer Commercial
Division Division Total
Sales:
14,400 units × $144 per unit $2,073,600 $2,073,600
2,880 units × $115 per unit 331,200 331,200
GARCON INC.
Divisional Income Statements
For the Year Ended December 31, 2014
23-31
CHAPTER 23 Performance Evaluation for Decentralized Operations
Prob. 23–6A (FIN MAN); Prob. 8–6A (MAN) (Concluded)
4. The Consumer Division’s income from operations would increase by $63,360:
Increase in Consumer Variable
(Supplying) Division’s Transfer Cost Units
Income from Operations = Price – per Unit × Transferred
$63,360 =($126 –$104) × 2,880
By selling to the Commercial Division, the Consumer Division earns $22 per
unit on these sales.
The Commercial Division’s income from operations would increase by $69,120:
Increase in Commercial
(Purchasing) Division’s Market Transfer Units
Income from Operations = Price – Price × Transferred
Garcon Inc.’s total income from operations would increase by the same amount
as in part (2), $132,480:
Variable
5. a. Any transfer price greater than the Consumer Division’s variable expenses
23-32
CHAPTER 23 Performance Evaluation for Decentralized Operations
Prob. 23–1B (FIN MAN); Prob. 8–1B (MAN)
1.
Over Under
Budget Actual Budget Budget
Sales salaries $ 819,840 $ 818,880 $ 960
2. The customer service salaries exceed the budget by 20% of budget ($30,520 ÷
$152,600). The manager should request additional detailed information about the
customer service department. There are several possible reasons for the budget
ADELSON INC.
Budget Performance Report—Supervisor, Eastern District
For the Month Ended December 31, 2014
23-33
CHAPTER 23 Performance Evaluation for Decentralized Operations
Prob. 23–2B (FIN MAN); Prob. 8–2B (MAN)
1.
South West
Revenues $5,673,000 $5,130,000
Supporting schedules:
Service department charge rates for the two service departments, Dispatching and
Equipment Management, are determined as follows:
South West Total
Number of scheduled trains……
…
1,105 845 2,600
Number of railroad cars in
THOMAS RAILROAD COMPANY
Divisional Income Statements
For the Quarter Ended December 31, 2014
North
$3,780,000
North
650
23-34
CHAPTER 23 Performance Evaluation for Decentralized Operations
Prob. 23–2B (FIN MAN); Prob. 8–2B (MAN) (Concluded)
2. The CEO evaluates the three regions using income from operations as a percent
of revenues. This measure is calculated for the three regions as follows:
3. To: CEO
The method used to evaluate the performance of the regions should be
reevaluated. The present method identifies the amount of income from operations
per dollar of earned revenue. However, a railroad company requires a significant
23-35
