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CHAPTER 23 Performance Evaluation for Decentralized Operations
Prob. 23–3B (FIN MAN); Prob. 8–3B (MAN)
1.
Sales
Cereal Division:
Snack Cake Division:
$660,000 $6,600,000
$6,600,000 $4,400,000
Retail Bakeries Division:
$688,800 $5,740,000
$5,740,000 $4,100,000
ROI = ×
×
Invested Assets
=
Rate of Return
on Investment
2. Rate of Return
on Investment = Profit Margin × Investment Turnover
ROI =
THE WHOLE EARTH FOOD COMPANY
Divisional Income Statements
For the Year Ended June 30, 2014
Sales
Cereal Snack Cake
Retail
Bakeries
Division Division Division
$12,000,000 $6,600,000 $5,740,000
Income from Operations
×
Sales
23-36
CHAPTER 23 Performance Evaluation for Decentralized Operations
Prob. 23–3B (FIN MAN); Prob. 8–3B (MAN) (Concluded)
3. Per dollar of invested assets, the Retail Bakeries Division is the most profitable
of the three divisions. Assuming that the rates of return on investments do not
23-37
CHAPTER 23 Performance Evaluation for Decentralized Operations
Prob. 23–4B (FIN MAN); Prob. 8–4B (MAN)
Electronics Division:
2.
Sales
$1,575,000
Proposal 3
$1,575,000
Profit Margin × Investment Turnover
GIHLBI INDUSTRIES INC.—ELECTRONICS DIVISION
Estimated Income Statements
Rate of Return
on Investment
Invested Assets
Rate of Return
on Investment
Sales
=Sales
Income from Operations
×
Proposal 1
For the Year Ended December 31, 2014
Proposal 2
1. =
$1,395,000
3
23-38
CHAPTER 23 Performance Evaluation for Decentralized Operations
Prob. 23–4B (FIN MAN); Prob. 8–4B (MAN) (Concluded)
$157,400 $1,575,000
$1,575,000 $750,000
$125,550 $1,395,000
$1,395,000 $937,500
$315,000 $1,575,000
$1,575,000 $1,968,750
4. Proposal 1 would yield a rate of return on investment of 21.0%.
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 × Required Investment Turnover
Proposal 1:
Proposal 2:
Proposal 3:
ROI =
ROI =
23-39
CHAPTER 23 Performance Evaluation for Decentralized Operations
Prob. 23–5B (FIN MAN); Prob. 8–5B (MAN)
1.
Sales
Mountain Bike Division:
$123,200 $1,760,000
$1,760,000 $800,000
FREE RIDE BIKE COMPANY
Divisional Income Statements
For the Year Ended December 31, 2014
BikeBike
Road Mountain
$1,728,000
$1,760,000
Division Division
2. = Profit Margin × Investment Turnover
Rate of Return
on Investment
ROI = ×
23-40
CHAPTER 23 Performance Evaluation for Decentralized Operations
Prob. 23–5B (FIN MAN); Prob. 8–5B (MAN) (Concluded)
4. On the basis of income from operations, the Road Bike Division generated
$49,600 ($172,800 – $123,200) more income from operations than did the Mountain
Bike 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 investment,
23-41
CHAPTER 23 Performance Evaluation for Decentralized Operations
Prob. 23–6B (FIN MAN); Prob. 8–6B (MAN)
1. No. When unused capacity exists in the supplying division (the Semiconductors
2. The Semiconductors Division’s income from operations would increase by
$45,240:
Increase in Semiconductors Variable
(Supplying) Division’s Transfer Cost Units
Income from Operations = Price – per Unit × Transferred
The Navigational Systems Division’s income from operations would increase
by $70,760:
Increase in Navigational Systems
(Purchasing) Division’s Market Transfer Units
Income from Operations = Price – Price × Transferred
23-42
CHAPTER 23 Performance Evaluation for Decentralized Operations
Prob. 23–6B (FIN MAN); Prob. 8–6B (MAN) (Continued)
3.
Semi- Navigational
conductors Systems Total
Sales:
2,240 units × $396 per unit $ 887,040 $ 887,040
580 units × $310 per unit 179,800 179,800
EXOPLEX INDUSTRIES INC.
Divisional Income Statements
For the Year Ended December 31, 2014
23-43
CHAPTER 23 Performance Evaluation for Decentralized Operations
Prob. 23–6B (FIN MAN); Prob. 8–6B (MAN) (Concluded)
4. The Semiconductors Division’s income from operations would increase by
$62,640:
Increase in Semiconductors Variable
(Supplying) Division’s Transfer Cost Units
Income from Operations = Price – per Unit × Transferred
The Navigational Systems Division’s income from operations would increase
by $53,360:
Increase in Navigational Systems
(Purchasing) Division’s Market Transfer Units
Income from Operations = Price – Price × Transferred
Exoplex Industries Inc.’s total income from operations would increase by the
same amount as in (2), $116,000:
Variable
Increase in Ecoplex Industries Market Cost Units
Income from Operations = Price – per Unit × Transferred
5. a. Any transfer price greater than the Semiconductors Division’s variable
23-44
CHAPTER 23 Performance Evaluation for Decentralized Operations
CP 23–1 (FIN MAN); CP 8–1 (MAN)
This scenario is a negotiation between two divisions. Dave is not behaving
unethically by attempting to get a better price from the Semiconductor Division than
from the market. He is not behaving unethically because he refuses market price. This
may not seem “fair,” but price negotiation is a very typical business activity and is part of
CASES & PROJECTS
23-45
CHAPTER 23 Performance Evaluation for Decentralized Operations
CP 23–2 (FIN MAN); CP 8–2 (MAN)
The Customer Service Department head is responsible for the quantity of service, but
not the source of the service (i.e., not the price). Most accountants would hold the
department head responsible for the cost by transferring the cost of the brochures to
CP 23–3 (FIN MAN); CP 8–3 (MAN)
1. The rate of return on invested assets is computed as follows:
Snack Frozen
Goods Cereal Foods
Income from operations…………………
…
$ 396,000 $ 554,400 $ 420,000
2. Not all projects that have greater than a 19% rate of return would be accepted.
This is because all three divisions have an ROI that is greater than 19%. Thus, any
3. There are two approaches to improving ROI: (1) improving the profit margin or
(2) improving the investment turnover. For all three divisions, the profit margin
is excellent:
Snack Goods 18% ($396,000 ÷ $2,200,000)
23-47
CHAPTER 23 Performance Evaluation for Decentralized Operations
CP 23–4 (FIN MAN); CP 8–4 (MAN)
1. 2012 2013 2014
2. 2012 2013 2014
Investment turnover (Sales ÷ invested assets)……… 2.00 1.4 0.7
3. 2012 2013 2014
4. Anna is concerned about the Norsk Division because the return on investment appears
to be deteriorating over the 2012–2014 operating periods. This is happening even thoug
h
the profit margin is increasing over this time period. In order for this to occur, the
investment turnover must be dropping, which is the case in part (2).
CP 23–5 (FIN MAN); CP 8–5 (MAN)
or
or
4. Even though the addition of the new product line would increase the overall
company rate of return on investment, its addition would decrease the Specialty
Rate of Return
on Investment =
Sales
Invested Assets
Income from Operations ×
Sales
1. =Invested Assets
Income from Operations
Rate of Return
on Investment
3. Rate of Return
on Investment =Income from Operations
Invested Assets
Rate of Return
on Investment =Income from Operations × Sales
Sales Invested Assets
23-49
CHAPTER 23 Performance Evaluation for Decentralized Operations
CP 23–5 (FIN MAN); CP 8–5 (MAN) (Concluded)
5. Use of residual income as a performance measure and as the basis for granting
bonuses would motivate division managers to accept investment opportunities
that exceed a minimum rate of return. If the minimum rate of return was set at
10%, the overall company average rate of return, any investment opportunity
whose rate exceeded 10% would be viewed as acceptable. If this performance
to the initial plan:
Income from operations…………………………………………………………… $4,860,000
Less: Minimum desired income (10% × $27,000,000)………………………
…
2,700,000
Residual income……………………………………………………………………
…
$2,160,000
23-50
