60 Minutes, Strong PROBLEM 22.4B
FREEZE, INC.
a. FREEZE, INC.
Responsibility Income Statement
Northern Territory
For January
Northern Territory Economy Efficiency
Dollars Percent Dollars Percent Dollars Percent
Sales
1,500,000$ 100.0 500,000$ 100.0 1,000,000$ 100.0
Variable costs 850,000 56.7 150,000 30.0 700,000 70.0
b. FREEZE, INC.
Responsibility Income Statement
For January
Entire Company Northern Territory Southern Territory
Dollars Percent Dollars Percent Dollars Percent
Sales
2,300,000$ 100.0 1,500,000$ 100.0 800,000$ 100.0
Variable costs 1,202,000 52.3 850,000 56.7 352,000 44.0
1,098,000$ 47.7 650,000$ 43.3 448,000$ 56.0
Division responsibility margin 393,000$ 17.1 235,000$ 15.7% 158,000$ 20.0%
Operating income 253,000$ 11.0%
Division responsibility margin 360,000$ 24.0 260,000$ 52.0% 100,000$ 10.0%
Operating income 235,000$ 15.7%
PROBLEM 22.4B
FREEZE, INC. (concluded)
c. Each territory’s return on assets:
Northern Southern
Territory Territory
Responsibility margin 235,000$ 158,000$
d.
e.
Economy Efficiency
f.
All costs are traceable at some level of the organization. While the $125,000 in “common”
The manager should focus the campaign on the product line that will generate the
greatest contribution margin in relation to the additional fixed advertising cost. Thus, the
manager should support advertising of Economy as shown below:
In the type of long-run investment described, top management must be aware of the
ability of the investment to cover fixed costs as well as variable costs. Thus, management
should look to such measures as responsibility margin and return on assets. As
45 Minutes, Strong PROBLEM 22.5B
SOTHEBY, INC.
a. Computation of expected change in responsibility margin:
(1) Product C (2) Product D
Expected increase in sales
25,000$ 25,000$
b.
c.
d.
When an increase in revenue requires new manufacturing facilities, the revenue must be
sufficient to cover the increase in fixed costs as well as the variable costs of production. The
In the Division 1 responsibility income statement, this $20,000 in costs was classified as
“common” because the costs could not be traced to the subunits within the division.
An increase in the monthly sales of Division 2 to $200,000 represents a $40,000 increase
12,500$ 4,750$
PROBLEM 22.5B
SOTHEBY, INC. (concluded)
SOTHEBY, INC.
Income Statement by Divisions
For the Month Ended November 30
Divisions
Sotheby, Inc. Division 1 Division 2
Dollars Percent Dollars Percent Dollars Percent
Sales
540,000$ 100 340,000$ 100 200,000$ 100
222,000$ 41 102,000$ 30 120,000$ 60
PROBLEM 22.6B
FOOTWARE, INC.
a.
b.
c.
15 Minutes, Easy
Closure of the Sandal Division would increase the company’s operating income to $9,000 (a
It is very possible that the Sandal Division contributes to the sales volume of the Moccasin
Division and vice versa. Indeed, these products could be complementary in nature (i.e., if
The Sandal Division has a contribution margin ratio of 50% ($30,000 ÷ $60,000). Thus, for
20 Minutes, Easy PROBLEM 22.7B
EASTRISE CORPORATION
a.
Entire Motor Mower
Company Division Division
Sales (1)
14,000,000$ 12,000,000$ 6,000,000$
b.
Entire Motor Mower
Company Division Division
Sales (1)
14,000,000$ 11,800,000$ 6,000,000$
c.
Using the market price, the contribution margins for each division and for the company as a
whole:
Using the discount price, the contribution margins for each division and for the company as
a whole:
Only cost centers should use cost as a transfer price. Profit centers, such as the Motor
PROBLEM 22.8B
WESTMINSTER, INC.
a.
Entire Frame Works
Company Division Division
Sales (1)
1,162,500$ 742,500$ 825,000$
b.
Entire Frame Works
Company Division Division
Sales (1)
1,162,500$ 727,500$ 825,000$
40 Minutes, Medium
Using the market price, the pre-tax operating profit for each division and for the company as
a whole:
Using the discount price, the pre-tax operating profit for each division and for the company
as a whole:
PROBLEM 22.8B
WESTMINSTER, INC. (concluded)
d.
Entire Frame Works
Company Division Division
Sales (1)
1,567,500$ 742,500$ 825,000$
Using the external sale price and purchase price for the casings, the pre-tax operating profit
for each division and for the company as a whole:
SOLUTIONS TO CRITICAL THINKING CASES
CASE 22.1
LAND’S END HOTEL
a.
b.
Note to instructor: In part b, students are asked to develop their “own approach” to
allocating fixed costs to departments. Thus, our answer is intended only to represent one
point of view.
We recommend that the revenue of a center should be offset only by the related variable
costs and by those fixed costs that are directly traceable to the center. Common fixed
Evaluation of Mettenburg’s comments:
Mettenburg is also correct in her criticism of Chamberlain’s suggestion that fixed costs
should be allocated on a basis of square feet of occupied space. Many fixed costs, such as
35 Minutes, Medium
Evaluation of Chamberlain’s comments:
A basic purpose of a responsibility accounting system is to measure the performance of
CASE 22.2
a.
b.
c.
d.
Once again, there is no correct answer to this question. However, if Jim’s daughter
decides to stay in Boston, she must live with the fact that her college education was
OSBORN DIVERSIFIED PRODUCTS, INC.
40 Minutes, Medium
Financially, the $40,000 error is not apt to significantly damage Osborn. However, this
There is no easy answer to this question. One option for Sara is to inform Jim that she
knows about the error in his bonus payment. She should also let him know that he has an
It is not ethical for Jim’s attorney to suggest that he keep the money. The attorney’s
CASE 22.3
a.
b.
HOSPITAL PROFIT CENTERS
30 Minutes, Medium
Student answers will vary. However, suggested profit centers include: Emergency room,
etc.
To be profitable, unit managers may try to generate more revenue. One way to generate
more revenue is to do more surgeries. This might encourage surgeons to schedule
CASE 22.4
a.
b.
30 Minutes, Medium
Given the diverse nature of the products supplied by General Mills, there are many ways
in which to organize responsibility centers. One way would be to define responsibility
The Kirby company produces one product line that is marketed through independent
GENERAL MILLS AND THE KIRBY COMPANY
CASE 22.5
20 Minutes, Medium
ETHICS, FRAUD & CORPORATE GOVERNANCE
Student answers will vary considerably, but one issue that can be discussed about the ethics
of considering students as profit centers is that it is inconsistent with the mission of
organizations that purport to be focused on higher education. Rather than focusing on
University Ethics