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 $ 546,840 $ 602,350 $ 55,510
Insurance and property taxes 114,660 110,240 $ 4,420
Distribution salaries 872,340 861,200 11,140
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
VALOTIC TECH, Inc.
Budget Performance Report—Director, Consumer Products Division
For the Month Ended January 31, 2016
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 Schedule:
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
Number of hours billed…………
…
2,160 1,890 5,400
Note (A) East Division: ($400,000 ÷ 20,000 contacts) × 5,000 contacts
West Division: ($400,000 ÷ 20,000 contacts) × 6,000 contacts
Note: The Shareholder Relations Department and general corporate officers’ salaries
TRAXONIA RAILROAD INC.
Divisional Income Statements
For the Quarter Ended December 31, 2016
East
East
$870,000
563,300
5,000
1,350
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
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.
Sales
Cost of goods sold
Cereal Division:
Snack Cake Division:
$480,000 $8,000,000
$8,000,000 $4,000,000
Retail Bakeries Division:
$682,500 $9,750,000
$9,750,000 $6,500,000
×
2. Rate of Return
on Investment = Profit Margin × Investment Turnover
ROI =
Invested Assets
=
Rate of Return
on Investment
ROI = ×
THE CRUNCHY GRANOLA COMPANY
Divisional Income Statements
For the Year Ended June 30, 2016
Sales
Cereal Snack Cake
Retail
Bakeries
6,795,000
Division Division Division
$25,000,000 $8,000,000 $9,750,000
×
Sales
Income from Operations
16,670,000 5,575,000
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 Snack Cake Division is the most profitable
of the three divisions. Assuming that the rates of return on investments do not
23-25
CHAPTER 23 Performance Evaluation for Decentralized Operations
Prob. 23–4A (FIN MAN); Prob. 8–4A (MAN)
2.
Sales
Cost of goods sold
1
$2,480,000 + $105,000
2
$2,500,000 – $312,500
3
$2,480,000 – $560,000
2,585,000
$2,905,000
Proposal 3
$3,500,000
Proposal 1
For the Year Ended December 31, 2016
Proposal 2
MAXELL MANUFACTURING INC.—COMMERCIAL DIVISION
Estimated Income Statements
1. =
1,920,000 2,073,300
$3,500,000
Profit Margin × Investment Turnover
Rate of Return
on Investment
1
3
5
6
23-26
CHAPTER 23 Performance Evaluation for Decentralized Operations
Prob. 23–4A (FIN MAN); Prob. 8–4A (MAN) (Concluded)
$315,000 $3,500,000
$3,500,000 $2,187,500
$980,000 $3,500,000
$3,500,000 $4,375,000
$406,700 $2,905,000
$2,905,000 $1,162,000
4. Proposal 3 would yield a rate of return on investment of 35.0%. Proposal 2 would
yield a rate of return on investment of 22.4%.
5.
=
3. = Profit Margin × Investment Turnover
12% × Required Investment Turnover
ROI =
Sales
Rate of Return
on Investment
Rate of Return
on Investment
Rate of Return
on Investment
21%
×
×
×
Profit Margin × Investment Turnover
= ×
Sales
Income from Operations
Invested Assets
ROI =
ROI =
=
Proposal 1:
Proposal 2:
Proposal 3:
23-27
CHAPTER 23 Performance Evaluation for Decentralized Operations
Prob. 23–5A (FIN MAN); Prob. 8–5A (MAN)
1.
Sales
Sales
Income from Operations
Invested Assets
Sales
Rate of Return
on Investment
=
×
2. = Profit Margin × Investment Turnover
Rate of Return
on Investment
PAVONE COMPANY
Divisional Income Statements
For the Year Ended December 31, 2016
$2,550,000
Business Consumer
Division Division
$2,500,000
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
By selling to the Commercial Division, the Consumer Division earns $11 per unit
on these sales.
The Commercial Division’s income from operations would increase by $100,800:
Increase in Commercial
(Purchasing) Division’s Market Transfer Units
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, 2016
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
Garcon Inc.’s total income from operations would increase by the same amount
as in part (2), $132,480:
Variable
Increase in Garcon Market Cost Units
5. a. Any transfer price greater than the Consumer Division’s variable expenses
per unit of $104 but less than the market price of $150 would be acceptable.
b. If the division managers cannot agree on a transfer price, a price of $127*
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
System administration salaries 448,152 447,720 432
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, 2016
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
Operating expenses 4,494,890 3,770,050
Income from operations before service
Supporting Schedule:
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
inventory…………………………
…
8,400 9,600 24,000
Note (A) East Division: ($182,000 ÷ 2,600 scheduled trains) × 650
West Division: ($182,000 ÷ 2,600 scheduled trains) × 1,105
THOMAS RAILROAD COMPANY
Divisional Income Statements
For the Quarter Ended December 31, 2016
North
$3,780,000
2,678,500
North
650
6,000
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