CHAPTER 23 Performance Evaluation for Decentralized Operations
Prob. 23–3B (FIN MAN); Prob. 8–3B (MAN)
1.
Mutual Fund Division:
Electronic Brokerage Division:
= 24.0%
Investment Banking Division:
$820,800 $4,560,000
$4,560,000 $3,800,000
ROI = ×
Division Division Division
=
Rate of Return
on Investment
2. Rate of Return
on Investment = Profit Margin × Investment Turnover
E.F. LYNCH COMPANY
Divisional Income Statements
For the Year Ended June 30, 2016
Mutual
Fund
Electronic
Brokerage
Investment
Banking
Income from Operations
×
Sales Invested Assets
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 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,
23-37
CHAPTER 23 Performance Evaluation for Decentralized Operations
Prob. 23–4B (FIN MAN); Prob. 8–4B (MAN)
Electronics Division:
$126,000 $1,575,000
$1,575,000 $1,050,000
2.
Sales
Cost of goods sold
1
$891,000 – $31,400
2
$1,050,000 – $300,000
3
$1,575,000 – $180,000
859,600
$1,575,000
Proposal 3
$1,575,000
ROI =
×
Proposal 1
For the Year Ended December 31, 2016
Proposal 2
GIHLBI INDUSTRIES INC.—ELECTRONICS DIVISION
Estimated Income Statements
1. =
771,450 702,000
$1,395,000
Profit Margin × Investment Turnover
Rate of Return
on Investment
1
3
4
7
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
8% × Required Investment Turnover
ROI =
Rate of Return
on Investment
Rate of Return
on Investment
20%
×
×
×
Profit Margin × Required Investment Turnover
ROI =
ROI =
=
Proposal 1:
Proposal 2:
Proposal 3:
23-39
CHAPTER 23 Performance Evaluation for Decentralized Operations
Prob. 23–5B (FIN MAN); Prob. 8–5B (MAN)
1.
Sales
Cost of goods sold
Road Bike Division:
Mountain Bike Division:
$123,200 $1,760,000
$1,760,000 $800,000
3. Road Bike Division: $28,800 [$172,800 – ($1,440,000 × 10%)]
$1,760,000
1,380,000 1,400,000
FREE RIDE BIKE COMPANY
Divisional Income Statements
For the Year Ended December 31, 2016
BikeBike
Road Mountain
Division Division
$1,728,000
2. = Profit Margin × Investment Turnover
Rate of Return
on Investment
ROI = ×
Rate of Return
on Investment
Invested Assets
=SalesIncome from Operations ×
Sales
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:
By selling to the Navigational Systems Division, the Semiconductors Division
earns $78 per unit on these sales.
The Navigational Systems Division’s income from operations would increase
by $70,760:
Exoplex Industries Inc.’s total income from operations would increase by
$116,000:
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
3,675 units × $590 per unit $2,168,250 2,168,250
EXOPLEX INDUSTRIES INC.
Divisional Income Statements
For the Year Ended December 31, 2016
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
By selling to the Navigational Systems Division, the Semiconductors Division
earns $108 per unit on these sales.
The Navigational Systems Division’s income from operations would increase
by $53,360:
Increase in Navigational Systems
By purchasing from the Semiconductors Division, the Navigational Systems
Division saves $92 per unit on its purchases.
Exoplex Industries Inc.’s total income from operations would increase by the
same amount as in (2), $116,000:
5. a. Any transfer price greater than the Semiconductors Division’s variable
expenses per unit of $232 but less than the market price of $432 would be
acceptable.
b. If the division managers cannot agree on a transfer price, a price of $332*
would be the best compromise. In this way, each division’s income from
operations would increase by $58,000.
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 Dave’s job. It would be unethical only if the X-ray Division refused to deal with the
CASES & PROJECTS
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
the Customer Service Department, even though the price is 25% higher than could be
23-46
CHAPTER 23 Performance Evaluation for Decentralized Operations
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)
Cereal 22% ($554,400 ÷ $2,520,000)
CHAPTER 23 Performance Evaluation for Decentralized Operations
CP 23–4 (FIN MAN); CP 8–4 (MAN)
1. 2014 2015 2016
2. 2014 2015 2016
3. 2014 2015 2016
4. Anna is concerned about the Norsk Division because the return on investment
appears to be deteriorating over the 2014–2016 operating periods. This is
happening even though 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).
The investment turnover is dropping faster than the profit margin is increasing,
causing the rate of return on investment to drop. It appears as though the Norsk
23-48
CHAPTER 23 Performance Evaluation for Decentralized Operations
CP 23–5 (FIN MAN); CP 8–5 (MAN)
2. $64,000 (8.0 × $8,000 = $64,000, where 8.0 = 18.0% – 10.0%)
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
3. Rate of Return
on Investment =Income from Operations
Invested Assets
1. =Invested Assets
Income from Operations
Rate of Return
on Investment
Rate of Return
on Investment =Income from Operations × Sales
Sales Invested Assets
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
measure had been used, the Specialty Products Division manager would have
increased the division’s residual income by $892,800 through the addition of the
new product line, as shown below.
The manager’s bonus could then be calculated as a percent of residual income. In
this case, a bonus equal to 3% of residual income would achieve a bonus similar
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
…
…
…