24-41
SOLUTION
Requirement 1
ROI
=
Operating income
Average total assets
=
= 0.3480 = 34.80%
Requirement 2
Profit margin ratio
=
Operating income
Net sales
24-42
P24-26B, cont.
Requirement 3
Asset turnover ratio
=
Net sales
Average total assets
Requirement 4
Profit
margin ratio
Asset
turnover ratio
ROI
Paint Stores Division
12.02%
2.8953
0.3480 = 34.80%
Consumer Division
14.45%
0.8076
0.1167 = 11.67%
$ 185,000
$ 185,000
24-43
P24-26B, cont.
Requirement 6
P24-27B Determining transfer pricing
Learning Objective 5
3. Total CM $21,600
The Greco Company is decentralized, and divisions are considered investment centers. Greco has one
division that manufactures oak dining room chairs with upholstered seat cushions. The Chair Division
cuts, assembles, and finishes the oak chairs and then purchases and attaches the seat cushions. The Chair
Division currently purchases the cushions for $20 from an outside vendor. The Cushion Division
manufactures upholstered seat cushions that are sold to customers outside the company. The Chair
Division currently sells 900 chairs per quarter, and the Cushion Division is operating at capacity, which
is 900 cushions per quarter. The two divisions report the following information:
Requirements
1. Determine the total contribution margin for Greco Company for the quarter.
2. Assume the Chair Division purchases the 900 cushions needed from the Cushion Division at its
current sales price. What is the total contribution margin for each division and the company?
3. Assume the Chair Division purchases the 900 cushions needed from the Cushion Division at its
current variable cost. What is the total contribution margin for each division and the company?
4. Review your answers for Requirements 1, 2, and 3. What is the best option for Greco Company?
5. Assume the Cushion Division has capacity of 1,800 cushions per quarter and can continue to supply
its outside customers with 900 cushions per quarter and also supply the Chair Division with 900
cushions per quarter. What transfer price should Greco Company set? Explain your reasoning. Using
the transfer price you determined, calculate the total contribution margin for the quarter.
24-44
SOLUTION
Requirement 1
Contribution
Margin
for the Quarter
Units
×
Contribution
Margin per Unit
Total
Contribution
Margin
Chair Division
900
Cushion Division
900
Total
Requirement 2
Contribution
Margin
for the Quarter
Units
×
Contribution
Margin per Unit
=
Total
Contribution
Margin
Chair Division
900
×
$12 [$14 + $20 – $22]
=
$ 10,800
Cushion Division
900
×
=
Total
$ 21,600
Requirement 3
Contribution Margin
for the Quarter
Units
×
Contribution
Margin per Unit
Total
Contribution
Margin
Chair Division
900
×
$24 [$14 + $20 – $10]
$21,600
Cushion Division
900
×
$ 0 [$12 – $22 + $10]
Total
24-45
P24-27B, cont.
Requirement 4
The best option for Greco Company is the current scenario. By having the Chair Division purchase the
Requirement 5
Greco Company should set the transfer price at $10 to $20, the range of the variable cost to the outside
price. The total contribution margin does not change for the whole company when the transfer price
24-46
Continuing Problem
P24-28 Using ROI and RI to evaluate investment centers
This problem continues the Daniels Consulting situation from Problem P23-35 of Chapter 23. Daniels
Consulting reported 2018 sales of $3,200,000 and operating income of $185,600. Average total assets
during 2018 were $640,000. Daniels’s target rate of return is 17%.
Calculate Daniels’s profit margin ratio, asset turnover ratio, ROI, and RI for 2018.
SOLUTION
Profit margin ratio
=
Operating income
Net sales
0.2900 = 29.00%
ROI can also be calculated as:
ROI
=
Operating income
Average total assets
=
= 0.2900 = 29.00%
RI
=
Operating income
(Target rate of return × Average total assets)
=
$ 185,600
(17% × $640,000)
=
$ 185,600
24-47
Comprehensive Problem for Chapters 22-24
The Thompson Toy Company manufactures toy building block sets for children. Thompson is planning
for 2017 by developing a master budget by quarters. Thompson’s balance sheet for December 31, 2016,
follows:
Other budget data for Thompson Toy Company:
a. Budgeted sales are 500 sets for the first quarter and expected to increase by 100 sets per quarter.
Cash sales are expected to be 40% of total sales, with the remaining 60% of sales on account. Sets
are budgeted to sell for $70 per set.
b. Finished Goods Inventory on December 31, 2016, consists of 100 sets at $32 each.
c. Desired ending Finished Goods Inventory is 30% of the next quarter’s sales; first quarter sales for
2018 are expected to be 900 sets. FIFO inventory costing method is used.
d. Direct materials cost is $10 per set.
e. Desired ending Raw Materials Inventory is 10% of the next quarter’s direct materials needed for
production; desired ending inventory for December 31, 2017, is $1,000; indirect materials are
insignificant and not considered for budgeting purposes.
f. Each set requires 0.20 hours of direct labor; direct labor costs average $10 per hour.
g. Variable manufacturing overhead is $2 per set.
h. Fixed manufacturing overhead includes $4,000 per quarter in depreciation and $1,540 per quarter for
other costs, such as utilities, insurance, and property taxes.
i. Fixed selling and administrative expenses include $8,500 per quarter for salaries; $2,400 per quarter
for rent; $750 per quarter for insurance; and $1,500 per quarter for depreciation.
24-48
j. Variable selling and administrative expenses include supplies at 1% of sales.
k. Capital expenditures include $30,000 for new manufacturing equipment, to be purchased and paid
for in the first quarter.
l. Cash receipts for sales on account are 30% in the quarter of the sale and 70% in the quarter
following the sale; Accounts Receivable balance on December 31, 2016, is expected to be received
in the first quarter of 2017; uncollectible accounts are considered insignificant and not considered for
budgeting purposes.
m. Direct materials purchases are paid 90% in the quarter purchased and 10% in the following quarter;
Accounts Payable balance on December 31, 2016, is expected to be paid in the first quarter of 2017.
n. Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter
incurred.
o. Income tax expense is projected at $3,500 per quarter and is paid in the quarter incurred.
p. Thompson desires to maintain a minimum cash balance of $25,000 and borrows from the local bank
as needed in increments of $1,000 at the beginning of the quarter; principal repayments are made at
the beginning of the quarter when excess funds are available and in increments of $1,000; interest is
5% per year and paid at the beginning of the quarter based on the amount outstanding from the
previous quarter.
Requirements
1. Prepare Thompson’s operating budget and cash budget for 2017 by quarter. Required schedules and
budgets include: sales budget, production budget, direct materials budget, direct labor budget,
manufacturing overhead budget, cost of goods sold budget, selling and administrative expense
budget, schedule of cash receipts, schedule of cash payments, and cash budget. Manufacturing
overhead costs are allocated based on direct labor hours.
2. Prepare Thompson’s annual financial budget for 2017, including budgeted income statement,
budgeted balance sheet, and budgeted statement of cash flows.
3. Thompson sold 3,000 sets in 2017, and its actual operating income was as follows:
24-49
Prepare a flexible budget performance report through operating income for 2017. Show product costs
4. What was the effect on Thompson’s operating income of selling 400 sets more than the static budget
level of sales?
5. What is Thompson’s static budget variance for operating income?
6. Explain why the flexible budget performance report provides more useful information to
Thompson’s managers than the static budget performance report. What insights can Thompson’s
managers draw from this performance report?
8. For manufacturing overhead, compute the variable overhead cost and efficiency variances and the
fixed overhead cost and volume variances.
10. Calculate Thompson’s ROI for 2017. To calculate average total assets, use the December 31, 2016,
11. Calculate Thompson’s profit margin ratio for 2017. Interpret your results.
13. Use the expanded ROI formula to confirm your results from Requirement 10. Interpret your results.
2017. Interpret your results.
24-50
Budgeted sets to be sold
Sales price per set
Total sales
Budgeted sets to be sold
(30% of next quarter’s sales)
Total sets needed
Less: Sets in beginning inventory
Budgeted sets to be produced
24-51
Comprehensive Problem for Chapters 22-24, cont.
Requirement 1, cont.
THOMPSON TOY COMPANY
Direct Materials Budget
Budgeted sets to be produced
Direct materials cost per set
Direct materials needed for production
(10% of next quarter’s needs for production)
Total direct materials needed
Less: Direct materials in beginning inventory
Budgeted purchases of direct materials
Budgeted sets to be produced
Direct labor hours per set
Direct labor hours needed for production
Direct labor cost per hour
Budgeted direct labor cost
24-52
Comprehensive Problem for Chapters 22-24, cont.
Requirement 1, cont.
THOMPSON TOY COMPANY
Budgeted sets to be produced
Variable overhead cost per set
Budgeted variable overhead
Budgeted fixed overhead
Depreciation
Utilities, insurance, property taxes
Total budgeted fixed overhead
Budgeted manufacturing overhead costs
Direct labor hours
($27,700 / 554 DLHr)
24-53
Comprehensive Problem for Chapters 22-24, cont.
Requirement 1, cont.
Calculations for Cost of Goods Sold Budget:
Year ended December 31, 2017:
Direct materials cost per set
Direct labor cost per set (0.2 DLHr/set × $10/DLHr)
Manufacturing overhead cost per set (0.2 DLHr/set × $50/DLHr)
Total projected manufacturing cost per set
Beginning inventory, 100 sets at $32 each
Sets produced and sold in 2017 at $22 each
Total budgeted cost of goods sold
24-54
Comprehensive Problem for Chapters 22-24, cont.
Requirement 1, cont.
THOMPSON TOY COMPANY
Salaries Expense
Rent Expense
Insurance Expense
Depreciation Expense
Supplies Expense (1% of sales)
Total budgeted selling and administrative expense
Comprehensive Problem for Chapters 22-24, cont.
Requirement 1, cont.
Schedule of Cash Receipts from Customers
Total sales
First
Second
Third
Fourth
Cash Receipts from Customers:
Accounts Receivable balance, December 31, 2016
6,300
7,560
8,820
Total cash receipts from customers
Accounts Receivable balance, December 31, 2017:
First
Second
Third
Fourth