CHAPTER 24 Performance Evaluation for Decentralized Operations
Prob. 24–3B
1.
Fee revenue
Mutual Fund Division:
$1,159,200 $4,140,000
$4,140,000 $5,175,000
Electronic Brokerage Division:
= 24.0%
Investment Banking Division:
$820,800 $4,560,000
$4,560,000 $3,800,000
ROI = ×
Division Division Division
2. Rate of Return
on Investment = Profit Margin × Investment Turnover
$4,140,000 $3,360,000 $4,560,000
E.F. LYNCH COMPANY
Divisional Income Statements
For the Year Ended June 30, 2016
Mutual
Fund
Electronic
Brokerage
Investment
Banking
ROI
= ×
24-36
CHAPTER 24 Performance Evaluation for Decentralized Operations
Prob. 24–3B (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,
24-37
CHAPTER 24 Performance Evaluation for Decentralized Operations
Prob. 24–4B
Electronics Division:
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
Profit Margin × Investment Turnover
GIHLBI INDUSTRIES INC.—ELECTRONICS DIVISION
Estimated Income Statements
Rate of Return
on Investment
Proposal 1
For the Year Ended December 31, 2016
Proposal 2
1. =
771,450 702,000
$1,395,000
1
3
4
7
24-38
CHAPTER 24 Performance Evaluation for Decentralized Operations
Prob. 24–4B (Concluded)
$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 2:
Proposal 3:
ROI =
24-39
CHAPTER 24 Performance Evaluation for Decentralized Operations
Prob. 24–5B
1.
Sales
Road Bike Division:
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, 2016
BikeBike
Road Mountain
$1,728,000
$1,760,000
Division Division
2. = Profit Margin × Investment Turnover
Rate of Return
on Investment
ROI = ×
×
Sales
Rate of Return
on Investment Invested Assets
=SalesIncome from Operations
24-40
CHAPTER 24 Performance Evaluation for Decentralized Operations
Prob. 24–5B (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,
24-41
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
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:
Increase in Navigational Systems
(Purchasing) Division’s Market Transfer Units
By purchasing from the Semiconductors Division, the Navigational Systems
Division saves $122 per unit on its purchases.
Exoplex Industries Inc.’s total income from operations would increase by
$116,000:
Variable
Increase in Exoplex Industries Market Cost Units
The increase in total company income from operations is also equal to the sum
of the increases in the division incomes from operations.
24-42
CHAPTER 24 Performance Evaluation for Decentralized Operations
Prob. 24–6B (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
24-43
CHAPTER 24 Performance Evaluation for Decentralized Operations
Prob. 24–6B (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:
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.
24-44
CHAPTER 24 Performance Evaluation for Decentralized Operations
CP 24–1
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 24 Performance Evaluation for Decentralized Operations
CP 24–2
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
obtained from the outside. This may not seem fair, but it does control the use of internal
24-46
CHAPTER 24 Performance Evaluation for Decentralized Operations
CP 24–3
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)
Frozen Foods 20% ($420,000 ÷ $2,100,000)
24-47
CP 24–4
1. 2014 2015 2016
Profit margin (Income from
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).
24-48
CHAPTER 24 Performance Evaluation for Decentralized Operations
CP 24–5
or
$4,860,000 $32,400,000
$32,400,000 $27,000,000
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
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
24-49
CP 24–5 (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
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
…
…
24-50