Accounting Chapter 24 Homework Semiconductor Division Plant Site This Case The Total Cost To the X ray Division

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CHAPTER 24 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 return on investments do not

change in the future, an expansion of the Electronic Brokerage Division will return

24.0 cents (24.0%) on each dollar of invested assets, while the Mutual Fund and

Investment Banking divisions will return only 22.4 cents (22.4%) and 21.6 cents

(21.6%), respectively. Thus, when faced with limited funds for expansion,

management should consider an expansion of the Electronic Brokerage Division

CHAPTER 24 Decentralized Operations

Prob. 24-4B

Sales

Cost of goods sold

Gross profit

$891,000 – $31,400

$1,050,000 – $300,000

$1,575,000 – $180,000

$891,000 – $119,550

$558,000 – $60,000

Return on

Investment (ROI)

Return on

Investment (ROI)

Sales

859,600

$ 873,000

Proposal 1

For the Year Ended December 31

Proposal 2

$ 715,400

Gihbli Industries Inc.—Electronics Division

Estimated Income Statements

$1,575,000

Proposal 3

$1,575,000

1. =

771,450 702,000

$1,395,000

$ 623,550

Sales

Income from Operations ×

Profit Margin × Investment Turnover

Invested Assets

CHAPTER 24 Decentralized Operations

Prob. 24-4B (Concluded)

$125,550 $1,395,000

$1,395,000 $937,500

= 9.0% × 1.5

= 13.5%

4. Proposal 1 would yield a rate of return on investment of 21.0%.

Return on

Investment (ROI)

Return on

Investment (ROI)

Return on

Required

3. = Profit Margin × Investment Turnover

8% × Required Investment Turnover

Sales

20%

Profit Margin × Required Investment Turnover

= ×

Sales

Income from Operations

Invested Assets

2.5 (20% ÷ 8%) rounded

ROI =

Proposal 2:

Investment (ROI)

Investment Turnover

CHAPTER 24 Decentralized Operations

Prob. 24-5B

Sales

Mountain Bike Division:

$123,200 $1,760,000

$1,760,000 $800,000

= 7.0% × 2.2

= 15.4%

$1,760,000

Free Ride Bike Company

Divisional Income Statements

For the Year Ended December 31, 20Y7

BikeBike

Road Mountain

Division Division

$1,728,000

2. = Profit Margin × Investment Turnover

ROI = ×

Invested Assets

Return on

Investment (ROI)

Return on

Investment (ROI)

SalesIncome from Operations ×

Sales

CHAPTER 24 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 return on investment, the

Road Bike Division earned 12.0 cents (12.0%) on each dollar of invested assets, while

the Mountain Bike Division earned 15.4 cents (15.4%) on each dollar of invested

assets. Although the profit margin of the Road Bike Division exceeds the Mountain

CHAPTER 24 Decentralized Operations

Prob. 24-6B

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:

The Navigational Systems Division’s income from operations would increase

by $70,760:

Increase in Navigational Systems

(Purchasing) Division’s Market Transfer Units

Income from Operations = Price – Price × Transferred

$70,760 =($432 –$310) × 580

The increase in total company income from operations is also equal to the sum

of the increases in the division incomes from operations.

CHAPTER 24 Decentralized Operations

Prob. 24-6B (Continued)

Semi- Navigational

conductors Systems

Division Division Total

Expenses:

Variable:

2,820 units × $232 per unit $ 654,240 $ 654,240

580 units × $350* per unit $ 203,000 203,000

3,095 units × $472** per unit 1,460,840 1,460,840

Exoplex Industries Inc.

Divisional Income Statements

For the Year Ended December 31, 20Y8

CHAPTER 24 Decentralized Operations

Prob. 24-6B (Concluded)

4. The Semiconductors Division’s income from operations would increase by

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

$53,360 =($432 –$340) × 580

By purchasing from the Semiconductors Division, the Navigational Systems

Division saves $92 per unit on its purchases.

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.

CHAPTER 24 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

Because the X-ray Division has overall profit responsibility and authority, this means

that the X-ray Division has the choice of purchasing from the inside or the outside. The

X-ray Division should have incentives to purchase from the inside in order to maximize

overall corporate income. This means that the transfer price should be set below

market price in order to give Dave an incentive to purchase from the Semiconductor

Division. Howard’s refusal to budge on market price will likely hurt the Semiconductor

CASES & PROJECTS

CHAPTER 24 Decentralized Operations

CP 24-2

Examples of balanced scorecard metrics employed by Mobil’s North America

Marketing and Refining are provided below.

Custome

Internal

Innovation Service Process Financial

Employee survey Market share New product Return on capital

return on employed (ROCE)

investment (ROI)

Personal balanced Mystery shopper New product Cash flow

scorecard rating acceptance rate

Strategic Dealer gross Dealer quality Net margin rank

competency profit growth score vs. competition

availability

CP 24-3

Memo

To: Tom Yang

From: Ima Student

Re: Norsk Division Financial Performance

The Norsk Division’s revenues, gross profit, and income from operations have

increased significantly from 20Y6 to 20Y8. While these increases indicate that the

division is growing profitability, return on investment is falling. The division’s

profit margin, investment turnover, and return on investment are as follows:

Mobil North America Marketing and Refining

Balanced Scorecard Dimension

CHAPTER 24 Decentralized Operations

CP 24-3 (Concluded)

revenue has not even doubled. Revenues are not growing fast enough to support

the underlying asset investment. While profit margins have improved, the increase

CP 24-4

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

services to some degree. If there were no internal transfer price, departments would

view the Publications Department as a “free good.” This would likely result in an

overdemand for the service because there would be no pricing discipline on the user

CHAPTER 24 Decentralized Operations

CP 24-5

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 a greater than 19% rate of return would be accepted.

This is because all three divisions have an ROI that is greater than 19%. Thus, any

project that is accepted between the 19% minimum and their existing ROI would

cause their ROI to drop. This is true because of averaging. There would be little

incentive to accept such projects if the divisions know they are competing against

each other on the basis of ROI.

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)

CP 24-6

$4,860,000

$27,000,000

= 18.0%

2. $64,000 (8.0 × $8,000 = $64,000, where 8.0 = 18.0% – 10.0%)

$2,332,800

$14,400,000

= 16.2%

4. Even though the addition of the new product line would increase the overall

company return on investment, its addition would decrease the Specialty

Products Division’s rate of return on investment from 18.0% to 17.4% ($7,192,800

÷ $41,400,000). This decrease could negatively influence management’s evaluation

3. =Income from Operations

Invested Assets

Return on

Investment (ROI)

1. =Invested Assets

Income from OperationsReturn on

Investment (ROI)

CHAPTER 24 Decentralized Operations

CP 24-6 (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 computed 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:

…

The new project would add $26,784 (3% × $892,800) to the bonus.

Income from operations with new product line………………………

…

$2,332,800

Less minimum desired income (10% × $14,400,000)…………………

…

1,440,000

Residual income……………………………………………………………

…

$ 892,800

× Bonus percentage………………………………………………………

…

3.0%

Bonus…………………………………………………………………………

…

$ 26,784