Chapter 12Segment Reporting, Profitability Analysis, and Decentralization True/False 1. F Medium Contribution margin and segment margin mean the same thing. 2. F Hard Assuming that a segment has both variable expenses and traceable fixed expenses, an increase in sales should increase profits by an amount equal to the sales times the segment margin ratio. 3. T Medium The salary paid to a store manager is a traceable fixed expense of the store. 4. T Easy Segmented statements for internal use should be prepared in the contribution format. 5. T Medium Fixed costs that are traceable to a segment may become common if the segment is divided into smaller units. 6. F Medium In responsibility accounting, each segment in an organization should be charged with the costs for which it is responsible and over which it has control plus its share of common organizational costs. 7. T Easy Only those costs that would disappear over time if a segment were eliminated should be considered traceable costs of the segment. 8. T Easy Some managers believe that residual income is superior to return on investment as a means of measuring performance, since it encourages the manager to make investment decisions that are more consistent with the interests of the company as a whole. 9. T Easy The return on investment can ordinarily be improved by either increasing sales, reducing expenses, or reducing operating assets. Managerial Accounting, 9/e 181 10. F Medium Since the sales figure is neutral in the return on investment (ROI) formula ROI = Margin X Turnover, a change in total sales will not affect ROI. 11. T Medium Allocations of corporate headquarters expenses to divisions used in return on investment calculations should be limited to the cost of those actual services provided by central headquarters which the divisions otherwise would have to provide for themselves. 12. T Medium The use of return on investment as a performance measure may lead managers to make decisions that are not in the best interests of the company as a whole. 13. T Easy Residual income is the net operating income that an investment center earns above the minimum required return on the investment in operating assets. 14. T Medium (Appendix) When a division is operating at full capacity, the transfer price to other divisions should include opportunity costs. 15. F Hard (Appendix) When an intermediate market price for a transferred item exists, it represents a lower limit on the charge that should be made on transfers between divisions. Multiple Choice 16. B Easy A good example of a common cost which normally could not be assigned to products on a segmented income statement except on an arbitrary basis would be: a. product advertising outlays. b. salary of a corporation president. c. direct materials. d. the product manager's salary. 17. C Medium All other things being equal, if a division's traceable fixed expenses increase: a. the division's contribution margin ratio will decrease. b. the division's segment margin ratio will remain the same. c. the division's segment margin will decrease. d. the overall company profit will remain the same. 18. D Easy Turnover is computed by dividing average operating assets into: a. invested capital. b. total assets. c. net operating income. d. sales. 182Managerial Accounting, 9/e 19. C Medium Which of the following statements provide(s) an argument in favor of including only a plant's net book value rather than gross book value as part of operating assets in the ROI computation? I. Net book value is consistent with how plant and equipment items are reported on a balance sheet. II. Net book value is consistent with the computation of net operating income, which includes depreciation as an operating expense. III. Net book value allows ROI to decrease over time as assets get older. a. Only I. b. Only III. c. Only I and II. d. Only I and III. 20. A Medium In computing the margin in a ROI analysis, which of the following is used? a. Sales in the denominator b. Net operating income in the denominator c. Average operating assets in the denominator d. Residual income in the denominator 21. D Easy Which of the following is not an operating asset? a. Cash b. Inventory c. Plant equipment d. Common stock 22. C Medium CPA adapted Assuming that sales and net income remain the same, a company's return on investment will: a. increase if operating assets increase. b. decrease if operating assets decrease. c. decrease if turnover decreases. d. decrease if turnover increases. 23. C Medium CPA adapted All other things equal, a company's return on investment (ROI) would generally increase when: a. average operating assets increase. b. sales decrease. c. operating expenses decrease. d. operating expenses increase. 24. B Easy A company's return on investment is the: a. margin divided by turnover. b. margin multiplied by turnover. c. turnover divided by average operating assets. d. turnover multiplied by average operating assets. Managerial Accounting, 9/e 183 d. A Easy All other things equal. b. B Medium Suppose a manager is to be measured by residual income. 28.25. Increase in minimum required return. D Medium Net operating income is defined as: a. Increase in average operating assets. net income plus interest and taxes. 29. c. No No d. An increase in sales. What major disadvantage of this method should the company consider before deciding to institute it? a. Yes No 26. sales minus variable expenses and traceable fixed expenses. a company's return on investment is affected by a change in: Turnover Margin a. c. assuming other factors remain constant? a. Decrease in net operating income. sales minus variable expenses. Decrease in average operating assets. A decrease in expenses. Which of the following will not result in an increase in the residual income figure for this manager. A decrease in operating assets. No Yes c. Yes Yes b. An increase in the minimum required rate of return. this method does not make allowance for difference in the size of compared divisions. d. the minimum required rate of return may eliminate desirable opportunities from consideration. d. 9/e . c. b. A Easy Delmar Corporation is considering the use of residual income as a measure of the performance of its divisions. 27. contribution margin minus traceable and common fixed expenses. Which of the following would increase the manager's performance measure? a. d. b. B Medium The performance of the manager of Division A is measured by residual income. b. residual income does not measure how effectively the division manager controls costs. 184Managerial Accounting. c. opportunities may be undertaken which will decrease the overall return on investment. II. b. c. II. Only II and III. d. Managers at corporate headquarters have greater control in seeing that the goals of the company are realized. b. Only I and II. I. Only II c. an investment center. III. III. the market price charged to outside customers. Only I b. C Easy Which of the following are benefits of decentralization? 33. C Easy A segment of a business responsible for both revenues and expenses would be called: a. C Medium (Appendix) When the selling division in an internal transfer has unsatisfied demand from outside customers for the product that is being transferred. 31. a. 32. An investment center has control over invested funds. residual income. d. then the lowest acceptable transfer price as far as the selling division is concerned is: a. A profit center has control over both cost and revenue. d. less costs saved by transferring internally. a cost center. b. Added decisionmaking authority and responsibility often leads to increased job satisfaction and often persuades a manager to put forth his/her best efforts. 9/e 185 . a profit center. C Medium Consider the following three statements: I. the full absorption cost of producing a unit of product. Giving a manager of a division greater decision making control over his/her division provides vital training for a manager who is on the rise in the company. c. but not over costs and revenue. the amount that the purchasing division would have to pay an outside seller to acquire a similar product for its use. variable cost of producing a unit of product.30. A cost center has no control over sales Which statement(s) is/are correct? a. c. Only I and III d. Only I and II Managerial Accounting. Only I and III. Only I. $60. $50.000. d. $100.000 for the month.000.34. $20. 9/e . $85. The company as a whole had sales of $200.000.000. and had a contribution margin ratio of 30% in Division B.500. $40.000 and the company net income was $20. $31.000 for Division A.000 and traceable fixed expenses were $40. Division D's sales were closest to: a. $45. L and M. $16. The segment margin for Division L was: a.000. The common fixed expenses were $50.000. 186Managerial Accounting.000.000. d. c. and segment margins for the two stores totaling $31.000 during March. the traceable fixed expenses in Store B must have been: a. $33. b. d.000. 35. c. Lyons Company's common fixed expenses were: a.000. and a segment margin of $11. A and B.000. A and B.000. d.000. B Hard More Company has two divisions. a contribution margin ratio of 36%.000. and traceable fixed expenses of $15. $22. Net income for the company was $25. $10. b.000. a contribution margin ratio of 30%.000. 37.000. Lyons Company reported a contribution margin of $50.000. a variable expense ratio of 60% of sales.000.000. $60. 36. $28. The contribution margin ratio in Division M was 40% and its sales were $250. During July. Division M's segment margin was $60. If net income for the company was $15. the contribution margin in Division L was $60. c.000. B Hard During April. Store A had sales of $80. b.333. Division D of Carney Company had a segment margin ratio of 15%. b. when sales in Division B were $200.000. C Hard Lyons Company consists of two divisions.000. D Hard Reardon Retail Company consists of two stores. $70. $0. c. O and E.000 and variable costs equal to 70% of sales..667. $116. $360. $260.38. Given this data.. $50.000 and traceable fixed costs for the two plants totaled $50.000. Johnson Company's common fixed costs for last year were: a.. Plant B had sales of $200.000... A and B. C Hard Johnson Company operates two plants. $150..000..000. and traceable fixed expenses of $26.000 Variable expenses as a percentage of sales .000.000 during March. $93.. 39..500. b. Hatch Company as a whole had a contribution margin of 40%. d. b. 9/e 187 .000 $ 23... $50..000.000 and a contribution margin ratio of 30%.. A Hard Hatch Company has two divisions. $87. 40. a segment margin of 30%.. $ 2... d.. that reported the following results for October: Division A Division B Sales .. $90... Traceable fixed costs for Division E were $19.000..000. $90..000. and sales of $200.000. $140.000. 70% 60% Segment margin . $62.000. c.000. $300. total variable expenses in Store M for the month must have been: a. Net income for the company was $20. the sales for Division E for last year were: a.000... M and N. d..000. $52. b.000. 41.. C Hard Denner Company has two divisions. The company as a whole had a contribution margin ratio of 25% and $120. Store N had sales of $180. $40. B Hard Leis Retail Company has two Stores.. c. Plant A and Plant B. Johnson Company reported for the year just ended a contribution margin of $50. total fixed expenses must have been: a. a segment margin of $25.000 $150. Division O had a segment margin of $9.000..000. b.000 in total contribution margin. c. c. $31.000 If common fixed expenses were $31. $70..000..000 for Plant A. d.. Managerial Accounting.. During the year just ended.000. Based on this information. $10.500. By how much was inventory reduced? a. $18.42. d. it is impossible to determine from the data given. b. net operating income of $16. 10%. 8%. d. c.5. The return on investment (ROI) was: a. $45.000.000 and $1. 43. 44. $22.000 and its return on investment (ROI) was 12%.000. 188Managerial Accounting.000. 9/e . $6. d. b.500. 8% and 4%.000. it is impossible to determine from the data given. The turnover was 0.. If the company's turnover was 3. 50% and 100%. $37. B Hard Howe Company increased its ROI from 20% to 25%. 2.000 Company Q . 9%. d. C Hard Sales and average operating assets for Company P and Company Q are given below: Sales Average Operating Assets Company P . then its net income for the year must have been: a.. If the division's average operating assets last year were $450.000. d. $2.000.000 respectively.000 $ 8..000.000 and sales of $100. c.000.000. 7%. then the division's residual income for last year was: a.000.. b.5% and 5%. 12% and 16%. C Medium Last year a company had stockholder's equity of $160.000 $10. The division's minimum required rate of return is 10%. A Hard Reed Company's sales last year totaled $150. $8. $20. $40. $67. The increase in ROI was attributed to a reduction in operating assets brought about by the sale of obsolete inventory at cost (the proceeds from the sale were used to reduce bank loans). B Hard Division B had an ROI last year of 15%. Net operating income and sales remained at their previous levels of $40.000. c.000 What is the margin that each company will have to earn in order to generate a return on investment of 20%? a. 45. $50. c. b. 46. c..500.. b. 500 Turnover ... d. What is the margin that Largo Company needed to earn in order to achieve an ROI of 15%? a..000. 20% Cable Company's average operating assets during the year were: a..000.. 9/e 189 .. 7. c.000. d.. b. $l8. $2. If the minimum required rate of return is 12%.000. c.. $540. Managerial Accounting.47.. 8%. 28%. $12... D Hard Largo Company recorded for the past year sales of $750.000.. The average operating assets last year were: a. $20. then the residual income for Northern last year was: a. return on investment. $ 5. 48. $2.000.. c. $200..000.... 2.000.. A Hard A company had the following results last year: sales. 9. 49. $10.. and margin. $ 2.450.000.. 4 Return on investment ..00% c.. d.. D Easy The Northern Division of the Smith Company had average operating assets totaling $150.50% 50... b.000 last year. and if last year's net operating income at Northern was $20.000.00% b.000. $700. $200.500.000 and average operating assets of $375.. C Medium Cable Company had the following results for the year just ended: Net operating income . $2.000.000..500. 15.000.99% d. b. $50. .. $50 Total fixed costs .. $66. 9/e .. Division Y currently purchases a similar part made by an outside company for $70 per unit and would substitute the part made by Division X....... Data concerning this part appear below: Selling price to outside customers $50 Variable cost per unit ....... What should be the lowest acceptable transfer price from the perspective of Division X? a. $75...... Division X can already sell all of the units it can produce on the outside market... b..000 Division Y of the same company would like to use the part manufactured by Division X in one of its products..... $30...... Division Y requires 5...000 units of the part each period. D Medium (Appendix) Division X makes a part that it sells to customers outside of the company.........51........ c....... $50.. $46. Data concerning this part appear below: Selling price to outside customers ... $50... d........ what is the lower limit on the transfer price? a.. $16.000 units of the part each period. 190Managerial Accounting.. $400.. According to the transfer pricing formula.000 Capacity in units ......000 Capacity in units . 52... Division Y currently purchases a similar part made by an outside company for $49 per unit and would substitute the part made by Division X. A Medium (Appendix) Division X makes a part that it sells to customers outside of the company.. $30 Total fixed costs .. Division X has ample excess capacity to handle all of Division Y's needs without any increase in fixed costs and without cutting into outside sales. d.. c.. 25..... 25.....000 Division Y of the same company would like to use the part manufactured by Division X in one of its products..... $75 Variable cost per unit . $49.... Division Y requires 5... b. $400.... ... c.... d. $16. $24.. b.000 units of the part each period..000 units and the variable cost to make each unit is $16... There would be no cost savings from transferring the units within the company rather than selling them on the outside market. 20... Division A has ample capacity to produce the units for Division B without any increase in fixed costs and without cutting into sales to outside customers. Division B requires 5. $40. the variable cost be unit would be $1 lower.40 c.000 units per year to outside customers at $24 per unit.000 Division B of the same company would like to use the part manufactured by Division A in one of its products...000 Capacity in units ..... What should be the lowest acceptable transfer price from the perspective of Division A? a.. $40 Variable cost per unit . $30. $21....000 units a year from Division X to use in its products.00 b.. 9/e 191 . D Hard (Appendix) Division A makes a part that it sells to customers outside of the company. What should be the lowest acceptable transfer price from the perspective of Division X? a.. If Division A sells to Division B rather than to outside customers.... Presently it sells 12...... $30 Total fixed costs ...... $29... $10.60 d... 54....... Data concerning this part appear below: Selling price to outside customers . The annual capacity is 20.... $38.00 Managerial Accounting... $17... Division B currently purchases a similar part made by an outside company for $38 per unit and would substitute the part made by Division A.53. C Hard (Appendix) Division X of Charter Corporation makes and sells a single product which is used by manufacturers of fork lift trucks... Division Y of Charter Corporation would like to buy 10... 000.000. The regular sales price is $100 per wheel set. D Hard Refer To: 121 Variable expenses in Store K totaled: a.000 wheel sets (of the kind made by Division P) yearly from an outside supplier at a price of $90 per wheel set. 57. $26.000. $15.000. $110. 58.000 motors per month and regularly sells 1. $600. c.000.000 and sales of $450.57 b. or 15% of sales.000. B Medium Refer To: 121 Sales in Store J totaled: a. Division B of Harkin Company would like to obtain 1.000 wheel sets per year and regularly sells 60. d. or 40% of sales. B Hard (Appendix) Division A of Harkin Company has the capacity for making 3.000. $70.400 motors each month from Division A. would be: a.000. The contribution margin in Store J was $100.000 in Store K. The segment margin in Store K was $30. and $40. $400. 9/e .000 each year on the outside market. b. the change in annual net operating income for the company as a whole. B Hard (Appendix) Division P of Turbo Corporation has the capacity for making 75. $130. $35.000. b. $62. During November. c. Division Q of Turbo Corporation currently buys 30. c. compared to what it is currently. $750. $200. and the variable production cost per unit is $65. $135.000 wheel sets it needs annually from Division P at $87 per wheel set.000 in Store J. 192Managerial Accounting. 56. $225.000. d. $100. $250. What should be the lowest acceptable transfer price from the perspective of Division A? a. b.000. $150.000. d.950 motors each month to outside customers at a contribution margin of $62 per motor.70 d.000.000. If Division Q were to buy the 30.50 c. Traceable fixed expenses are $60.55.000.00 Reference: 121 Ieso Company has two stores: J and K. Ieso Company reported a net income of $30. 60. $185. $9... A Hard Refer To: 121 The segment margin ratio in Store J was: a.000. or 8% of sales.. 62. $24. During last year.000. $170....... $40..000 in the South. 9/e 193 .... c. The segment margin in the South was $15.59.. d. b. c. $140. During last year. $25.. c. d. 100. 15% 63.000 c.. C Hard Refer To: 122 The variable costs for the South Area for the year were: a.000... $21.000 in the North and $10..000....000. 24%.. d....000. $24. the contribution margin in the North Area was $50.. Traceable fixed costs are $15.000. b... or 20% of sales.. $65.....000. Managerial Accounting. $100. $162.000.. A Hard Refer To: 122 The total fixed costs (traceable and common) for Canon Company for the year were: a. c...000. $49.000 Net operating income ..... $50..000. the company reported total net income of $26..... Reference: 123 The following information is available on Company A: Sales .. d..000...000 Average operating assets .000..000 Stockholders' equity ... $230.000..000. C Hard Refer To: 121 Ieso Company's total fixed expenses for the year were: a. b.000.. Reference: 122 Canon Company has two sales areas: North and South.. 36. 60%. d..000 Minimum required rate of return ...000. b. 61... $900. b. 40%.... A Medium Refer To: 123 Company A's residual income is: a. 180. 16%.500.. $45. ...000 units per year. D Hard Refer To: 124 How many units must South sell each year to have an ROI of 16%? a.000. the annual turnover will have to be: a.25.... the residual income should be: a......000 Average operating assets .000 Minimum required rate of return .64...000. C Medium Refer To: 123 Company A's return on investment (ROI) is: a.. 36%.. 4%. 194Managerial Accounting.. b. $50... $200..... $20 Variable cost per unit ..000........ 240....... d.. Reference: 125 The Axle Division of LaBate Company makes and sells only one product....000 Average operating assets .. 65. 20%..000.000.000 65. b.. c.80..50..... 1... D Medium Refer To: 125 If Axle sells 15. d.... Inc. $1. $12 Annual fixed costs ......000.. $280. c..000 and the minimum required rate of return is 10%.... c. 66....... 52..32... and the single product it makes: Unit selling price .. $50 Unit variable cost . 0. c.... d. Reference: 124 The following data are available for the South Division of Redride Products. b.000....500. $30.000. $750. 1. $30 Total fixed costs . 9/e ... b... 12% 67.. $10.. Annual data on the Axle Division's single product follow: Unit selling price .. $100.300.. 15%....... 0. 1.. B Hard Refer To: 124 If South wants a residual income of $50... d.. Managerial Accounting. 16. 15%.000..000...000. $100. c.68....000.. 1.... c.500.. c. B Medium Refer To: 126 Division A's residual income is: a... ? $6.. 16%..000 Net operating income .. d.. $30. 18%...... 12%. b. 16. d.250.. Axle must sell how many units per year? a... $125. $400.. $20....... B Hard Refer To: 125 Suppose the manager of Axle desires an annual residual income of $45.. In order to achieve this goal...25 4 Margin . b.. $500..000 units per year. d.. 19. 9/e 195 . $35.300 Turnover . the return on investment should be: a.. $45........ c..000... 19.. In order to achieve this...000.. C Hard Refer To: 125 Suppose the manager of Axle desires a return on investment of 22%...500.. Axle should sell how many units per year? a...000 ? Sales .750.. d. 72.. d. ? $520.. 70..... b. $625.000.. 14.. 14. b.000...500..750. c.. Reference: 126 Estes Company has assembled the following data for its divisions for the past year: Division A Division B Average operating assets . B Hard Refer To: 126 Division A's sales are: a.......000.. 14% ? Residual income .. 18. 18....000 71.000 $20.. 69... C Medium Refer To: 125 If Axle sells 16..9% Minimum required rate of return ..500.. $200... ? 3... b.250.. $130. Reference: 127 The Holmes Division recorded operating data as follows for the past year: Sales .. c. 196Managerial Accounting...00% d.00%. 14.... b. 4. c..000.. D Medium Refer To: 127 For the past year. the minimum required rate of return was: a.. 13%.333. d.... d.000 Stockholders' equity .. b. b..000 Residual income .... 13.000.73.. C Medium Refer To: 127 For the past year.... 20... b. 100.... 31. the return on investment was: a. $1...... $81... 12%.... 2. 75. 25. the margin was: a. the turnover was: a. B Hard Refer To: 127 For the past year.......50%.000 74..333. $200... 14%... d. 10. $2. 11%..25%.. 9/e .. D Medium Refer To: 126 Division B's average operating assets is: a. 80.000 Average operating assets .000 Net operating income .. d... c.. 12......75%..50%. c. 25. 13.00%. b. 15....75%..200.. 77. A Medium Refer To: 127 For the past year.080. 15.. 76. 25. c. .Reference: 128 The Baily Division recorded operating data as follows for the past two years: Year 1 Year 2 Sales .. $900.00%..200.000.. D Hard Refer To: 128 The margin in Year 2 was: a....... c.... $900...... $750...5 Minimum required return ..000 ? Margin .......000.50%..000.000.... 22.. $600..000... c.... $750.. c. d. 22.000 Stockholders' equity ... $400...000 Average operating assets ... 15% ? Return on investment ..000.....75%. b..000...000 720.. 12..... 81......... $800. b.. $80............... $135........... 27.... $720. b. 80...000 Turnover . 79. c.. $90. 18. C Hard Refer To: 128 The average operating assets in Year 2 were: a......... d... 78.. $1.... B Hard Refer To: 128 The net operating income in Year 1 was: a. $500.. $200.....00%. $150....000.000. 20% Managerial Accounting. $540.000...000 Average operating assets . 9/e 197 ...000. ? $1. B Hard Refer To: 128 Sales in Year 1 amounted to: a...... Reference: 129 The following selected data pertain to the belt division of Allen Corp..000..200. d. d.5% 18% Baily Division's turnover was exactly the same in both Year 1 and Year 2. for last year: Sales ... $140.... b.. 2...000 Net operating income ... 40% 198Managerial Accounting........000 Traceable fixed expenses .... $50.000 85..000 d....... 25% c..... 12...000 d...... C Medium CPA adapted Refer To: 129 How much is the residual income? a...000 Reference: 1210 The following selected data pertain to Beck Co. $100. $100...... 9/e . $40. 16% c..000 b....... 20% 84.. $420. 15% 83. $80. 20% b. $400.82. $10.. $200. A Medium CPA adapted Refer To: 1210 How much is the return on the investment? a...5% d.'s Beam Division for last year: Sales .000 Variable expenses . C Medium CPA adapted Refer To: 1210 How much is the residual income? a......000 Minimum required rate of return ..000 Average operating assets . 40% b...000 c.. $80. A Medium CPA adapted Refer To: 129 How much is the return on investment? a.000 c.. $250.. 20% d.000 b........ $40. ..125%... Reference: 1212 Harstin Corporation has provided the following data: Sales . $48. 50......... 36%. Managerial Accounting... c.000 Operating Expenses ...... 250..000.................. b..... 89........ b...000 Minimum Required Rate of Return .......000 Interest Expense ..5%......000 Gross margin ... 70.. $320.. d.... C Medium Refer To: 1211 The return on investment last year for the Northern Division was: a........2%... $ 50. d...... c...000 Average operating assets ........000 Stockholders' equity ........ 40%. 15% 86.. 18%...000.... b.0%.... $90........... 28......... b......000 Average Operating Assets .. 90.. B Medium Refer To: 1211 The residual income for the Northern Division last year was: a.... 8.000..000 Stockholders' Equity ....... 20%. D Medium Refer To: 1212 The margin for the past year was: a...... 20.....000 Net operating income ...000... d... 14.Reference: 1211 The Northern Division of the Gordon Company reported the following data for last year: Sales ... 11.... c. $ 60.. 87......... $700..... B Medium Refer To: 1212 The return on investment for the past year was: a.... 28%...2%. $135............. d.000 88. 62. $625... 19... 9/e 199 . $125..000 Residual income ....000 Tax Expense ........ 8%.. $900.. $500...... c....4%. . d. 1. c. ? 3 Margin ....000.. d. b... 91.0...000.98. C Hard Refer To: 1213 The sales for Year 2 were: a.... d.. $1.. b..000.0.....000 Turnover . c.000. 2.000. 1... $3.000.080..... ? ? Sales . Reference: 1213 The Millard Division's operating data for the past two years are provided below: Year 1 Year 2 Return on investment . 200Managerial Accounting..889.000.000. $240. d.94... $3... C Medium Refer To: 1212 The minimum required rate of return for the past year was: a. 3... b... b.388..90. $1. 4..200..5...200. ? 360.....000. $3.333. B Hard Refer To: 1213 The turnover for Year 1 was: a.200. 3. 92.. 12%.. 1..000 Net operating income .. d. c...2. 94.000 $ 500. 95. $ 800.. $256..000. c.000.... $384. 2. 40%. c. $768.000.. 8%. $1. b. d...000 ? Millard Division's margin in Year 2 was 150% of the margin in Year 1.. 9/e . 6.. 93.... 12% 36% Stockholders' equity ..333. $1. c. b.200. 36%.. A Medium Refer To: 1212 The turnover for the past year was: a... A Hard Refer To: 1213 The average operating assets for Year 2 were: a.. B Hard Refer To: 1213 The net operating income for Year 1 was: a. $1..5..4... ... b.. $1 in variable costs can be avoided. b..000 units Selling price to outside customers ..000 each period. worse off by $35..Reference: 1214 (Appendix) Division A makes a part with the following characteristics: Production capacity in units .. better off by $15... worse off by $30... 15. $25 Variable cost per unit ..... If Division A sells the parts to Division B at $24 per unit (Division B’s outside price). the company as a whole will be: a.000 each period.....000 each period. worse off by $10. C Medium Refer To: 1214 Suppose that Division A is operating at capacity and can sell all of its output to outside customers at its usual selling price..000 each period. $3 Division B.. 9/e 201 ...... Division B is presently purchasing the part from an outside source at $28 per unit.. would like to buy this part from Division A.......... 97.. the company as a whole will be: a. better off by $5. there will be no change in the status of the company as a whole....... If Division B continues to purchase parts from an outside supplier rather then from Division A. Division B is now purchasing these parts from an outside supplier at a price of $24 each.. $30 Variable costs per unit . would like to purchase 5. worse off by $15.000 Selling price per unit .... worse off by $5.. $18 Total fixed costs ...000 Division B... Reference: 1215 (Appendix) Division A produces a part with the following characteristics: Capacity in units .. another division of the same company....... If Division A sells to Division B....000 units of the part each period from Division A.... 50.. c. d.. $60. A Medium Refer To: 1214 Suppose that Division A has ample idle capacity to handle all of Division B's needs without any increase in fixed costs and without cutting into sales to outside customers. $18 Fixed costs per unit ..000 each period. c. Managerial Accounting. 96...000 each period...000 each period. d. another division in the company. 00 b. $28. any sales to Division B should be priced no lower than: a. $18. What should be the lowest acceptable transfer price from the perspective of the Vega Division? a. b. B Hard Refer To: 1216 Suppose that Vega can sell 9. 12..00 202Managerial Accounting.. any sales to Division B should be priced no lower than: a......... Vega can avoid $2 per wheel in sales commissions.. $42 d.... Last month the Walsh Division bought all 4..000 of its wheels from the Vega Division for $42 each. d. Reference: 1216 (Appendix) The Vega Division of Ace Company makes wheels which can either be sold to outside customers or transferred to the Walsh Division of Ace Company. An outside supplier has offered to supply wheels to the Walsh Division for $41 each. The following data are available from last month's operations for the Vega Company: Capacity . B Medium Refer To: 1215 Suppose Division A is currently operating at capacity and can sell all of the units is produces on the outside market for its usual selling price.. $41 c. $30 If the Vega Division sells wheels to the Walsh Division. so transfers to the Walsh Division cut into outside sales. $28...75 c.. $45 102. c. $29. A Medium Refer To: 1216 Suppose that the Vega Division has ample idle capacity so that transfers to the Walsh Division would not cut into its sales to outside customers... $27.. $42 d.. c.. $31.... $30 c.. $28 b....... $30.. $42....98... d.. What should be the lowest acceptable transfer price from the perspective of the Vega Division? a. $45 Variable costs per wheel when sold to outside customers ... $45 101. D Medium Refer To: 1215 Suppose that Division A has ample idle capacity to handle all of Division B's needs without any increase in fixed costs and without cutting into its sales to outside customers. $17.. From the point of view of Division A... $41.. 9/e ...000 wheels each month to outside consumers. $28 b.. $29. $20. From the point of view of Division A. b... 100. B Medium Refer To: 1216 What is the maximum price per wheel that Walsh should be willing to pay Vega? a..000 wheels Selling price per wheel to outside customers ......00 d... 99. 105. 104. $1. The following data were gathered on activities last month: Sleds Saucers Managerial Accounting. 300.000 posts Selling price per post to outside customers . d..T.. b. total . $0. $1. $1. Further suppose that an outside supplier is willing to provide the Lamp Division with basic posts at $1. What is the lowest transfer price that would not reduce the profits of the Post Division? a.35. Woodhead Company produces basic posts which can be sold to outside customers or sold to the Lamp Division of the M. A Medium Refer To: 1217 Suppose there is ample capacity so that transfers of the posts to the Lamp Division do not cut into sales to outside customers. $1. Medium The Winter Products Division of American Sports Corporation produces and markets two products for use in the snow: Sleds and Saucers.45 each...250 decrease... the change in net operating income for the company as a whole would have been: a.000 The total fixed costs would be the same for all the alternatives considered below.75..90 Fixed costs..35. Last Year the Lamp Division bought all of its 25.. If the Lamp Division had chosen to buy all of its posts from the outside supplier instead of the Post Division.... The following data are available for last year's activities of the Post Division: Capacity in units ...250 increase.... $0.000 units. $1.75.. C Hard Refer To: 1217 Suppose the transfers of posts to the Lamp Division cut into sales to outside customers by 15...000 units. $13. b. c. c..41..000 posts from Post at $1..000 decrease. What is the lowest transfer price that would not reduce the profits of the Post Division? a.50 each. $150...... $10.. C Hard Refer To: 1217 Suppose the transfers of posts to the Lamp Division cut into sales to outside customers by 15. c. b. $0.T.750 decrease. $1.... d..75 Variable costs per post . 103.. Woodhead Company..90. $1. $1..90. Essay 106..41.. $1. d. 9/e 203 ..Reference: 1217 (Appendix) The Post Division of the M. ....000 35 44.000 18 14....... 182. $40.000 Selling price per unit .... 98..000 44 54...000 100% $180......000 56 126.000 $3.. 50.....000 Allocated division adminis trative expenses .000 70 Traceable fixed expenses .000 50% Common fixed expenses ..000 100% $100.. $280.... 2. showing both "Amount" and "Percent" columns for the division as a whole and for each product..000 Variable selling expenses per unit $2 $1 Traceable fixed selling expenses $2.000 $33..000 30 Contribution margin .... 132.. $ 20....000 100% Variable expenses ..000 65 56.000 9.000 Required: Prepare a segmented income statement in the contribution format for last month..000 20 Segment margin ..000 $72......000 7% 204Managerial Accounting. Sales in units .... Answer: Segments o Total Company Sleds Saucers o Sales .000 47 $ 42..000 42% $ 90. 112...000 14 36..000 40 Net Income . $50 $20 Variable production costs per unit $20 $5 Traceable fixed production costs $12.... 9/e ...... 000 Accounts receivable ..000 Required: Prepare a segmented income statement in the contribution format for last month...000 35.000 $150. Medium The IT Corporation produces and markets two types of electronic calculators: Model 11 and Model 12...000 Investment in Cedar Company ........ $116.....000 100... $10 $26 Traceable fixed production costs ......000 69% $175..........000 31 75..000 30 96...... 110.000 Managerial Accounting..500 Allocated division administrative expenses ....... 5.000 $7..000 28% $ 46.... The following data were gathered on activities last month: Model 11 Model 12 Sales in units ...5 Segment margin ...000 Selling price per unit ..... 262...... 20.........000 68...5% Common fixed expenses .500 48 105.0 Contribution margin ................ 171. $ 50. $ 6.....500 21% $ 70.. 30.......... $50.....000 32.500 52.000 Plant and equipment (net) ... $470.....0% Variable expenses .........500 15..................... $5.000 100% $250. showing both "Amount" and "Percent" columns for the division as a whole and for each product.000 $510.000 100% $300.0% Traceable fixed expenses ............ $50 $100 Variable production costs per unit ..500 1% 108..000 $ 70.. 170....107..000 Variable selling expenses per unit ...000 25.000 $60.........000 100.... $5 $6 Traceable fixed selling expenses .. Medium Financial data for Beaker Company for last year appear below: Beaker Company Statements of Financial Position Beginning Ending Balance Balance Assets: Cash ... 120......000 Total assets ......... $100..000 42 157...000 70% $204...000 110.....000 170.000 20 Net Income .000 Land (undeveloped) ...................000 Inventory ...... $379... 9/e 205 .........000 3..... 80... Answer: Segments Total Company Model 11 Model 12 Sales $550. . 62...........000 Net Income ......000 250.... The Board of Directors of Beaker Company have set a minimum required return of 20%.....000 Total operating assets $220.000 35..... $ 50.Liabilities and owners' equity: Accounts payable ..... Beginning Ending Balance Balance Cash .... $ 70.100 ÷ $414........ turnover...000 $240...000 Inventory ......000) ÷ 2 = $230.....100 The company paid dividends of $2.........100 last year. 30.......8 = 27% b.000 Beaker Company Income Statement Sales ............ 10.. and return on investment for last year.000 = 1..000 Plant and equipment (net) 120..100 Minimum required return 206Managerial Accounting....000 Longterm debt ......... Operating assets do not include investments in other or in undeveloped land.8 ROI = Margin X Turnover = 15% X 1......000 + $240. Required: a...... $470.........000 170............... 250.000 Owners' equity .. 150..000 25...................000 = 15% Turnover = Sales ÷ Average operating assets = $414. 351............100 Less interest and taxes: Interest expense .000 Accounts receivable . 9/e companies .000 110.............. 20......000 Tax expense ..... b.. What was the company's residual income last year? Answer: a...000 Less operating expenses .. $30......000 Average operating assets = ($220.... Compute the company's margin...000 40...000 Total liabilities and owners' equity ......000 $510........000 Margin = Net operating income ÷ Sales = $62........... The "Investment in Cedar Company" on the statement of financial position represents an investment in the stock of another company.. $ 22...... Net operating income ..900 Net operating income ...000 $ 90....000 $ 70...... $414. $62....000 ÷ $230.... ..................... 225.................. Required: a.. 353..........243...... The Board of Directors of Beaker Company have set a minimum required return of 15%. 585........... $1... $1...644.....000 Investment in Carr Company ....000 Less interest and taxes: Interest expense . 4.000 $2..161... $ 135...... $ 134....100 109...........000 $ 266................ 314.........916....291....000 Accounts receivable ..........000 $2.000 101... b. 198...916.000 Total liabilities and owners' equity ....000 Net Income ..000 394..........000 Residual income ........... 1.....000 219...000 860.... 129......... 46..000 Tax expense ..000 Net operating income ................ 940...000 475...000 Land (undeveloped) . 104.... Hard Financial data for Bingham Company for last year appear below: Bingham Company Statements of Financial Position Beginning Ending Balance Balance Assets: Cash ...000 Liabilities and owners' equity: Accounts payable ........000 1............ Compute the company's margin........000 Plant and equipment (net) ...000 Less operating expenses .....000 Owners' equity ...000 Bingham Company Income Statement Sales .....000 The "Investment in Carr Company" on the statement of financial position represents an investment in the stock of another company...000 Longterm debt ... $4. and return on investment for last year... What was the company's residual income last year? Managerial Accounting....000 Total assets .......000 Inventory ......377............ (20% X $230..........161..000) ........... $ 90.....000 65.. $ 88.... 9/e 207 ..000 $ 119...000 665... $16.... turnover....... .000 Total operating assets $1..........804.325 110..000 ÷ $4.000 $ 266.000 475.....804.. Net operating income ...000 ÷ $1..........Answer: a..500 = 2....56% b.000 = 7.....500 = 19.....000 ? Net operating income ..000 + $1.644. 225.000 394.....000 Minimum required return (15% X $1..000 Inventory .995..60% Turnover = Sales ÷ Average operating assets = $4..675 Residual income .. 270...000 ÷ $1.......614...614... $800.. Medium The following data have been extracted from the yearend reports of two companies Company X and Company Y: Company X Company Y Sales ........804.... Operating assets do not include investments in other or in undeveloped land.. ? 4% Turnover ...000 Margin .804.. $353.. $56............. companies Beginning Ending Balance Balance Cash .....000 Plant and equipment (net) 940.... 14% ? 208Managerial Accounting.. 314..57 ROI = Net operating income ÷ Average operating assets = $353..000 860...995.... ? $125........000 Average operating assets = ($1...000) ÷ 2 = $1.....644. ? 6 Return on investment .. $ 135.500 Margin = Net operating income ÷ Sales = $353..... 9/e ..... $ 82...000 Accounts receivable .500) .......000 ? Average operating assets .........000 $1..... .......450. $2... $800..600...000 $125. ? 8% Turnover ................. ? $1.700................... $ 256........................ Medium The following data have been extracted from the yearend reports of two companies Company X and Company Y: Company X Company Y Sales ...................000 $3... 1...........725.000 $30............0 ROI ...0% Turnover ........................................ ? 2 Return on investment .......000 Margin ...000 ? Net operating income .. 14% 24% 111.....000 Net Operating Income . 9.............. Answer: Company X Company Y Sales ......700......000 Margin ........000 Net Operating Income .000 Average Operating Assets ...000 Margin ......... Answer: Company X Company Y Sales .. $1.725......... $56................... 7% 4% Turnover ...........000 ? Average operating assets .. $400.......... $ 256.. 16% 16% Managerial Accounting........Required: Fill in the missing data on the above table.................000 $750..............000 $1.....000 $ 276.....................000 Average Operating Assets .... 16% ? Required: Fill in the missing data on the above table.......7 2... 2 6 ROI .5% 8..... 9/e 209 .. $2................ The Machine Products Division has a bid from an outside supplier for the castings of $29 per unit.112. Is it in the best interests of Larinore Corporation for this transfer to take place? Explain.000 special castings each year on a continuing basis. Required: a. Answer: a. divided by the number of units transferred: Opportunity cost = [($30 $12 $4) x 20. 9/e . In order to have time and space to produce the new casting. Production and sales of this casting would drop by 20% if the new casting is produced. The company is now producing and selling 100. Transfer price > ($10 + $1) + $16 = $27 From the viewpoint of the purchasing division. but the cost of purchasing them from the outside 210Managerial Accounting. the transfer should take place. From the viewpoint of the entire company. The RB4 sells for $30 per unit. the transfer price must be less than the cost of buying the units from outside supplier. profits would increase as a result of the transfer providing that: Transfer price > Variable cost + Opportunity cost The opportunity cost is the contribution margin on the lost sales. From the perspective of the Castings Division.000]/20. Hard (Appendix) Larinore Corporation has a Castings Division which does casting work of various types. and requires $12 per unit in variable production costs. Boxing and shipping costs for the new special casting would be only $1 per unit. Yes. the Transfer price < $29 Combining the two requirements.000 units of the RB4 each year. The special casting would require $10 per unit in variable production costs. the Castings Division would have to cut back production of another casting the RB4 which it presently is producing.000 castings per year from the Castings Division to the Machine Products Division? b.000 = $16 Therefore. Boxing and shipping costs of the RB4 are $4 per unit. we get the following range transfer prices: of $27 < Transfer price < $29 b. The company's Machine Products Division has asked the Castings Division to provide it with 20. the cost of transferring the units within the company is $27. What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 20. 9/e 211 . In order to have time and space to produce the new casting. The Machine Products Division has a bid from an outside supplier for the castings of $30 per unit. Boxing and shipping costs of the NW2 are $4 per unit. within which both the Divisions' profits would increase as a result of agreeing to the transfer of 10.000 special castings each year on a continuing basis. The company is now producing and selling 100. Hard (Appendix) Geneva Corporation has a Castings Division that does casting work of various types. Boxing and shipping costs for the new special casting would be only $2 per unit.000 castings per year from the Castings Division to the Machine Products Division? b. The NW2 sells for $40 per unit. and requires $25 per unit in variable production costs. profits would increase as a result of the transfer providing that: Transfer price > Variable cost + Opportunity cost The opportunity cost is the contribution margin on the lost Managerial Accounting. if any.supplier is $29. Production and sales of this casting would drop by 10% if the new casting were produced. the company's profits increase by $2 for each of the castings that is used within the company rather than being sold on the outside market. Therefore. Is it in the best interests of Geneva Corporation for this transfer to take place? Explain. Answer: a. Required: a.000 units of the NW2 each year. 113. the Castings Division would have to cut back production of another casting the NW2 which it presently is producing. From the perspective of the Castings Division. What is the range of transfer prices. The company's Machine Products Division has asked the Castings Division to provide it with 10. The special casting would require $20 per unit in variable production costs. we find that no feasible range of transfer prices exists under current conditions.000]/10. but the cost of purchasing them from the outside supplier is $30. divided by the number of units transferred: Opportunity cost = [($40 $25 $4) x 10.ales.000 = $11 Therefore. 9/e . Transfer price > ($20 + $2) + $11 = $33 From the viewpoint of the purchasing division. the Transfer price < $30 Combining the two requirements. No. b. From the viewpoint of the entire company. the cost of transferring the units within the company is $33. the company's profits decrease by $3 for each of the castings that is produced within the company rather than being purchased in the outside market. 212Managerial Accounting. the transfer should not take place. the transfer price must be less than the cost of buying the units from outside supplier. Therefore.