The Dry Wall Division reports the following operating data for the past two years: \[\begin{array} { | l | r | r | } \hline \text { Margin } & \text { Year 1 } & \text { Year 2 } \\ \hline \text { Turnourer } & 16 \% & ? \\ \hline \text { Average operating assets } & 2.5 & 2 \\ \hline \text { Net operating income } & \$ 40,000 & ? \\ \hline \text { Stockholders' equity } & \$ 80,000 & \$ 125,000 \\ \hline \text { Sales } & ? & ? \\ \hline \end{array}\]The return on investment at the Dry Wall Division was exactly the same in Year 1 and Year 2.The margin in Year 2 was:

A) 48%. B) 32%. C) 20%. D) 10%. A) 48%. B) 32%. C) 20%. D) 10%. C

The following information has been gathered for the Door Division: C\[\begin{array} { | l | r | } \hline \text { Return on inw estment (Rol) } & 15.0 \% \\ \hline \text { Sales } & \$ 120,000 \\ \hline \text { Operating assets } & \$ 60,000 \\ \hline \text { Cost of Capital } & 12.0 \% \\ \hline \text { Profit margin } & 7.5 \% \\ \hline \end{array}\]ompute the Door Division's residual income.

A) $1,800. B) $2,700. C) $3,600. D) $5,400. A) $1,800. B) $2,700. C) $3,600. D) $5,400. A

Suade Inc.manufactures furniture and is organized into three large divisions: bedroom,living room,and dining room furniture.The following information presents operating revenues,operating incomes and invested assets of the company over the last three years.(all figures in 000s) \[\begin{array} { | l | r | r | r | } \hline \text { Operating Revenues } & \mathbf { 2 0 1 6 } & \mathbf { 2 0 1 7 } & \mathbf { 2 0 1 8 } \\ \hline \text { Dining Room } & \$ 8,000 & \$ 15,000 & \$ 16,000 \\ \hline \text { Living Room } & 4,500 & 3,600 & 2,400 \\ \hline \text { Bedroom } & 8,800 & 7,600 & 6,600 \\ \hline \text { Operating Income } & & & \\ \hline \text { Dining Room } & \$ 2,500 & \$ 3,100 & \$ 1,800 \\ \hline \text { Living Room } & 450 & 900 & 600 \\ \hline \text { Bedroom } & 1,200 & 1,500 & 1,600 \\ \hline \text { Imrested Assets } & & & \\ \hline \text { Dining Room } & \$ 12,000 & \$ 12,500 & \$ 12,500 \\ \hline \text { Living Room } & 2,500 & 2,400 & 2,200 \\ \hline \text { Bedroom } & 4,500 & 4,700 & 4,900 \\ \hline \end{array}\] The following table shows the number of managers covered by the current compensation package of Suade Inc.:\[\begin{array} { | l | r | r | r | } \hline \text { Number of Managers } & \mathbf { 2 0 1 6 } & \mathbf { 2 0 1 7 } & \mathbf { 2 0 1 8 } \\ \hline \text { Dining Room } & 300 & 350 & 375 \\ \hline \text { Living Room } & 40 & 40 & 37 \\ \hline \text { Bedroom } & 120 & 140 & 175 \\ \hline \end{array}\] The current compensation package is an annual bonus award.The managers share in the bonus pool.The pool is calculated as 12% of the annual residual income of the company.The residual income is defined as operating income minus an interest charge of 15% of invested assets.Required: (1)Use investment turnover,return on sales,and ROI to explain the differences in profitability of the three divisions. (2)Compute the bonus amount to be paid during each year.Also,compute the (average)individual executive bonus amounts. (3)If the bonus were calculated by divisional residual income what would be the bonus amounts? (4)Discuss the benefits and problems of basing the bonus on residual income of a company compared to using divisional residual income.

(1) \[\begin{array} { | l | r | r | r |

The Dry Wall Division reports the following operating data for the past two years: \[\begin{array} { | l | r | r | } \hline \text { Margin } & \text { Year 1 } & \text { Year 2 } \\ \hline \text { Turnourer } & 16 \% & ? \\ \hline \text { Average operating assets } & 2.5 & 2 \\ \hline \text { Net operating income } & \$ 40,000 & ? \\ \hline \text { Stockholders' equity } & \$ 80,000 & \$ 125,000 \\ \hline \text { Sales } & ? & ? \\ \hline \end{array}\] The return on investment at the Dry Wall Division was exactly the same in Year 1 and Year 2.Average operating assets in Year 1 were:

A) $160,000. B) $150,000. C) $125,000. D) $100,000. A) $160,000. B) $150,000. C) $125,000. D) $100,000.

The Labrador Falls Company has three divisions: A Division,B Division,and C Division.$\begin{array}{|l|r|r|r|} \hline & \text { A } & \text { B } & \text { c } \\ \text { Sales }& \$ 320,000 & \$ 540,000 & ?\\ \hline \text { Net operating income } & 60,000 & ? & \$ 24,000 \\ \hline \text { Residual income }& ? & 36,000 & 14,400 \\ \hline \text { Average Division } \\ \text { Assets } & 250,000 & 320,000 & 80,000 \\ \hline \text { Cost of Capital } & 12 \% & 16 \% & \\ \hline \text { Profit Margin } & 20 \% & 5 \% & \\ \text { Asset Turnover } & ? & 4.0 & \\ \hline \text { Return on irwestment } & 15 \% & & \\ \hline \end{array}$ What was C Division's cost of capital last year?

A) 8%. B) 12%. C) 18%. D) 20%. A) 8%. B) 12%. C) 18%. D) 20%.

The Labrador Falls Company has three divisions: A Division,B Division,and C Division.$\begin{array}{|l|r|r|r|} \hline & \text { A } & \text { B } & \text { c } \\ \text { Sales }& \$ 320,000 & \$ 540,000 & ?\\ \hline \text { Net operating income } & 60,000 & ? & \$ 24,000 \\ \hline \text { Residual income }& ? & 36,000 & 14,400 \\ \hline \text { Average Division } \\ \text { Assets } & 250,000 & 320,000 & 80,000 \\ \hline \text { Cost of Capital } & 12 \% & 16 \% & \\ \hline \text { Profit Margin } & 20 \% & 5 \% & \\ \text { Asset Turnover } & ? & 4.0 & \\ \hline \text { Return on irwestment } & 15 \% & & \\ \hline \end{array}$ What was B Division's return on investment (ROI)last year?

A) 16.00%. B) 20.00%. C) 24.00%. D) 33.75%. A) 16.00%. B) 20.00%. C) 24.00%. D) 33.75%.

La Mesa Foods has the following data for its two divisions for the year:\[\begin{array} { | l | r | r | } \hline & \text { Uno } & \text { Dos } \\ \hline \text { Revenues } & \$ 600,000 & \$ 1,900,000 \\ \hline \text { Cost of sales } & 384,750 & 950,000 \\ \hline \text { Allocated comorate overhead } & 36,000 & 114,000 \\ \hline \text { Other general \& administration } & 79,250 & 550,000 \\ \hline \end{array}\] Required: a.Compute divisional operating income for each of the divisions.Assume taxes are 30%.b.Calculate the gross margin ratio for each division.c.Calculate the operating margin ratio for each division.d.Calculate the profit margin ratio for each division.

a. \[\begin{array} { | l | r | r | } \h

The following information is available for Kiss Company: \[\begin{array} { | l | r | } \hline \text { Sales } & \$ 100,000 \\ \hline \text { Operating expenses } & \$ 94,000 \\ \hline \text { Operating assets } & \$ 40,000 \\ \hline \text { Stockholder's equity } & \$ 25,000 \\ \hline \text { Cost of capital } & 10 \% \\ \hline \end{array}\]What is Kiss Company's residual income?

A) $2,000. B) $2,500. C) $3,500. D) $4,000. A) $2,000. B) $2,500. C) $3,500. D) $4,000.

How will increases in the following items affect return on investment (ROI)? \[\begin{array} { | l | l | l | } \hline & \text { Erpenses } & \text { Imrentory } \\ \hline \text { A. } & \text { Decrease } & \text { Decrease } \\ \hline \text { B. } & \text { Decrease } & \text { Increase } \\ \hline \text { C. } & \text { Increase } & \text { Decrease } \\ \hline \text { D. } & \text { Increase } & \text { Increase } \\ \hline \end{array}\]

A) Option A B) Option B C) Option C D) Option D A) Option A B) Option B C) Option C D) Option D

Exam 14: Business Unit Performance Measurement

The Dry Wall Division reports the following operating data for the past two years: Margin Year 1 Year 2 Turnourer 16\% ? Average operating assets 2.5 2 Net operating income \ 40,000 ? Stockholders' equity \ 80,000 \ 125,000 Sales ? ? The return on investment at the Dry Wall Division was exactly the same in Year 1 and Year 2.The margin in Year 2 was:

Free

(Multiple Choice)

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Question 1

Correct Answer:

Verified

C

Managerial myopia is the distortion in incentives that result from using accounting measures to evaluate performance.

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(True/False)

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Question 2

Correct Answer:

Verified

True

The following information has been gathered for the Door Division: C Return on inw estment (Rol) 15.0\% Sales \ 120,000 Operating assets \ 60,000 Cost of Capital 12.0\% Profit margin 7.5\% ompute the Door Division's residual income.

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(Multiple Choice)

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Question 3

Correct Answer:

Verified

A

Suade Inc.manufactures furniture and is organized into three large divisions: bedroom,living room,and dining room furniture.The following information presents operating revenues,operating incomes and invested assets of the company over the last three years.(all figures in 000s) Operating Revenues Dining Room \ 8,000 \ 15,000 \ 16,000 Living Room 4,500 3,600 2,400 Bedroom 8,800 7,600 6,600 Operating Income Dining Room \ 2,500 \ 3,100 \ 1,800 Living Room 450 900 600 Bedroom 1,200 1,500 1,600 Imrested Assets Dining Room \ 12,000 \ 12,500 \ 12,500 Living Room 2,500 2,400 2,200 Bedroom 4,500 4,700 4,900 The following table shows the number of managers covered by the current compensation package of Suade Inc.: Number of Managers Dining Room 300 350 375 Living Room 40 40 37 Bedroom 120 140 175 The current compensation package is an annual bonus award.The managers share in the bonus pool.The pool is calculated as 12% of the annual residual income of the company.The residual income is defined as operating income minus an interest charge of 15% of invested assets.Required: (1)Use investment turnover,return on sales,and ROI to explain the differences in profitability of the three divisions. (2)Compute the bonus amount to be paid during each year.Also,compute the (average)individual executive bonus amounts. (3)If the bonus were calculated by divisional residual income what would be the bonus amounts? (4)Discuss the benefits and problems of basing the bonus on residual income of a company compared to using divisional residual income.

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Question 4

One division of the Marvin Educational Enterprises has depreciable assets costing $4,000,000.The cash flows from these assets for the past three years have been: Year Cash flows 1 \ 1,200,000 2 \ 1,400,000 3 \ 1,620,000 The current (i.e. ,replacement)costs of these assets were expected to increase 25% each year.Marvin used the straight-line depreciation method;the estimated useful life is 10-years with no salvage value.For return on investment (ROI)calculations,Marvin uses end-of-year balances.What is the ROI using historical cost and gross book value? Year 1 Year 2 Year 3 A. 20.0\% 25.0\% 30.5\% B. 25.0\% 28.0\% 32.0\% C. 18.0\% 26.5\% 28.0\% D. 30.0\% 35.0\% 40.5\%

(Multiple Choice)

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Question 5

The Dry Wall Division reports the following operating data for the past two years: Margin Year 1 Year 2 Turnourer 16\% ? Average operating assets 2.5 2 Net operating income \ 40,000 ? Stockholders' equity \ 80,000 \ 125,000 Sales ? ? The return on investment at the Dry Wall Division was exactly the same in Year 1 and Year 2.Average operating assets in Year 1 were:

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Question 6

The Labrador Falls Company has three divisions: A Division,B Division,and C Division. A B c Sales \ 320,000 \ 540,000 ? Net operating income 60,000 ? \ 24,000 Residual income ? 36,000 14,400 Average Division Assets 250,000 320,000 80,000 Cost of Capital 12\% 16\% Profit Margin 20\% 5\% Asset Turnover ? 4.0 Return on irwestment 15\% What was C Division's cost of capital last year?

(Multiple Choice)

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Question 7

The asset turnover is a measure (ratio)of an investment center's ability to:

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Question 8

Current costs should not be used to compute either return on investment (ROI)or residual income because current costs are not generally accepted accounting principles (GAAP).

(True/False)

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Question 9

You are the manager of an operating division of a manufacturing company.Your division has $4,500,000 in assets,and your budgeted income statement for the current year follows: Revenues \ 8,000,000 Cash costs: Variable 1,000,000 Fixed 3,750,000 Depreciation 1,375,000 Your company uses a performance evaluation and bonus plan,which is based on return on investment (ROI)computed with end-of-year gross asset balances.In October,you discover that you can purchase a new machine for $3,250,000,which will enable you to expand the output of your division and save costs.The machine would have a salvage value of $250,000 and would be depreciated over 3-years using the straight-line method.It will increase output by 10% while reducing cash fixed costs by 5%.If you accept the machine,it will be installed in late December,but no depreciation will be taken on the new machine this year.If you do buy this machine,you will have to dispose of the machine you are now using,which you just purchased last January.That machine cost you $2,500,000 but has no salvage value.$750,000 of the depreciation on the income statement is depreciation for this machine.In the ROI calculations,the company includes any gains or losses for equipment disposal in income for the year.You may safely ignore all taxes for this analysis.Required: a.What is your division's ROI this year if you do not acquire the new machine? b.What is your division's ROI this year if you do acquire the new machine? c.What is your division's expected ROI next year if the machine is acquired and meets expectations?

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Question 10

The Labrador Falls Company has three divisions: A Division,B Division,and C Division. A B c Sales \ 320,000 \ 540,000 ? Net operating income 60,000 ? \ 24,000 Residual income ? 36,000 14,400 Average Division Assets 250,000 320,000 80,000 Cost of Capital 12\% 16\% Profit Margin 20\% 5\% Asset Turnover ? 4.0 Return on irwestment 15\% What was B Division's return on investment (ROI)last year?

(Multiple Choice)

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Question 11

Return on investment (ROI)is a very popular measure employed to evaluate the performance of corporate segments because it incorporates all of the major ingredients of profitability (revenue,cost,investment)into a single measure.Under which one of the following combinations of actions regarding a segment's revenues,costs,and investment would a segment's ROI always increase? (CIA adapted) Sales Equipment Inrestment A. Increase Decrease Increase B. Decrease Decrease Decrease C. Increase Increase Increase D. Increase Decrease Decrease

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Question 12

Which of the following items would not require an adjustment to capital employed when using economic value added (EVA)?

(Multiple Choice)

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Question 13

La Mesa Foods has the following data for its two divisions for the year: Uno Dos Revenues \ 600,000 \ 1,900,000 Cost of sales 384,750 950,000 Allocated comorate overhead 36,000 114,000 Other general \& administration 79,250 550,000 Required: a.Compute divisional operating income for each of the divisions.Assume taxes are 30%.b.Calculate the gross margin ratio for each division.c.Calculate the operating margin ratio for each division.d.Calculate the profit margin ratio for each division.

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Question 14

Describe the two main limitations of return on investment.

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Question 15

The following information is available for Kiss Company: Sales \ 100,000 Operating expenses \ 94,000 Operating assets \ 40,000 Stockholder's equity \ 25,000 Cost of capital 10\% What is Kiss Company's residual income?

(Multiple Choice)

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Question 16

How will increases in the following items affect return on investment (ROI)? Erpenses Imrentory A. Decrease Decrease B. Decrease Increase C. Increase Decrease D. Increase Increase

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Question 17

The Butyl Division of the Swiss Corporation just started operations.It purchased depreciable assets costing $2,500,000 with an expected life of five years,after which the assets can be salvaged for $400,000.Depreciation is computed for the financial statements on a straight-line basis,using the salvage value.Annual cash operating flows are $1,300,000.Required: a.Compute the division's return on investment (ROI)for each year,using beginning of the year asset values,historical costs,and net book values.b.Compute the division's return on investment (ROI)for each year,using end of the year asset values,historical costs,and net book values.

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Question 18

The Butyl Division of the Swiss Corporation just started operations.It purchased depreciable assets costing $2,500,000 with an expected life of five years,after which the assets can be salvaged for $400,000.Depreciation is computed for the financial statements on a straight-line basis,using the salvage value.Annual cash operating flows are $1,300,000 for year 1.Assume that all cash flows and asset prices increase by 12.5% per year.Required: a.Compute the division's ROI for the first three years,using end of the year asset values,current costs,and net book values.b.Compute the division's ROI for the first three years,using end of the year asset values,current costs,and gross book values.

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Question 19

Divisional income statements do not have to follow generally accepted accounting principles (GAAP)because they are internal reports.

(True/False)

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Question 20

Managerial myopia is the distortion in incentives that result from using accounting measures to evaluate performance.

The following information has been gathered for the Door Division: C Return on inw estment (Rol) 15.0\% Sales \ 120,000 Operating assets \ 60,000 Cost of Capital 12.0\% Profit margin 7.5\% ompute the Door Division's residual income.

The asset turnover is a measure (ratio)of an investment center's ability to:

Current costs should not be used to compute either return on investment (ROI)or residual income because current costs are not generally accepted accounting principles (GAAP).

Which of the following items would not require an adjustment to capital employed when using economic value added (EVA)?

Describe the two main limitations of return on investment.

The following information is available for Kiss Company: Sales \ 100,000 Operating expenses \ 94,000 Operating assets \ 40,000 Stockholder's equity \ 25,000 Cost of capital 10\% What is Kiss Company's residual income?

How will increases in the following items affect return on investment (ROI)? Erpenses Imrentory A. Decrease Decrease B. Decrease Increase C. Increase Decrease D. Increase Increase

Divisional income statements do not have to follow generally accepted accounting principles (GAAP)because they are internal reports.

Cost Accounting: Information for Decision Making

Fundamentals of Cost-Volume-Profit Analysis

Fundamentals of Cost Analysis for Decision Making

Cost Estimation

Fundamentals of Product and Service Costing

Job Costing

Process Costing

Activity-Based Costing

Fundamentals of Cost Management

Service Department and Joint Cost Allocation

Fundamentals of Management Control Systems

Planning and Budgeting

Transfer Pricing

Fundamentals of Variance Analysis

Additional Topics in Variance Analysis

Performance Measurement to Support Business Strategy

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