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Chapter 12
Segment Reporting, Profitability Analysis,
and Decentralization
True!alse
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 organizationshould 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.
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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.
TMedium
Allocations of corporate headquarters expenses to divisions
used in return on investment calculations should be limited tothe 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, thetransfer 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.
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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 thefollowing 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.
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25.
A
Easy
All other things equal, a company's return on investment is
affected by a change in:
Turnover Margin
a. Yes Yes
b. No Yesc. No No
d. Yes No
26.
D
Medium
Net operating income is defined as:
a. sales minus variable expenses.
b. sales minus variable expenses and traceable fixed expenses.
c. contribution margin minus traceable and common fixed
expenses.
d. net income plus interest and taxes.
27.
A
Easy
Delmar Corporation is considering the use of residual income as
a measure of the performance of its divisions. What major
disadvantage of this method should the company consider beforedeciding to institute it?
a. this method does not make allowance for difference in the
size of compared divisions.
b. opportunities may be undertaken which will decrease the
overall return on investment.
c. the minimum required rate of return may eliminate desirable
opportunities from consideration.
d. residual income does not measure how effectively the
division manager controls costs.
28.
B
Medium
Suppose a manager is to be measured by residual income. Which
of the following will not result in an increase in the residual
income figure for this manager, assuming other factors remain
constant?
a. An increase in sales.
b. An increase in the minimum required rate of return.
c. A decrease in expenses.
d. A decrease in operating assets.
29.
B
Medium
The performance of the manager of Division A is measured by
residual income. Which of the following would increase the
manager's performance measure?
a. Increase in average operating assets.
b. Decrease in average operating assets.
c. Increase in minimum required return.
d. Decrease in net operating income.
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30.
C
Medium
(Appendix) When the selling division in an internal transfer
has unsatisfied demand from outside customers for the product
that is being transferred, then the lowest acceptable transfer
price as far as the selling division is concerned is:
a. variable cost of producing a unit of product.
b. the full absorption cost of producing a unit of product.c. the market price charged to outside customers, less costs
saved by transferring internally.
d. the amount that the purchasing division would have to pay an
outside seller to acquire a similar product for its use.
31.
C
Easy
A segment of a business responsible for both revenues and
expenses would be called:
a. a cost center.
b. an investment center.
c. a profit center.
d. residual income.
32.C
Easy
Which of the following are benefits of decentralization?
I. 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.
II. Managers at corporate headquarters have greater control in
seeing that the goals of the company are realized.
III. Added decision-making authority and responsibility often
leads to increased job satisfaction and often persuades a
manager to
put forth his/her best efforts.
a. Only I and II.
b. Only II and III.
c. Only I and III.
d. Only I.
33.
C
Medium
Consider the following three statements:
I. A profit center has control over both cost and revenue.
II. An investment center has control over invested funds,
but not over costs and revenue.
III. A cost center has no control over sales
Which statement(s) is/are correct?
a. Only I
b. Only II
c. Only I and III
d. Only I and II
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34.
C
Hard
Lyons Company consists of two divisions, A and B. Lyons
Company reported a contribution margin of $50,000 for Division
A, and had a contribution margin ratio of 30% in Division B,
when sales in Division B were $200,000. Net income for the
company was $25,000 and traceable fixed expenses were $40,000.
Lyons Company's common fixed expenses were:a. $85,000.
b. $70,000.
c. $45,000.
d. $40,000.
35.
B
Hard
More Company has two divisions, L and M. During July, the
contribution margin in Division L was $60,000. The contribution
margin ratio in Division M was 40% and its sales were $250,000.
Division M's segment margin was $60,000. The common fixed
expenses were $50,000 and the company net income was $20,000.
The segment margin for Division L was:
a. $0.
b. $10,000.c. $50,000.
d. $60,000.
36.
B
Hard
During April, Division D of Carney Company had a segment margin
ratio of 15%, a variable expense ratio of 60% of sales, and
traceable fixed expenses of $15,000. Division D's sales were
closest to:
a. $100,000.
b. $60,000.
c. $33,333.
d. $22,500.
37.
D
Hard
Reardon Retail Company consists of two stores, A and B. Store
A had sales of $80,000 during March, a contribution margin
ratio of 30%, and a segment margin of $11,000. The company as a
whole had sales of $200,000, a contribution margin ratio of
36%, and segment margins for the two stores totaling $31,000.
If net income for the company was $15,000 for the month, the
traceable fixed expenses in Store B must have been:
a. $16,000.
b. $20,000.
c. $31,000.
d. $28,000.
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38.
B
Hard
Leis Retail Company has two Stores, M and N. Store N had sales
of $180,000 during March, a segment margin of 30%, and
traceable fixed expenses of $26,000. The company as a whole had
a contribution margin ratio of 25% and $120,000 in total
contribution margin. Based on this information, total variable
expenses in Store M for the month must have been:a. $140,000.
b. $260,000.
c. $300,000.
d. $360,000.
39.
C
Hard
Denner Company has two divisions, A and B, that reported the
following results for October:
Division A Division B
Sales .................... $90,000 $150,000
Variable expenses as a
percentage of sales .... 70% 60%
Segment margin ........... $ 2,000 $ 23,000
If common fixed expenses were $31,000, total fixed expenses
must have been:
a. $31,000.
b. $62,000.
c. $93,000.
d. $52,000.
40.
C
Hard
Johnson Company operates two plants, Plant A and Plant B.
Johnson Company reported for the year just ended a contribution
margin of $50,000 for Plant A. Plant B had sales of $200,000
and a contribution margin ratio of 30%. Net income for the
company was $20,000 and traceable fixed costs for the two
plants totaled $50,000. Johnson Company's common fixed costs
for last year were:
a. $50,000.
b. $70,000.
c. $40,000.
d. $90,000.
41.
A
Hard
Hatch Company has two divisions, O and E. During the year just
ended, Division O had a segment margin of $9,000 and variable
costs equal to 70% of sales. Traceable fixed costs for Division
E were $19,000. Hatch Company as a whole had a contribution
margin of 40%, a segment margin of $25,000, and sales of
$200,000. Given this data, the sales for Division E for last
year were:
a. $50,000.
b. $150,000.
c. $87,500.
d. $116,667.
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42.
B
Hard
Division B had an ROI last year of 15%. The division's minimum
required rate of return is 10%. If the division's average
operating assets last year were $450,000, then the division's
residual income for last year was:
a. $67,500.
b. $22,500.c. $37,500.
d. $45,000.
43.
A
Hard
Reed Company's sales last year totaled $150,000 and its return
on investment (ROI) was 12%. If the company's turnover was 3,
then its net income for the year must have been:
a. $6,000.
b. $2,000.
c. $18,000.
d. it is impossible to determine from the data given.
44.
CHard
Sales and average operating assets for Company P and Company Q
are given below:
Sales Average Operating Assets
Company P .... $20,000 $ 8,000
Company Q .... $50,000 $10,000
What is the margin that each company will have to earn in order
to generate a return on investment of 20%?
a. 12% and 16%.
b. 50% and 100%.
c. 8% and 4%.
d. 2.5% and 5%.
45.
B
Hard
Howe Company increased its ROI from 20% to 25%. Net operating
income and sales remained at their previous levels of $40,000
and $1,000,000 respectively. 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). By how much was inventory reduced?
a. $8,000.
b. $40,000.
c. $10,000.
d. it is impossible to determine from the data given.
46.
C
Medium
Last year a company had stockholder's equity of $160,000, net
operating income of $16,000 and sales of $100,000. The turnover
was 0.5. The return on investment (ROI) was:
a. 10%.
b. 9%.
c. 8%.
d. 7%.
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47.
A
Hard
A company had the following results last year: sales, $700,000;
return on investment, 28%; and margin, 8%. The average
operating assets last year were:
a. $200,000.
b. $2,450,000.
c. $540,000.d. $2,500,000.
48.
C
Medium
Cable Company had the following results for the year just
ended:
Net operating income ...... $2,500
Turnover .................. 4
Return on investment ...... 20%
Cable Company's average operating assets during the year were:
a. $50,000.
b. $200,000.
c. $12,500.d. $10,000.
49.
D
Hard
Largo Company recorded for the past year sales of $750,000 and
average operating assets of $375,000. What is the margin that
Largo Company needed to earn in order to achieve an ROI of 15%?
a. 2.00%
b. 15.00%
c. 9.99%
d. 7.50%
50.
D
Easy
The Northern Division of the Smith Company had average
operating assets totaling $150,000 last year. If the minimum
required rate of return is 12%, and if last year's net
operating income at Northern was $20,000, then the residual
income for Northern last year was:
a. $20,000.
b. $l8,000.
c. $ 5,000.
d. $ 2,000.
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51.
A
Medium
(Appendix) Division X makes a part that it sells to customers
outside of the company. Data concerning this part appear below:
Selling price to outside customers ..... $75
Variable cost per unit ................. $50
Total fixed costs ...................... $400,000 Capacity in units ...................... 25,000
Division Y of the same company would like to use the part
manufactured by Division X in one of its products. 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. Division Y requires 5,000 units of the part each period.
Division X can already sell all of the units it can produce on
the outside market. What should be the lowest acceptable
transfer price from the perspective of Division X?
a. $75.
b. $66.
c. $16.d. $50.
52.
D
Medium
(Appendix) Division X makes a part that it sells to customers
outside of the company. Data concerning this part appear below:
Selling price to outside customers $50
Variable cost per unit ........... $30
Total fixed costs ................ $400,000
Capacity in units ................ 25,000
Division Y of the same company would like to use the part
manufactured by Division X in one of its products. 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. Division Y requires 5,000 units of the part each period.
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. According to the transfer pricing
formula, what is the lower limit on the transfer price?
a. $50.
b. $49.
c. $46.
d. $30.
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53.
D
Hard
(Appendix) Division A makes a part that it sells to customers
outside of the company. Data concerning this part appear below:
Selling price to outside customers .... $40
Variable cost per unit ................ $30
Total fixed costs ..................... $10,000 Capacity in units ..................... 20,000
Division B of the same company would like to use the part
manufactured by Division A in one of its products. 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. Division B requires 5,000 units of the part each period.
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. If Division A sells to Division B
rather than to outside customers, the variable cost be unit
would be $1 lower. What should be the lowest acceptable
transfer price from the perspective of Division A?a. $40.
b. $38.
c. $30.
d. $29.
54.
C
Hard
(Appendix) Division X of Charter Corporation makes and sells a
single product which is used by manufacturers of fork lift
trucks. Presently it sells 12,000 units per year to outside
customers at $24 per unit. The annual capacity is 20,000 units
and the variable cost to make each unit is $16. Division Y of
Charter Corporation would like to buy 10,000 units a year from
Division X to use in its products. There would be no cost
savings from transferring the units within the company rather
than selling them on the outside market. What should be the
lowest acceptable transfer price from the perspective of
Division X?
a. $24.00
b. $21.40
c. $17.60
d. $16.00
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55.
B
Hard
(Appendix) Division P of Turbo Corporation has the capacity for
making 75,000 wheel sets per year and regularly sells 60,000
each year on the outside market. The regular sales price is
$100 per wheel set, and the variable production cost per unit
is $65. Division Q of Turbo Corporation currently buys 30,000
wheel sets (of the kind made by Division P) yearly from anoutside supplier at a price of $90 per wheel set. If Division Q
were to buy the 30,000 wheel sets it needs annually from
Division P at $87 per wheel set, the change in annual net
operating income for the company as a whole, compared to what
it is currently, would be:
a. $600,000.
b. $225,000.
c. $750,000.
d. $135,000.
56.
B
Hard
(Appendix) Division A of Harkin Company has the capacity for
making 3,000 motors per month and regularly sells 1,950 motors
each month to outside customers at a contribution margin of $62per motor. Division B of Harkin Company would like to obtain
1,400 motors each month from Division A. What should be the
lowest acceptable transfer price from the perspective of
Division A?
a. $26.57
b. $15.50
c. $35.70
d. $62.00
Reference: 12-1
Ieso Company has two stores: J and K. During November, Ieso Company
reported a net income of $30,000 and sales of $450,000. The contribution
margin in Store J was $100,000, or 40% of sales. The segment margin in Store
K was $30,000, or 15% of sales. Traceable fixed expenses are $60,000 in
Store J, and $40,000 in Store K.
57.
B
Medium
Refer To:
12-1
Sales in Store J totaled:
a. $400,000.
b. $250,000.
c. $150,000.
d. $100,000.
58.
D
Hard
Refer To:
12-1
Variable expenses in Store K totaled:
a. $70,000.
b. $110,000.
c. $200,000.
d. $130,000.
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59.
C
Hard
Refer To:
12-1
Ieso Company's total fixed expenses for the year were:
a. $40,000.
b. $100,000
c. $140,000.
d. $170,000.
60.
A
Hard
Refer To:
12-1
The segment margin ratio in Store J was:
a. 16%.
b. 24%.
c. 40%.
d. 60%.
Reference: 12-2
Canon Company has two sales areas: North and South. During last year, the
contribution margin in the North Area was $50,000, or 20% of sales. The
segment margin in the South was $15,000, or 8% of sales. Traceable fixed
costs are $15,000 in the North and $10,000 in the South. During last year,
the company reported total net income of $26,000.
61.
A
Hard
Refer To:
12-2
The total fixed costs (traceable and common) for Canon Company
for the year were:
a. $49,000.
b. $25,000.
c. $24,000.
d. $50,000.
62.
C
Hard
Refer To:
12-2
The variable costs for the South Area for the year were:
a. $230,000.
b. $185,000.
c. $162,500.
d. $65,000.
Reference: 12-3
The following information is available on Company A:
Sales ............................. $900,000
Net operating income .............. 36,000
Stockholders' equity .............. 100,000
Average operating assets .......... 180,000
Minimum required rate of return ... 15%
63.
A
Medium
Refer To:
12-3
Company A's residual income is:
a. $9,000.
b. $21,000.
c. $45,000.
d. $24,000.
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64.
C
Medium
Refer To:
12-3
Company A's return on investment (ROI) is:
a. 4%.
b. 15%.
c. 20%.
d. 36%.
Reference: 12-4
The following data are available for the South Division of Redride Products,
Inc. and the single product it makes:
Unit selling price ........... $20
Variable cost per unit ....... $12
Annual fixed costs ........... $280,000
Average operating assets ..... $1,500,000
65.
D
HardRefer To:
12-4
How many units must South sell each year to have an ROI of 16%?
a. 240,000.
b. 1,300,000.c. 52,000.
d. 65,000.
66.
B
Hard
Refer To:
12-4
If South wants a residual income of $50,000 and the minimum
required rate of return is 10%, the annual turnover will have
to be:
a. 0.32.
b. 0.80.
c. 1.25.
d. 1.50.
Reference: 12-5
The Axle Division of LaBate Company makes and sells only one product. Annual
data on the Axle Division's single product follow:
Unit selling price .................. $50
Unit variable cost .................. $30
Total fixed costs ................... $200,000
Average operating assets ............ $750,000
Minimum required rate of return ..... 12%
67.
D
Medium
Refer To:
12-5
If Axle sells 15,000 units per year, the residual income should
be:
a. $30,000.
b. $100,000.
c. $50,000.
d. $10,000.
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68.
C
Medium
Refer To:
12-5
If Axle sells 16,000 units per year, the return on investment
should be:
a. 12%.
b. 15%.
c. 16%.
d. 18%.
69.
C
Hard
Refer To:
12-5
Suppose the manager of Axle desires a return on investment of
22%. In order to achieve this goal, Axle must sell how many
units per year?
a. 14,500.
b. 16,750.
c. 18,250.
d. 19,500.
70.
B
Hard
Refer To:12-5
Suppose the manager of Axle desires an annual residual income
of $45,000. In order to achieve this, Axle should sell how many
units per year?
a. 14,500.b. 16,750.
c. 18,250.
d. 19,500.
Reference: 12-6
Estes Company has assembled the following data for its divisions for the
past year:
Division A Division B
Average operating assets ... $500,000 ?
Sales ...................... ? $520,000
Net operating income ....... $100,000 $20,300
Turnover ................... 1.25 4
Margin ..................... ? 3.9%
Minimum required rate
of return ................ 14% ?
Residual income ............ ? $6,000
71.
B
Hard
Refer To:
12-6
Division A's sales are:
a. $400,000.
b. $625,000.
c. $125,000.
d. $200,000.
72.
B
Medium
Refer To:
12-6
Division A's residual income is:
a. $20,000.
b. $30,000.
c. $35,000.
d. $45,000.
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73.
D
Medium
Refer To:
12-6
Division B's average operating assets is:
a. $81,200.
b. $2,080,000.
c. $1,333,333.
d. $130,000.
Reference: 12-7
The Holmes Division recorded operating data as follows for the past year:
Sales .......................... $200,000
Net operating income ........... 25,000
Average operating assets ....... 100,000
Stockholders' equity ........... 80,000
Residual income ................ 13,000
74.
C
MediumRefer To:
12-7
For the past year, the return on investment was:
a. 15.75%.
b. 20.50%.c. 25.00%
d. 31.25%.
75.
A
Medium
Refer To:
12-7
For the past year, the margin was:
a. 12.50%.
b. 13.00%.
c. 14.75%.
d. 15.00%.
76.
D
Medium
Refer To:
12-7
For the past year, the turnover was:
a. 25.
b. 10.
c. 4.
d. 2.
77.
B
Hard
Refer To:
12-7
For the past year, the minimum required rate of return was:
a. 11%.
b. 12%.
c. 13%.
d. 14%.
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Reference: 12-8
The Baily Division recorded operating data as follows for the past two
years:
Year 1 Year 2
Sales ....................... ? $1,200,000
Stockholders' equity ........ $540,000 720,000 Average operating assets .... $600,000 ?
Margin ...................... 15% ?
Return on investment ........ 22.5% 18%
Baily Division's turnover was exactly the same in both Year 1 and Year 2.
78.
B
Hard
Refer To:
12-8
Sales in Year 1 amounted to:
a. $400,000.
b. $900,000.
c. $750,000.
d. $1,200,000.
79.B
Hard
Refer To:
12-8
The net operating income in Year 1 was:a. $90,000.
b. $135,000.
c. $140,000.
d. $150,000.
80.
D
Hard
Refer To:
12-8
The margin in Year 2 was:
a. 18.75%.
b. 27.00%.
c. 22.50%.
d. 12.00%.
81.
C
Hard
Refer To:
12-8
The average operating assets in Year 2 were:
a. $720,000.
b. $750,000.
c. $800,000.
d. $900,000.
Reference: 12-9
The following selected data pertain to the belt division of Allen Corp. for
last year:
Sales ............................ $500,000
Average operating assets ......... $200,000
Net operating income ............. $80,000
Turnover ......................... 2.5
Minimum required return .......... 20%
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82.
A
Medium
CPA
adapted
Refer To:12-9
How much is the return on investment?
a. 40%
b. 16%
c. 20%
d. 15%
83.
C
Medium
CPA
adapted
Refer To:
12-9
How much is the residual income?
a. $100,000
b. $80,000
c. $40,000
d. $420,000
Reference: 12-10
The following selected data pertain to Beck Co.'s Beam Division for lastyear:
Sales ............................. $400,000
Variable expenses ................. $100,000
Traceable fixed expenses .......... $250,000
Average operating assets .......... $200,000
Minimum required rate of return ... 20%
84.
C
Medium
CPA
adapted
Refer To:
12-10
How much is the residual income?
a. $40,000
b. $50,000
c. $10,000
d. $80,000
85.
A
Medium
CPA
adapted
Refer To:
12-10
How much is the return on the investment?
a. 25%
c. 20%
b. 12.5%
d. 40%
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Reference: 12-11
The Northern Division of the Gordon Company reported the following data for
last year:
Sales ................................. $900,000
Stockholders' Equity .................. $320,000
Operating Expenses .................... $700,000 Average Operating Assets .............. $500,000
Interest Expense ...................... $ 50,000
Tax Expense ........................... $ 60,000
Minimum Required Rate of Return ....... 15%
86.
C
Medium
Refer To:
12-11
The return on investment last year for the Northern Division
was:
a. 28.125%.
b. 62.5%.
c. 40%.
d. 18%.
87.B
Medium
Refer To:
12-11
The residual income for the Northern Division last year was:a. $90,000.
b. $125,000.
c. $48,000.
d. $135,000.
Reference: 12-12
Harstin Corporation has provided the following data:
Sales .......................... $625,000
Gross margin ................... 70,000
Net operating income ........... 50,000
Stockholders' equity ........... 90,000
Average operating assets ....... 250,000
Residual income ................ 20,000
88.
D
Medium
Refer To:
12-12
The margin for the past year was:
a. 19.2%.
b. 14.4%.
c. 11.2%.
d. 8.0%.
89.
B
Medium
Refer To:
12-12
The return on investment for the past year was:
a. 28%.
b. 20%.
c. 36%.
d. 8%.
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90.
A
Medium
Refer To:
12-12
The turnover for the past year was:
a. 2.5.
b. 6.94.
c. 2.98.
d. 1.4.
91.
C
Medium
Refer To:
12-12
The minimum required rate of return for the past year was:
a. 36%.
b. 8%.
c. 12%.
d. 40%.
Reference: 12-13
The Millard Division's operating data for the past two years are provided
below:
Year 1 Year 2
Return on investment ...... 12% 36% Stockholders' equity ...... $ 800,000 $ 500,000
Net operating income ...... ? 360,000
Turnover .................. ? 3
Margin .................... ? ?
Sales ..................... 3,200,000 ?
Millard Division's margin in Year 2 was 150% of the margin in Year 1.
92.
B
Hard
Refer To:
12-13
The net operating income for Year 1 was:
a. $240,000.
b. $256,000.
c. $384,000.
d. $768,000.
93.
B
Hard
Refer To:
12-13
The turnover for Year 1 was:
a. 1.2.
b. 1.5.
c. 3.0.
d. 4.0.
94.
C
Hard
Refer To:
12-13
The sales for Year 2 were:
a. $1.200,000.
b. $3,200,000.
c. $3,000,000.
d. $3,333,333.
95.
A
Hard
Refer To:
12-13
The average operating assets for Year 2 were:
a. $1,000,000.
b. $1,080,000.
c. $1,200,000.
d. $1,388,889.
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Reference: 12-14
(Appendix) Division A makes a part with the following characteristics:
Production capacity in units ........ 15,000 units
Selling price to outside customers .. $25
Variable cost per unit .............. $18 Total fixed costs ................... $60,000
Division B, another division of the same company, would like to purchase
5,000 units of the part each period from Division A. Division B is now
purchasing these parts from an outside supplier at a price of $24 each.
96.
A
Medium
Refer To:
12-14
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. If Division B
continues to purchase parts from an outside supplier rather then
from Division A, the company as a whole will be:
a. worse off by $30,000 each period.
b. worse off by $10,000 each period.c. better off by $15,000 each period.
d. worse off by $35,000 each period.
97.
C
Medium
Refer To:
12-14
Suppose that Division A is operating at capacity and can sell all
of its output to outside customers at its usual selling price. 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. better off by $5,000 each period.
b. worse off by $15,000 each period,
c. worse off by $5,000 each period.
d. there will be no change in the status of the company as a
whole,
Reference: 12-15
(Appendix) Division A produces a part with the following characteristics:
Capacity in units ............. 50,000
Selling price per unit ........ $30
Variable costs per unit ....... $18
Fixed costs per unit .......... $3
Division B, another division in the company, would like to buy this part
from Division A. Division B is presently purchasing the part from an
outside source at $28 per unit. If Division A sells to Division B, $1 in
variable costs can be avoided.
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98.
B
Medium
Refer To:
12-15
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. From the point of view of Division A, any
sales to Division B should be priced no lower than:
a. $27.
b. $29.c. $20.
d. $28.
99.
D
Medium
Refer To:
12-15
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. From the
point of view of Division A, any sales to Division B should be
priced no lower than:
a. $29.
b. $30.
c. $18.
d. $17.
Reference: 12-16
(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. Last month the Walsh Division bought all 4,000 of its wheels from
the Vega Division for $42 each. The following data are available from last
month's operations for the Vega Company:
Capacity ...................................... 12,000 wheels
Selling price per wheel to outside customers .. $45
Variable costs per wheel when sold to
outside customers ....................... $30
If the Vega Division sells wheels to the Walsh Division, Vega can avoid $2
per wheel in sales commissions. An outside supplier has offered to supply
wheels to the Walsh Division for $41 each.
100.
A
Medium
Refer To:
12-16
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. What should be the lowest acceptable transfer
price from the perspective of the Vega Division?
a. $28
b. $30
c. $42
d. $45
101.
B
Medium
Refer To:
12-16
What is the maximum price per wheel that Walsh should be willing
to pay Vega?
a. $28
b. $41
c. $42
d. $45
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102.
B
Hard
Refer To:
12-16
Suppose that Vega can sell 9,000 wheels each month to outside
consumers, so transfers to the Walsh Division cut into outside
sales. What should be the lowest acceptable transfer price from
the perspective of the Vega Division?
a. $28.00
b. $31.75
c. $41.00d. $42.00
Reference: 12-17
(Appendix) The Post Division of the M.T. Woodhead Company produces basic
posts which can be sold to outside customers or sold to the Lamp Division of
the M.T. Woodhead Company. Last Year the Lamp Division bought all of its
25,000 posts from Post at $1.50 each. The following data are available for
last year's activities of the Post Division:
Capacity in units .............. 300,000 posts
Selling price per post
to outside customers ........ $1.75 Variable costs per post ........ $0.90
Fixed costs, total ............. $150,000
The total fixed costs would be the same for all the alternatives considered
below.
103.
A
Medium
Refer To:
12-17
Suppose there is ample capacity so that transfers of the posts to
the Lamp Division do not cut into sales to outside customers.
What is the lowest transfer price that would not reduce the
profits of the Post Division?
a. $0.90.
b. $1.35.
c. $1.41.
d. $1.75.
104.
C
Hard
Refer To:
12-17
Suppose the transfers of posts to the Lamp Division cut into
sales to outside customers by 15,000 units. What is the lowest
transfer price that would not reduce the profits of the Post
Division?
a. $0.90.
b. $1.35.
c. $1.41.
d. $1.75.
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105.
C
Hard
Refer To:
12-17
Suppose the transfers of posts to the Lamp Division cut into
sales to outside customers by 15,000 units. Further suppose that
an outside supplier is willing to provide the Lamp Division with
basic posts at $1.45 each. If the Lamp Division had chosen to buy
all of its posts from the outside supplier instead of the Post
Division, the change in net operating income for the company as a
whole would have been:a. $1,250 decrease.
b. $10,250 increase.
c. $1,000 decrease.
d. $13,750 decrease.
Essay
106.
Medium
The Winter Products Division of American Sports Corporation
produces and markets two products for use in the snow: Sleds
and Saucers. The following data were gathered on activities
last month:
Sleds Saucers
Sales in units ................... 2,000 9,000
Selling price per unit ........... $50 $20
Variable production costs per unit $20 $5
Traceable fixed production costs $12,000 $33,000
Variable selling expenses per unit $2 $1
Traceable fixed selling expenses $2,000 $3,000
Allocated division adminis-
trative expenses ............... $40,000 $72,000
Required:
Prepare a segmented income statement in the contribution format
for last month, showing both "Amount" and "Percent" columns for
the division as a whole and for each product.
Answer:
Segments o
Total Company Sleds Saucers o
Sales ........ $280,000 100% $100,000 100% $180,000 100%
Variable
expenses ... 98,000 35 44,000 44 54,000 30
Contribution
margin ... 182,000 65 56,000 56 126,000 70
Traceable fixed expenses ... 50,000 18 14,000 14 36,000 20
Segment
margin ..... 132,000 47 $ 42,000 42% $ 90,000 50%
Common fixed
expenses ... 112,000 40
Net Income ... $ 20,000 7%
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107.
Medium
The IT Corporation produces and markets two types of electronic
calculators: Model 11 and Model 12. The following data were
gathered on activities last month:
Model 11 Model 12
Sales in units ........................ 5,000 3,000 Selling price per unit ................ $50 $100
Variable production costs per unit .... $10 $26
Traceable fixed production costs ...... $100,000 $150,000
Variable selling expenses per unit .... $5 $6
Traceable fixed selling expenses ...... $5,000 $7,500
Allocated division administrative
expenses ............................. $50,000 $60,000
Required:
Prepare a segmented income statement in the contribution format
for last month, showing both "Amount" and "Percent" columns for
the division as a whole and for each product.
Answer:
Segments
Total Company Model 11 Model 12
Sales $550,000 100% $250,000 100% $300,000 100.0%
Variable
expenses .... 171,000 31 75,000 30 96,000 32.0
Contribution
margin ...... $379,000 69% $175,000 70% $204,000 68.0%
Traceable fixed
expenses .... 262,500 48 105,000 42 157,500 52.5
Segment
margin ...... $116,500 21% $ 70,000 28% $ 46,500 15.5%
Common fixed
expenses .... 110,000 20
Net Income .... $ 6,500 1%
108.
Medium
Financial data for Beaker Company for last year appear below:
Beaker Company
Statements of Financial Position
Beginning Ending
Balance Balance
Assets:
Cash ................................ $ 50,000 $ 70,000
Accounts receivable ................. 20,000 25,000
Inventory ........................... 30,000 35,000
Plant and equipment (net) ........... 120,000 110,000
Investment in Cedar Company ......... 80,000 100,000
Land (undeveloped) .................. 170,000 170,000
Total assets ....................... $470,000 $510,000
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Liabilities and owners' equity:
Accounts payable .................... $ 70,000 $ 90,000
Long-term debt ...................... 250,000 250,000
Owners' equity ...................... 150,000 170,000
Total liabilities
and owners' equity .............. $470,000 $510,000
Beaker Company
Income Statement
Sales ................................. $414,000
Less operating expenses ............ 351,900
Net operating income ............... 62,100
Less interest and taxes:
Interest expense ................. $30,000
Tax expense ...................... 10,000 40,000
Net Income ......................... $ 22,100
The company paid dividends of $2,100 last year. The "Investment
in Cedar Company" on the statement of financial positionrepresents an investment in the stock of another company.
Required:
a. Compute the company's margin, turnover, and return on
investment for last year.
b. The Board of Directors of Beaker Company have set a minimum
required return of 20%. What was the company's residual
income last year?
Answer:
a. Operating assets do not include investments in other
companies or in undeveloped land.
Beginning Ending
Balance Balance
Cash .................... $ 50,000 $ 70,000
Accounts receivable ..... 20,000 25,000
Inventory ............... 30,000 35,000
Plant and equipment (net) 120,000 110,000
Total operating assets $220,000 $240,000
Average operating assets = ($220,000 + $240,000) ÷ 2
= $230,000
Margin = Net operating income ÷ Sales
= $62,100 ÷ $414,000
= 15%
Turnover = Sales ÷ Average operating assets
= $414,000 ÷ $230,000
= 1.8
ROI = Margin X Turnover
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= 15% X 1.8
= 27%
b. Net operating income ........... $62,100
Minimum required return
(20% X $230,000) ............. 46,000
Residual income ................ $16,100
109.
Hard
Financial data for Bingham Company for last year appear below:
Bingham Company
Statements of Financial Position
Beginning Ending
Balance Balance
Assets:
Cash .............................. $ 135,000 $ 266,000
Accounts receivable ............... 225,000 475,000
Inventory ......................... 314,000 394,000
Plant and equipment (net) ......... 940,000 860,000 Investment in Carr Company ........ 104,000 101,000
Land (undeveloped) ................ 198,000 65,000
Total assets ..................... $1,916,000 $2,161,000
Liabilities and owners' equity:
Accounts payable .................. $ 88,000 $ 119,000
Long-term debt .................... 585,000 665,000
Owners' equity .................... 1,243,000 1,377,000
Total liabilities
and owners' equity ............ $1,916,000 $2,161,000
Bingham Company
Income Statement
Sales ............................ $4,644,000
Less operating expenses .......... 4,291,000
Net operating income ............. 353,000
Less interest and taxes:
Interest expense ............... $ 90,000
Tax expense .................... 129,000 219,000
Net Income ....................... $ 134,000
The "Investment in Carr Company" on the statement of financial
position represents an investment in the stock of another
company.
Required:
a. Compute the company's margin, turnover, and return on
investment for last year.
b. The Board of Directors of Beaker Company have set a minimum
required return of 15%. What was the company's residual
income last year?
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Answer:
a. Operating assets do not include investments in other
companies or in undeveloped land.
Beginning Ending
Balance Balance Cash ..................... $ 135,000 $ 266,000
Accounts receivable ...... 225,000 475,000
Inventory ................ 314,000 394,000
Plant and equipment (net) 940,000 860,000
Total operating assets $1,614,000 $1,995,000
Average operating assets = ($1,614,000 + $1,995,000) ÷ 2
= $1,804,500
Margin = Net operating income ÷ Sales
= $353,000 ÷ $4,644,000
= 7.60%
Turnover = Sales ÷ Average operating assets
= $4,644,000 ÷ $1,804,500
= 2.57
ROI = Net operating income
÷ Average operating assets
= $353,000 ÷ $1,804,500
= 19.56%
b. Net operating income .... $353,000
Minimum required return
(15% X $1,804,500) .... 270,675
Residual income ......... $ 82,325
110.
Medium
The following data have been extracted from the year-end
reports of two companies -- Company X and Company Y:
Company X Company Y
Sales ......................... $800,000 ?
Net operating income .......... $56,000 ?
Average operating assets ...... ? $125,000
Margin ........................ ? 4%
Turnover ...................... ? 6
Return on investment .......... 14% ?
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Required:
Fill in the missing data on the above table.
Answer: Company X Company Y
Sales ............................ $800,000 $750,000
Net Operating Income ............. $56,000 $30,000
Average Operating Assets ......... $400,000 $125,000
Margin ........................... 7% 4%
Turnover ......................... 2 6
ROI .............................. 14% 24%
111.
Medium
The following data have been extracted from the year-end
reports of two companies -- Company X and Company Y:
Company X Company Y Sales ......................... $2,700,000 ?
Net operating income .......... $ 256,000 ?
Average operating assets ...... ? $1,725,000
Margin ........................ ? 8%
Turnover ...................... ? 2
Return on investment .......... 16% ?
Required:
Fill in the missing data on the above table.
Answer:
Company X Company Y
Sales ............................ $2,700,000 $3,450,000
Net Operating Income ............. $ 256,000 $ 276,000
Average Operating Assets ......... $1,600,000 $1,725,000
Margin ........................... 9.5% 8.0%
Turnover ......................... 1.7 2.0
ROI .............................. 16% 16%
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112.
Hard
(Appendix) Larinore Corporation has a Castings Division which
does casting work of various types. The company's Machine
Products Division has asked the Castings Division to provide it
with 20,000 special castings each year on a continuing basis.
The special casting would require $10 per unit in variable
production costs. The Machine Products Division has a bid froman outside supplier for the castings of $29 per unit.
In order to have time and space to produce the new casting, the
Castings Division would have to cut back production of another
casting - the RB4 which it presently is producing. The RB4
sells for $30 per unit, and requires $12 per unit in variable
production costs. Boxing and shipping costs of the RB4 are $4
per unit. Boxing and shipping costs for the new special casting
would be only $1 per unit. The company is now producing and
selling 100,000 units of the RB4 each year. Production and
sales of this casting would drop by 20% if the new casting is
produced.
Required:
a. What is the range of transfer prices within which both the
Divisions' profits would increase as a result of agreeing to
the transfer of 20,000 castings per year from the Castings
Division to the Machine Products Division?
b. Is it in the best interests of Larinore Corporation for this
transfer to take place? Explain.
Answer:
a. From the perspective of the Castings Division, 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, divided by the number of units transferred:
Opportunity cost = [($30 - $12 - $4) x 20,000]/20,000 = $16
Therefore,
Transfer price > ($10 + $1) + $16 = $27
From the viewpoint of the purchasing division, the transfer
price must be less than the cost of buying the units from
the outside supplier.
Transfer price < $29
Combining the two requirements, we get the following range
of transfer prices:
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$27 < Transfer price < $29
b. Yes, the transfer should take place. From the viewpoint of
the entire company, the cost of transferring the units
within the company is $27, but the cost of purchasing them
from the outside supplier is $29. Therefore, the company'sprofits increase by $2 for each of the castings that is used
within the company rather than being sold on the outside
market.
113.
Hard
(Appendix) Geneva Corporation has a Castings Division that does
casting work of various types. The company's Machine Products
Division has asked the Castings Division to provide it with
10,000 special castings each year on a continuing basis. The
special casting would require $20 per unit in variable
production costs. The Machine Products Division has a bid from
an outside supplier for the castings of $30 per unit.
In order to have time and space to produce the new casting, theCastings Division would have to cut back production of another
casting - the NW2 - which it presently is producing. The NW2
sells for $40 per unit, and requires $25 per unit in variable
production costs. Boxing and shipping costs of the NW2 are $4
per unit. Boxing and shipping costs for the new special casting
would be only $2 per unit. The company is now producing and
selling 100,000 units of the NW2 each year. Production and
sales of this casting would drop by 10% if the new casting were
produced.
Required:
a. What is the range of transfer prices, if any, within which
both the Divisions' profits would increase as a result of
agreeing to the transfer of 10,000 castings per year from
the Castings Division to the Machine Products Division?
b. Is it in the best interests of Geneva Corporation for this
transfer to take place? Explain.
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Answer:
a. From the perspective of the Castings Division, 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
ales, divided by the number of units transferred:
Opportunity cost = [($40 - $25 - $4) x 10,000]/10,000 = $11
Therefore,
Transfer price > ($20 + $2) + $11 = $33
From the viewpoint of the purchasing division, the transfer
price must be less than the cost of buying the units from
the outside supplier.
Transfer price < $30
Combining the two requirements, we find that no feasible
range of transfer prices exists under current conditions.
b. No, the transfer should not take place. From the viewpoint
of the entire company, the cost of transferring the units
within the company is $33, but the cost of purchasing them
from the outside supplier is $30. Therefore, 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.