Deck 24: Performance Eva Uation for Decentra Ized Operations

Question 1

Ethics and professional conduct in business
Rambotix Company has two divisions, the Semiconductor Division and the X-ray Division. The X-ray Division may purchase semiconductors from the Semiconductor Division or from outside suppliers. The Semiconductor Division sells semiconductor products both internally and externally. The market price for semiconductors is $100 per 100 semiconductors. Dave Bryant is the controller of the X-ray Division, and Howard Hillman is the controller of the Semiconductor Division. The following conversation took place between Dave and Howard:
Dave: I hear you are having problems selling semiconductors out of your division. Maybe I can help.
Howard: You've got that right. We're producing and selling at about 90% of our capacity to outsiders. Last year we were selling 100% of capacity. Would it be possible for your division to pick up some of our excess capacity After all, we are part of the same company.
Dave: What kind of price could you give me
Howard: Well, you know as well as I that we are under strict profit responsibility in our divisions, so I would expect to get market price, $100 for 100 semiconductors.
Dave: I'm not so sure we can swing that. I was expecting a price break from a "sister" division.
Howard: Hey, I can only take this "sister" stuff so far. If I give you a price break, our profits will fall from last year's levels. I don't think I could explain that. I'm sorry, but I must remain firm-market price. After all, it's only fair-that's what you would have to pay from an external supplier.
Dave: Fair or not, I think we'll pass. Sorry we couldn't have helped.
Was Dave behaving ethically by trying to force the Semiconductor Division into a price break Comment on Howard's reactions.

Answer 1

Comment on H's reactions:
• 'R' Company includes two divisions which are semiconductor divisions and x-ray divisions for which D.D and H.H are the controller's respectively-ray dimensions requires semiconductors from semiconductors divisions with reduced price as semiconductor divisions were unable to market 10% of their semiconductors the previous year.
• Definitely D.D the controller of the x-ray division behaved in an ethical and in a philosophical manner by trying to force the semiconductor division for a price break.if both the controllers arrives to a deal ,there would not be any stock left over and x-ray division no need to purchase the products for high price. The deals satisfies both the conditions by improving sales and fetching profits as both the departments works for one same company.
• H.H, the controller of the semi-conductor division is awkward and grim in his approach and reaction. H.H was so stubborn and stringent in looking at his personal aspects instead of organization's welfare and integrity.

Question 2

Differentiate between centralized and decentralized operations.

Answer 2

Difference between Centralized Operations and Decentralized Operations

Question 3

Budget performance reports for cost centers
Partially completed budget performance reports for Maguire Company, a manufacturer of air conditioners, are provided on the following page.



a. Complete the budget performance reports by determining the correct amounts for the lettered spaces.
b. Compose a memo to Holly Keller, vice president of production for Maguire Company, explaining the performance of the production division for May.

Answer 3

Cost center
Cost center is a decision making unit pertaining to an entire manufacturing or a service rendering company. There might be many cost centers inside a cost center. Managers of cost centers are usually held responsible in controlling costs of the cost centers of a firm.
Example:
• Production department of a car manufacturing company
• Admissions department of a hospital
A)
Budget performance reports for cost centers
Maguire Company Budget Performance Report - Vice President Production for the month ended May 31 st 2014
Maguire Company Budget Performance Report -Manger South Region, Plant for the month ended May 31 st 2014
Maguire Company Budget Performance Report - Supervisor, Chip Fabrication for the month ended May 31 st 2014
Comparison of division incomes is not possible as the divisions might vary in terms of different attributes like number of customers, products, size of the market and others. However each division income has to be compared with the budgeted income.
B)
MEMORANDUM
Maguire Company,
California,
USA,
3-07-2014
To : Holley Keller, Vice-president of Production, Maguire Company
From : ABC, Finance executive, Maguire Company
Subject: Performance of the production division during the month of May, 2014
I would like to present you the details of the production departments of chip fabrication, electronic assembly and Final assembly during the month of May 2014 for the three plants of Maguire Company namely Mid- Atlantic, West and south regions of USA.
The chip fabrication department of south region was over budgeted by $ 2,832. The expenses of factory wages, power and light and maintenance were over budgeted by $ 1,152. The materials expenses were only under the budget. So, all these budgeted expenses must have to revise before preparing budget for the upcoming month of June 2014. However the expenses of Mid-Atlantic region and west region are predicted according to the requirements as they are under the budget estimates for the month of May 2014.
I would here by inform you that we would estimate the expenses of the South region in preparing the budget for the month of June 2014 by reviewing the actual expenses incurred during the month of May 2014.
ABC, Finance Executive
Maguire Company

Question 4

Budgetary performance for cost center
Mandel Company's costs were over budget by $252,000. The company is divided into West and East regions. The East Region's costs were under budget by $74,000. Determine the amount that the West Region's costs were over or under budget.
Conley Company's costs were under budget by $198,000. The company is divided into North and South regions. The North Region's costs were over budget by $52,000. Determine the amount that the South Region's costs were over or under budget.

Question 5

Budget performance report for a cost center
E-Net Company sells electronics over the Internet. The Consumer Products Division is organized as a cost center. The budget for the Consumer Products Division for the month ended January 31, 2014, is as follows (in thousands):

During January, the costs incurred in the Consumer Products Division were as follows:

Instructions
1. Prepare a budget performance report for the director of the Consumer Products Division for the month of January.
2. For which costs might the director be expected to request supplemental reports

Question 6

Budget performance report for a cost center
The Eastern District of Adelson Inc. is organized as a cost center. The budget for the Eastern District of Adelson Inc. for the month ended December 31, 2014, is as follows:

During December, the costs incurred in the Eastern District were as follows:

Instructions
1. Prepare a budget performance report for the manager of the Eastern District of Adelson for the month of December.
2. For which costs might the supervisor be expected to request supplemental reports

Question 7

Service department charges
The Customer Service Department of Door Industries Inc. asked the Publications Department to prepare a brochure for its training program. The Publications Department delivered the brochures and charged the Customer Service Department a rate that was 25% higher than could be obtained from an outside printing company. The policy of the company required the Customer Service Department to use the internal publications group for brochures. The Publications Department claimed that it had a drop in demand for its services during the fiscal year, so it had to charge higher prices in order to recover its payroll and fixed costs.
Should the cost of the brochure be transferred to the Customer Service Department in order to hold the Customer Service Department head accountable for the cost of the brochure What changes in policy would you recommend

Question 8

Differentiate between a profit center and an investment center.

Question 9

Divisional income statements
The following data were summarized from the accounting records for Endless River Construction Company for the year ended June 30, 2014:

Prepare divisional income statements for Endless River Construction Company.

Question 10

Service department charges
The centralized employee travel department of Kensy Company has expenses of $435,000. The department has serviced a total of 4,000 travel reservations for the period. The Northeast Division has made 1,800 reservations during the period, and the Pacific Division has made 2,200 reservations. How much should each division be charged for travel services
The centralized computer technology department of Lee Company has expenses of $264,000. The department has provided a total of 2,500 hours of service for the period. The Retail Division has used 1,125 hours of computer technology service during the period, and the Commercial Division has used 1,375 hours of computer technology service. How much should each division be charged for computer technology department services

Question 11

Profit center responsibility reporting
Traxonia Railroad Inc. has three regional divisions organized as profit centers. The chief executive officer (CEO) evaluates divisional performance, using income from operations as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31, 2014:

The company operates three service departments: Shareholder Relations, Customer Support, and Legal. The Shareholder Relations Department conducts a variety of services for shareholders of the company. The Customer Support Department is the company's point of contact for new service, complaints, and requests for repair. The department believes that the number of customer contacts is an activity base for this work. The Legal Department provides legal services for division management. The department believes that the number of hours billed is an activity base for this work. The following additional information has been gathered:

Instructions
1. Prepare quarterly income statements showing income from operations for the three divisions. Use three column headings: East, West, and Central.
2. Identify the most successful division according to the profit margin.
3. Provide a recommendation to the CEO for a better method for evaluating the performance of the divisions. In your recommendation, identify the major weakness of the present method.

Question 12

Profit center responsibility reporting
Thomas Railroad Company organizes its three divisions, the North (N), South (S), and West (W) regions, as profit centers. The chief executive officer (CEO) evaluates divisional performance, using income from operations as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31, 2014:

The company operates three service departments: the Dispatching Department, the Equipment Management Department, and the Treasurer's Department. The Dispatching Department manages the scheduling and releasing of completed trains. The Equipment Management Department manages the railroad cars inventories. It makes sure the right freight cars are at the right place at the right time. The Treasurer's Department conducts a variety of services for the company as a whole. The following additional information has been gathered:

Instructions
1. Prepare quarterly income statements showing income from operations for the three regions. Use three column headings: North, South, and West.
2. Identify the most successful region according to the profit margin.
3. Provide a recommendation to the CEO for a better method for evaluating the performance of the regions. In your recommendation, identify the major weakness of the present method.

Question 13

Evaluating divisional performance
The three divisions of Yummy Foods are Snack Goods, Cereal, and Frozen Foods. The divisions are structured as investment centers. The following responsibility reports were prepared for the three divisions for the prior year:

1. Which division is making the best use of invested assets and should be given priority for future capital investments
2. Assuming that the minimum acceptable rate of return on new projects is 19%, would all investments that produce a return in excess of 19% be accepted by the divisions
3. Can you identify opportunities for improving the company's financial performance

Question 14

Weyerhaeuser developed a system that assigns service department expenses to user divisions on the basis of actual services consumed by the division. Here are a number of Weyerhaeuser's activities in its central Financial Services Department:
• Payroll
• Accounts payable
• Accounts receivable
• Database administration-report preparation For each activity, identify an activity base that could be used to charge user divisions for service.

Question 15

Service department charges and activity bases
For each of the following service departments, identify an activity base that could be used for charging the expense to the profit center.
a. Legal
b. Duplication services
c. Electronic data processing
d. Central purchasing
e. Telecommunications
f. Accounts receivable

Question 16

Income from operations for profit center
Using the data for Kensy Company from Practice Exercise 24-2A along with the data provided below, determine the divisional income from operations for the Northeast and Pacific divisions.

Using the data for Lee Company from Practice Exercise 24-2B along with the data provided below, determine the divisional income from operations for the Retail Division and the Commercial Division.

Question 17

Divisional income statements and rate of return on investment analysis
E.F. Lynch Company is a diversified investment company with three operating divisions organized as investment centers. Condensed data taken from the records of the three divisions for the year ended June 30, 2014, are as follows:

The management of E.F. Lynch Company is evaluating each division as a basis for planning a future expansion of operations.
Instructions
1. Prepare condensed divisional income statements for the three divisions, assuming that there were no service department charges.
2. Using the DuPont formula for rate of return on investment, compute the profit margin, investment turnover, and rate of return on investment for each division.
3. If available funds permit the expansion of operations of only one division, which of the divisions would you recommend for expansion, based on parts (1) and (2) Explain.

Question 18

Divisional income statements and rate of return on investment analysis
The Whole Earth Food Company is a diversified food company with three operating divisions organized as investment centers. Condensed data taken from the records of the three divisions for the year ended June 30, 2014, are as follows:

The management of The Whole Earth Food Company is evaluating each division as a basis for planning a future expansion of operations.
Instructions
1. Prepare condensed divisional income statements for the three divisions, assuming that there were no service department charges.
2. Using the DuPont formula for rate of return on investment, compute the profit margin, investment turnover, and rate of return on investment for each division.
3. If available funds permit the expansion of operations of only one division, which of the divisions would you recommend for expansion, based on parts (1) and (2) Explain.

Question 19

Evaluating division performance over time
The Norsk Division of Gridiron Concepts Inc. has been experiencing revenue and profit growth during the years 2012-2014. The divisional income statements are provided below.

Assume that there are no charges from service departments. The vice president of the division, Tom Yang, is proud of his division's performance over the last three years. The president of Gridiron Concepts Inc., Anna Evans, is discussing the division's performance with Tom, as follows:
Tom: As you can see, we've had a successful three years in the Norsk Division.
Anna: I'm not too sure.
Tom: What do you mean Look at our results. Our income from operations has more than doubled, while our profit margins are improving.
Anna: I am looking at your results. However, your income statements fail to include one very important piece of information; namely, the invested assets. You have been investing a great deal of assets into the division. You had $735,000 in invested assets in 2012, $1,500,000 in 2013, and $3,500,000 in 2014.
Tom: You are right. I've needed the assets in order to upgrade our technologies and expand our operations. The additional assets are one reason we have been able to grow and improve our profit margins. I don't see that this is a problem.
Anna: The problem is that we must maintain a 15% rate of return on invested assets.
1. Determine the profit margins for the Norsk Division for 2012-2014.
2. Compute the investment turnover for the Norsk Division for 2012-2014. Round to two decimal places.
3. Compute the rate of return on investment for the Norsk Division for 2012-2014.
4. Evaluate the division's performance over the 2012-2014 time period. Why was Anna concerned about the performance

Question 20

What is the major shortcoming of using income from operations as a performance measure for investment centers

Question 21

Activity bases for service department charges
For each of the following service departments, select the activity base listed that is most appropriate for charging service expenses to responsible units.

Question 22

Profit margin, investment turnover, and ROI
McBreen Company has income from operations of $96,000, invested assets of $400,000, and sales of $1,200,000. Use the DuPont formula to compute the rate of return on investment and show (a) the profit margin, (b) the investment turnover, and (c) the rate of return on investment.
Briggs Company has income from operations of $36,000, invested assets of $180,000, and sales of $720,000. Use the DuPont formula to compute the rate of return on investment and show (a) the profit margin, (b) the investment turnover, and (c) the rate of return on investment.

Question 23

Effect of proposals on divisional performance
A condensed income statement for the Commercial Division of Maxell Manufacturing Inc.for the year ended December 31, 2014, is as follows:

Assume that the Commercial Division received no charges from service departments. The president of Maxell Manufacturing has indicated that the division's rate of return on a $2,500,000 investment must be increased to at least 21% by the end of the next year if operations are to continue. The division manager is considering the following three proposals:
Proposal 1: Transfer equipment with a book value of $312,500 to other divisions at no gain or loss and lease similar equipment. The annual lease payments would exceed the amount of depreciation expense on the old equipment by $105,000. This increase in expense would be included as part of the cost of goods sold. Sales would remain unchanged.
Proposal 2: Purchase new and more efficient machining equipment and thereby reduce the cost of goods sold by $560,000. Sales would remain unchanged, and the old equipment, which has no remaining book value, would be scrapped at no gain or loss. The new equipment would increase invested assets by an additional $1,875,000 for the year.
Proposal 3: Reduce invested assets by discontinuing a product line. This action would eliminate sales of $595,000, reduce cost of goods sold by $406,700, and reduce operating expenses by $175,000. Assets of $1,338,000 would be transferred to other divisions at no gain or loss.
Instructions
1. Using the DuPont formula for rate of return on investment, determine the profit margin, investment turnover, and rate of return on investment for the Commercial Division for the past year.
2. Prepare condensed estimated income statements and compute the invested assets for each proposal.
3. Using the DuPont formula for rate of return on investment, determine the profit margin, investment turnover, and rate of return on investment for each proposal.
4. Which of the three proposals would meet the required 21% rate of return on investment
5. If the Commercial Division were in an industry where the profit margin could not be increased, how much would the investment turnover have to increase to meet the president's required 21% rate of return on investment Round to one decimal place.

Question 24

Effect of proposals on divisional performance
A condensed income statement for the Electronics Division of Gihbli Industries Inc. for the year ended December 31, 2014, is as follows:

Assume that the Electronics Division received no charges from service departments. The president of Gihbli Industries Inc. has indicated that the division's rate of return on a $1,050,000 investment must be increased to at least 20% by the end of the next year if operations are to continue. The division manager is considering the following three proposals:
Proposal 1: Transfer equipment with a book value of $300,000 to other divisions at no gain or loss and lease similar equipment. The annual lease payments would be less than the amount of depreciation expense on the old equipment by $31,400. This decrease in expense would be included as part of the cost of goods sold. Sales would remain unchanged.
Proposal 2: Reduce invested assets by discontinuing a product line. This action would eliminate sales of $180,000, reduce cost of goods sold by $119,550, and reduce operating expenses by $60,000. Assets of $112,500 would be transferred to other divisions at no gain or loss.
Proposal 3: Purchase new and more efficient machinery and thereby reduce the cost of goods sold by $189,000. Sales would remain unchanged, and the old machinery, which has no remaining book value, would be scrapped at no gain or loss. The new machinery would increase invested assets by $918,750 for the year.
Instructions
1. Using the DuPont formula for rate of return on investment, determine the profit margin, investment turnover, and rate of return on investment for the Electronics Division for the past year. Round investment turnover and the rate of return to one decimal place.
2. Prepare condensed estimated income statements and compute the invested assets for each proposal.
3. Using the DuPont formula for rate of return on investment, determine the profit margin, investment turnover, and rate of return on investment for each proposal.
4. Which of the three proposals would meet the required 20% rate of return on investment
5. If the Electronics Division were in an industry where the profit margin could not be increased, how much would the investment turnover have to increase to meet the president's required 20% rate of return on investment Round to one decimal place.

Question 25

Evaluating division performance
Last Resort Industries Inc. is a privately held diversified company with five separate divisions organized as investment centers. A condensed income statement for the Specialty Products Division for the past year, assuming no service department charges, is as follows:

The manager of the Specialty Products Division was recently presented with the opportunity to add an additional product line, which would require invested assets of $14,400,000. A projected income statement for the new product line is as follows:

The Specialty Products Division currently has $27,000,000 in invested assets, and Last Resort Industries Inc.'s overall rate of return on investment, including all divisions, is 10%. Each division manager is evaluated on the basis of divisional rate of return on investment. A bonus is paid, in $8,000 increments, for each whole percentage point that the division's rate of return on investment exceeds the company average.
The president is concerned that the manager of the Specialty Products Division rejected the addition of the new product line, even though all estimates indicated that the product line would be profitable and would increase overall company income. You have been asked to analyze the possible reasons why the Specialty Products Division manager rejected the new product line.
1. Determine the rate of return on investment for the Specialty Products Division for the past year.
2. Determine the Specialty Products Division manager's bonus for the past year.
3. Determine the estimated rate of return on investment for the new product line. Round whole percents to one decimal place and investment turnover to two decimal places.
4. Why might the manager of the Specialty Products Division decide to reject the new product line Support your answer by determining the projected rate of return on investment for 2014, assuming that the new product line was launched in the Specialty Products Division, and 2014 actual operating results were similar to those of 2013.
5. Can you suggest an alternative performance measure for motivating division managers to accept new investment opportunities that would increase the overall company income and rate of return on investment

Question 26

In a decentralized company in which the divisions are organized as investment centers, how could a division be considered the least profitable even though it earned the largest amount of income from operations

Question 27

Service department charges
In divisional income statements prepared for Wilborne Construction Company, the Payroll Department costs are charged back to user divisions on the basis of the number of payroll checks, and the Purchasing Department costs are charged back on the basis of the number of purchase requisitions. The Payroll Department had expenses of $119,280, and the Purchasing Department had expenses of $57,750 for the year. The following annual data for Residential, Commercial, and Government Contract divisions were obtained from corporate records:

a. Determine the total amount of payroll checks and purchase requisitions processed per year by the company and each division.
b. Using the activity base information in (a), determine the annual amount of payroll and purchasing costs charged back to the Residential, Commercial, and Government Contract divisions from payroll and purchasing services.
c. Why does the Residential Division have a larger service department charge than the other two divisions, even though its sales are lower

Question 28

Residual income
The Consumer Division of Hernandez Company has income from operations of $90,000 and assets of $450,000. The minimum acceptable rate of return on assets is 10%. What is the residual income for the division
The Commercial Division of Herring Company has income from operations of $420,000 and assets of $910,000. The minimum acceptable rate of return on assets is 8%. What is the residual income for the division

Question 29

Divisional performance analysis and evaluation
The vice president of operations of Pavone Company is evaluating the performance of two divisions organized as investment centers. Invested assets and condensed income statement data for the past year for each division are as follows:

Instructions
1. Prepare condensed divisional income statements for the year ended December 31, 2014, assuming that there were no service department charges.
2. Using the DuPont formula for rate of return on investment, determine the profit margin, investment turnover, and rate of return on investment for each division.
3. If management desires a minimum acceptable rate of return of 17%, determine the residual income for each division.
4. Discuss the evaluation of the two divisions, using the performance measures determined in parts (1), (2), and (3).

Question 30

Divisional performance analysis and evaluation
The vice president of operations of Free Ride Bike Company is evaluating the performance of two divisions organized as investment centers. Invested assets and condensed income statement data for the past year for each division are as follows:

Instructions
1. Prepare condensed divisional income statements for the year ended December 31, 2014, assuming that there were no service department charges.
2. Using the DuPont formula for rate of return on investment, determine the profit margin, investment turnover, and rate of return on investment for each division.
3. If management's minimum acceptable rate of return is 10%, determine the residual income for each division.
4. Discuss the evaluation of the two divisions, using the performance measures determined in parts (1), (2), and (3).

Question 31

How does using the rate of return on investment facilitate comparability between divisions of decentralized companies

Question 32

Service department charges and activity bases
Middler Corporation, a manufacturer of electronics and communications systems, uses a service department charge system to charge profit centers with Computing and Communications Services (CCS) service department costs. The following table identifies an abbreviated list of service categories and activity bases used by the CCS department. The table also includes some assumed cost and activity base quantity information for each service for October.

One of the profit centers for Middler Corporation is the Communication Systems (COMM) sector. Assume the following information for the COMM sector:
• The sector has 5,200 employees, of whom 25% are office employees.
• All the office employees have a phone, and 96% of them have a computer on the network.
• One hundred percent of the employees with a computer also have an e-mail account.
• The average number of help desk calls for October was 1.5 calls per individual with a computer.
• There are 600 additional printers, servers, and peripherals on the network beyond the personal computers.
a. Determine the service charge rate for the four CCS service categories for October.
b. Determine the charges to the COMM sector for the four CCS service categories for October.

Question 33

Transfer pricing
The materials used by the North Division of Horton Company are currently purchased from outside suppliers at $60 per unit. These same materials are produced by Horton's South Division. The South Division can produce the materials needed by the North Division at a variable cost of $42 per unit. The division is currently producing 200,000 units and has capacity of 250,000 units. The two divisions have recently negotiated a transfer price of $52 per unit for 30,000 units. By how much will each division's income increase as a result of this transfer
The materials used by the Multinomah Division of Isbister Company are currently purchased from outside suppliers at $90 per unit. These same materials are produced by the Pembroke Division. The Pembroke Division can produce the materials needed by the Multinomah Division at a variable cost of $75 per unit. The division is currently producing 120,000 units and has capacity of 150,000 units. The two divisions have recently negotiated a transfer price of $82 per unit for 15,000 units. By how much will each division's income increase as a result of this transfer

Question 34

Transfer pricing
Garcon Inc. manufactures electronic products, with two operating divisions, the Consumer and Commercial divisions. Condensed divisional income statements, which involve no intracompany transfers and which include a breakdown of expenses into variable and fixed components, are as follows:

The Consumer Division is presently producing 14,400 units out of a total capacity of 17,280 units. Materials used in producing the Commercial Division's product are currently purchased from outside suppliers at a price of $150 per unit. The Consumer Division is able to produce the materials used by the Commercial Division. Except for the possible transfer of materials between divisions, no changes are expected in sales and expenses.
Instructions
1. Would the market price of $150 per unit be an appropriate transfer price for Garcon Inc. Explain.
2. If the Commercial Division purchases 2,880 units from the Consumer Division, rather than externally, at a negotiated transfer price of $115 per unit, how much would the income from operations of each division and the total company income from operations increase
3. Prepare condensed divisional income statements for Garcon Inc. based on the data in part (2).
4. If a transfer price of $126 per unit is negotiated, how much would the income from operations of each division and the total company income from operations increase
5. a. What is the range of possible negotiated transfer prices that would be acceptable for Garcon Inc.
b. Assuming that the managers of the two divisions cannot agree on a transfer price, what price would you suggest as the transfer price

Question 35

Transfer pricing
Exoplex Industries Inc. is a diversified aerospace company, including two operating divisions, Semiconductors and Navigational Systems divisions. Condensed divisional income statements, which involve no intracompany transfers and which include a breakdown of expenses into variable and fixed components, are as follows:

The Semiconductors Division is presently producing 2,240 units out of a total capacity of 2,820 units. Materials used in producing the Navigational Systems Division's product are currently purchased from outside suppliers at a price of $432 per unit. The Semiconductors Division is able to produce the components used by the Navigational Systems Division. Except for the possible transfer of materials between divisions, no changes are expected in sales and expenses.
Instructions
1. Would the market price of $432 per unit be an appropriate transfer price for Exoplex Industries Inc. Explain.
2. If the Navigational Systems Division purchases 580 units from the Semiconductors Division, rather than externally, at a negotiated transfer price of $310 per unit, how much would the income from operations of each division and total company income from operations increase
3. Prepare condensed divisional income statements for Exoplex Industries Inc. based on the data in part (2).
4. If a transfer price of $340 per unit is negotiated, how much would the income from operations of each division and total company income from operations increase
5. a. What is the range of possible negotiated transfer prices that would be acceptable for Exoplex Industries Inc.
b. Assuming that the managers of the two divisions cannot agree on a transfer price, what price would you suggest as the transfer price

Question 36

Why would a firm use a balanced scorecard in evaluating divisional performance

Question 37

Divisional income statements with service department charges
Van Emburgh Technology has two divisions, Consumer and Commercial, and two corporate service departments, Tech Support and Accounts Payable. The corporate expenses for the year ended December 31, 2014, are as follows:

The other corporate administrative expenses include officers' salaries and other expenses required by the corporation. The Tech Support Department charges the divisions for services rendered, based on the number of computers in the department, and the Accounts Payable Department charges divisions for services, based on the number of checks issued for each department. The usage of service by the two divisions is as follows:

The service department charges of the Tech Support Department and the Accounts Payable Department are considered controllable by the divisions. Corporate administrative expenses are not considered controllable by the divisions. The revenues, cost of goods sold, and operating expenses for the two divisions are as follows:

Prepare the divisional income statements for the two divisions.

Question 38

What is the objective of transfer pricing

Question 39

Corrections to service department charges
Wild Sun Airlines Inc. has two divisions organized as profit centers, the Passenger Division and the Cargo Division. The following divisional income statements were prepared:

The service department charge rate for the service department costs was based on revenues. Since the revenues of the two divisions were the same, the service department charges to each division were also the same.
The following additional information is available:

a. Does the income from operations for the two divisions accurately measure performance Explain.
b. Correct the divisional income statements, using the activity bases provided above in revising the service department charges.

Question 40

When is the negotiated price approach preferred over the market price approach in setting transfer prices

Question 41

Profit center responsibility reporting
Full Throttle Sporting Goods Co. operates two divisions-the Winter Sports Division and the Summer Sports Division. The following income and expense accounts were provided from the trial balance as of December 31, 2014, the end of the current fiscal year, after all adjustments, including those for inventories, were recorded and posted:

The bases to be used in allocating expenses, together with other essential information, are as follows:
a. Advertising expense-incurred at headquarters, charged back to divisions on the basis of usage: Winter Sports Division, $611,000; Summer Sports Division, $746,900.
b. Transportation expense-charged back to divisions at a charge rate of $14.00 per bill of lading: Winter Sports Division, 20,400 bills of lading; Summer Sports Division, 22,100 bills of lading.
c. Accounts receivable collection expense-incurred at headquarters, charged back to divisions at a charge rate of $7.50 per invoice: Winter Sports Division, 13,120 sales invoices; Summer Sports Division, 18,880 sales invoices.
d. Warehouse expense-charged back to divisions on the basis of floor space used in storing division products: Winter Sports Division, 124,550 square feet; Summer Sports Division, 140,450 square feet.
Prepare a divisional income statement with two column headings: Winter Sports Division and Summer Sports Division. Provide supporting calculations for service department charges.

Question 42

When using the negotiated price approach to transfer pricing, within what range should the transfer price be established

Question 43

Rate of return on investment
The income from operations and the amount of invested assets in each division of Steele Industries are as follows:

a. Compute the rate of return on investment for each division.
b. Which division is the most profitable per dollar invested

Question 44

Residual income
Based on the data in Exercise 24-10, assume that management has established an 8% minimum acceptable rate of return for invested assets.
a. Determine the residual income for each division.
b. Which division has the most residual income

Question 45

Determining missing items in rate of return computation
One item is omitted from each of the following computations of the rate of return on investment:

Determine the missing items, identifying each by the appropriate letter.

Question 46

Profit margin, investment turnover, and rate of return on investment
The condensed income statement for the Consumer Products Division of Milner Industries Inc. is as follows (assuming no service department charges):

The manager of the Consumer Products Division is considering ways to increase the rate of return on investment.
a. Using the DuPont formula for rate of return on investment, determine the profit margin, investment turnover, and rate of return on investment of the Consumer Products Division, assuming that $5,000,000 of assets have been invested in the Consumer Products Division.
b. If expenses could be reduced by $350,000 without decreasing sales, what would be the impact on the profit margin, investment turnover, and rate of return on investment for the Consumer Products Division

Question 47

Rate of return on investment
The Walt Disney Company has four profitable business segments, described as follows:
• Media Networks: The ABC television and radio network, Disney channel, ESPN, A E, E!, and Disney.com.
• Parks and Resorts: Walt Disney World Resort, Disneyland, Disney Cruise Line, and other resort properties.
• Studio Entertainment: Walt Disney Pictures, Touchstone Pictures, Hollywood Pictures, Miramax Films, and Buena Vista Theatrical Productions.
• Consumer Products: Character merchandising, Disney stores, books, and magazines.
Disney recently reported sector income from operations, revenue, and invested assets (in millions) as follows:

a. Use the DuPont formula to determine the rate of return on investment for the four Disney sectors. Round whole percents to one decimal place and investment turnover to two decimal places.
b. How do the four sectors differ in their profit margin, investment turnover, and return on investment

Question 48

Determining missing items in rate of return and residual income computations
Data for Magnum Company are presented in the following table of rates of return on investment and residual incomes:

Determine the missing items, identifying each item by the appropriate letter.

Question 49

Determining missing items from computations
Data for the North, South, East, and West divisions of Free Bird Company are as follows:

a. Determine the missing items, identifying each by the letters (a) through (l). Round percents and investment turnover to one decimal place.
b. Determine the residual income for each division, assuming that the minimum acceptable rate of return established by management is 10%.
c. Which division is the most profitable in terms of (1) return on investment and (2) residual income

Question 50

Rate of return on investment, residual income
Starwood Hotels Resorts Worldwide provides lodging services around the world. The company is separated into two major divisions.
• Hotel Ownership: Hotels owned and operated by Starwood.
• Vacation Ownership: Resort properties developed, owned, and operated for timeshare vacation owners.
Financial information for each division, from a recent annual report, is as follows (in millions):

a. Use the DuPont formula to determine the return on investment for each of the Star-wood business divisions. Round whole percents to one decimal place and investment turnover to two decimal places.
b. Determine the residual income for each division, assuming a minimum acceptable income of 5% of total assets. Round minimal acceptable return to the nearest million dollars.
c. Interpret your results.

Question 51

Balanced scorecard
American Express Company is a major financial services company, noted for its American Express® card. Below are some of the performance measures used by the company in its balanced scorecard.

For each measure, identify whether the measure best fits the innovation, customer, internal process, or financial dimension of the balanced scorecard.

Question 52

Balanced scorecard
Several years ago, United Parcel Service (UPS) believed that the Internet was going to change the parcel delivery market and would require UPS to become a more nimble and customer-focused organization. As a result, UPS replaced its old measurement system, which was 90% oriented toward financial performance, with a balanced scorecard. The scorecard emphasized four "point of arrival" measures, which were:
1. Customer satisfaction index-a measure of customer satisfaction.
2. Employee relations index-a measure of employee sentiment and morale.
3. Competitive position-delivery performance relative to competition.
4. Time in transit-the time from order entry to delivery.
a. Why did UPS introduce a balanced scorecard and nonfinancial measures in its new performance measurement system
b. Why do you think UPS included a factor measuring employee sentiment

Question 53

Decision on transfer pricing
Materials used by the Instrument Division of Dart Industries are currently purchased from outside suppliers at a cost of $180 per unit. However, the same materials are available from the Components Division. The Components Division has unused capacity and can produce the materials needed by the Instrument Division at a variable cost of $125 per unit.
a. If a transfer price of $145 per unit is established and 40,000 units of materials are transferred, with no reduction in the Components Division's current sales, how much would Dart Industries' total income from operations increase
b. How much would the Instrument Division's income from operations increase
c. How much would the Components Division's income from operations increase

Question 54

Decision on transfer pricing
Based on Dart Industries' data in Exercise 24 20, assume that a transfer price of $158 has been established and that 40,000 units of materials are transferred, with no reduction in the Components Division's current sales.
a. How much would Dart Industries' total income from operations increase
b. How much would the Instrument Division's income from operations increase
c. How much would the Components Division's income from operations increase
d. If the negotiated price approach is used, what would be the range of acceptable transfer prices and why