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Final

MGAB03H3 Final: MGTB03 Final Exam Review Q and A Final Version.pdf


Department
Financial Accounting
Course Code
MGAB03H3
Professor
G.Quan Fun
Study Guide
Final

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MGTB03 Managerial Accounting – Final Exam Review Questions
Page 1
Question 1:
Faced with headquarters' desire to add a new product line, Stefan Grenier, manager of Bilti
Products' East Division, felt that he had to see the numbers before he made a move. His
division's return on investment (ROI) had led the company for three years, and he don't want any
letdown.”
Bilti Products is a decentralized wholesaler with four autonomous divisions. The divisions are
evaluated on the basis of ROI, with year-end bonuses given to divisional managers who have the
highest ROI. Operating results for the company's East Division for last year are given below:
Sales $21,000,000
Variable expenses 13,400,000
Contribution margin 7,600,000
Fixed expenses 5,920,000
Operating income $ 1,680,000
Divisional operating assets$ 5,250,000
The company had an overall ROI of 18% last year (considering all divisions). The new product
line that headquarters wants Grenier's East Division to add would require an investment of
$3,000,000. The cost and revenue characteristics of the new product line per year would be as
follows:
Sales $9,000,000
Variable expenses65% of sales
Fixed expenses $2,520,000
Required:
1. Compute the East Division's ROI for last year; also compute the ROI as it would appear if
the new product line is added.
2. If you were in Grenier's position, would you accept or reject the new product line? Explain.
3. Why do you suppose headquarters is anxious for the East Division to add the new product
line?
4. Suppose that the company's minimum required rate of return on operating assets is 15% and
that performance is evaluated using residual income.
1. Compute East Division's residual income for last year; also compute the residual
income as it would appear if the new product line is added.
2. Under these circumstances, if you were in Grenier's position, would you accept or
reject the new product line? Explain.

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MGTB03 Managerial Accounting – Final Exam Review Questions
Page 2
Question 1- Solution
1.
Present New Line
Total
(1)
Sales
$21,000,000
$9,000,000
$30,000,000
(2)
Operating income
..........
$1,680,000
$630,000
*
$2,310,000
(3)
Operating assets
.............
$5,250,000
$3,0
00,000
$8,250,000
(4)
Margin (2) ÷ (1)
.............
8.0%
7.0%
7.7%
(5)
Turnover (1) ÷ (3)
..........
4.00
3.00
3.64
(6)
ROI (4) × (5)
..................
32%
21%
28%
*
Sales
................................
................................
..........
$9,000,000
Variable expenses (65% x $9,000,000)
.....................
5,850,000
Contribution margin
................................
..................
3,150,000
Fixed e
xpenses
................................
..........................
2,520,000
Operating income
................................
......................
$
630,000
2. Stefan Grenier will be inclined to reject the new product line, since accepting it
would reduce his division’s overall rate of return.
3. The new product line promises an ROI of 21%, whereas the company’s overall
ROI last year was only 18%. Thus, adding the new line would increase the
company’s overall ROI.
4.
a.
Present New Line Total
Operating assets
.............................
$5,250,000
$3,000,000
$8,250,000
Minimum required return
..............
×
15%
×
15%
×
15%
Minimum o
perating income
..........
$787,500
$450,000
$1,237,500
Actual operating income
................
$1,680,000
$
630,000
$2,310,000
Minimum net operating income
(above)
................................
........
787,500
450,000
1,237,500
Residual income
.............................
$
892,500
$
180,000
$1,072,500
b. Under the residual income approach, Stefan Grenier would be inclined to
accept the new product line, since adding the product line would increase the
total amount of his division’s residual income, as shown above.

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MGTB03 Managerial Accounting – Final Exam Review Questions
Page 3
Question 2:
Gerbig Company's Electrical Division produces a high-quality transformer. Sales and cost data
on the transformer follow:
Selling price per unit on the outside market $40
Variable costs per unit $21
Fixed costs per unit (based on capacity) $9
Capacity in units 60,000
Gerbig Company has a Motor Division that would like to begin purchasing this transformer from
the Electrical Division. The Motor Division is currently purchasing 10,000 transformers each
year from another company at a cost of $38 per transformer. Gerbig Company evaluates its
division managers on the basis of divisional profits.
Required:
1. Assume that the Electrical Division is now selling only 50,000 transformers each year to
outside customers.
1. From the standpoint of the Electrical Division, what is the lowest acceptable
transfer price for transformers sold to the Motor Division?
2. From the standpoint of the Motor Division, what is the highest acceptable transfer
price for transformers acquired from the Electrical Division?
3. If left free to negotiate without interference, would you expect the division
managers to voluntarily agree to the transfer of 10,000 transformers from the
Electrical Division to the Motor Division? Why or why not?
4. From the standpoint of the entire company, should a transfer take place? Why or
why not?
2. Assume that the Electrical Division is now selling to outside customers all of the
transformers it can produce.
1. From the standpoint of the Electrical Division, what is the lowest acceptable
transfer price for transformers sold to the Motor Division?
2. From the standpoint of the Motor Division, what is the highest acceptable transfer
price for transformers acquired from the Electrical Division?
3. If left free to negotiate without interference, would you expect the division
managers to voluntarily agree to the transfer of 10,000 transformers from the
Electrical Division to the Motor Division? Why or why not?
4. From the standpoint of the entire company, should a transfer take place? Why or
why not?
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