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ACCTG322 (11)
Chapter 11

Chapter 11.pdf

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Department
Accounting
Course Code
ACCTG322
Professor
Trish Stringer

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Chapter 11 – Solutions to Recommended Questions Exercise 11-1 DVD CD Total Sales* ...............................................$660,000............... Variable expenses**....................................309,000..... Contribution margin....................................351,000..... Traceable fixed expenses...............................183,000.. Product line segment margin ...........................168,000 Common fixed expenses not traceable to products 105,000 Operating income......................................$ 63,000...... * CD: 37,500 packs × $8.00 per pack = $300,000; DVD: 18,000 packs × $20.00 per pack= $360,000. ** CD: 37,500 packs × $3.20 per pack = $120,000; DVD: 18,000 packs × $10.50 per pack= $189,000. Chapter 11 – Solutions to Recommended Questions Exercise 11-7 1. Total Division A Division B Company Sal..s....................................... $10,500,00$7,200,000 2 $15,600,000 4 Expenses: Added by the division........... 7,800,000 3,600,000 11,400,000 3 Transfer price paid................ — 2,100,000 — Total expenses...........................7,800,000 5,700,0101,400,000 Operatinigcom................,700,000 $ 1,500,000 $4,200,000 1 20,000 units × $525 per unit = $10,500,000. 24,000 units × $1,800 per unit = $7,200,000. 3 4,000 units x $525 per = $2,100,000 (sales to Div B were at the same price as sales to outside customers) 4DivisionAoutside sales (16,000 units × $525 per unit) ..........................$ 8,400,000 Division B outside sales (4,000 units × $1,800 per unit)..........................7,200,000 Total outside sales.............................................................$15,600,000............... Observe that the $2,100,000 in intra-company sales has been eliminated from both sales and expenses. For proper GAAP financial statements you don’t want to double count the revenue and expenses as the internal sale is really just a transfer. 2. DivisionAshould transfer the 1,000 additional units to Division B. Note that Division B’s processing adds $1,275 to each unit’s selling price (B’s $1,800 selling price, lessA’s $525 selling price = $1,275 increase), but it adds only $900 in cost. Therefore, each component trans- ferred to Division B ultimately yields $375 more in contribution margin ($1,275 – $900 = $375) to the company than can be obtained from selling to outside customers. Thus, the company as a whole will be better off if DivisionAtransfers the 1,000 additional components to Division B. Page 2 of 13 Chapter 11 – Solutions to Recommended Questions Exercise 11-11 1. ROIcomputations: ROI = Operating Income × Sales SaleAsvereastnts Pert($:630,000/ $9,000,000) × ($9,000,000/$3,000,000) 21%= 3 × 7% Darwin: ($1,800,000/$20,000,000) × ($20,000,000/$10,000,000) 18%= 2 × 9% 2. Perth Darwin Average operating assets (a).............................$3,000,000 $10,000,000 Operatiigco......................................$630,000.... $1,800,000 Minimum required return on average operating assets—16% × (a) ........................................480,000 1,600,000 Residunlco.......................................$150,000..... $ 200,000 3. No, the Darwin Division is simply larger than the Perth Division and for this reason one would expect that it would have a greater amount of residual income. Residual income can’t be used to compare the performance of divisions of different sizes. Larger divisions will al- most always look better. In fact, in the case above, Darwin does not appear to be as well managed as Perth. Note from Part (1) that Darwin has only an 18% ROI as compared to 21% for Perth. Page 3 of 13 Chapter 11 – Solutions to Recommended Questions Exercise 11-15 1. Computation of ROI. DivisionA: $300,000 × $6,000,000 = 5% × 4 = 20% $6,000,000 $1,500,000 Division B: $900,000 × $10,000,000 = 9% × 2 = 18% $10,000,000 $5,000,000 Division C: $180,000 × $8,000,000 = 2.25% × 4 = 9% $8,000,000 $2,000,000 2. Division A Division B Division C Average operating assets...............$1,500,000 $5,000,000 $2,000,000 Required rate of return..................×...15% × 18% × 12% Required operating income...............$ 225,000 $ 900,000 $ 240,000 Actual operating income.................$ 300,000 $ 900,000 $ 180,000 Required operating income (above).. 225,000 900,000 240,000 Residual income.........................$ 75,000 $ 0 $ (60,000) 3. a. and b. Division A Division B Division C Return on investment (ROI) ...............20% 18% 9% Therefore, if the division is presented with an investment opportunity yielding 17%, it probably would ...... Reject Reject Accept Minimum required return for compu- ting residual income....................15%.. 18% 12% Therefore, if the division is presented with an investment opportunity yielding 17%, it probably would...... Accept Reject Accept Page 4 of 13 Chapter 11 – Solutions to Recommended Questions Problem 11-15 (continued) If performance is being measured by ROI, both DivisionAand Division B probably would reject the 17% investment opportunity. The reason is that these companies are presently earning a re- turn greater than 17%; thus, the new investment would reduce the overall rate of return and place the divisional managers in a less favourable light. Division C probably would accept the 17% investment opportunity, since its acceptance would increase the Division’s overall rate of return. If performance is being measured by residual income, both DivisionAand Division C probably would accept the 17% investment opportunity. The 17% rate of return promised by the new in- vestment is greater than their required rates of return of 15% and 12%, respectively, and would therefore add to the total amount of their residual income. Division B would reject the opportuni- ty, since the 17% return on the new investment is less than B’s 18% required rate of return. Page 5 of 13 Page 6 of 13 1561,404,000 331,9R (51,000) 2804,200,000 56,203R217,000 25,000 3251,705,000 135,000 LeatDivision Garments Shoes Handbags Line Product Adv AertDsnpirt.i..i............................................7.,..000 80,03.001,0,000112,03..........3 ChapterP 11obl1e.lSt1-2m2eots eeofnemdeanserdoduuetslonss:iet..t..oe...lD.fv.x..e.et.m*R217,000 – R107,000 = R110,000....060,000R.. 96,0300,000 Chapter 11 – Solutions to Recommended Questions Problem 11-22 (continued) 2. Segments defined as markets for the handbag product line: Market Sales ForeignDomesH tiandbags Sales ...........................................R300,000.......R200,000 R100,000 Variable expenses.................................156,000 86,000 70,000 Contribution margin...............................144,000 114,000 30,000 Traceable fixed expenses: Advertising....................................120,000... 40,000 80,000 Market segment margin..............................24,000 R 74,000 R(50,000) Common fixed expenses: Administrative ..................................42,000. Depreciation....................................33,000.. Total common fixed expenses..................... 75,000 Product line segment margin .....................R(51,000) 3. Garments Shoes Contributiomnarg......................................R175,000 R420,000 Sal(.....................................................R500,000 R700,000... Contribution margin ratio (a) ÷ (b).................................35% 60% Incrementcaolntributmnargin: 35% × R200,000 increased sales ..............................R70,000 60% × R145,000 increased sales ................................. R87,000 Less cost of the promotional campaign........................... 30,000 30,000 Increased operating income......................................R40,000 R57,000 Based on these data, the campaign should be directed toward the shoes product line. Notice that the analysis uses the contribution margin ratio rather than the segment margin ratio be- cause fixed expenses do not change. Page 7 of 13 Chapter 11 – Solutions to Recommended Questions Problem 11-23 1. From the standpoint of the selling division, Division A: Transfer price ≥ Variable cost+ Total contribution margin on lost sales u N t i n u r e p mber of units transferred Transfer price  ($63 - $5) +[($100 - $63) × 10,000]/10,000  $58 + $37 = 95 But, from the standpoint of the buying division, Division B: Transfer price  Cost of buying from outside supplier = $92 Division B won’t pay more than $92 and Division A will not accept less than $95, so no deal is possible. There will be no transfer. 2. a. From the standpoint of the selling division, Division A: Transfer price ≥ Variable cost+ Total contribution margin on lost sales u N t i n u r e p mber of units transferred Transfer price  ($19 - $4) +[($40 - $19) × 70,000]/70,000  $15 + $21 = 36 From the standpoint of the buying division, Division B: Transfer price  Cost of buying from outside supplier = $39 In this instance, an agreement is possible within the range: $36  Transfer price  $39 Even though both managers would be better off with any transfer price within this range, they may disagree about the exact amount of the transfer price. It would not be surprising to hear the buying division arguing strenuously for $36 while the selling division argues just as strongly for $39. Chapter 11 – Solutions to Recommended Questions Problem 11-23 (continued)
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