CHAPTER10:DIVISIONALPERFORMANCEMEASUREMENT

MultipleChoice
c1.BothROIandRIcanbeusedforperformanceevaluationof
a.costcenters.
b.profitcenters.
c.investmentcenters.
d.alloftheabove.
b2.Thebesttransferpriceisusually
a.actualcostplusapercentagemarkup.
b.areliablemarketprice.
c.budgetedfullcostplusapercentagemarkup.
d.budgetedvariablecostplusapercentagemarkup.
d3.ThisyearDivisionAmadesalestoDivisionBatahighertransferpricethanwasusedlastyear.All
otherthingsequal,whichofthefollowingistrue?
a.A'sprofitthisyearshouldbeaboutthesameaslastyear.
b.B'sprofitthisyearshouldbeaboutthesameaslastyear.
c.Thecompany'stotalprofitshouldbehigherthisyearthanlastyear.
d.Thecompany'stotalprofitshouldbeaboutthesamethisyearaslastyear.
b4.GoalcongruenceisespeciallyrelevanttoallofthefollowingEXCEPT
a.settingtransferpricesforanartificialprofitcenter.
b.quotingpricesforoutsidecustomersofaninvestmentcenter.
c.selectingcoststobeincludedinperformancereports.
d.settingtransferpricesforaninvestmentcenter.
d5.Foradivision,ROI
a.isusuallylessthanROIforthecompanyasawhole.
b.eliminatesthedistortionthatcostallocationcanproduceinothermeasuresofperformance.
c.usuallycannotbecomputedifdivisionalassetsarevaluedattheirreplacementcosts.
d.isaperformancemeasureinferior,forsomepurposes,toresidualincome.
a6.DivisionalROIisusually
a.higherthanthatforthecompanyasawhole.
b.lowerthanthatforanoutsidecompanyoperatinginthesameindustry.
c.lowerthanreturnonsalesforthedivision.
d.lowerthanthatfortheenterpriseasawhole.
c7.Divisionalprofitsshould
a.excluderevenuesandexpensesrelatedtodealingswithotherdivisionswithinthesameenterprise.
b.becomputedsothatthetotalprofitsofallthedivisionsequalsthetotalprofitforthecompany.
c.bebasedontheprincipleofcontrollability.
d.bebasedoncashflowsratherthanaccrualbasisaccounting.
c8.Divisionalprofit
a.iscomputedinessentiallythesamewayasisincomeforthecompanyasawhole.
b.shouldincludeadeductionforanappropriateshareofthecompany'scommoncosts.
c.normallyincludestheresultsofintracompanysales.
d.isnotaffectedbydepreciationmethods.
d9.UsingreplacementcostsforassetsincomputingROIandRI
a.isprohibitedbecauseitviolatesgenerallyacceptedaccountingprinciples.
b.willincreasebothROIandRIforadivision.
c.isunfairtodivisionalmanagers.
d.islesspopularthantheuseofbookvaluesinthosecomputations.
c10.Usingresidualincomeforevaluatingperformance
a.penalizesmanagerswhosesegmentshavelowROIs.
b.penalizesmanagersofrelativelylargesegments.
c.encouragesmanagerstomaximizedollarsofprofitafterarequiredROIhasbeenachieved.
d.encouragesmanagerstomaximizeROIforthecompany.
c11.WhichitemisusuallyNOTrelevanttoadecisionbyadivisionalmanagertoreduceatransferpriceto
meetapriceofferedtoanotherdivisionbyanoutsidesupplier?
a.Opportunitycost.
b.Variablemanufacturingcosts.
c.Fixeddivisionaloverhead.
d.Thepriceofferedbytheoutsidesupplier.
c12.DivisionAearns$6,000onaninvestmentof$36,000.Onaninvestmentof$84,000,DivisionBearns
$12,000.Whichofthefollowingistrue?
a.DivisionA'sprofitsaretoolow.
b.Iftherearefurthercoststhatarecommontobothdivisions,thetotalcompany'sROIisprobably
greaterthan15%.
c.IftheminimumdesiredROIis10%,DivisionA'sresidualincomeislowerthanthatofDivisionB.
d.ROIforDivisionBisgreaterthanROIforDivisionA.
d13.WhichequationdescribesROI?(I=investment,S=sales,and
N=income)
a.S/I
b.S/IxN
c.S/IxS/N
d.N/SxS/I
a14.Whichequationdescribesresidualincome?(I=investment,N=income,andK=minimumrequiredROI)
a.N(KxI)
b.(KxI)N
c.N/IK
d.(KxI)(N/I)
c15.IfDivisionChasa10%returnonsales,incomeof$10,000,andaninvestmentturnoverof4times,its

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salesare
a.$10,000.
b.$40,000.
c.$100,000.
d.$400,000.
b16.IfDivisionChasa10%returnonsales,incomeof$10,000,andaninvestmentturnoverof4times,
divisionalinvestmentis
a.$10,000.
b.$25,000.
c.$40,000.
d.$100,000.
c17.IfDivisionChasa10%returnonsales,incomeof$10,000,andaninvestmentturnoverof4times,itsROI
is
a.5000%.
b.100%.
c.40%.
d.10%.
b18.Ifadivision'sROIandtheminimumrequiredROIarethesame,thedivision'sresidualincomeis
a.positive.
b.zero.
c.negative.
d.noneoftheabove.
a19.IfresidualincomeforDivisionQofCompanyZisnegative,whichofthefollowingistrue?
a.Q'sROIislessthanZ'sminimumrequiredROI.
b.Q'sROIequalsZ'sminimumrequiredROI.
c.Q'sROIishigherthanZ'sminimumrequiredROI.
d.Noneoftheabove.
b20.Marketbasedtransferpricesarebestfor
a.thecompanywhenthesellingdivisionisoperatingbelowcapacity.
b.thecompanywhenthesellingdivisionisoperatingatcapacity.
c.thebuyingdivisionifitisoperatingatcapacity.
d.thebuyingdivision.
d21.Theworsttransferpricingmethodistobasethepriceson
a.marketprices.
b.budgetedvariablecosts.
c.budgetedtotalcosts.
d.actualtotalcosts.
d22.Allotherthingsremainingconstant,ifadivisiondoublesitsinvestmentturnover,itsROIwill
a.decrease.
b.remainconstant.
c.increase.
d.double.
c23.Residualincome
a.isalwaysthebestmeasureofdivisionalperformance.
b.isnotasgoodameasureofperformanceasROI.
c.overcomessomeoftheproblemsassociatedwithROI.
d.cannotbeusedbydivisionsthatdealwithothersinthesamecompany.
b24.IftwodivisionsearnthesameROIandRI,whichofthefollowingistrue?
a.Theirmanagersmustbeaboutequallyskillful.
b.Theirincomesandinvestmentsmustbethesame.
c.Bothdivisionsaredoingaswellastheyshouldbe.
d.Alloftheabove.
c25.Whichofthefollowingismostlikelytobeincludedincalculatingdivisionalprofit?
a.Interestoncorporatedebt.
b.Incometaxes.
c.Salestootherdivisionswithinthecompany.
d.Ashareofcorporateadministrationexpenses.
b26.Ifsalesincrease,whileincomeandinvestmentremainconstant,whichofthefollowingistrue?
a.Investmentturnoverdecreases.
b.ROSdecreases.
c.ROIincreases.
d.ROIcouldincreaseordecrease.
c27.Comparedtoajewelrystore,asupermarkethas
a.highermarginandhigherturnover.
b.highermarginandlowerturnover.
c.lowermarginandhigherturnover.
d.lowermarginandlowerturnover.
c28.Ifincomeincreaseswhilesalesandinvestmentremainconstant,whichofthefollowingistrue?
a.Investmentturnoverincreases.
b.ROSdecreases.
c.ROIincreases.
d.ROIcouldincreaseordecrease.
a29.Whichtransferpriceisidealforthecompanywhenthesellingdivisionisatcapacity?
a.Marketprice.
b.Incrementalcost.
c.Budgetedfullcost.
d.Actualvariablecostplusapercentageprofit.
c30.Fromthestandpointofthecompany,theimportantquestionintransferpricingis
a.whatisfairtothedivisions.
b.howtodeterminetheprofitofthedivisions.
c.whetherornotthetransfershouldtakeplace.

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d.whenthetransfershouldbemade.
d31.TheROIofDivisionArelativetothatofDivisionBcanbeinfluencedby
a.theindustryinwhicheachdivisionoperates.
b.thetransferpriceusedforsalestoDivisionB.
c.thetaxstructuresofthecountriesinwhichthedivisionsoperate.
d.alloftheabove.
c32.Consideringliabilitiesincomputingdivisionalinvestment
a.encouragesmanagersofdivisionstopaytheirbillsfaster.
b.discouragesmanagersofdivisionsfromacquiringlongtermfinancing.
c.raisesdivisionalROIabovewhatitwouldotherwisebe.
d.isabadmanagerialpractice.
d33.Interdivisionalsales
a.lowerthecompany'spublicimage.
b.minimizeincometaxes.
c.areignoredwhencomputingdivisionalROI.
d.dononeoftheabove.
a34.Whichofthefollowingistrueabouttransferpricesforsalesbetweendivisionslocatedindifferent
countries?
a.Theyshouldconsiderthetaxstructuresinthetwocountries.
b.Theyareusuallysetbythegovernmentsofthetwocountries.
c.Theycannotaffectthetotalincomeofthecompany.
d.Alloftheabove.
d35.Multinationalcompaniesfacespecialproblemsinwhichofthefollowingareasofmanagerialpractice?
a.Performanceevaluation.
b.Transferprices.
c.Allocatingcommoncosts.
d.Alloftheabove.
b36.WhichofthefollowingdescribesthecomputationofROI?
a.ReturnonSalesxInvestment
b.InvestmentTurnoverxReturnonSales
c.Income(InvestmentxMinimumRI)
d.SalesxInvestmentTurnover
b37.Iftheinvestmentturnoverincreasedby20%andROSdecreasedby30%,theROIwould
a.increaseby20%.
b.decreaseby16%.
c.increaseby4%.
d.noneoftheabove.
b38.ScottsoDivisionhasthefollowingresultsfortheyear:

Revenues$1,080,000
Variableexpenses440,000
Fixedexpenses400,000

Totaldivisionalassetsare$1,600,000.Thecompany'sminimumrequiredrateofreturnis14percent.
ResidualincomeforScottsois
a.$(64,000).
b.$16,000.
c.$151,200.
d.$224,000.
c39.ScottsoDivisionhasthefollowingresultsfortheyear:

Revenues$1,080,000
Variableexpenses440,000
Fixedexpenses400,000
Totaldivisionalassetsare$1,600,000.Thecompany'sminimumrequiredrateofreturnis14percent.
ReturnoninvestmentforScottsois
a.54%.
b.18%.
c.15%.
d.10%.
b40.MonroviaDivisionhasnetincomeof$240,000onsalesof$3,200,000.Iftheinvestmentis$1,600,000what
isROS?
a.15.0%
b.7.5%
c.10.0
d.2.0
c41.ScottsoDivisionhasthefollowingresultsfortheyear:

Revenues$1,080,000
Variableexpenses440,000
Fixedexpenses400,000
Totaldivisionalassetsare$1,600,000.Thecompany'sminimumrequiredrateofreturnis14percent.
ReturnonsalesforScottsois
a.1.5%.
b.15.0%.
c.22.2%.
d.67.5%.
d42.MonroviaDivisionhasnetincomeof$240,000onsalesof$3,200,000.Iftheinvestmentis$1,600,000what
isassetturnover?
a.15.0%
b.7.5%

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c.10.0
d.2.0
a43.MonroviaDivisionhasnetincomeof$240,000onsalesof$3,200,000.Iftheinvestmentis$1,600,000what
isROI?
a.15.0%
b.7.5%
c.10.0
d.2.0
b44.AlcatrazDivisionofXYZCorp.sells80,000unitsofpartXtotheoutsidemarket.PartXsellsfor$40,
hasavariablecostof$22,andafixedcostperunitof$10.Alcatrazhasacapacitytoproduce100,000
unitsperperiod.CaponeDivisioncurrentlypurchases10,000unitsofpartXfromAlcatrazfor$40.
Caponehasbeenapproachedbyanoutsidesupplierwillingtosupplythepartsfor$36.Whatistheeffect
onXYZ'soverallprofitifAlcatrazREFUSEStheoutsidepriceandCaponedecidestobuyoutside?
a.nochange
b.$140,000decreaseinXYZprofits
c.$80,000decreaseinXYZprofits
d.$40,000increaseinXYZprofits
a45.AlcatrazDivisionofXYZCorp.sells80,000unitsofpartXtotheoutsidemarket.PartXsellsfor$40,
hasavariablecostof$22,andafixedcostperunitof$10.Alcatrazhasacapacitytoproduce100,000
unitsperperiod.CaponeDivisioncurrentlypurchases10,000unitsofpartXfromAlcatrazfor$40.
Caponehasbeenapproachedbyanoutsidesupplierwillingtosupplythepartsfor$36.Whatistheeffect
onXYZ'soverallprofitifAlcatrazACCEPTStheoutsidepriceandCaponecontinuestobuyinside?
a.nochange
b.$140,000decreaseinXYZprofits
c.$80,000decreaseinXYZprofits
d.$40,000increaseinXYZprofits
c46.Iftheinvestmentturnoverdecreasedby20%andROSdecreasedby30%,theROIwould
a.increaseby30%.
b.decreaseby20%.
c.decreaseby44%.
d.noneoftheabove.
c47.Iftheinvestmentturnoverincreasedby10%andROSincreasedby20%,theROIwould
a.increaseby10%.
b.increaseby20%.
c.increaseby30%.
d.increaseby32%.
b48.DurandDivisionhasthefollowingresultsfortheyear:

Revenues$470,000
Netincome130,000
Totaldivisionalassetsare$625,000.Thecompany'sminimumrequiredrateofreturnis12percent.
ResidualincomeforDurandis
a.$3,760.
b.$55,000.
c.$73,600.
d.cannotbedeterminedwithoutfurtherinformation.
c49.DurandDivisionhasthefollowingresultsfortheyear:

Revenues$470,000
Netincome130,000
Totaldivisionalassetsare$625,000.Thecompany'sminimumrequiredrateofreturnis12percent.
ReturnoninvestmentforDurandis
a.9.0%.
b.18.3%.
c.20.8%.
d.27.7%.
d50.DurandDivisionhasthefollowingresultsfortheyear:

Revenues$470,000
Netincome130,000
Totaldivisionalassetsare$625,000.Thecompany'sminimumrequiredrateofreturnis12percent.
ReturnonsalesforDurandis
a.9.0%.
b.18.3%.
c.20.8%.
d.27.7%.
TrueFalse
F1.Multinationalcompaniescannotusetransferprices.
T2.LongtermdebtisseldomconsideredindeterminingdivisionalROI.
F3.Themeasuremostcommonlyusedforevaluatingdivisionalperformanceisinvestmentturnover.
T4.Allocatingallcommonassets,liabilities,andcoststodivisionsdoesnotaffecttheROIofthecompany
asawhole.
T5.Usingresidualincomeasacriterionforevaluatingdivisionalperformancerequiresthatthecompany
establishaminimumdesiredrateofreturnoninvestment.
F6.Returnoninvestmentistheproductofreturnonsalesandinventoryturnover.
F7.ReturnoninvestmentforamultidivisioncompanywillbelowerthantheROIforthedivisionwiththe

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lowestROI.
T8.Transferpricesequaltomarketpricesareleastappropriatewhenthesellingdivisionhasexcess
productivecapacity.
F9.Multinationalcompaniesmustusetransferpricesbasedonactualcosts.
F10.Returnoninvestmentisdefinedasnetincomedividedbystockholders'equity.
Problems
1. ThefollowinginformationisavailableaboutthestatusandoperationsofAKlopCompany,whichhasa
minimumrequiredROIof15%.ANSWEREACHITEMINDEPENDENTLYOFTHEOTHERS.
DivisionDivision
AB

Divisionalinvestment$500,000$1,500,000
Divisionalprofit$150,000$540,000
Divisionalsales$1,000,000$3,600,000

a.ComputeROIforDivisionA.
b.ComputeresidualincomeforDivisionB.

c.DivisionAcouldincreaseitsprofitby$40,000byincreasingitsinvestmentby$150,000.Computeits
totalresidualincome.

d.DivisionAcouldincreaseitsreturnonsalesbyonepercentagepoint,whilekeepingthesametotalsales
andinvestment.ComputeitsROI.

e.DivisionBcouldreduceitsinvestmentsothatitsassetturnoverincreasedbyonetime,whileholding
totalsalesconstant.ComputeitsROI.
SOLUTION:
a.ROIforA:30%($150,000/$500,000)
b.RIforB:$315,000[$540,000($1,500,000x15%)]
c.RIforA:$92,500[$150,000+$40,00015%x($500,000+$150,000)]
d.ROIforA:32%[$150,000/$1,000,000=15%ROS+1%=16%,turnover=2($1,000,000/$500,000),so16%x2=
32%]
e.ROIforB:51%[$3,600,000/1,500,000=2.4times+1=3.4timesxROSof15%($540,000/$3,600,000)=51%]
2.DivisionAofGetzCompanyexpectsthefollowingresults.ANSWEREACHQUESTIONINDEPENDENTLY.
ToDivisionBToOutsiders

Sales(40,000x$10)$400,000
(40,000x$12)$480,000
Variablecostsat$6240,000240,000

Contributionmargin$160,000$240,000
Fixedcosts,allcommon,allocated
onthebasisofrelativeunits120,000120,000

Profit$40,000$120,000
===============

DivisionBhastheopportunitytobuyitsneedsfor40,000unitsfromanoutsidesupplierat$8each.

a.DivisionArefusestomeetthe$8price,salestooutsiderscannotbeincreased,andDivisionBbuysfrom
theoutsidesupplier.ComputetheeffectontheincomeofGetz.

b.DivisionAcannotincreaseitssalestooutsiders,doesmeetthe$8price,andDivisionBcontinuestobuy
fromA.ComputetheeffectontheincomeofGetz.
c.SupposethatDivisionAcouldsellthe40,000unitsnowtakenbyDivisionBtooutsidersat$9each
withoutdisturbingsalesattheregular$12price.DivisionBbuysoutsideat$8andDivisionA
increasesitsoutsidesales.FindtheeffectontheincomeofGetz.
SOLUTION:
a.Getz'sincome:Decreases$80,000[40,000unitsx($8outsideprice$6variablecost)]
b.Getz'sincome:Nochange
c.Getz'sincome:$40,000increase($360,000addedrevenuefromoutsiders$320,000paidtotheoutsiderby
B)
3.ThefollowinginformationrelatestoZimmerDivisionofPurdyInc.Purdy'sdesiredROIforitssegmentsis
20%.
Sales$2,000,000Variablecosts1,500,000
Directfixedcosts300,000Investment500,000
a.FindZimmer'sROI.
b.FindZimmer'sresidualincome.
SOLUTION:
a.ROI:40%[($2,000,000$1,500,000$300,000)/$500,000]
b.RI:$100,000[$200,000($500,000x20%)]

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4.BayfieldDivisionofAshlandInc.hasacapacityof200,000unitsandexpectsthefollowingresults.
Sales(160,000unitsat$4)$640,000
Variablecosts,at$2(320,000)
Fixedcosts(260,000)

Income$60,000
========
WashburnDivisionofAshlandInc.currentlypurchases50,000unitsofapartforoneofitsproductsfroman
outsidesupplierfor$4perunit.Washburn'smanagerbelieveshecoulduseaminorvariationofBayfield's
productinstead,andofferstobuytheunitsfromBayfieldat$3.50.Makingthevariationdesiredby
WashburnwouldcostBayfieldanadditional$0.50perunitandwouldincreaseBayfield'sannualcashfixed
costsby$20,000.BAYFIELD'SMANAGERAGREESTOTHEDEALOFFEREDBYWASHBURN'SMANAGER.
a.FindtheeffectofthedealonWashburn'sincomeandcirclethecorrectdirection.(increasedecrease
none)
b.FindtheeffectofthedealonBayfield'sincomeandcirclethecorrectdirection.(increasedecrease
none)
c.FindtheeffectofthedealontheincomeofAshlandInc.andcirclethecorrectdirection.(increase
decreasenone)
SOLUTION:
a.Washburn'sincome,+$25,000[50,000x($4$3.50)]
b.Bayfield'sincome,+$10,000{50,000x($3.50$2$0.50)[lostcontributionmarginof10,000x($4
$2)]$20,000newfixedcosts}
c.Ashland'sincome,+$35,000($25,000+$10,000)
5.CrosbyDivisionhasthefollowinginformationforthemostrecentperiod:
Divisionalincome
$1,500,000
Divisionalinvestment $6,500,000
Divisionalsales
$12,000,000
Crosbyhasaminimumrequiredreturnof18%.
a.ComputeCrosby'sreturnoninvestment.
b.ComputeCrosby'sinvestmentturnover.
c.ComputeCrosby'sresidualincome.
d.ComputeCrosby'sreturnonsales.
SOLUTION:
a.ROI:23.1%($1,500,000/$6,500,000)
b.IT:1.85($12,000,000/$6,500,000)
c.RI:$330,000[$1,500,000(18%x$6,500,000)]
d.ROS:12.5%($1,500,000/$12,000,000)
6.

ThefollowinginformationisavailableaboutthestatusandoperationsofStillsCompany,whichhasa
minimumrequiredROIof20%.ANSWEREACHITEMINDEPENDENTLYOFTHEOTHERS.

DivisionDivision
AB

Divisionalinvestment$400,000$1,250,000
Divisionalprofit$120,000$580,000
Divisionalsales$800,000$2,600,000

a.ComputeROIforDivisionB.
b.ComputeresidualincomeforDivisionA.

c.DivisionBcouldincreaseitsprofitby$80,000byincreasingitsinvestmentby$300,000.Computeits
totalresidualincome.

d.DivisionAcouldincreaseitsreturnonsalesbyonepercentagepoint,whilekeepingthesametotalsales.
ComputeitsROI.

e.DivisionAcouldincreaseitssalessothatitsassetturnoverincreasedbyonetime,whileholdingtotal
assetsconstant.ComputeitsROI.

SOLUTION:
a.ROIforB:46.4%($580,000/$1,250,000)
b.RIforA:$20,000[$120,000($400,000x20%)]
c.RIforB:$350,000[$580,000+$80,00020%x($1,250,000+$300,000)]
d.ROIforA:32%[$120,000/$800,000=15%ROS+1%=16%,turnover=2($800,000/$400,000),so16%x2=
32%]
e.ROIforA:45%[$800,000/400,000=2times+1=3timesxROSof15%($120,000/$800,000)=45%]

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7.DivisionAofNashCompanyexpectsthefollowingresults.ANSWEREACHQUESTIONINDEPENDENTLY.
ToDivisionBToOutsiders

Sales(5,000x$60)$300,000
(25,000x$72)$1,800,000
Variablecostsat$36180,000900,000

Contributionmargin$120,000$900,000
Fixedcosts,allcommon,allocated
onthebasisofrelativeunits60,000300,000

Profit$60,000$600,000
==================

DivisionBhastheopportunitytobuyitsneedsfor5,000unitsfromanoutsidesupplierat$45each.

a.DivisionArefusestomeetthe$45price,salestooutsiderscannotbeincreased,andDivisionBbuysfrom
theoutsidesupplier.ComputetheeffectontheincomeofNash.

b.DivisionAcannotincreaseitssalestooutsiders,doesmeetthe$45price,andDivisionBcontinuesto
buyfromA.ComputetheeffectontheincomeofNash.
c.SupposethatDivisionAcouldsellthe5,000unitsnowtakenbyDivisionBtooutsidersat$57each
withoutdisturbingsalesattheregular$72price.DivisionBbuysoutsideat$45andDivisionA
increasesitsoutsidesales.FindtheeffectontheincomeofNash.

SOLUTION:
a.Nash'sincome:Decreases$45,000[5,000unitsx($45outsideprice$36variablecost)]
b.Nash'sincome:Nochange
c.Nash'sincome:$60,000increase($285,000addedrevenuefromoutsiders$225,000paidtotheoutsiderby
B)
8.ThefollowinginformationrelatestoBradleyDivisionofAllenCompany.Allen'sminimumcostofcapitalfor
itssegmentsis15%.
Sales$4,000,000Variablecosts1,400,000
Directfixedcosts1,800,000Investment4,800,000
a.FindBradley'sROI.
b.FindBradley'seconomicvalueadded.
SOLUTION:
a.ROI:16.7%[($4,000,000$1,400,000$1,800,000)/$4,800,000]
b.EVA:$80,000[$800,000($4,800,000x15%)]
9.RosalieDivisionofLacheneInc.hasacapacityof100,000unitsandexpectsthefollowingresultsfor.
Sales(90,000unitsat$30)$2,700,000
Variablecosts,at$20(1,800,000)
Fixedcosts(700,000)

Income$200,000
==========
KatarinaDivisionofLacheneInc.currentlypurchases20,000unitsofapartforoneofitsproductsfroman
outsidesupplierat$32perunit.Katarina'smanagerbelieveshecoulduseaminorvariationofRosalie's
productinstead,andofferstobuytheunitsfromRosalieat$26.MakingthevariationdesiredbyKatarina
wouldcostRosalieanadditional$5perunitandwouldincreaseRosalie'sannualcashfixedcostsby
$80,000.ROSALIE'SMANAGERAGREESTOTHEDEALOFFEREDBYKATARINA'SMANAGER.
a.FindtheeffectofthedealonKatarina'sincomeandcirclethecorrectdirection.(increasedecrease
none)
b.FindtheeffectofthedealonRosalie'sincomeandcirclethecorrectdirection.(increasedecrease
none)
c.FindtheeffectofthedealontheincomeofLacheneInc.andcirclethecorrectdirection.(increase
decreasenone)
SOLUTION:
a.Katarina'sincome,+$120,000[20,000x($32$26)]
b.Rosalie'sincome,$160,000{20,000x($26$20$5)[lostcontributionmarginof10,000x($30
$20)]$80,000newfixedcosts)}
c.Lachene'sincome,$40,000($120,000$160,000)
10.YoungDivisionhasthefollowinginformationforthemostrecentperiod:
Divisionalincome
Divisionalinvestment
Divisionalsales

$11,000,000
$85,000,000
$100,000,000

Younghasaminimumrequiredreturnof15%
a.ComputeYoung'sreturnoninvestment.

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b.ComputeYoung'sinvestmentturnover.
c.ComputeYoung'sresidualincome.
d.ComputeYoung'sreturnonsales.
SOLUTION:
a.ROI:12.9%($11,000,000/$85,000,000)
b.IT:1.18($100,000,000/$85,000,000)
c.RI:($1,750,000)[$11,000,000(15%x$85,000,000)]
d.ROS:11.0%($11,000,000/$100,000,000)

64