Bhakti Nagara Arifianto/1906456490 - 192 DK1

Individual Task 2

CH 10 – Decentralization: Responsibility Accounting, Performance Evaluation, and

Transfer Pricing

Problem 10.26 ROI, Residual Income

1. Calculate the unit contribution (rounded to the nearest cent) for Keimer Steel Company if
1.187.000 units were produced and sold during the year ended November 30, 20x2.

Sales Revenue $ 25.000.000,00

Variable Cost:
COGS
Selling Expenses
Contribution Margin
Divided by unit sold
Unit contribution margin
$ -16.500.000,00
$ -1.080.000,00
$ 7.420.000,00
1.187.999
$ 6,25 /unit

2. Calculate the following performance measures for 20x2 for Keimer Steel Company:
a. ROI
Beginning Operating Asset =12.600.000:1.05 $12.000.000,00
End Operating Asset $12.600.000,00
Average Operating Asset $12.300.000,00

Earning Before Tax $1.845.000,00

ROI (Earning befor tax/Average Operating Assets)
=1.845.000/12.300.000 15,00%
b. RI
Risidual Income
=1,845,000-(13%×12,300,000) $246.000,00

3. Explain why the management of Keimer would have been more likely to accept the
contemplated capital acquisition if residual income rather than ROI were used as a performance
measure.
Because the investment could increase bonus if the division well performed, and also increase
residual income for this division. For example, with residual income, manager should accept an
investment if the projected return by using this investment will be higher than 13% (expected
earning for investment) because it will also potentially increase the profit (in dollars) which will be
considered as residual income. In other hands, with ROI, manager tends to refuse any investment
because it will lower the performance by increasing the operating asset in current year.
 Bhakti Nagara Arifianto/1906456490 - 192 DK1

4. Identify several items that Keimer should control if it is to be evaluated fairly by either the ROI
or RI.
Keimer should control the effectiveness and efficiency of the using of any operating asset. It could
be done by increasing the turnover rate, quantity sold or selling price (margin) as the expected
return for the investment. In other hand, the cost of the investment itself could only be controlled
by Raddington as a parent company.

Problem 10.27 Bonuses and Stock Option

Required: Advise Lawanna on the relative merits of the Shasta offer

With assumption:
 Shasta is unlevered company
 Increasing in stock price is an effect of increasing in operating income
 Without considering any taxes and discount rate
 Current Shasta’s earning is not to be considered as bonus calculation base

Shares Stock Option 10.000

Price/share $15,00
Budgeted Operating Income $ 1.600.000,00

Earning Projection
Year 1 Year 2
Salary $ 50.000,00 $ 50.000,00
Bonus
1%xFuture Operating Income $ 16.000,00 $ 18.560,00
Increase in Stock Value $ 51.840,00 *
Total Earnings $ 66.000,00 $ 120.400,00
Average Earning / year $ 93.200,00

*Increase in Stock Value $15x10.000x(1+16%)^2-$15x10.000

First Year Operating Income Projection $1.600.000
2nd Years Operating Income Projection $1.600.000x(1+16%)

Conclusion: Accept the offer, because it will exceed Lawanna’s current salary ($65.000). As an
outstanding performer in previous company, Lawanna could even bring more value to Shasta and even
generate more salary by raising company’s operating income.