Test Bank - Chapter12 Segment Reporting

Chapter 12 Segment Reporting, Profitability Analysis, and Decentralization

True/False 1. F Medium

Contribution margin and segment margin mean the same thing.

2. F Hard

Assuming that a segment has both variable expenses and traceable fixed expenses, an increase in sales should increase profits by an amount equal to the sales times the segment margin ratio.

3. T Medium

The salary paid to a store manager is a traceable fixed expense of the store.

4. T Easy

Segmented statements for internal use should be prepared in the contribution format.

5. T Medium

Fixed costs that are traceable to a segment may become common if the segment is divided into smaller units.

6. F Medium

In responsibility accounting, each segment in an organization should be charged with the costs for which it is responsible and over which it has control plus its share of common organizational costs.

7. T Easy

Only those costs that would disappear over time if a segment were eliminated should be considered traceable costs of the segment.

8. T Easy

Some managers believe that residual income is superior to return on investment as a means of measuring performance, since it encourages the manager to make investment decisions that are more consistent with the interests of the company as a whole.

9. T Easy

The return on investment can ordinarily be improved by either increasing sales, reducing expenses, or reducing operating assets.

Managerial Accounting, 9/e

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10. F Medium

Since the sales figure is neutral in the return on investment (ROI) formula ROI = Margin X Turnover, a change in total sales will not affect ROI.

11. T Medium

Allocations of corporate headquarters expenses to divisions used in return on investment calculations should be limited to the cost of those actual services provided by central headquarters which the divisions otherwise would have to provide for themselves.

12. T Medium

The use of return on investment as a performance measure may lead managers to make decisions that are not in the best interests of the company as a whole.

13. T Easy

Residual income is the net operating income that an investment center earns above the minimum required return on the investment in operating assets.

14. T Medium

(Appendix) When a division is operating at full capacity, the transfer price to other divisions should include opportunity costs.

15. F Hard

(Appendix) When an intermediate market price for a transferred item exists, it represents a lower limit on the charge that should be made on transfers between divisions.

Multiple Choice 16. B Easy

A good example of a common cost which normally could not be assigned to products on a segmented income statement except on an arbitrary basis would be: a. product advertising outlays. b. salary of a corporation president. c. direct materials. d. the product manager's salary.

17. C Medium

All other things being equal, if a division's traceable fixed expenses increase: a. the division's contribution margin ratio will decrease. b. the division's segment margin ratio will remain the same. c. the division's segment margin will decrease. d. the overall company profit will remain the same.

18. D Easy

Turnover is computed by dividing average operating assets into: a. invested capital. b. total assets. c. net operating income. d. sales.

182Managerial Accounting, 9/e

19. C Medium

Which of the following statements provide(s) an argument in favor of including only a plant's net book value rather than gross book value as part of operating assets in the ROI computation? I. Net book value is consistent with how plant and equipment items are reported on a balance sheet. II. Net book value is consistent with the computation of net operating income, which includes depreciation as an operating expense. III. Net book value allows ROI to decrease over time as assets get older. a. Only I. b. Only III. c. Only I and II. d. Only I and III.

20. A Medium

In computing the margin in a ROI analysis, which of the following is used? a. Sales in the denominator b. Net operating income in the denominator c. Average operating assets in the denominator d. Residual income in the denominator

21. D Easy

Which of the following is not an operating asset? a. Cash b. Inventory c. Plant equipment d. Common stock

22. C Medium CPA adapted

Assuming that sales and net income remain the same, a company's return on investment will: a. increase if operating assets increase. b. decrease if operating assets decrease. c. decrease if turnover decreases. d. decrease if turnover increases.

23. C Medium CPA adapted

All other things equal, a company's return on investment (ROI) would generally increase when: a. average operating assets increase. b. sales decrease. c. operating expenses decrease. d. operating expenses increase.

24. B Easy

A company's return on investment is the: a. margin divided by turnover. b. margin multiplied by turnover. c. turnover divided by average operating assets. d. turnover multiplied by average operating assets.


183

25. A Easy

All other things equal, a company's return on investment is affected by a change in: Turnover Margin a. Yes Yes b. No Yes c. No No d. Yes No

26. D Medium

Net operating income is defined as: a. sales minus variable expenses. b. sales minus variable expenses and traceable fixed expenses. c. contribution margin minus traceable and common fixed expenses. d. net income plus interest and taxes.

27. A Easy

Delmar Corporation is considering the use of residual income as a measure of the performance of its divisions. What major disadvantage of this method should the company consider before deciding to institute it? a. this method does not make allowance for difference in the size of compared divisions. b. opportunities may be undertaken which will decrease the overall return on investment. c. the minimum required rate of return may eliminate desirable opportunities from consideration. d. residual income does not measure how effectively the division manager controls costs.

28. B Medium

Suppose a manager is to be measured by residual income. Which of the following will not result in an increase in the residual income figure for this manager, assuming other factors remain constant? a. An increase in sales. b. An increase in the minimum required rate of return. c. A decrease in expenses. d. A decrease in operating assets.

29. B Medium

The performance of the manager of Division A is measured by residual income. Which of the following would increase the manager's performance measure? a. Increase in average operating assets. b. Decrease in average operating assets. c. Increase in minimum required return. d. Decrease in net operating income.


30. C Medium

(Appendix) When the selling division in an internal transfer has unsatisfied demand from outside customers for the product that is being transferred, then the lowest acceptable transfer price as far as the selling division is concerned is: a. variable cost of producing a unit of product. b. the full absorption cost of producing a unit of product. c. the market price charged to outside customers, less costs saved by transferring internally. d. the amount that the purchasing division would have to pay an outside seller to acquire a similar product for its use.

31. C Easy

A segment of a business responsible for both revenues and expenses would be called: a. a cost center. b. an investment center. c. a profit center. d. residual income.

32. C Easy

Which of the following are benefits of decentralization?

33. C Medium

Consider the following three statements:

I. Giving a manager of a division greater decision making control over his/her division provides vital training for a manager who is on the rise in the company. II. Managers at corporate headquarters have greater control in seeing that the goals of the company are realized. III. Added decisionmaking authority and responsibility often leads to increased job satisfaction and often persuades a manager to put forth his/her best efforts. a. Only I and II. b. Only II and III. c. Only I and III. d. Only I.

I. A profit center has control over both cost and revenue. II. An investment center has control over invested funds, but not over costs and revenue. III. A cost center has no control over sales Which statement(s) is/are correct? a. Only I b. Only II c. Only I and III d. Only I and II


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34. C Hard

Lyons Company consists of two divisions, A and B. Lyons Company reported a contribution margin of $50,000 for Division A, and had a contribution margin ratio of 30% in Division B, when sales in Division B were $200,000. Net income for the company was $25,000 and traceable fixed expenses were $40,000. Lyons Company's common fixed expenses were: a. $85,000. b. $70,000. c. $45,000. d. $40,000.

35. B Hard

More Company has two divisions, L and M. During July, the contribution margin in Division L was $60,000. The contribution margin ratio in Division M was 40% and its sales were $250,000. Division M's segment margin was $60,000. The common fixed expenses were $50,000 and the company net income was $20,000. The segment margin for Division L was: a. $0. b. $10,000. c. $50,000. d. $60,000.

36. B Hard

During April, Division D of Carney Company had a segment margin ratio of 15%, a variable expense ratio of 60% of sales, and traceable fixed expenses of $15,000. Division D's sales were closest to: a. $100,000. b. $60,000. c. $33,333. d. $22,500.

37. D Hard

Reardon Retail Company consists of two stores, A and B. Store A had sales of $80,000 during March, a contribution margin ratio of 30%, and a segment margin of $11,000. The company as a whole had sales of $200,000, a contribution margin ratio of 36%, and segment margins for the two stores totaling $31,000. If net income for the company was $15,000 for the month, the traceable fixed expenses in Store B must have been: a. $16,000. b. $20,000. c. $31,000. d. $28,000.


38. B Hard

Leis Retail Company has two Stores, M and N. Store N had sales of $180,000 during March, a segment margin of 30%, and traceable fixed expenses of $26,000. The company as a whole had a contribution margin ratio of 25% and $120,000 in total contribution margin. Based on this information, total variable expenses in Store M for the month must have been: a. $140,000. b. $260,000. c. $300,000. d. $360,000.

39. C Hard

Denner Company has two divisions, A and B, that reported the following results for October: Division A Division B Sales .................... $90,000 $150,000 Variable expenses as a percentage of sales .... 70% 60% Segment margin ........... $ 2,000 $ 23,000 If common fixed expenses were $31,000, total fixed expenses must have been: a. $31,000. b. $62,000. c. $93,000. d. $52,000.

40. C Hard

Johnson Company operates two plants, Plant A and Plant B. Johnson Company reported for the year just ended a contribution margin of $50,000 for Plant A. Plant B had sales of $200,000 and a contribution margin ratio of 30%. Net income for the company was $20,000 and traceable fixed costs for the two plants totaled $50,000. Johnson Company's common fixed costs for last year were: a. $50,000. b. $70,000. c. $40,000. d. $90,000.

41. A Hard

Hatch Company has two divisions, O and E. During the year just ended, Division O had a segment margin of $9,000 and variable costs equal to 70% of sales. Traceable fixed costs for Division E were $19,000. Hatch Company as a whole had a contribution margin of 40%, a segment margin of $25,000, and sales of $200,000. Given this data, the sales for Division E for last year were: a. $50,000. b. $150,000. c. $87,500. d. $116,667.


187

42. B Hard

Division B had an ROI last year of 15%. The division's minimum required rate of return is 10%. If the division's average operating assets last year were $450,000, then the division's residual income for last year was: a. $67,500. b. $22,500. c. $37,500. d. $45,000.

43. A Hard

Reed Company's sales last year totaled $150,000 and its return on investment (ROI) was 12%. If the company's turnover was 3, then its net income for the year must have been: a. $6,000. b. $2,000. c. $18,000. d. it is impossible to determine from the data given.

44. C Hard

Sales and average operating assets for Company P and Company Q are given below: Sales Average Operating Assets Company P .... $20,000 $ 8,000 Company Q .... $50,000 $10,000 What is the margin that each company will have to earn in order to generate a return on investment of 20%? a. 12% and 16%. b. 50% and 100%. c. 8% and 4%. d. 2.5% and 5%.

45. B Hard

Howe Company increased its ROI from 20% to 25%. Net operating income and sales remained at their previous levels of $40,000 and $1,000,000 respectively. The increase in ROI was attributed to a reduction in operating assets brought about by the sale of obsolete inventory at cost (the proceeds from the sale were used to reduce bank loans). By how much was inventory reduced? a. $8,000. b. $40,000. c. $10,000. d. it is impossible to determine from the data given.

46. C Medium

Last year a company had stockholder's equity of $160,000, net operating income of $16,000 and sales of $100,000. The turnover was 0.5. The return on investment (ROI) was: a. 10%. b. 9%. c. 8%. d. 7%.


47. A Hard

A company had the following results last year: sales, $700,000; return on investment, 28%; and margin, 8%. The average operating assets last year were: a. $200,000. b. $2,450,000. c. $540,000. d. $2,500,000.

48. C Medium

Cable Company had the following results for the year just ended: Net operating income ...... $2,500 Turnover .................. 4 Return on investment ...... 20% Cable Company's average operating assets during the year were: a. $50,000. b. $200,000. c. $12,500. d. $10,000.

49. D Hard

Largo Company recorded for the past year sales of $750,000 and average operating assets of $375,000. What is the margin that Largo Company needed to earn in order to achieve an ROI of 15%? a. 2.00% b. 15.00% c. 9.99% d. 7.50%

50. D Easy

The Northern Division of the Smith Company had average operating assets totaling $150,000 last year. If the minimum required rate of return is 12%, and if last year's net operating income at Northern was $20,000, then the residual income for Northern last year was: a. $20,000. b. $l8,000. c. $ 5,000. d. $ 2,000.


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51. A Medium

(Appendix) Division X makes a part that it sells to customers outside of the company. Data concerning this part appear below: Selling price to outside customers ..... $75 Variable cost per unit ................. $50 Total fixed costs ...................... $400,000 Capacity in units ...................... 25,000 Division Y of the same company would like to use the part manufactured by Division X in one of its products. Division Y currently purchases a similar part made by an outside company for $70 per unit and would substitute the part made by Division X. Division Y requires 5,000 units of the part each period. Division X can already sell all of the units it can produce on the outside market. What should be the lowest acceptable transfer price from the perspective of Division X? a. $75. b. $66. c. $16. d. $50.

52. D Medium

(Appendix) Division X makes a part that it sells to customers outside of the company. Data concerning this part appear below: Selling price to outside customers $50 Variable cost per unit ........... $30 Total fixed costs ................ $400,000 Capacity in units ................ 25,000 Division Y of the same company would like to use the part manufactured by Division X in one of its products. Division Y currently purchases a similar part made by an outside company for $49 per unit and would substitute the part made by Division X. Division Y requires 5,000 units of the part each period. Division X has ample excess capacity to handle all of Division Y's needs without any increase in fixed costs and without cutting into outside sales. According to the transfer pricing formula, what is the lower limit on the transfer price? a. $50. b. $49. c. $46. d. $30.


53. D Hard

(Appendix) Division A makes a part that it sells to customers outside of the company. Data concerning this part appear below: Selling price to outside customers .... $40 Variable cost per unit ................ $30 Total fixed costs ..................... $10,000 Capacity in units ..................... 20,000 Division B of the same company would like to use the part manufactured by Division A in one of its products. Division B currently purchases a similar part made by an outside company for $38 per unit and would substitute the part made by Division A. Division B requires 5,000 units of the part each period. Division A has ample capacity to produce the units for Division B without any increase in fixed costs and without cutting into sales to outside customers. If Division A sells to Division B rather than to outside customers, the variable cost be unit would be $1 lower. What should be the lowest acceptable transfer price from the perspective of Division A? a. $40. b. $38. c. $30. d. $29.

54. C Hard

(Appendix) Division X of Charter Corporation makes and sells a single product which is used by manufacturers of fork lift trucks. Presently it sells 12,000 units per year to outside customers at $24 per unit. The annual capacity is 20,000 units and the variable cost to make each unit is $16. Division Y of Charter Corporation would like to buy 10,000 units a year from Division X to use in its products. There would be no cost savings from transferring the units within the company rather than selling them on the outside market. What should be the lowest acceptable transfer price from the perspective of Division X? a. $24.00 b. $21.40 c. $17.60 d. $16.00


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55. B Hard

(Appendix) Division P of Turbo Corporation has the capacity for making 75,000 wheel sets per year and regularly sells 60,000 each year on the outside market. The regular sales price is $100 per wheel set, and the variable production cost per unit is $65. Division Q of Turbo Corporation currently buys 30,000 wheel sets (of the kind made by Division P) yearly from an outside supplier at a price of $90 per wheel set. If Division Q were to buy the 30,000 wheel sets it needs annually from Division P at $87 per wheel set, the change in annual net operating income for the company as a whole, compared to what it is currently, would be: a. $600,000. b. $225,000. c. $750,000. d. $135,000.

56. B Hard

(Appendix) Division A of Harkin Company has the capacity for making 3,000 motors per month and regularly sells 1,950 motors each month to outside customers at a contribution margin of $62 per motor. Division B of Harkin Company would like to obtain 1,400 motors each month from Division A. What should be the lowest acceptable transfer price from the perspective of Division A? a. $26.57 b. $15.50 c. $35.70 d. $62.00

Reference: 121 Ieso Company has two stores: J and K. During November, Ieso Company reported a net income of $30,000 and sales of $450,000. The contribution margin in Store J was $100,000, or 40% of sales. The segment margin in Store K was $30,000, or 15% of sales. Traceable fixed expenses are $60,000 in Store J, and $40,000 in Store K. 57. B Medium Refer To: 121

Sales in Store J totaled: a. $400,000. b. $250,000. c. $150,000. d. $100,000.

58. D Hard Refer To: 121

Variable expenses in Store K totaled: a. $70,000. b. $110,000. c. $200,000. d. $130,000.


59. C Hard Refer To: 121

Ieso Company's total fixed expenses for the year were: a. $40,000. b. $100,000 c. $140,000. d. $170,000.

60. A Hard Refer To: 121

The segment margin ratio in Store J was: a. 16%. b. 24%. c. 40%. d. 60%.

Reference: 122 Canon Company has two sales areas: North and South. During last year, the contribution margin in the North Area was $50,000, or 20% of sales. The segment margin in the South was $15,000, or 8% of sales. Traceable fixed costs are $15,000 in the North and $10,000 in the South. During last year, the company reported total net income of $26,000. 61. A Hard Refer To: 122

The total fixed costs (traceable and common) for Canon Company for the year were: a. $49,000. b. $25,000. c. $24,000. d. $50,000.


The variable costs for the South Area for the year were: a. $230,000. b. $185,000. c. $162,500. d. $65,000.

Reference: 123 The following information is available on Company A: Sales ............................. $900,000 Net operating income .............. 36,000 Stockholders' equity .............. 100,000 Average operating assets .......... 180,000 Minimum required rate of return ... 15% 63. A Medium Refer To: 123

Company A's residual income is: a. $9,000. b. $21,000. c. $45,000. d. $24,000.


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64. C Medium Refer To: 123

Company A's return on investment (ROI) is: a. 4%. b. 15%. c. 20%. d. 36%.

Reference: 124 The following data are available for the South Division of Redride Products, Inc. and the single product it makes: Unit selling price ........... $20 Variable cost per unit ....... $12 Annual fixed costs ........... $280,000 Average operating assets ..... $1,500,000 65. D Hard Refer To: 124

How many units must South sell each year to have an ROI of 16%? a. 240,000. b. 1,300,000. c. 52,000. d. 65,000.

66. B Hard Refer To: 124

If South wants a residual income of $50,000 and the minimum required rate of return is 10%, the annual turnover will have to be: a. 0.32. b. 0.80. c. 1.25. d. 1.50.

Reference: 125 The Axle Division of LaBate Company makes and sells only one product. Annual data on the Axle Division's single product follow: Unit selling price .................. $50 Unit variable cost .................. $30 Total fixed costs ................... $200,000 Average operating assets ............ $750,000 Minimum required rate of return ..... 12% 67. D Medium Refer To: 125

If Axle sells 15,000 units per year, the residual income should be: a. $30,000. b. $100,000. c. $50,000. d. $10,000.



If Axle sells 16,000 units per year, the return on investment should be: a. 12%. b. 15%. c. 16%. d. 18%.


Suppose the manager of Axle desires a return on investment of 22%. In order to achieve this goal, Axle must sell how many units per year? a. 14,500. b. 16,750. c. 18,250. d. 19,500.


Suppose the manager of Axle desires an annual residual income of $45,000. In order to achieve this, Axle should sell how many units per year? a. 14,500. b. 16,750. c. 18,250. d. 19,500.

Reference: 126 Estes Company has assembled the following data for its divisions for the past year: Division A Division B Average operating assets ... $500,000 ? Sales ...................... ? $520,000 Net operating income ....... $100,000 $20,300 Turnover ................... 1.25 4 Margin ..................... ? 3.9% Minimum required rate of return ................ 14% ? Residual income ............ ? $6,000 71. B Hard Refer To: 126

Division A's sales are: a. $400,000. b. $625,000. c. $125,000. d. $200,000.

72. B Medium Refer To: 126

Division A's residual income is: a. $20,000. b. $30,000. c. $35,000. d. $45,000.


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73. D Medium Refer To: 126

Division B's average operating assets is: a. $81,200. b. $2,080,000. c. $1,333,333. d. $130,000.

Reference: 127 The Holmes Division recorded operating data as follows for the past year: Sales .......................... $200,000 Net operating income ........... 25,000 Average operating assets ....... 100,000 Stockholders' equity ........... 80,000 Residual income ................ 13,000 74. C Medium Refer To: 127

For the past year, the return on investment was: a. 15.75%. b. 20.50%. c. 25.00% d. 31.25%.

75. A Medium Refer To: 127

For the past year, the margin was: a. 12.50%. b. 13.00%. c. 14.75%. d. 15.00%.


For the past year, the turnover was: a. 25. b. 10. c. 4. d. 2.


For the past year, the minimum required rate of return was: a. 11%. b. 12%. c. 13%. d. 14%.


Reference: 128 The Baily Division recorded operating data as follows for the past two years: Year 1 Year 2 Sales ....................... ? $1,200,000 Stockholders' equity ........ $540,000 720,000 Average operating assets .... $600,000 ? Margin ...................... 15% ? Return on investment ........ 22.5% 18% Baily Division's turnover was exactly the same in both Year 1 and Year 2. 78. B Hard Refer To: 128

Sales in Year 1 amounted to: a. $400,000. b. $900,000. c. $750,000. d. $1,200,000.


The net operating income in Year 1 was: a. $90,000. b. $135,000. c. $140,000. d. $150,000.

80. D Hard Refer To: 128

The margin in Year 2 was: a. 18.75%. b. 27.00%. c. 22.50%. d. 12.00%.


The average operating assets in Year 2 were: a. $720,000. b. $750,000. c. $800,000. d. $900,000.

Reference: 129 The following selected data pertain to the belt division of Allen Corp. for last year: Sales ............................ $500,000 Average operating assets ......... $200,000 Net operating income ............. $80,000 Turnover ......................... 2.5 Minimum required return .......... 20%


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82. A Medium CPA adapted Refer To: 129

How much is the return on investment? a. 40% b. 16% c. 20% d. 15%

83. C Medium CPA adapted Refer To: 129

How much is the residual income? a. $100,000 b. $80,000 c. $40,000 d. $420,000

Reference: 1210 The following selected data pertain to Beck Co.'s Beam Division for last year: Sales ............................. $400,000 Variable expenses ................. $100,000 Traceable fixed expenses .......... $250,000 Average operating assets .......... $200,000 Minimum required rate of return ... 20% 84. C Medium CPA adapted Refer To: 1210

How much is the residual income? a. $40,000 b. $50,000 c. $10,000 d. $80,000

85. A Medium CPA adapted Refer To: 1210

How much is the return on the investment? a. 25% c. 20% b. 12.5% d. 40%


Reference: 1211 The Northern Division of the Gordon Company reported the following data for last year: Sales ................................. $900,000 Stockholders' Equity .................. $320,000 Operating Expenses .................... $700,000 Average Operating Assets .............. $500,000 Interest Expense ...................... $ 50,000 Tax Expense ........................... $ 60,000 Minimum Required Rate of Return ....... 15% 86. C Medium Refer To: 1211

The return on investment last year for the Northern Division was: a. 28.125%. b. 62.5%. c. 40%. d. 18%.


The residual income for the Northern Division last year was: a. $90,000. b. $125,000. c. $48,000. d. $135,000.

Reference: 1212 Harstin Corporation has provided the following data: Sales .......................... $625,000 Gross margin ................... 70,000 Net operating income ........... 50,000 Stockholders' equity ........... 90,000 Average operating assets ....... 250,000 Residual income ................ 20,000 88. D Medium Refer To: 1212

The margin for the past year was: a. 19.2%. b. 14.4%. c. 11.2%. d. 8.0%.


The return on investment for the past year was: a. 28%. b. 20%. c. 36%. d. 8%.


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90. A Medium Refer To: 1212

The turnover for the past year was: a. 2.5. b. 6.94. c. 2.98. d. 1.4.


The minimum required rate of return for the past year was: a. 36%. b. 8%. c. 12%. d. 40%.

Reference: 1213 The Millard Division's operating data for the past two years are provided below: Year 1 Year 2 Return on investment ...... 12% 36% Stockholders' equity ...... $ 800,000 $ 500,000 Net operating income ...... ? 360,000 Turnover .................. ? 3 Margin .................... ? ? Sales ..................... 3,200,000 ? Millard Division's margin in Year 2 was 150% of the margin in Year 1. 92. B Hard Refer To: 1213

The net operating income for Year 1 was: a. $240,000. b. $256,000. c. $384,000. d. $768,000.


The turnover for Year 1 was: a. 1.2. b. 1.5. c. 3.0. d. 4.0.


The sales for Year 2 were: a. $1.200,000. b. $3,200,000. c. $3,000,000. d. $3,333,333.

95. A Hard Refer To: 1213

The average operating assets for Year 2 were: a. $1,000,000. b. $1,080,000. c. $1,200,000. d. $1,388,889.


Reference: 1214 (Appendix) Division A makes a part with the following characteristics: Production capacity in units ........ 15,000 units Selling price to outside customers .. $25 Variable cost per unit .............. $18 Total fixed costs ................... $60,000 Division B, another division of the same company, would like to purchase 5,000 units of the part each period from Division A. Division B is now purchasing these parts from an outside supplier at a price of $24 each. 96. A Medium Refer To: 1214

Suppose that Division A has ample idle capacity to handle all of Division B's needs without any increase in fixed costs and without cutting into sales to outside customers. If Division B continues to purchase parts from an outside supplier rather then from Division A, the company as a whole will be: a. worse off by $30,000 each period. b. worse off by $10,000 each period. c. better off by $15,000 each period. d. worse off by $35,000 each period.


Suppose that Division A is operating at capacity and can sell all of its output to outside customers at its usual selling price. If Division A sells the parts to Division B at $24 per unit (Division B’s outside price), the company as a whole will be: a. better off by $5,000 each period. b. worse off by $15,000 each period, c. worse off by $5,000 each period. d. there will be no change in the status of the company as a whole,

Reference: 1215 (Appendix) Division A produces a part with the following characteristics: Capacity in units ............. 50,000 Selling price per unit ........ $30 Variable costs per unit ....... $18 Fixed costs per unit .......... $3 Division B, another division in the company, would like to buy this part from Division A. Division B is presently purchasing the part from an outside source at $28 per unit. If Division A sells to Division B, $1 in variable costs can be avoided.


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Suppose Division A is currently operating at capacity and can sell all of the units is produces on the outside market for its usual selling price. From the point of view of Division A, any sales to Division B should be priced no lower than: a. $27. b. $29. c. $20. d. $28.


Suppose that Division A has ample idle capacity to handle all of Division B's needs without any increase in fixed costs and without cutting into its sales to outside customers. From the point of view of Division A, any sales to Division B should be priced no lower than: a. $29. b. $30. c. $18. d. $17.

Reference: 1216 (Appendix) The Vega Division of Ace Company makes wheels which can either be sold to outside customers or transferred to the Walsh Division of Ace Company. Last month the Walsh Division bought all 4,000 of its wheels from the Vega Division for $42 each. The following data are available from last month's operations for the Vega Company: Capacity ...................................... 12,000 wheels Selling price per wheel to outside customers .. $45 Variable costs per wheel when sold to outside customers ....................... $30 If the Vega Division sells wheels to the Walsh Division, Vega can avoid $2 per wheel in sales commissions. An outside supplier has offered to supply wheels to the Walsh Division for $41 each. 100. A Medium Refer To: 1216

Suppose that the Vega Division has ample idle capacity so that transfers to the Walsh Division would not cut into its sales to outside customers. What should be the lowest acceptable transfer price from the perspective of the Vega Division? a. $28 b. $30 c. $42 d. $45


What is the maximum price per wheel that Walsh should be willing to pay Vega? a. $28 b. $41 c. $42 d. $45


Suppose that Vega can sell 9,000 wheels each month to outside consumers, so transfers to the Walsh Division cut into outside sales. What should be the lowest acceptable transfer price from the perspective of the Vega Division? a. $28.00 b. $31.75 c. $41.00 d. $42.00


Reference: 1217 (Appendix) The Post Division of the M.T. Woodhead Company produces basic posts which can be sold to outside customers or sold to the Lamp Division of the M.T. Woodhead Company. Last Year the Lamp Division bought all of its 25,000 posts from Post at $1.50 each. The following data are available for last year's activities of the Post Division: Capacity in units .............. 300,000 posts Selling price per post to outside customers ........ $1.75 Variable costs per post ........ $0.90 Fixed costs, total ............. $150,000 The total fixed costs would be the same for all the alternatives considered below. 103. A Medium Refer To: 1217

Suppose there is ample capacity so that transfers of the posts to the Lamp Division do not cut into sales to outside customers. What is the lowest transfer price that would not reduce the profits of the Post Division? a. $0.90. b. $1.35. c. $1.41. d. $1.75.


Suppose the transfers of posts to the Lamp Division cut into sales to outside customers by 15,000 units. What is the lowest transfer price that would not reduce the profits of the Post Division? a. $0.90. b. $1.35. c. $1.41. d. $1.75.


Suppose the transfers of posts to the Lamp Division cut into sales to outside customers by 15,000 units. Further suppose that an outside supplier is willing to provide the Lamp Division with basic posts at $1.45 each. If the Lamp Division had chosen to buy all of its posts from the outside supplier instead of the Post Division, the change in net operating income for the company as a whole would have been: a. $1,250 decrease. b. $10,250 increase. c. $1,000 decrease. d. $13,750 decrease.

Essay 106. Medium

The Winter Products Division of American Sports Corporation produces and markets two products for use in the snow: Sleds and Saucers. The following data were gathered on activities last month: Sleds Saucers


203

Sales in units ................... 2,000 9,000 Selling price per unit ........... $50 $20 Variable production costs per unit $20 $5 Traceable fixed production costs $12,000 $33,000 Variable selling expenses per unit $2 $1 Traceable fixed selling expenses $2,000 $3,000 Allocated division adminis trative expenses ............... $40,000 $72,000 Required: Prepare a segmented income statement in the contribution format for last month, showing both "Amount" and "Percent" columns for the division as a whole and for each product. Answer: Segments o Total Company Sleds Saucers o Sales ........ $280,000 100% $100,000 100% $180,000 100% Variable expenses ... 98,000 35 44,000 44 54,000 30 Contribution margin ... 182,000 65 56,000 56 126,000 70 Traceable fixed expenses ... 50,000 18 14,000 14 36,000 20 Segment margin ..... 132,000 47 $ 42,000 42% $ 90,000 50% Common fixed expenses ... 112,000 40 Net Income ... $ 20,000 7%


107. Medium

The IT Corporation produces and markets two types of electronic calculators: Model 11 and Model 12. The following data were gathered on activities last month: Model 11 Model 12 Sales in units ........................ 5,000 3,000 Selling price per unit ................ $50 $100 Variable production costs per unit .... $10 $26 Traceable fixed production costs ...... $100,000 $150,000 Variable selling expenses per unit .... $5 $6 Traceable fixed selling expenses ...... $5,000 $7,500 Allocated division administrative expenses ............................. $50,000 $60,000 Required: Prepare a segmented income statement in the contribution format for last month, showing both "Amount" and "Percent" columns for the division as a whole and for each product. Answer: Segments Total Company Model 11 Model 12 Sales $550,000 100% $250,000 100% $300,000 100.0% Variable expenses .... 171,000 31 75,000 30 96,000 32.0 Contribution margin ...... $379,000 69% $175,000 70% $204,000 68.0% Traceable fixed expenses .... 262,500 48 105,000 42 157,500 52.5 Segment margin ...... $116,500 21% $ 70,000 28% $ 46,500 15.5% Common fixed expenses .... 110,000 20 Net Income .... $ 6,500 1%

108. Medium

Financial data for Beaker Company for last year appear below: Beaker Company Statements of Financial Position Beginning Ending Balance Balance Assets: Cash ................................ $ 50,000 $ 70,000 Accounts receivable ................. 20,000 25,000 Inventory ........................... 30,000 35,000 Plant and equipment (net) ........... 120,000 110,000 Investment in Cedar Company ......... 80,000 100,000 Land (undeveloped) .................. 170,000 170,000 Total assets ....................... $470,000 $510,000


205

Liabilities and owners' equity: Accounts payable .................... $ 70,000 $ 90,000 Longterm debt ...................... 250,000 250,000 Owners' equity ...................... 150,000 170,000 Total liabilities and owners' equity .............. $470,000 $510,000 Beaker Company Income Statement Sales ................................. $414,000 Less operating expenses ............ 351,900 Net operating income ............... 62,100 Less interest and taxes: Interest expense ................. $30,000 Tax expense ...................... 10,000 40,000 Net Income ......................... $ 22,100 The company paid dividends of $2,100 last year. The "Investment in Cedar Company" on the statement of financial position represents an investment in the stock of another company. Required: a. Compute the company's margin, turnover, and return on investment for last year. b. The Board of Directors of Beaker Company have set a minimum required return of 20%. What was the company's residual income last year? Answer: a. Operating assets do not include investments in other or in undeveloped land. Beginning Ending Balance Balance Cash .................... $ 50,000 $ 70,000 Accounts receivable ..... 20,000 25,000 Inventory ............... 30,000 35,000 Plant and equipment (net) 120,000 110,000 Total operating assets $220,000 $240,000 Average operating assets = ($220,000 + $240,000) ÷ 2 = $230,000 Margin = Net operating income ÷ Sales = $62,100 ÷ $414,000 = 15% Turnover = Sales ÷ Average operating assets = $414,000 ÷ $230,000 = 1.8 ROI = Margin X Turnover = 15% X 1.8 = 27% b. Net operating income ........... $62,100 Minimum required return


companies

(20% X $230,000) ............. 46,000 Residual income ................ $16,100 109. Hard

Financial data for Bingham Company for last year appear below: Bingham Company Statements of Financial Position Beginning Ending Balance Balance Assets: Cash .............................. $ 135,000 $ 266,000 Accounts receivable ............... 225,000 475,000 Inventory ......................... 314,000 394,000 Plant and equipment (net) ......... 940,000 860,000 Investment in Carr Company ........ 104,000 101,000 Land (undeveloped) ................ 198,000 65,000 Total assets ..................... $1,916,000 $2,161,000 Liabilities and owners' equity: Accounts payable .................. $ 88,000 $ 119,000 Longterm debt .................... 585,000 665,000 Owners' equity .................... 1,243,000 1,377,000 Total liabilities and owners' equity ............ $1,916,000 $2,161,000 Bingham Company Income Statement Sales ............................ $4,644,000 Less operating expenses .......... 4,291,000 Net operating income ............. 353,000 Less interest and taxes: Interest expense ............... $ 90,000 Tax expense .................... 129,000 219,000 Net Income ....................... $ 134,000 The "Investment in Carr Company" on the statement of financial position represents an investment in the stock of another company. Required: a. Compute the company's margin, turnover, and return on investment for last year. b. The Board of Directors of Beaker Company have set a minimum required return of 15%. What was the company's residual income last year?


207

Answer: a. Operating assets do not include investments in other or in undeveloped land.

companies

Beginning Ending Balance Balance Cash ..................... $ 135,000 $ 266,000 Accounts receivable ...... 225,000 475,000 Inventory ................ 314,000 394,000 Plant and equipment (net) 940,000 860,000 Total operating assets $1,614,000 $1,995,000 Average operating assets = ($1,614,000 + $1,995,000) ÷ 2 = $1,804,500 Margin = Net operating income ÷ Sales = $353,000 ÷ $4,644,000 = 7.60% Turnover = Sales ÷ Average operating assets = $4,644,000 ÷ $1,804,500 = 2.57 ROI = Net operating income ÷ Average operating assets = $353,000 ÷ $1,804,500 = 19.56% b. Net operating income .... $353,000 Minimum required return (15% X $1,804,500) .... 270,675 Residual income ......... $ 82,325 110. Medium

The following data have been extracted from the yearend reports of two companies Company X and Company Y: Company X Company Y Sales ......................... $800,000 ? Net operating income .......... $56,000 ? Average operating assets ...... ? $125,000 Margin ........................ ? 4% Turnover ...................... ? 6 Return on investment .......... 14% ?


Required: Fill in the missing data on the above table.

Answer: Company X Company Y Sales ............................ $800,000 $750,000 Net Operating Income ............. $56,000 $30,000 Average Operating Assets ......... $400,000 $125,000 Margin ........................... 7% 4% Turnover ......................... 2 6 ROI .............................. 14% 24%

111. Medium

The following data have been extracted from the yearend reports of two companies Company X and Company Y: Company X Company Y Sales ......................... $2,700,000 ? Net operating income .......... $ 256,000 ? Average operating assets ...... ? $1,725,000 Margin ........................ ? 8% Turnover ...................... ? 2 Return on investment .......... 16% ? Required: Fill in the missing data on the above table.

Answer: Company X Company Y Sales ............................ $2,700,000 $3,450,000 Net Operating Income ............. $ 256,000 $ 276,000 Average Operating Assets ......... $1,600,000 $1,725,000 Margin ........................... 9.5% 8.0% Turnover ......................... 1.7 2.0 ROI .............................. 16% 16%


209

112. Hard

(Appendix) Larinore Corporation has a Castings Division which does casting work of various types. The company's Machine Products Division has asked the Castings Division to provide it with 20,000 special castings each year on a continuing basis. The special casting would require $10 per unit in variable production costs. The Machine Products Division has a bid from an outside supplier for the castings of $29 per unit. In order to have time and space to produce the new casting, the Castings Division would have to cut back production of another casting the RB4 which it presently is producing. The RB4 sells for $30 per unit, and requires $12 per unit in variable production costs. Boxing and shipping costs of the RB4 are $4 per unit. Boxing and shipping costs for the new special casting would be only $1 per unit. The company is now producing and selling 100,000 units of the RB4 each year. Production and sales of this casting would drop by 20% if the new casting is produced. Required: a. What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 20,000 castings per year from the Castings Division to the Machine Products Division? b. Is it in the best interests of Larinore Corporation for this transfer to take place? Explain. Answer: a. From the perspective of the Castings Division, profits would increase as a result of the transfer providing that: Transfer price > Variable cost + Opportunity cost The opportunity cost is the contribution margin on the lost sales, divided by the number of units transferred: Opportunity cost = [($30 $12 $4) x 20,000]/20,000 = $16 Therefore, Transfer price > ($10 + $1) + $16 = $27 From the viewpoint of the purchasing division, the transfer price must be less than the cost of buying the units from outside supplier.

the

Transfer price < $29 Combining the two requirements, we get the following range transfer prices:

of

$27 < Transfer price < $29 b. Yes, the transfer should take place. From the viewpoint of the entire company, the cost of transferring the units within the company is $27, but the cost of purchasing them from the outside


supplier is $29. Therefore, the company's profits increase by $2 for each of the castings that is used within the company rather than being sold on the outside market. 113. Hard

(Appendix) Geneva Corporation has a Castings Division that does casting work of various types. The company's Machine Products Division has asked the Castings Division to provide it with 10,000 special castings each year on a continuing basis. The special casting would require $20 per unit in variable production costs. The Machine Products Division has a bid from an outside supplier for the castings of $30 per unit. In order to have time and space to produce the new casting, the Castings Division would have to cut back production of another casting the NW2 which it presently is producing. The NW2 sells for $40 per unit, and requires $25 per unit in variable production costs. Boxing and shipping costs of the NW2 are $4 per unit. Boxing and shipping costs for the new special casting would be only $2 per unit. The company is now producing and selling 100,000 units of the NW2 each year. Production and sales of this casting would drop by 10% if the new casting were produced. Required: a. What is the range of transfer prices, if any, within which both the Divisions' profits would increase as a result of agreeing to the transfer of 10,000 castings per year from the Castings Division to the Machine Products Division? b. Is it in the best interests of Geneva Corporation for this transfer to take place? Explain.

Answer: a. From the perspective of the Castings Division, profits would increase as a result of the transfer providing that: Transfer price > Variable cost + Opportunity cost The opportunity cost is the contribution margin on the lost


211

ales, divided by the number of units transferred: Opportunity cost = [($40 $25 $4) x 10,000]/10,000 = $11 Therefore, Transfer price > ($20 + $2) + $11 = $33 From the viewpoint of the purchasing division, the transfer price must be less than the cost of buying the units from outside supplier.

the

Transfer price < $30 Combining the two requirements, we find that no feasible range of transfer prices exists under current conditions. b. No, the transfer should not take place. From the viewpoint of the entire company, the cost of transferring the units within the company is $33, but the cost of purchasing them from the outside supplier is $30. Therefore, the company's profits decrease by $3 for each of the castings that is produced within the company rather than being purchased in the outside market.


Test Bank - Chapter12 Segment Reporting

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