Segment Reporting and Decentralization
True/False Questions
1. Allocating common fixed costs to segments on segmented income statements reduces the usefulness of such statements.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: 1 Level: Easy
2. A segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit data.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: 1 Level: Easy
3. A responsibility center is a business segment whose manager has control over costs, revenues, or investments in operating assets.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: 1 Level: Easy
4. Residual income is used in the numerator to compute turnover in an ROI analysis.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
5. Net operating income is earnings before interest and taxes.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: 2 Level: Easy
6. Land held for possible plant expansion would be included as an operating asset in the ROI calculation.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
7. Margin equals Stockholders' Equity divided by Sales.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
8. The use of return on investment (ROI) as a performance measure may lead managers to reject a project that would be favorable for the company as a whole.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
9. Residual income is equal to the difference between total revenues and operating expenses.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
10. When using residual income as a measure of performance, it is not meaningful to compare the residual incomes of divisions of different sizes.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
11. The transfer price used for internal transfers between divisions of the same company can increase or decrease each division's reported profits.
Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 12A LO: 4 Level: Medium
12. For performance evaluation purposes, the lump-sum amount of fixed service department costs charged to an operating department should usually be based on either the operating department's peak-period or long-run average needs.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 12B LO: 5 Level: Easy
13. In service department cost allocations, sales dollars should be used as an allocation base whenever possible.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 12B LO: 5 Level: Easy
14. A cost center is also a responsibility center.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy
15. The basic objective of responsibility accounting is to charge each manager with those costs and/or revenues over which he has control.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy
Multiple Choice Questions
16. The impact on net operating income of short-run changes in sales for a segment can be most clearly predicted by analyzing:
A) the contribution margin ratio.
B) the segment margin.
C) the ratio of the segment margin to sales.
D) net sales less segment fixed costs.
Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium
17. In a segmented contribution format income statement, what is the best measure of the long-run profitability of a segment?
A) its gross margin
B) its contribution margin
C) its segment margin
D) its segment margin minus an allocated portion of common fixed expenses
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: 1 Level: Medium
18. In order to properly report segment margin as a guide to long-run segment profitability and performance, fixed costs must be separated into two broad categories. One category is common fixed costs. What is the other category?
A) discretionary fixed costs
B) committed fixed costs
C) traceable fixed costs
D) specialized fixed costs
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: 1 Level: Easy
19. Which of the following segment performance measures will decrease if there is an increase in the interest expense for that segment?
| |Return on Investment |Residual Income |
|A) |Yes |Yes |
|B) |No |Yes |
|C) |Yes |No |
|D) |No |No |
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2; 3 Level: Hard
20. Which of the following segment performance measures will increase if there is a decrease in the selling expenses for that segment?
| |Return on Investment |Residual Income |
|A) |Yes |Yes |
|B) |No |Yes |
|C) |Yes |No |
|D) |No |No |
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2; 3 Level: Medium
21. Some investment opportunities that should be accepted from the viewpoint of the entire company may be rejected by a manager who is evaluated on the basis of:
A) return on investment.
B) residual income.
C) contribution margin.
D) segment margin.
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
22. Consider the following three conditions:
I. An increase in sales
II. An increase in operating assets
III. A reduction in expenses
Which of the above conditions provide a way in which a manager can improve return on investment?
A) Only I
B) Only I and II
C) Only I and III
D) Only II and III
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
23. When calculating a segment's return on investment (ROI), which of the following assets of that segment would be considered a part of average operating assets?
A) cash
B) accounts receivable
C) plant and equipment
D) all of the above
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
24. Which of the following measures of performance encourages continued expansion by an investment center so long as it is able to earn a return in excess of the minimum required return on average operating assets?
A) return on investment
B) transfer pricing
C) the contribution approach
D) residual income
Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
25. Residual income is:
A) Net operating income plus the minimum required return on average operating assets.
B) Net operating income less the minimum required return on average operating assets.
C) Contribution margin plus the minimum required return on average operating assets.
D) Contribution margin less the minimum required return on average operating assets.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
26. Which of the following is NOT a common approach used to set transfer prices?
A) market price
B) variable cost
C) negotiation
D) suboptimization
Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 12A LO: 4 Level: Easy
27. For performance evaluation purposes, the variable costs of a service department should be charged to operating departments using:
A) the actual variable rate and the budgeted level of activity for the period.
B) the budgeted variable rate and the actual level of activity for the period.
C) the budgeted variable rate and the budgeted level of activity for the period.
D) the actual variable rate and the peak-period or long-run average servicing capacity.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 12B LO: 5 Level: Medium
28. Which of the following companies is following a policy with respect to the costs of service departments that is not recommended?
A) To charge operating departments with the depreciation of forklifts used at its central warehouse, Shalimar Electronics charges predetermined lump-sum amounts calculated on the basis of the long-term average use of the services provided by the warehouse to the various segments.
B) Manhattan Electronics uses the sales revenue of its various divisions to allocate costs connected with the upkeep of its headquarters building.
C) Rainier Industrial does not allow its service departments to pass on the costs of their inefficiencies to the operating departments.
D) Golkonda Refinery separately allocates fixed and variable costs incurred by its service departments to its operating departments.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 12B LO: 5 Level: Medium Source: CMA; adapted
29. 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.
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy
30. Devlin Company has two divisions, C and D. The overall company contribution margin ratio is 30%, with sales in the two divisions totaling $500,000. If variable expenses are $300,000 in Division C, and if Division C's contribution margin ratio is 25%, then sales in Division D must be:
A) $50,000
B) $100,000
C) $150,000
D) $200,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Hard
Solution:
Total company contribution margin = $500,000 × 30% = $150,000
Total company variable expenses = $500,000 − $150,000 = $350,000
Division C contribution margin ratio = (Sales − $300,000) ÷ Sales = 0.25
Sales − $300,000 = 0.25 × Sales
(0.75 × Sales) ÷ 0.75 = $300,000 ÷ 0.75
Sales = $400,000
Division D sales = Total company sales − Division C sales
= $500,000 − $400,000 = $100,000
| | | |Divisions |
| | |Total |Division C |Division D |
| | |Company | | |
| |Sales |$500,000 |$400,000 |$100,000 |
| |Less variable expenses | 350,000 | 300,000 | 50,000 |
| |Contribution margin |$150,000 |$100,000 |$ 50,000 |
| |Contribution margin ratio |0.30 |0.25 |0.50 |
31. Toxemia Salsa Company manufactures five flavors of salsa. Last year, Toxemia generated net operating income of $40,000. The following information was taken from last year's income statement segmented by flavor (brackets indicate a negative amount):
| | |Wimpy |Mild |Medium |Hot |Atomic |
| |Contribution margin |$(2,000) |$45,000 |$35,000 |$50,000 |$162,000 |
| |Segment margin |$(16,000) |$(5,000) |$7,000 |$10,000 |$94,000 |
| |Segment margin less allocated |$(26,000) |$(15,000) |$(3,000) |$0 |$84,000 |
| |common fixed expenses | | | | | |
Toxemia expects similar operating results for the upcoming year. If Toxemia wants to maximize its profitability in the upcoming year, which flavor or flavors should Toxemia discontinue?
A) no flavors should be discontinued
B) Wimpy
C) Wimpy and Mild
D) Wimpy, Mild, and Medium
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; LO: 1 Level: Medium
Solution:
The segment margin is a better indication of profitability of individual products than the segment margin less allocated common fixed expenses. The products with negative segment margins should be discontinued to maximize profit: Wimpy and Mild.
32. Uchimura Corporation has two divisions: the AFE Division and the GBI Division. The corporation's net operating income is $42,000. The AFE Division's divisional segment margin is $15,700 and the GBI Division's divisional segment margin is $175,400. What is the amount of the common fixed expense not traceable to the individual divisions?
A) $149,100
B) $57,700
C) $217,400
D) $191,100
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium
Solution:
| | |Total Company | |
| |Divisional segment margin |$191,100 |($15,700 + $175,400) |
| |Less common fixed costs not traceable to the individual | X | |
| |divisions | | |
| |Net operating income |$ 42,000 | |
Common fixed costs not traceable to the individual divisions
= $191,100 − $42,000 = $149,100
33. Younie Corporation has two divisions: the South Division and the West Division. The corporation's net operating income is $26,900. The South Division's divisional segment margin is $42,800 and the West Division's divisional segment margin is $29,900. What is the amount of the common fixed expense not traceable to the individual divisions?
A) $56,800
B) $69,700
C) $72,700
D) $45,800
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium
Solution:
| | |Total Company | |
| |Divisional segment margin |$72,700 |($42,800 + $29,900) |
| |Less common fixed costs not traceable to the individual | X | |
| |divisions | | |
| |Net operating income |$26,900 | |
Common fixed costs not traceable to the individual divisions
= $72,700 − $26,900 = $45,800
34. Dukelow Corporation has two divisions: the Governmental Products Division and the Export Products Division. The Governmental Products Division's divisional segment margin is $255,000 and the Export Products Division's divisional segment margin is $59,800. The total amount of common fixed expenses not traceable to the individual divisions is $163,700. What is the company's net operating income?
A) $314,800
B) ($314,800)
C) $151,100
D) $478,500
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: 1 Level: Easy
Solution:
| | |Total Company | |
| |Divisional segment margin |$314,800 |* |
| |Less common fixed costs not traceable to the individual | 163,700 | |
| |divisions | | |
| |Net operating income |$151,100 | |
*$255,000 + $59,800 = $314,800
35. Miscavage Corporation has two divisions: the Beta Division and the Alpha Division. The Beta Division has sales of $580,000, variable expenses of $301,600, and traceable fixed expenses of $186,500. The Alpha Division has sales of $510,000, variable expenses of $178,500, and traceable fixed expenses of $222,100. The total amount of common fixed expenses not traceable to the individual divisions is $235,500. What is the company's net operating income?
A) $374,400
B) $201,300
C) $609,900
D) ($34,200)
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: 1 Level: Easy
Solution:
| | |Divisions |
| |Total Company |Alpha Division |Beta Division |
|Sales |$1,090,000 |$510,000 |$580,000 |
|Less: variable expenses |480,100 |178,500 |301,600 |
|Contribution margin |609,900 |331,500 |278,400 |
|Less: traceable fixed expenses |408,600 |222,100 |186,500 |
|Divisional segment margin |201,300 |$109,400 |$91,900 |
|Less common fixed expenses |235,500 | | |
|Net operating income |($34,200) | | |
36. J Corporation has two divisions. Division A has a contribution margin of $79,300 and Division B has a contribution margin of $126,200. If total traceable fixed costs are $72,400 and total common fixed costs are $34,900, what is J Corporation's net operating income?
A) $168,000
B) $170,600
C) $133,100
D) $98,200
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: 1 Level: Easy
Solution:
| |Total Company | |
|Contribution margin |$205,500 |* |
|Less: traceable fixed expenses | 72,400 | |
|Divisional segment margin |133,100 | |
|Less common fixed expenses | 34,900 | |
|Net operating income |$ 98,200 | |
*$79,300 + $126,200 = $205,500
37. Kop Corporation has provided the following data:
| |Return on investment (ROI) |15% |
| |Sales |$120,000 |
| |Average operating assets |$60,000 |
| |Minimum required rate of return |12% |
| |Margin on sales |7.5% |
Kop Corporation's residual income is:
A) $1,800
B) $5,400
C) $2,700
D) $3,600
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2; 3 Level: Medium
Solution:
Net operating income = Sales × Margin on sales = $120,000 × 7.5% = $9,000
Residual income = Net operating income − (Average operating assets × Minimum required rate of return) = $9,000 − ($60,000 × 12%) = $9,000 − $7,200 = $1,800
38. Spar Company has calculated the following ratios for one of its investment centers:
| |Margin |25% |
| |Turnover |0.5 times |
What is Spar's return on investment for this investment center?
A) 50.0%
B) 12.5%
C) 15.0%
D) 25.0%
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy Source: CPA; adapted
Solution:
Return on investment = Margin × Turnover = 25% × 0.5 times = 12.5%
39. Mike Corporation uses residual income to evaluate the performance of its divisions. The company's minimum required rate of return is 14%. In January, the Commercial Products Division had average operating assets of $970,000 and net operating income of $143,700. What was the Commercial Products Division's residual income in January?
A) $7,900
B) -$20,118
C) $20,118
D) -$7,900
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Residual income = Net operating income − (Average operating assets × Minimum required rate of return) = $143,700 − ($970,000 × 14%) = $143,700 − $135,800 = $7,900
40. In November, the Universal Solutions Division of Keaffaber Corporation had average operating assets of $480,000 and net operating income of $46,200. The company uses residual income, with a minimum required rate of return of 11%, to evaluate the performance of its divisions. What was the Universal Solutions Division's residual income in November?
A) -$6,600
B) $5,082
C) $6,600
D) -$5,082
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Residual income = Net operating income − (Average operating assets × Minimum required rate of return) = $46,200 − ($480,000 × 11%) = $46,200 − $52,800 = -$6,600
41. If operating income is $60,000, average operating assets are $240,000, and the minimum required rate of return is 20%, what is the residual income?
A) 40%
B) 25%
C) $12,000
D) $48,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Residual income = Net operating income − (Average operating assets × Minimum required rate of return) = $60,000 − ($240,000 × 20%) = $60,000 − $48,000 = $12,000
42. 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 is already selling all of the units it can produce to outside customers. If Division A sells to Division B rather than to outside customers, the variable cost per unit would be $1 lower. What is the lowest acceptable transfer price from the standpoint of the selling division?
A) $40
B) $39
C) $38
D) $37
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting Appendix: 12A LO: 4 Level: Hard
Solution:
Transfer price ≥ Variable cost per unit + (Total contribution margin on lost sales ÷ Number of units transferred) = ($30 − $1) + [($40 − $30) × 5,000] ÷ 5,000 = $29 + $10 = $39
43. Product A, which is produced by the Parts Division of BYP Corporation, sells for $14.25 on the outside market. The costs to make Product A as recorded by the company's cost accounting system are:
| |Direct materials |$7.25 |
| |Direct labor |$2.25 |
| |Variable manufacturing overhead |$1.50 |
| |Fixed manufacturing overhead |$2.50 |
The Assembly Division of BYP Corporation requires a part much like Product A to make one of its products. The Assembly Division can buy this part from an outside supplier for $14.15. However, the Assembly Division could use Product A instead of this part purchased from an outside supplier. What is the most the Assembly Division would be willing to pay the Parts Division for Product A?
A) $13.50
B) $14.25
C) $14.15
D) $14.00
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting Appendix: 12A LO: 4 Level: Easy
Solution:
Transfer price ≤ Cost of buying from outside supplier = $14.15
44. Macumber Corporation has two operating divisions-an Atlantic Division and a Pacific Division. The company's Logistics Department services both divisions. The variable costs of the Logistics Department are budgeted at $36 per shipment. The Logistics Department's fixed costs are budgeted at $234,000 for the year. The fixed costs of the Logistics Department are determined based on peak-period demand.
| | |Percentage of Peak Period Capacity |Actual Shipments |
| | |Required | |
| |Atlantic Division |30% |1,100 |
| |Pacific Division |70% |3,400 |
How much Logistics Department cost should be charged to the Altlantic Division at the end of the year for performance evaluation purposes?
A) $198,000
B) $109,800
C) $118,800
D) $96,800
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 12B LO: 5 Level: Easy
Solution:
Labor department cost charged to Atlantic Division
= (1,100 shipments × $36 per shipment) + ($234,000 × 30%)
= $39,600 + $70,200 = $109,800
45. Erholm Corporation has two operating divisions-an Atlantic Division and a Pacific Division. The company's Logistics Department services both divisions. The variable costs of the Logistics Department are budgeted at $31 per shipment. The Logistics Department's fixed costs are budgeted at $411,800 for the year. The fixed costs of the Logistics Department are determined based on peak-period demand.
| | |Percentage of Peak Period Capacity |Budgeted Shipments |
| | |Required | |
| |Atlantic Division |35% |1,900 |
| |Pacific Division |65% |5,200 |
At the end of the year, actual Logistics Department variable costs totaled $290,700 and fixed costs totaled $431,950. The Atlantic Division had a total of 3,900 shipments and the Pacific Division had a total of 5,100 shipments for the year. How much Logistics Department cost should be charged to the Pacific Division at the END of the year for performance evaluation purposes?
A) $391,453
B) $425,770
C) $445,498
D) $409,502
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 12B LO: 5 Level: Medium
Solution:
Logistics department cost charged to Pacific Division
= (5,100 shipments × $31 per shipment) + ($411,800 × 65%)
= $158,100 + $267,670 = $425,770
46. Gretter Corporation has two operating divisions-an Atlantic Division and a Pacific Division. The company's Logistics Department services both divisions. The variable costs of the Logistics Department are budgeted at $36 per shipment. The Logistics Department's fixed costs are budgeted at $399,600 for the year. The fixed costs of the Logistics Department are determined based on peak-period demand.
| | |Percentage of Peak Period Capacity Required|Budgeted Shipments |
| |Atlantic Division |25% |1,600 |
| |Pacific Division |75% |5,800 |
At the end of the year, actual Logistics Department variable costs totaled $305,040 and fixed costs totaled $418,680. The Atlantic Division had a total of 2,600 shipments and the Pacific Division had a total of 5,600 shipments for the year. For performance evaluation purposes, how much actual Logistics Department cost should NOT be charged to the operating divisions at the END of the year?
A) $28,920
B) $9,840
C) $19,080
D) $0
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 12B LO: 5 Level: Medium
Solution:
Actual Logistics Department cost incurred = $305,040 + $418,680 = $723,720
Logistics Department charged to operating divisions
= [$36 per shipment × (2,600 shipments + 5,600 shipments)] + $399,600
= [$36 per shipment × 8,200 shipments] + $399,600
= $295,200 + $399,600 = $694,800
Actual Logistics Department cost not charged to operating divisions
= $723,720 − $694,800 = $28,920
47. Bockoven Corporation has two operating divisions-a Consumer Division and a Commercial Division. The company's Customer Service Department provides services to both divisions. The variable costs of the Customer Service Department are budgeted at $46 per order. The Customer Service Department's fixed costs are budgeted at $181,500 for the year. The fixed costs of the Customer Service Department are determined based on the peak period orders.
| | |Percentage of Peak Period Capacity |Actual Orders |
| | |Required | |
| |Consumer Division |40% |1,100 |
| |Commercial Division |60% |2,200 |
How much Customer Service Department cost should be charged to the Consumer Division at the beginning of the year for performance evaluation purposes?
A) $123,200
B) $166,650
C) $111,100
D) $133,320
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 12B LO: 5 Level: Easy
Solution:
Customer Service Department cost charged to Consumer Division
= ($46 per order × 1,100 orders) + ($181,500 × 40%)
= $50,600 + $72,600 = $123,200
48. Levar Corporation has two operating divisions-a Consumer Division and a Commercial Division. The company's Order Fulfillment Department provides services to both divisions. The variable costs of the Order Fulfillment Department are budgeted at $73 per order. The Order Fulfillment Department's fixed costs are budgeted at $470,400 for the year. The fixed costs of the Order Fulfillment Department are determined based on the peak period orders.
| | |Percentage of Peak Period Capacity Required |Budgeted Orders |
| |Consumer Division |25% |1,800 |
| |Commercial Division |75% |6,600 |
At the end of the year, actual Order Fulfillment Department variable costs totaled $621,600 and fixed costs totaled $473,970. The Consumer Division had a total of 1,840 orders and the Commercial Division had a total of 6,560 orders for the year. For purposes of evaluation performance, how much Order Fulfillment Department cost should be charged to the Commercial Division at the END of the year?
A) $831,680
B) $855,588
C) $840,918
D) $846,240
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 12B LO: 5 Level: Easy
Solution:
Order Fulfillment Department cost charged to Commercial Division
= ($73 per order × 6,560 orders) + ($470,400 × 75%)
= $478,880 + $352,800 = $831,680
49. Schabel Corporation has two operating divisions-a Consumer Division and a Commercial Division. The company's Customer Service Department provides services to both divisions. The variable costs of the Customer Service Department are budgeted at $72 per order. The Customer Service Department's fixed costs are budgeted at $695,400 for the year. The fixed costs of the Customer Service Department are determined based on the peak period orders.
| | |Percentage of Peak Period Capacity |Budgeted Orders |
| | |Required | |
| |Consumer Division |25% |2,600 |
| |Commercial Division |75% |9,600 |
At the end of the year, actual Customer Service Department variable costs totaled $891,089 and fixed costs totaled $709,820. The Consumer Division had a total of 2,610 orders and the Commercial Division had a total of 9,580 orders for the year. For performance evaluation purposes, how much actual Customer Service Department cost should NOT be charged to the operating divisions at the END of the year?
A) $13,409
B) $0
C) $14,420
D) $27,829
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 12B LO: 5 Level: Medium
Solution:
Actual Customer Service Department cost incurred
= $891,089 + $709,820 = $1,600,909
Customer Service Department cost charged to operating divisions
= [$72 per order × (2,610 orders + 9,580 orders)] + $695,400
= [$72 per order × 12,190 orders] + $695,400
= $877,680 + $695,400 = $1,573,080
Actual Customer Service Department cost not charged to operating divisions
= $1,600,909 − $1,573,080 = $27,829
50. Mangiamele Corporation's Maintenance Department provides services to the company's two operating divisions-the Paints Division and the Stains Division. The variable costs of the Maintenance Department are budgeted based on the number of cases produced by the operating departments. The fixed costs of the Maintenance Department are budgeted based on the number of cases produced by the operating departments during the peak period. Data appear below:
| |Maintenance Department | |
| |Budgeted variable cost |$4 per case |
| |Budgeted total fixed cost |$693,000 |
| | | |
| |Paints Division | |
| |Percentage of peak period capacity required |30% |
| |Actual cases |18,000 |
| | | |
| |Stains Division | |
| |Percentage of peak period capacity required |70% |
| |Actual cases |59,000 |
For performance evaluation purposes, how much Maintenance Department cost should be charged to the Paints Division at the end of the year?
A) $234,000
B) $500,500
C) $279,900
D) $300,300
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 12B LO: 5 Level: Medium
Solution:
Maintenance Department cost charged to Paints Division
= ($4 per case × 18,000 cases) + ($693,000 × 30%)
= $72,000 + $207,900 = $279,900
51. Tabarez Corporation's Maintenance Department provides services to the company's two operating divisions-the Paints Division and the Stains Division. The variable costs of the Maintenance Department are budgeted based on the number of cases produced by the operating departments. The fixed costs of the Maintenance Department are budgeted based on the number of cases produced by the operating departments during the peak period. Data appear below:
| |Maintenance Department | |
| |Budgeted variable cost |$2 per case |
| |Budgeted total fixed cost |$1,140,000 |
| |Actual total variable cost |$239,400 |
| |Actual total fixed cost |$1,157,980 |
| | | |
| |Paints Division | |
| |Percentage of peak period capacity required |30% |
| |Budgeted cases |29,000 |
| |Actual cases |29,040 |
| | | |
| |Stains Division | |
| |Percentage of peak period capacity required |70% |
| |Budgeted cases |85,000 |
| |Actual cases |84,960 |
For performance evaluation purposes, how much Maintenance Department cost should be charged to the Stains Division at the END of the year?
A) $989,002
B) $1,041,416
C) $967,920
D) $1,019,520
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 12B LO: 5 Level: Medium
Solution:
Maintenance Department cost charged to Stains Division
= ($2 per case × 84,960 cases) + ($1,140,000 × 70%)
= $169,920 + $798,000 = $967,920
Use the following to answer questions 52-56:
O'Neill, Incorporated's income statement for the most recent month is given below.
| | |Total |Store A |Store B |
| |Sales |$300,000 |$100,000 |$200,000 |
| |Variable expenses | 192,000 | 72,000 | 120,000 |
| |Contribution margin |108,000 |28,000 |80,000 |
| |Traceable fixed expenses | 76,000 | 21,000 | 55,000 |
| |Segment margin |32,000 |$ 7,000 |$ 25,000 |
| |Common fixed expenses | 27,000 | | |
| |Net operating income |$ 5,000 | | |
For each of the following questions, refer back to the original data.
52. If Store B sales increase by $20,000 with no change in traceable fixed expenses, the overall company net operating income should:
A) increase by $2,500
B) increase by $5,000
C) increase by $8,000
D) increase by $12,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: 1 Level: Medium
Solution:
Store B contribution margin ratio = $80,000 ÷ $200,000 = 40%
Additional net operating income = $20,000 × 40% = $8,000
53. The marketing department believes that a promotional campaign at Store A costing $5,000 will increase sales by $15,000. If its plan is adopted, overall company net operating income should:
A) decrease by $800
B) decrease by $5,800
C) increase by $5,800
D) increase by $10,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: 1 Level: Medium
Solution:
Store A contribution margin ratio = $28,000 ÷ $100,000 = 28%
Change in net operating income = ($15,000 × 28%) − $5,000
= $4,200 − $5,000 = $800 decrease
54. A proposal has been made that will lower variable expenses in Store A to 62% of sales. However, this reduction can only be accomplished by an increase in fixed expenses of $8,000. If this proposal is implemented and sales remain constant, overall company net operating income should:
A) remain the same
B) decrease by $4,200
C) increase by $2,000
D) increase by $8,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: 1 Level: Medium
Solution:
New amount for Store A variable expenses = $100,000 × 62% = $62,000
Change in net operating income = ($72,000 − $62,000) − $8,000
= $10,000 − $8,000 = $2,000 increase
55. If sales in Store B increase by $30,000 as a result of a $7,000 expenditure in fixed expenses:
A) the contribution margin should increase by $18,000
B) the segment margin should increase by $12,000
C) the contribution margin should increase by $11,000
D) the segment margin should increase by $5,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Hard
Solution:
Store B contribution margin ratio = $80,000 ÷ $200,000 = 40%
Change in segment margin = ($30,000 × 40%) − $7,000
= $12,000 − $7,000 = $5,000 increase
56. Currently the sales clerks receive a salary of $7,000 per month in Store B. A proposal has been made to change from a fixed salary to a sales commission of 5%. Assume that this proposal is adopted, and that as a result sales increase by $20,000. The new segment margin for Store B should be:
A) $29,000
B) $32,000
C) $39,000
D) $45,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: 1 Level: Hard
Solution:
| |Sales |$220,000 |($200,000 + $20,000) |
| |Sales commissions |11,000 |($220,000 × 5%) |
| |Other variable expenses | 132,000 |($220,000 × 60%*) |
| |Contribution margin |77,000 | |
| |Traceable fixed expenses | 48,000 |($55,000 − $7,000) |
| |Segment margin |$ 29,000 | |
*Variable expenses ÷ Sales = $120,000 ÷ $200,000 = 60%
Use the following to answer questions 57-59:
Higgins Company sells three products, Product A, Product B, and Product C. Sales during June totaled $1,500,000 in the company. The company's overall contribution margin ratio was 38%, and its fixed expenses totaled $525,000 for the year. Sales by product were: Product A, $750,000; Product B, $450,000; and Product C, $300,000. Traceable fixed expenses were: Product A, $180,000; Product B, $150,000; and Product C, $90,000. The variable expenses were: Product A, $450,000; Product B, $270,000; and Product C, $___?___.
57. The net operating income for the company as a whole for June was:
A) $45,000
B) $105,000
C) $150,000
D) $570,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: 1 Level: Medium
Solution:
| |Sales |$1,500,000 |
| |Contribution margin ratio |× 38% |
| |Contribution margin |$570,000 |
| |Fixed expenses | 525,000 |
| |Net operating income |$ 45,000 |
58. The contribution margin ratio for Product C for June was:
A) 0%
B) 30%
C) 38%
D) 70%
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Hard
Solution:
Company variable expenses = $1,500,000 × (100% − 38%)
= $1,500,000 × 62% = $930,000
Product C variable expenses = $930,000 − $450,000 − $270,000 = $210,000
Product C contribution margin = $300,000 − $210,000 = $90,000
Product C contribution margin ratio = $90,000 ÷ $300,000 = 30%
59. Common fixed expenses for Higgins Company for June were:
A) $45,000
B) $420,000
C) $150,000
D) $105,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Hard
Solution:
Common fixed expenses = Total fixed expenses – Traceable fixed expenses
= $525,000 – ($180,000 + $150,000 + $90,000)
= $525,000 – $420,000 = $105,000
Use the following to answer questions 60-62:
Azuki Corporation operates in two sales territories, urban and rural. Shown below is last year's income statement segmented by territory:
| | |Urban |Rural |
| |Sales |$320,000 |$80,000 |
| |Variable expenses | 208,000 | 56,000 |
| |Contribution margin |112,000 |24,000 |
| |Traceable fixed expenses | 48,000 | 30,000 |
| |Segment margin |$64,000 |$(6,000) |
Azuki's common fixed expenses were $25,000 last year.
60. What was Azuki Corporation's overall net operating income for last year?
A) $33,000
B) $45,000
C) $58,000
D) $83,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: 1 Level: Easy
Solution:
| |Segment margin |$58,000 |($64,000 + -$6,000) |
| |Common fixed expenses | 25,000 | |
| |Net operating income |$33,000 | |
61. If urban sales were 10% higher last year, by approximately how much would Azuki's net operating income have increased? (Assume no change in the revenue or cost structure.)
A) $4,400
B) $6,400
C) $11,200
D) $32,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium
Solution:
Urban contribution margin ratio = $112,000 ÷ $320,000 = 35%
Increase in net operating income = $320,000 × 10% × 35% = $11,200
62. If operations in rural areas would have been discontinued at the beginning of last year, how would this have changed the net operating income of Azuki Company as a whole?
A) $5,000 increase
B) $6,000 increase
C) $11,000 increase
D) $24,000 decrease
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Rural segment margin = Contribution margin − Traceable fixed expenses
= $24,000 − $30,000 = ($6,000)
Net operating income would have increased by $6,000 if operations in rural areas would have been discontinued at the beginning of last year.
Use the following to answer questions 63-65:
Tubaugh Corporation has two major business segments—East and West. In December, the East business segment had sales revenues of $690,000, variable expenses of $352,000, and traceable fixed expenses of $104,000. During the same month, the West business segment had sales revenues of $140,000, variable expenses of $56,000, and traceable fixed expenses of $24,000. The common fixed expenses totaled $162,000 and were allocated as follows: $89,000 to the East business segment and $73,000 to the West business segment.
63. The contribution margin of the West business segment is:
A) $84,000
B) $234,000
C) $422,000
D) $145,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
West contribution margin = Sales − Variable expenses
= $140,000 − $56,000 = $84,000
64. A properly constructed segmented income statement in a contribution format would show that the segment margin of the East business segment is:
A) $352,000
B) $145,000
C) $234,000
D) $249,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: 1 Level: Easy
Solution:
| |Sales |$690,000 |
| |Variable expenses | 352,000 |
| |Contribution margin |338,000 |
| |Traceable fixed expenses | 104,000 |
| |Segment margin |$234,000 |
65. A properly constructed segmented income statement in a contribution format would show that the net operating income of the company as a whole is:
A) $294,000
B) $422,000
C) $132,000
D) -$30,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: 1 Level: Easy
Solution:
| | |Total Company |East |West |
| |Sales |$830,000 |$690,000 |$140,000 |
| |Variable expenses |408,000 |352,000 |56,000 |
| |Contribution margin |422,000 |338,000 |84,000 |
| |Traceable fixed expenses |128,000 |104,000 |24,000 |
| |Segment margin |294,000 |$234,000 |$60,000 |
| |Common fixed expenses |162,000 | | |
| |Net operating income |$132,000 | | |
Use the following to answer questions 66-68:
Data for January for Bondi Corporation and its two major business segments, North and South, appear below:
| |Sales revenues, North |$660,000 |
| |Variable expenses, North |$383,000 |
| |Traceable fixed expenses, North |$79,000 |
| |Sales revenues, South |$510,000 |
| |Variable expenses, South |$291,000 |
| |Traceable fixed expenses, South |$66,000 |
In addition, common fixed expenses totaled $179,000 and were allocated as follows: $93,000 to the North business segment and $86,000 to the South business segment.
66. The contribution margin of the South business segment is:
A) $198,000
B) $496,000
C) $219,000
D) $105,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
| |Sales |$510,000 |
| |Variable expenses | 291,000 |
| |Contribution margin |$219,000 |
67. A properly constructed segmented income statement in a contribution format would show that the segment margin of the North business segment is:
A) $105,000
B) $383,000
C) $198,000
D) $184,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: 1 Level: Easy
Solution:
| | |North |
| |Sales |$660,000 |
| |Variable expenses | 383,000 |
| |Contribution margin |277,000 |
| |Traceable fixed expenses | 79,000 |
| |Segment margin |$198,000 |
68. A properly constructed segmented income statement in a contribution format would show that the net operating income of the company as a whole is:
A) -$7,000
B) $172,000
C) $351,000
D) $496,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: 1 Level: Easy
Solution:
| | |Total Company |North |South |
| |Sales |$1,170,000 |$660,000 |$510,000 |
| |Variable expenses |674,000 |383,000 |291,000 |
| |Contribution margin |496,000 |277,000 |219,000 |
| |Traceable fixed expenses |145,000 |79,000 |66,000 |
| |Segment margin |351,000 |$198,000 |$153,000 |
| |Common fixed expenses |179,000 | | |
| |Net operating income |$172,000 | | |
Use the following to answer questions 69-71:
Ferrar Corporation has two major business segments-Consumer and Commercial. Data for the segment and for the company for March appear below:
| |Sales revenues, Consumer |$680,000 |
| |Sales revenues, Commercial |$280,000 |
| |Variable expenses, Consumer |$394,000 |
| |Variable expenses, Commercial |$143,000 |
| |Traceable fixed expenses, Consumer |$102,000 |
| |Traceable fixed expenses, Commercial |$45,000 |
In addition, common fixed expenses totaled $210,000 and were allocated as follows: $122,000 to the Consumer business segment and $88,000 to the Commercial business segment.
69. The contribution margin of the Commercial business segment is:
A) $137,000
B) $184,000
C) $62,000
D) $423,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
| |Sales |$280,000 |
| |Variable expenses | 143,000 |
| |Contribution margin |$137,000 |
70. A properly constructed segmented income statement in a contribution format would show that the segment margin of the Consumer business segment is:
A) $164,000
B) $62,000
C) $394,000
D) $184,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: 1 Level: Easy
Solution:
| | |Consumer |
| |Sales |$680,000 |
| |Variable expenses | 394,000 |
| |Contribution margin |286,000 |
| |Traceable fixed expenses | 102,000 |
| |Segment margin |$184,000 |
71. A properly constructed segmented income statement in a contribution format would show that the net operating income of the company as a whole is:
A) $66,000
B) -$144,000
C) $423,000
D) $276,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: 1 Level: Easy
Solution:
| | | |Segments |
| | |Total Company |Consumer |Commercial |
| |Sales |$960,000 |$680,000 |$280,000 |
| |Variable expenses |537,000 |394,000 |143,000 |
| |Contribution margin |423,000 |286,000 |137,000 |
| |Traceable fixed expenses |147,000 |102,000 |45,000 |
| |Segment margin |276,000 |$184,000 |$92,000 |
| |Common fixed expenses |210,000 | | |
| |Net operating income |$66,000 | | |
Use the following to answer questions 72-73:
The Tipton Division of Dudley Company reported the following data last year:
| |Return on investment |20% |
| |Minimum required rate of return |12% |
| |Residual income |$50,000 |
72. Tipton Division's average operating assets last year were:
A) $625,000
B) $250,000
C) $416,677
D) $333,333
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2; 3 Level: Hard
Solution:
Residual income = Average operating assets × (ROI − Minimum required rate of return)
Average operating assets = Residual income ÷ (ROI − Minimum required rate of return)
= $50,000 ÷ (20% − 12%) = $50,000 ÷ 8% = $625,000
73. The division's net operating income last year was:
A) $250,000
B) $125,000
C) $100,000
D) $75,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2; 3 Level: Hard
Solution:
ROI = Net operating income ÷ Average operating assets
Net operating income = ROI × Average operating assets
= 20% × $625,000 = $125,000
Use the following to answer questions 74-75:
The following data pertain to Turk Company's operations last year:
| |Sales |$900,000 |
| |Net operating income |$36,000 |
| |Contribution margin |$150,000 |
| |Average operating assets |$180,000 |
| |Stockholders’ equity |$100,000 |
| |Plant, property, & equipment |$120,000 |
74. Turk's return on investment for the year was:
A) 4%
B) 15%
C) 36%
D) 20%
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
ROI = Net operating income ÷ Average operating assets
= $36,000 ÷ $180,000 = 20%
75. If the residual income for the year was $9,000, the minimum required rate of return must have been:
A) 15%
B) 4%
C) 20%
D) 36%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Hard
Solution:
Residual income = Net operating income − (Average operating assets × Minimum required rate of return)
= $9,000 = $36,000 − ($180,000 × Minimum required rate of return)
= $27,000 ÷ $180,000
Minimum required rate of return = 15%
Use the following to answer questions 76-77:
The Hum Division of the Ho Company reported the following data for last year:
| |Sales |$800,000 |
| |Operating expenses |$650,000 |
| |Interest expense |$50,000 |
| |Tax expense |$30,000 |
| |Stockholders’ equity |$200,000 |
| |Average operating assets |$600,000 |
| |Minimum required rate of return |12% |
76. The residual income for the Hum Division last year was:
A) $126,000
B) $46,000
C) $78,000
D) $22,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
| |Sales |$800,000 |
| |Operating expenses | 650,000 |
| |Net operating income |$150,000 |
Residual income = Net operating income − (Average operating assets × Minimum required rate of return) = $150,000 − ($600,000 × 12%) = $150,000 − $72,000 = $78,000
77. The return on investment last year for the Hum Division was:
A) 75%
B) 25%
C) 35%
D) 12%
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
ROI = Net operating income ÷ Average operating assets
= $150,000 ÷ $600,000 = 25%
Use the following to answer questions 78-79:
The following selected data pertain to Beck Co.'s Beam Division for last year:
| |Sales |$2,000,000 |
| |Variable expenses |$800,000 |
| |Traceable fixed expenses |$900,000 |
| |Average operating assets |$500,000 |
| |Minimum required rate of return |20% |
Note: the traceable fixed expenses do not include any interest expense.
78. How much is the residual income?
A) $400,000
B) $200,000
C) $300,000
D) $500,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium Source: CPA; adapted
Solution:
| |Sales |$2,000,000 |
| |Variable expenses |800,000 |
| |Traceable fixed expenses | 900,000 |
| |Net operating income |$ 300,000 |
Residual income = Net operating income − (Average operating assets × Minimum required rate of return) = $300,000 − ($500,000 × 20%) = $300,000 − $100,000 = $200,000
79. How much is the return on the investment?
A) 25%
B) 45%
C) 20%
D) 60%
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Source: CPA; adapted
Solution:
ROI = Net operating income ÷ Average operating assets
= $300,000 ÷ $500,000 = 60%
Use the following to answer questions 80-81:
Edith Carolina is president of the Deed Corporation. The company is decentralized, and leaves investment decisions up to the discretion of the division managers. Michael Sanders, manager of the Cosmetics Division, has had a return on investment of 14% for his division for the past three years and expects the division to have the same return in the coming year. Sanders has the opportunity to invest in a new line of cosmetics which is expected to have a return on investment of 12%.
80. Suppose Deed Corporation evaluates managerial performance using return on investment. Edith Carolina, as president of the company, may view the opportunity for taking on the cosmetics line differently from Michael Sanders, manager of the Cosmetics Division. What action would each of them prefer with respect to the decision of whether to take on the new cosmetics line?
| |Carolina |Sanders |
|A) |accept |reject |
|B) |reject |accept |
|C) |accept |accept |
|D) |reject |reject |
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2 Level: Easy
81. If the Deed Corporation evaluates managerial performance using residual income based on the corporate minimum required rate of return of 8%, what decision would be preferred by Edith Carolina and Michael Sanders?
| |Carolina |Sanders |
|A) |accept |reject |
|B) |reject |accept |
|C) |accept |accept |
|D) |reject |reject |
Ans: C AACSB: Analytic AICPA BB: Decision Making AICPA FN: Reporting LO: 3 Level: Easy
Use the following to answer questions 82-83:
The following information relates to the Quilt Division of TDS Corporation for last year:
| |Sales |$200,000 |
| |Contribution margin |$90,000 |
| |Net operating income |$65,000 |
| |Average operating assets |$500,000 |
| |Minimum desired rate of return |10% |
82. What was the Quilt Division's return on investment (ROI) for last year?
A) 13%
B) 18%
C) 40%
D) 45%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
Solution:
ROI = Net operating income ÷ Average operating assets
= $65,000 ÷ $500,000 = 13%
83. Assume that Quilt was being evaluated solely on the basis of residual income. Which of the following investment opportunities would Quilt want to invest in?
| |An investment that generates a return |An investment that generates a return of |
| |of 12% |16% |
|A) |Yes |Yes |
|B) |No |Yes |
|C) |Yes |No |
|D) |No |No |
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Medium
Use the following to answer questions 84-87:
Cecille Products is a division of a major corporation. Last year the division had total sales of $7,940,000, net operating income of $254,080, and average operating assets of $2,000,000. The company's minimum required rate of return is 12%.
84. The division's margin is closest to:
A) 3.2%
B) 25.2%
C) 12.7%
D) 28.4%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Level: Easy
Solution:
Margin = Net operating income ÷ Sales = $254,080 ÷ $7,940,000 = 3.2%
85. The division's turnover is closest to:
A) 0.13
B) 3.52
C) 3.97
D) 31.25
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Turnover = Sales ÷ Average operating assets = $7,940,000 ÷ $2,000,000 = 3.97
86. The division's return on investment (ROI) is closest to:
A) 2.6%
B) 12.7%
C) 0.4%
D) 50.4%
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
Solution:
ROI = Net operating income ÷ Average operating assets
= $254,080 ÷ $2,000,000 = 12.7%
87. The division's residual income is closest to:
A) $(698,720)
B) $494,080
C) $254,080
D) $14,080
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Residual income = Net operating income − (Average operating assets × Minimum required rate of return) = $254,080 − ($2,000,000 × 12%) = $254,080 − $240,000 = $14,080
Use the following to answer questions 88-91:
Deanda Products is a division of a major corporation. The following data are for the last year of operations:
| |Sales |$28,630,000 |
| |Net operating income |$1,145,200 |
| |Average operating assets |$7,000,000 |
| |The company’s minimum required rate of return |18% |
88. The division's margin is closest to:
A) 4.0%
B) 16.4%
C) 24.4%
D) 28.4%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Margin = Net operating income ÷ Sales = $1,145,200 ÷ $28,630,000 = 4.0%
89. The division's turnover is closest to:
A) 4.09
B) 0.16
C) 25.00
D) 3.51
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Turnover = Sales ÷ Average operating assets = $28,630,000 ÷ $7,000,000 = 4.09
90. The division's return on investment (ROI) is closest to:
A) 16.4%
B) 3.2%
C) 67.1%
D) 0.6%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
Solution:
ROI = Net operating income ÷ Average operating assets
= $1,145,200 ÷ $7,000,000 = 16.4%
91. The division's residual income is closest to:
A) $(4,008,200)
B) $2,405,200
C) $(114,800)
D) $1,145,200
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Residual income = Net operating income − (Average operating assets × Minimum required rate of return) = $1,145,200 − ($7,000,000 × 18%) = $1,145,200 − $1,260,000 = $(114,800)
Use the following to answer questions 92-94:
Last year the Uptown Division of Gorcen Enterprises had sales of $300,000 and a net operating income of $24,000. The average operating assets at Uptown last year amounted to $120,000.
92. Last year at Uptown the return on investment was:
A) 8%
B) 12%
C) 20%
D) 40%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
Solution:
ROI = Net operating income ÷ Average operating assets
= $24,000 ÷ $120,000 = 20%
93. Last year at Uptown the margin amounted to:
A) 8%
B) 12%
C) 20%
D) 40%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Margin = Net operating income ÷ Sales = $24,000 ÷ $300,000 = 8%
94. At Uptown the turnover last year was:
A) 0.4
B) 2.5
C) 3.2
D) 5.0
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Turnover = Sales ÷ Average operating assets = $300,000 ÷ $120,000 = 2.5
Use the following to answer questions 95-97:
Ahartz Industries is a division of a major corporation. Data concerning the most recent year appears below:
| |Sales |$7,820,000 |
| |Net operating income |$445,740 |
| |Average operating assets |$2,000,000 |
95. The division's margin is closest to:
A) 22.3%
B) 25.6%
C) 5.7%
D) 31.3%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Margin = Net operating income ÷ Sales = $445,740 ÷ $7,820,000 = 5.7%
96. The division's turnover is closest to:
A) 3.20
B) 17.54
C) 0.22
D) 3.91
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Turnover = Sales ÷ Average operating assets = $7,820,000 ÷ $2,000,000 = 3.91
97. The division's return on investment (ROI) is closest to:
A) 18.2%
B) 4.5%
C) 22.3%
D) 1.3%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
Solution:
ROI = Net operating income ÷ Average operating assets
= $445,740 ÷ $2,000,000 = 22.3%
Use the following to answer questions 98-100:
Beade Industries is a division of a major corporation. Last year the division had total sales of $16,760,000, net operating income of $770,960, and average operating assets of $4,000,000.
98. The division's margin is closest to:
A) 28.5%
B) 23.9%
C) 4.6%
D) 19.3%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Margin = Net operating income ÷ Sales = $770,960 ÷ $16,760,000 = 4.6%
99. The division's turnover is closest to:
A) 21.74
B) 4.19
C) 3.51
D) 0.19
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Turnover = Sales ÷ Average operating assets = $16,760,000 ÷ $4,000,000 = 4.19
100. The division's return on investment (ROI) is closest to:
A) 16.1%
B) 0.9%
C) 19.3%
D) 3.7%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
Solution:
ROI = Net operating income ÷ Average operating assets
= $770,960 ÷ $4,000,000 = 19.3%
Use the following to answer questions 101-102:
The West Division of Cecchetti Corporation had average operating assets of $240,000 and net operating income of $42,200 in August. The minimum required rate of return for performance evaluation purposes is 19%.
101. What was the West Division's minimum required return in August?
A) $45,600
B) $42,200
C) $53,618
D) $8,018
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Minimum required return = Minimum required rate of return × Average operating assets = 19% × $240,000 = $45,600
102. What was the West Division's residual income in August?
A) -$8,018
B) $3,400
C) -$3,400
D) $8,018
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Residual income = Net operating income − (Average operating assets × Minimum required rate of return) = $42,200 − ($240,000 × 19%) = $42,200 − $45,600 = -$3,400
Use the following to answer questions 103-104:
The Consumer Products Division of Goich Corporation had average operating assets of $800,000 and net operating income of $81,300 in May. The minimum required rate of return for performance evaluation purposes is 10%.
103. What was the Consumer Products Division's minimum required return in May?
A) $81,300
B) $8,130
C) $88,130
D) $80,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Minimum required return = Minimum required rate of return × Average operating assets = 10% × $800,000 = $80,000
104. What was the Consumer Products Division's residual income in May?
A) -$1,300
B) $8,130
C) $1,300
D) -$8,130
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Residual income = Net operating income − (Average operating assets × Minimum required rate of return) = $81,300 − ($800,000 × 10%) = $81,300 − $80,000 = $1,300
Use the following to answer questions 105-108:
(Appendix 12A) Division P of the Nyers Company makes a part that can either be sold to outside customers or transferred internally to Division Q for further processing. Annual data relating to this part are as follows:
| |Annual production capacity |80,000 |units |
| |Selling price of the item to outside customers |$35 | |
| |Variable cost per unit |$23 | |
| |Fixed cost per unit |$5 | |
Division Q of the Nyers Company requires 15,000 units per year and is currently paying an outside supplier $33 per unit. Consider each part below independently.
105. If outside customers demand only 50,000 units per year, then according to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?
A) $35
B) $33
C) $28
D) $23
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Medium
Solution:
Transfer price ≥ Variable cost per unit + (Total contribution margin on lost sales ÷ Number of units transferred) = $23 + ($0 ÷ 15,000) = $23
106. If outside customers demand 80,000 units, then according to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?
A) $35
B) $33
C) $28
D) $23
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Medium
Solution:
Transfer price ≥ Variable cost per unit + (Total contribution margin on lost sales ÷ Number of units transferred) = $23 + [($35 − $23) × 15,000] ÷ 15,000 = $23 + $12 = $35
107. If outside customers demand 80,000 units and if, by selling to Division Q, Division P could avoid $4 per unit in variable selling expense, then according to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?
A) $35
B) $21
C) $31
D) $33
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Hard
Solution:
Transfer price ≥ Variable cost per unit + (Total contribution margin on lost sales ÷ Number of units transferred) = $23 + [($35 − $23 − $4) × 15,000] ÷ 15,000 = $23 + $8 = $31
108. If outside customers demand 70,000 units, then according to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division for each of the 15,000 units needed by Q?
A) $33
B) $27
C) $28
D) $29
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Hard
Solution:
Transfer price ≥ Variable cost per unit + (Total contribution margin on lost sales ÷ Number of units transferred)
= $23 + [($35 − $23) × 5,000*] ÷ 15,000 = $23 + ($12 ÷ 3)
= $23 + $4 = $27
*Lost sales units = 15,000 − (80,000 − 70,000) = 15,000 − 10,000 = 5,000
Use the following to answer questions 109-110:
(Appendix 12A) Two of the decentralized divisions of Gamberi Electronics Corporation are the Plastics Division and the Components Division. The Plastics Division sells molded parts to both the Components Division and to customers outside the corporation.
109. Assume that the Plastics Division is currently operating at full capacity. Also assume that the Components Division wants to increase the number of parts it purchases from Plastics. In order to maintain its current level of profitability, the Plastics Division should not accept any transfer price on these additional parts that is below the:
A) variable cost of the additional parts.
B) full (absorption) cost of the additional parts.
C) variable cost of the additional parts plus the lost contribution margin on all units that could no longer be sold to customers outside the corporation.
D) full (absorption) cost of the additional parts plus the lost contribution margin on all units that could no longer be sold to customers outside the corporation.
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Medium
110. Assume that the Plastics Division is currently operating with idle capacity. Also assume that the Components Division wants to purchase from Plastics all of the additional parts that could be made with this idle capacity. In order to increase its current level of profitability, the Plastics Division should accept any transfer price on these additional parts that is above the:
A) variable cost of the additional parts.
B) full (absorption) cost of the additional parts.
C) variable cost of the additional parts plus the lost contribution margin on all units that could no longer be sold to customers outside the corporation.
D) full (absorption) cost of the additional parts plus the lost contribution margin on all units that could no longer be sold to customers outside the corporation.
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Medium
Use the following to answer questions 111-112:
(Appendix 12B) Ampulla Production Studios charges the Sound Effects Department's costs to two operating departments, Audio and Video. Charges are made on the basis of labor-hours. Information pertaining to the labor-hours for the year follow:
| | |Audio |Video |
| |Budgeted labor-hours for the year |18,000 |27,000 |
| |Actual labor-hours for the year |14,700 |27,300 |
| |Annual long-run average capacity in labor-hours |15,000 |25,000 |
The following costs pertain to the Sound Effects Department:
| | |Budgeted For Year |Actual For Year |
| |Variable costs |$315,000 |$273,000 |
| |Fixed costs |$756,000 |$819,000 |
111. How much of the Sound Effects Department's variable cost should be charged to the Video Department at year-end for performance evaluation purposes?
A) $175,000
B) $175,500
C) $177,450
D) $191,100
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium
Solution:
Variable cost charged to Video Department
= Budgeted variable cost per lab-hour × Actual labor-hours
= [$315,000 ÷ (18,000 + 27,000)] × 27,300 = ($315,000 ÷ 45,000) × 27,300
= $7 × 27,300 = $191,100
112. How much of the Sound Effects Department's fixed cost should be charged to the Audio department at year-end for performance evaluation purposes?
A) $264,600
B) $283,500
C) $302,400
D) $307,125
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium
Solution:
Fixed cost charged to Audio department
= Audio’s percent of total capacity × Budgeted fixed costs
= [15,000 ÷ (15,000 + 25,000)] × $756,000 = (15,000 ÷ 40,000) × $756,000
= 37.5% × $756,000 = $283,500
Use the following to answer questions 113-114:
(Appendix 12B) Wollan Corporation has two operating divisions-an East Division and a West Division. The company's Logistics Department services both divisions. The variable costs of the Logistics Department are budgeted at $44 per shipment. The Logistics Department's fixed costs are budgeted at $237,600 for the year. The fixed costs of the Logistics Department are determined based on peak-period demand.
| | |Percentage of Peak Period Capacity |Budgeted Shipments |
| | |Required | |
| |East Division |40% |1,300 |
| |West Division |60% |3,100 |
At the end of the year, actual Logistics Department variable costs totaled $332,880 and fixed costs totaled $253,960. The East Division had a total of 4,300 shipments and the West Division had a total of 3,000 shipments for the year.
113. How much Logistics Department cost should be allocated to the West Division at the end of the year?
A) $289,176
B) $229,644
C) $241,167
D) $274,560
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
Solution:
Logistics Department cost allocated to West Division
= (Budgeted variable cost per unit × Actual shipments) + (Budgeted fixed costs × Percent of peak capacity required)
= ($44 per shipment × 3,000 shipments) + (($237,600 × 60%)
= $132,000 + $142,560 = $274,560
114. How much actual Logistics Department cost should not be allocated to the operating divisions at the end of the year?
A) $28,040
B) $0
C) $16,360
D) $11,680
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
Solution:
Actual cost = $332,880 + $253,960 = $586,840
Cost allocated to operating divisions
= [$44 per shipment × (4,300 + 3,000 shipments)] + $237,600
= [$44 per shipment × 7,300 shipments] + $237,600 = $321,200 + $237,600
= $558,800
Actual Logistics Department cost not allocated to operating divisions
= $586,840 − $558,800 = $28,040
Use the following to answer questions 115-116:
(Appendix 12B) Azotea Corporation has two operating divisions-a Consumer Division and a Commercial Division. The company's Order Fulfillment Department provides services to both divisions. The variable costs of the Order Fulfillment Department are budgeted at $56 per order. The Order Fulfillment Department's fixed costs are budgeted at $233,700 for the year. The fixed costs of the Order Fulfillment Department are budgeted based on the peak period orders.
| | |Percentage of Peak Period Capacity |Budgeted Orders |
| | |Required | |
| |Consumer Division |40% |1,200 |
| |Commercial Division |60% |2,900 |
At the end of the year, actual Order Fulfillment Department variable costs totaled $237,390 and fixed costs totaled $239,140. The Consumer Division had a total of 1,240 orders and the Commercial Division had a total of 2,860 orders for the year.
115. How much Order Fulfillment Department cost should be allocated to the Commercial Division at the end of the year?
A) $300,380
B) $309,078
C) $332,409
D) $323,180
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
Solution:
Order Fulfillment Department cost allocated to Commercial Division
= ($56 per order × 2,860 orders) + ($233,700 × 60%)
= $160,160 + $140,220 = $300,380
116. How much actual Order Fulfillment Department cost should not be allocated to the operating divisions at the end of the year?
A) $7,790
B) $5,440
C) $13,230
D) $0
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
Solution:
Actual cost = $237,390 + $239,140 = $476,530
Cost allocated to operating divisions
= [$56 per order × (1,240 + 2,860 orders)] + $233,700
= [$56 per order × 4,100 orders] + $233,700
= $229,600 + $233,700 = $463,300
Actual Order Fulfillment cost not allocated to operating divisions
= $476,530 − $463,300 = $13,230
Use the following to answer questions 117-118:
(Appendix 12B) Frame Corporation's Maintenance Department provides services to the company's two operating divisions-the Paints Division and the Stains Division. The variable costs of the Maintenance Department are budgeted based on the number of cases produced by the operating departments. The fixed costs of the Maintenance Department are determined by the number of cases produced by the operating departments during the peak period. Data appear below:
| |Maintenance Department | |
| |Budgeted variable cost |$6 per case |
| |Budgeted total fixed cost |$328,000 |
| |Actual total variable cost |$254,014 |
| |Actual total fixed cost |$331,940 |
| | | |
| |Paints Division | |
| |Percentage of peak period capacity required |35% |
| |Budgeted cases |12,000 |
| |Actual cases |12,010 |
| | | |
| |Stains Division | |
| |Percentage of peak period capacity required |65% |
| |Budgeted cases |29,000 |
| |Actual cases |28,960 |
117. How much Maintenance Department cost should be allocated to the Stains Division at the end of the year?
A) $395,313
B) $414,187
C) $405,610
D) $386,960
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
Solution:
Maintenance Department cost allocated to Stains Division
= ($6 per case × 28,960 cases) + ($328,000 × 65%)
= $173,760 + $213,200 = $386,960
118. How much actual Maintenance Department cost should not be allocated to the operating divisions at the end of the year?
A) $12,134
B) $8,194
C) $0
D) $3,940
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
Solution:
Actual cost = $254,014 + $331,940 = $585,954
Maintenance Department cost allocated to operating divisions
= [$6 per case × (12,010 + 28,960 cases)] + $328,000
= [$6 per case × 40,970 cases] + $328,000
= $245,820 + $328,000 = $573,820
Maintenance Department cost not allocated to operating divisions
= $585,954 − $573,820 = $12,134
Essay Questions
119. Fausnaught Corporation has two major business segments—Retail and Wholesale. In October, the Retail business segment had sales revenues of $730,000, variable expenses of $409,000, and traceable fixed expenses of $117,000. During the same month, the Wholesale business segment had sales revenues of $400,000, variable expenses of $220,000, and traceable fixed expenses of $48,000. Common fixed expenses totaled $218,000 and were allocated as follows: $122,000 to the Retail business segment and $96,000 to the Wholesale business segment.
Required:
Prepare a segmented income statement in the contribution format for the company. Omit percentages; show only dollar amounts.
Ans:
| |Total |Retail |Wholesale |
|Sales |$1,130,000 |$730,000 |$400,000 |
|Variable expenses |629,000 |409,000 |220,000 |
|Contribution margin |501,000 |321,000 |180,000 |
|Traceable fixed expenses |165,000 |117,000 |48,000 |
|Segment margin |336,000 |$204,000 |$132,000 |
|Common fixed expenses |218,000 | | |
|Net operating income |$118,000 | | |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: 1 Level: Easy
120. Spiess Corporation has two major business segments—Apparel and Accessories. Data concerning those segments for December appear below:
| |Sales revenues, Apparel |$370,000 |
| |Variable expenses, Apparel |$185,000 |
| |Traceable fixed expenses, Apparel |$48,000 |
| |Sales revenues, Accessories |$670,000 |
| |Variable expenses, Accessories |$275,000 |
| |Traceable fixed expenses, Accessories |$114,000 |
Common fixed expenses totaled $309,000 and were allocated as follows: $142,000 to the Apparel business segment and $167,000 to the Accessories business segment.
Required:
Prepare a segmented income statement in the contribution format for the company. Omit percentages; show only dollar amounts.
Ans:
| |Total |Apparel |Accessories |
|Sales |$1,040,000 |$370,000 |$670,000 |
|Variable expenses |460,000 |185,000 |275,000 |
|Contribution margin |580,000 |185,000 |395,000 |
|Traceable fixed expenses |162,000 |48,000 |114,000 |
|Segment margin |418,000 |$137,000 |$281,000 |
|Common fixed expenses |309,000 | | |
|Net operating income |$109,000 | | |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: 1 Level: Easy
121. Data for September concerning Greenberger Corporation's two major business segments—Fibers and Feedstocks—appear below:
| |Sales revenues, Fibers |$750,000 |
| |Sales revenues, Feedstocks |$620,000 |
| |Variable expenses, Fibers |$368,000 |
| |Variable expenses, Feedstocks |$254,000 |
| |Traceable fixed expenses, Fibers |$98,000 |
| |Traceable fixed expenses, Feedstocks |$112,000 |
Common fixed expenses totaled $344,000 and were allocated as follows: $175,000 to the Fibers business segment and $169,000 to the Feedstocks business segment.
Required:
Prepare a segmented income statement in the contribution format for the company. Omit percentages; show only dollar amounts.
Ans:
| |Total |Fibers |Feedstocks |
|Sales |$1,370,000 |$750,000 |$620,000 |
|Variable expenses |622,000 |368,000 |254,000 |
|Contribution margin |748,000 |382,000 |366,000 |
|Traceable fixed expenses |210,000 |98,000 |112,000 |
|Segment margin |538,000 |$284,000 |$254,000 |
|Common fixed expenses |344,000 | | |
|Net operating income |$194,000 | | |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: 1 Level: Easy
122. The following data pertains to Timmins Company's operations last year:
| |Return on investment (ROI) |20% |
| |Sales |$800,000 |
| |Margin |5% |
| |Minimum required rate of return |16% |
Required:
a. Compute the company's average operating assets.
b. Compute the company's residual income for the year.
Ans:
a. ROI = Margin × Turnover
20% = 5% × Turnover
Turnover = 20% ÷ 5% = 4
Turnover = Sales ÷ Average operating assets
4 = $800,000 ÷ Average operating assets
Average operating assets = $800,000 ÷ 4 = $200,000
b. Before the residual income can be computed, we must first compute the company’s net operating income for the year:
Margin = Net operating income ÷ Sales
5% = Net operating income ÷ $800,000
Net operating income = 5% × $800,000 = $40,000
| |Average operating assets |$200,000 |
| |Minimum required rate of return |16% |
| |Minimum required net operating income |$32,000 |
| | | |
| |Actual net operating income |$40,000 |
| |Minimum required net operating income |32,000 |
| |Residual income |$8,000 |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2; 3 Level: Medium
123. Ebel Wares is a division of a major corporation. The following data are for the latest year of operations:
| |Sales |$29,120,000 |
| |Net operating income |$1,514,240 |
| |Average operating assets |$8,000,000 |
| |The company’s minimum required rate of return |18% |
Required:
a. What is the division's margin?
b. What is the division's turnover?
c. What is the division's return on investment (ROI)?
d. What is the division's residual income?
Ans:
a. Margin = Net operating income ÷ Sales = $1,514,240 ÷ $29,120,000 = 5.2%
b. Turnover = Sales ÷ Average operating assets = $29,120,000 ÷ $8,000,000 = 3.6
c. ROI = Net operating income ÷ Average operating assets = $1,514,240 ÷ $8,000,000 = 18.9%
d. Residual income = Net operating income − Minimum required rate of return × Average operating assets = $1,514,240 − 18% × $8,000,000 = $74,240
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2; 3 Level: Easy
124. The Clipper Corporation had net operating income of $380,000 and average operating assets of $2,000,000. The corporation requires a return on investment of 18%.
Required:
a. Calculate the company's return on investment (ROI) and residual income (RI).
b. Clipper Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950. Would it be in the best interests of the company to make this investment?
c. Clipper Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950. If the division planning to make the investment currently has a return on investment of 20% and its manager is evaluated based on the division's ROI, will the division manager be inclined to request funds to make this investment?
d. Clipper Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950. If the division planning to make the investment currently has a residual income of $50,000 and its manager is evaluated based on the division's residual income, will the division manager be inclined to request funds to make this investment?
Ans:
a. Return on investment = Net operating income ÷ Average operating assets = $380,000 ÷ $2,000,000 = 19%
Residual income = Net operating income − (Average operating assets × Minimum required rate of return) = $380,000 − ($2,000,000 × 0.18) = $20,000
b. Return on investment = Net operating income ÷ Average operating assets = $12,950 ÷ $70,000 = 18.5%. Since the return on investment of the project exceeds the company’s minimum required rate of return, the project should be accepted. It would increase both the company’s residual income and its return on investment.
c. The manager of the division would not be inclined to request funds to make the investment in the new project since its return on investment is only 18.5%, which is less than the division’s current return on investment of 20%. The new project would drag down the division’s return on investment.
d. The manager of the division would be inclined to request funds for the new project. The project’s return on investment of 18.5% exceeds the minimum required rate of return of 18%, which would result in an increase in residual income if the project were accepted.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2; 3 Level: Medium
125. Geballe Industries is a division of a major corporation. Last year the division had total sales of $21,420,000, net operating income of $2,270,520, and average operating assets of $6,000,000. The company's minimum required rate of return is 10%.
Required:
a. What is the division's margin?
b. What is the division's turnover?
c. What is the division's return on investment (ROI)?
Ans:
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AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
126. Ide Industries is a division of a major corporation. The following data are for the latest year of operations:
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Required:
What is the division's residual income?
Ans:
Residual income = Net operating income − Minimum required rate of return × Average operating assets = $1,743,000 - 18% × $7,000,000 = $483,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
127. Brodrick Corporation uses residual income to evaluate the performance of its divisions. The minimum required rate of return for performance evaluation purposes is 19%. The Games Division had average operating assets of $140,000 and net operating income of $25,900 in August.
Required:
What was the Games Division's residual income in August?
Ans:
|Net operating income |$25,900 |
|Minimum required return (19% × $140,000) |26,600 |
|Residual income |($700) |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
128. The Casket Division of Saal Corporation had average operating assets of $950,000 and net operating income of $135,200 in January. The company uses residual income to evaluate the performance of its divisions, with a minimum required rate of return of 13%.
Required:
What was the Casket Division's residual income in January?
Ans:
|Net operating income |$135,200 |
|Minimum required return (13% × $950,000) |123,500 |
|Residual income |$11,700 |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
129. Ulrich Company 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 $12 per unit in variable production costs.
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 $40 per unit, and requires $18 per unit in variable production costs. Boxing and shipping costs of the RB4 are $6 per unit. Boxing and shipping costs for the new special casting would be only $1 per unit, thereby saving the company $5 per unit in cost. The company is now producing and selling 100,000 units of the RB4 each year. Production and sales of this casting would drop by 25 percent if the new casting is produced. Some $240,000 in fixed production costs in the Castings Division are now being covered by the RB4 casting; 25 percent of these costs would have to be covered by the new casting if it is produced and sold to the Machine Products Division.
Required:
According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division? Show all computations.
Ans:
Transfer Price = Variable cost + Lost contribution margin per unit on outside sales
|Variable costs: | |
|Variable production costs |$12 |
|Boxing and shipping |1 |
|Total |$13 |
| | |
|Lost contribution margin on outside sales: | |
|RB4 selling price per unit |$40 |
|Variable costs per unit ($18 + $6) |24 |
|Contribution margin per unit |$16 |
|Loss in production (100,000 × 0.25) |× 25,000 |
|Total lost contribution margin |$400,000 |
$400,000 ÷ 20,000 new castings = $20 per casting.
Therefore, the lower limit on the transfer price should be:
Transfer price = $13 + $20 = $33 per casting.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting Appendix: 12A LO: 4 Level: Hard
130. Ishtaki Corporation has a Parts Division that does work for other Divisions in the company as well as for outside customers. The company's Equipment Division has asked the Parts Division to provide it with 20,000 special parts each year. The special parts would require $16.00 per unit in variable production costs.
The Equipment Division has a bid from an outside supplier for the special parts at $25.00 per unit. In order to have time and space to produce the special part, the Parts Division would have to cut back production of another part-the PW27 that it presently is producing. The PW27 sells for $38.00 per unit, and requires $29.00 per unit in variable production costs. Packaging and shipping costs of the PW27 are $2.00 per unit. Packaging and shipping costs for the new special part would be only $0.50 per unit. The Parts Division is now producing and selling 40,000 units of the PW27 each year. Production and sales of the PW27 would drop by 40% if the new special part is produced for the Equipment Division.
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 special parts per year from the Parts Division to the Equipment Division?
b. Is it in the best interests of Ishtaki Corporation for this transfer to take place? Explain.
Ans:
a. From the perspective of the Parts Division, profits would increase as a result of the transfer if and only if:
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 = [($38.00-$29.00-$2.00)×16,000*]/20,000 = $5.60
* 40%×40,000 = 16,000
Therefore, Transfer price > ($16.00+$0.50)+$5.60 = $22.10.
From the viewpoint of the Equipment Division, the transfer price must be less than the cost of buying the units from the outside supplier. Therefore, Transfer price < $25.00.
Combining the two requirements, we get the following range of transfer prices: $22.10 < Transfer price < $25.00.
b. Yes, the transfer should take place. From the viewpoint of the entire company, the cost of transferring the units within the company is $22.10, but the cost of purchasing the special parts from the outside supplier is $25.00. Therefore, the company’s profits increase on average by $2.90 for each of the special parts that is transferred within the company, even though this would cut into production and sales of another product.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting Appendix: 12A LO: 4 Level: Hard
131. Division G has asked Division F of the same company to supply it with 5,000 units of part WD26 this year to use in one of its products. Division G has received a bid from an outside supplier for the parts at a price of $19.00 per unit. Division F has the capacity to produce 25,000 units of part WD26 per year. Division F expects to sell 21,000 units of part WD26 to outside customers this year at a price of $18.00 per unit. To fill the order from Division G, Division F would have to cut back its sales to outside customers. Division F produces part WD26 at a variable cost of $12.00 per unit. The cost of packing and shipping the parts for outside customers is $2.00 per unit. These packing and shipping costs would not have to be incurred on sales of the parts to Division G.
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 5,000 parts this year from Division G to Division F?
b. Is it in the best interests of the overall company for this transfer to take place? Explain.
Ans:
a. From the perspective of Division G, profits would increase as a result of the transfer if and only if:
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 = [($18.00 - $12.00 - $2.00)×1,000*]/5,000 = $0.80
|* |Demand from outside customers |21,000 |
| |Units required by Division G |5,000 |
| |Total requirements |26,000 |
| |Capacity |25,000 |
| |Required reduction in sales to outside customers |1,000 |
Therefore, Transfer price > $12.00 + $0.80 = $12.80.
From the viewpoint of Division F, the transfer price must be less than the cost of buying the units from the outside supplier. Therefore,
Transfer price < $19.00.
Combining the two requirements, we get the following range of transfer prices:
$12.80 < Transfer price < $19.00.
b. Yes, the transfer should take place. From the viewpoint of the entire company, the cost of transferring the units within the company is $12.80, but the cost of purchasing them from the outside supplier is $19.00. Therefore, the company’s profits increase on average by $6.20 for each of the special parts that is transferred within the company.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting Appendix: 12A LO: 4 Level: Medium
132. Cannata Corporation has two operating divisions-a North Division and a South Division. The company's Logistics Department services both divisions. The variable costs of the Logistics Department are budgeted at $32 per shipment. The Logistics Department's fixed costs are budgeted at $372,300 for the year. The fixed costs of the Logistics Department are determined based on peak-period demand.
| | |Percentage of Peak Period Capacity |Budgeted Shipments |
| | |Required | |
| |North Division |25% |1,700 |
| |South Division |75% |5,600 |
At the end of the year, actual Logistics Department variable costs totaled $335,000 and fixed costs totaled $382,850. The North Division had a total of 4,700 shipments and the South Division had a total of 5,300 shipments for the year.
Required:
a. Prepare a report showing how much of the Logistics Department's costs should be charged to each of the operating divisions at the end of the year.
b. How much of the actual Logistics Department costs should not be charged to the operating divisions at the end of the year? Who should be held responsible for these uncharged costs?
Ans:
a. The amount of cost that would be charged to each of the operating divisions at the end of the year would be as follows:
| | |North Division |South Division |
| |Variable cost allocation: | | |
| |$32 × 4,700 shipments |$150,400 | |
| |$32 × 5,300 shipments | |$169,600 |
| |Fixed cost allocation: | | |
| |25% × $372,300 |93,075 | |
| |75% × $372,300 | |279,225 |
| |Total cost charged |$243,475 |$448,825 |
b. The uncharged costs are:
| | |Variable |Fixed |
| |Total actual costs incurred |$335,000 |$382,850 |
| |Costs charged |320,000 |372,300 |
| |Spending variance |$15,000 |$10,550 |
The spending variance represents the difference between the Logistics Department’s actual costs and what those costs should have been, given the actual level of activity. This difference is properly the responsibility of the Logistics Department and should not be charged to the operating divisions.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement Appendix: 12B LO: 5 Level: Medium
133. Sauseda Corporation has two operating divisions-an Inland Division and a Coast Division. The company's Customer Service Department provides services to both divisions. The variable costs of the Customer Service Department are budgeted at $38 per order. The Customer Service Department's fixed costs are budgeted at $433,200 for the year. The fixed costs of the Customer Service Department are determined based on the peak period orders.
| | |Percentage of Peak Period Capacity Required |Budgeted Orders |
| |Inland Division |40% |2,400 |
| |Coast Division |60% |5,200 |
At the end of the year, actual Customer Service Department variable costs totaled $303,240 and fixed costs totaled $450,280. The Inland Division had a total of 2,430 orders and the Coast Division had a total of 5,170 orders for the year.
Required:
a. Prepare a report showing how much of the Customer Service Department's costs should be charged to each of the operating divisions at the end of the year.
b. How much of the actual Customer Service Department costs should not be charged to the operating divisions at the end of the year? Who should be held responsible for these uncharged costs?
Ans:
a. The amount of cost that would be charged to each of the operating divisions at the end of the year would be as follows:
| | |Inland Division |Coast Division |
| |Variable cost allocation: | | |
| |$38 × 2,430 orders |$92,340 | |
| |$38 × 5,170 orders | |$196,460 |
| |Fixed cost allocation: | | |
| |40% × $433,200 |173,280 | |
| |60% × $433,200 | |259,920 |
| |Total cost charged |$265,620 |$456,380 |
b. The uncharged costs are:
| | |Variable |Fixed |
| |Total actual costs incurred |$303,240 |$450,280 |
| |Costs charged |288,800 |433,200 |
| |Spending variance |$14,440 |$17,080 |
The spending variance represents the difference between the Customer Service Department’s actual costs and what those costs should have been, given the actual level of activity. This difference is properly the responsibility of the Customer Service Department and should not be charged to the operating divisions.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement Appendix: 12B LO: 5 Level: Medium
134. Nealon Corporation's Maintenance Department provides services to the company's two operating divisions-the Paints Division and the Stains Division. The variable costs of the Maintenance Department are budgeted based on the number of cases produced by the operating departments. The fixed costs of the Maintenance Department are determined based on the number of cases produced by the operating departments during the peak period. Data appear below:
| |Maintenance Department | |
| |Budgeted variable cost |$7 per case |
| |Budgeted total fixed cost |$600,000 |
| |Actual total variable cost |$432,072 |
| |Actual total fixed cost |$602,860 |
| | | |
| |Paints Division | |
| |Percentage of peak period capacity required |30% |
| |Budgeted cases |15,000 |
| |Actual cases |15,020 |
| | | |
| |Stains Division | |
| |Percentage of peak period capacity required |70% |
| |Budgeted cases |45,000 |
| |Actual cases |44,990 |
Required:
a. Prepare a report showing how much of the Maintenance Department's costs should be charged to each of the operating divisions at the end of the year.
b. How much of the actual Maintenance Department costs should not be charged to the operating divisions at the end of the year? Who should be held responsible for these uncharged costs?
Ans:
a. The amount of cost that would be charged to each of the operating divisions at the end of the year would be as follows:
| | |Paints Division |Stains Division |
| |Variable cost allocation: | | |
| |$7 × 15,020 orders |$105,140 | |
| |$7 × 44,990 orders | |$314,930 |
| |Fixed cost allocation: | | |
| |30% × $600,000 |180,000 | |
| |70% × $600,000 | |420,000 |
| |Total cost charged |$285,140 |$734,930 |
b. The uncharged costs are:
| | |Variable |Fixed |
| |Total actual costs incurred |$432,072 |$602,860 |
| |Costs charged |420,070 |600,000 |
| |Spending variance |$12,002 |$2,860 |
The spending variance represents the difference between the Maintenance Department’s actual costs and what those costs should have been, given the actual level of activity. This difference is the responsibility of the Maintenance Department and should not be charged to the operating divisions.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement Appendix: 12B LO: 5 Level: Easy
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