RESPONSIBILITY ACCOUNTING

Sample Problems
Problem 1 - Omar Company produces and sells only two products that are referred to as RIPS and PITS. Production is
“for order” only, and no finished goods inventories are maintained; work in process inventories are negligible.

RIPS PITS
Sales.................................................... ₱180,000 ₱180,000
Manufacturing costs:
Materials.......................................... ₱18,000 ₱24,000
Labor................................................ ₱54,000 ₱48,000
Overhead.......................................... ₱72,000 ₱84,000
Selling expenses.................................. ₱14,400 ₱10,080
Administrative expenses..................... ₱12,000 ₱18,000

An analysis has been made of the manufacturing overhead. Although the items listed above are traceable to the products,
₱36,000 of the overhead assigned to RIPS and ₱72,000 of that assigned to PITS is fixed. The balance of the overhead is
variable.
Selling expenses consist entirely of commissions paid as a percentage of sales. Direct labor is completely variable.
Administrative expenses in the data above are fixed and cannot be traced to the products but have been arbitrarily
allocated to the products.
Required:
Prepare a segmented income statement, in total and for the two products. Use the contribution approach.

Problem 2 - Financial data for Redbone Company for last year appear below:
Redbone Company
Statements of Financial Position

Beginning Ending
Balance Balance
Assets:
Cash.................................................................. ₱120,000 ₱160,000
Accounts receivable......................................... 110,000 100,000
Inventory.......................................................... 50,000 60,000
Plant and equipment (net)................................ 180,000 160,000
Investment in Balsam Company...................... 50,000 60,000
Land (undeveloped)......................................... 120,000 120,000
Total assets....................................................... ₱630,000 ₱660,000

Liabilities and owners’ equity:

Accounts payable............................................. ₱ 70,000 ₱ 90,000
Long-term debt................................................. 500,000 500,000
Owners’ equity................................................. 60,000 70,000
Total liabilities and owners’ equity.................. ₱630,000 ₱660,000
 Redbone Company
Income Statement

Sales................................................................. ₱1,222,000
Less operating expenses................................... 1,099,800
Net operating income....................................... 122,200
Less interest and taxes:
Interest expense............................................ ₱60,000
Tax expense.................................................. 20,000 80,000
Net income....................................................... ₱ 42,200

The company paid dividends of ₱32,200 last year. The “Investment in Balsam Company” on the statement of financial
position represents an investment in the stock of another company.
Required:
1. Compute the company's margin, turnover, and return on investment for last year.
2. The Board of Directors of Redbone has set a minimum required return of 25%. What was the company's residual
income last year?

Problem 3 - Ivan Wares is a division of a major corporation. The following data are for the latest year of operations:
Sales......................................................................................... ₱10,890,000
Net operating income............................................................... ₱609,840
Average operating assets......................................................... ₱3,000,000
The company’s minimum required rate of return.................... 16%

Required:
1. What is the division's margin?
2. What is the division's turnover?
3. What is the division's return on investment (ROI)?
4. What is the division's residual income?
Problem 4 - Farrel Wares is a division of a major corporation. The following data are for the latest year of operations:
Sales......................................................................................... ₱25,550,000
Net operating income............................................................... ₱1,149,750
Average operating assets......................................................... ₱7,000,000
The company’s minimum required rate of return.................... 14%

Required:
1.What is the division's return on investment (ROI)?
2.What is the division's residual income?

Problem 5 - Gary Industries is a division of a major corporation. Last year the division had total sales of ₱7,920,000, net
operating income of ₱190,080, and average operating assets of ₱3,000,000. The company's minimum required rate of
return is 16%.
Required:
1. What is the division's margin?
2. What is the division's turnover?
3. What is the division's return on investment (ROI)?

Problem 6 - Hady Fabrication is a division of a major corporation. Last year the division had total sales of ₱6,480,000, net
operating income of ₱667,440, and average operating assets of ₱2,000,000. The company's minimum required rate of
return is 10%.
Required:
What is the division's return on investment (ROI)?
Problem 7 - Dom Industries is a division of a major corporation. The following data are for the latest year of operations:
Sales........................................................................................ ₱12,480,000
Net operating income.............................................................. ₱449,280
Average operating assets......................................................... ₱4,000,000
The company’s minimum required rate of return................... 12%

Required:
What is the division's residual income?

Problem 8 - Fedora Corporation has a Parts Division that does work for other Divisions in the company as well as for
outside customers. The company's Machinery Division has asked the Parts Division to provide it with 4,000 special parts
each year. The special parts would require ₱23.00 per unit in variable production costs.
The Machinery Division has a bid from an outside supplier for the special parts at ₱37.00 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 YR24 that
it presently is producing. The YR24 sells for ₱40.00 per unit, and requires ₱28.00 per unit in variable production costs.
Packaging and shipping costs of the YR24 are ₱3.00 per unit. Packaging and shipping costs for the new special part would
be only ₱1.50 per unit. The Parts Division is now producing and selling 15,000 units of the YR24 each year. Production
and sales of the YR24 would drop by 20% if the new special part is produced for the Machinery Division.
Required:
1. What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing
to the transfer of 4,000 special parts per year from the Parts Division to the Machinery Division?
2. Is it in the best interests of Fedora Corporation for this transfer to take place? Explain.

Problem 9 - Division B has asked Division A of the same company to supply it with 6,000 units of part L763 this year to
use in one of its products. Division B has received a bid from an outside supplier for the parts at a price of ₱17.00 per unit.
Division A has the capacity to produce 30,000 units of part L763 per year. Division A expects to sell 27,000 units of part
L763 to outside customers this year at a price of ₱18.00 per unit. To fill the order from Division B, Division A would
have to cut back its sales to outside customers. Division A produces part L763 at a variable cost of ₱9.00 per unit. The
cost of packing and shipping the parts for outside customers is ₱1.00 per unit. These packing and shipping costs would not
have to be incurred on sales of the parts to Division B.
Required:
1. What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing
to the transfer of 6,000 parts this year from Division B to Division A?
2. Is it in the best interests of the overall company for this transfer to take place? Explain.