Chapter 12

Segment Reporting, Profitability Analysis,

and Decentralization

True/False

1. Contribution margin and segment margin mean the same thing.

F
Medium

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

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

T store.
Medium

4. Segmented statements for internal use should be prepared in the

T contribution format.
Easy

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

6. In responsibility accounting, each segment in an organization should

F be charged with the costs for which it is responsible and over which
Medium it has control plus its share of common organizational costs.

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

8. Some managers believe that residual income is superior to return on

T investment as a means of measuring performance, since it encourages
Easy the manager to make investment decisions that are more consistent with
the interests of the company as a whole.

9. The return on investment can ordinarily be improved by either

T increasing sales, reducing expenses, or reducing operating assets.
Easy

Managerial Accounting, 9/e 437

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

11. Allocations of corporate headquarters expenses to divisions used in

T return on investment calculations should be limited to the cost of
Medium those actual services provided by central headquarters which the
divisions otherwise would have to provide for themselves.

12. The use of return on investment as a performance measure may lead

T managers to make decisions that are not in the best interests of the
Medium company as a whole.

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

14. (Appendix) When a division is operating at full capacity, the transfer

T price to other divisions should include opportunity costs.
Medium

15. (Appendix) When an intermediate market price for a transferred item

F exists, it represents a lower limit on the charge that should be made
Hard on transfers between divisions.

Multiple Choice

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

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

18. Turnover is computed by dividing average operating assets into:

D a. invested capital.
Easy b. total assets.
c. net operating income.
d. sales.

438Managerial Accounting, 9/e

19. Which of the following statements provide(s) an argument in favor of
C including only a plant's net book value rather than gross book value
Medium as part of operating assets in the ROI computation?

I. Net book value is consistent with how plant and

equipment items are reported on a balance sheet.
II. Net book value is consistent with the computation of
net operating income, which includes depreciation as an
operating expense.
III. Net book value allows ROI to decrease over time as
assets get older.

a. Only I.
b. Only III.
c. Only I and II.
d. Only I and III.

20. In computing the margin in a ROI analysis, which of the following is

A used?
Medium a. Sales in the denominator
b. Net operating income in the denominator
c. Average operating assets in the denominator
d. Residual income in the denominator

21. Which of the following is not an operating asset?

D a. Cash
Easy b. Inventory
c. Plant equipment
d. Common stock

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

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

24. A company's return on investment is the:

B a. margin divided by turnover.
Easy b. margin multiplied by turnover.
c. turnover divided by average operating assets.
d. turnover multiplied by average operating assets.

25. All other things equal, a company's return on investment is affected

A by a change in:
Easy
Turnover Margin
a. Yes Yes
b. No Yes
c. No No
d. Yes No

26. Net operating income is defined as:

Managerial Accounting, 9/e 439

D a. sales minus variable expenses.
Medium b. sales minus variable expenses and traceable fixed expenses.
c. contribution margin minus traceable and common fixed expenses.
d. net income plus interest and taxes.

27. Delmar Corporation is considering the use of residual income as a

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

28. Suppose a manager is to be measured by residual income. Which of the

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

29. The performance of the manager of Division A is measured by residual

B income. Which of the following would increase the manager's
Medium performance measure?
a. Increase in average operating assets.
b. Decrease in average operating assets.
c. Increase in minimum required return.
d. Decrease in net operating income.

30. (Appendix) When the selling division in an internal transfer has

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

31. A segment of a business responsible for both revenues and expenses

C would be called:
Easy a. a cost center.
b. an investment center.
c. a profit center.
d. residual income.

32. Which of the following are benefits of decentralization?

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

440Managerial Accounting, 9/e

 put forth his/her best efforts.
a. Only I and II.
b. Only II and III.
c. Only I and III.
d. Only I.

33. Consider the following three statements:

C
Medium I. A profit center has control over both cost and revenue.
II. An investment center has control over invested funds,
but not over costs and revenue.
III. A cost center has no control over sales

Which statement(s) is/are correct?

a. Only I
b. Only II
c. Only I and III
d. Only I and II

34. Lyons Company consists of two divisions, A and B. Lyons Company

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

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

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

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

Managerial Accounting, 9/e 441

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

39. Denner Company has two divisions, A and B, that reported the following
C results for October:
Hard
Division A Division B
Sales .................... $90,000 $150,000
Variable expenses as a
percentage of sales .... 70% 60%
Segment margin ........... $ 2,000 $ 23,000

If common fixed expenses were $31,000, total fixed expenses must have
been:
a. $31,000.
b. $62,000.
c. $93,000.
d. $52,000.

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

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

442Managerial Accounting, 9/e

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

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

44. Sales and average operating assets for Company P and Company Q are
C given below:
Hard
Sales Average Operating Assets
Company P .... $20,000 $ 8,000
Company Q .... $50,000 $10,000

What is the margin that each company will have to earn in order to
generate a return on investment of 20%?
a. 12% and 16%.
b. 50% and 100%.
c. 8% and 4%.
d. 2.5% and 5%.

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

46. Last year a company had stockholder's equity of $160,000, net

C operating income of $16,000 and sales of $100,000. The turnover was
Medium 0.5. The return on investment (ROI) was:
a. 10%.
b. 9%.
c. 8%.
d. 7%.

Managerial Accounting, 9/e 443

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

48. Cable Company had the following results for the year just ended:
C
Medium Net operating income ...... $2,500
Turnover .................. 4
Return on investment ...... 20%

Cable Company's average operating assets during the year were:

a. $50,000.
b. $200,000.
c. $12,500.
d. $10,000.

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

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

51. (Appendix) Division X makes a part that it sells to customers outside

A of the company. Data concerning this part appear below:
Medium
Selling price to outside customers ..... $75
Variable cost per unit ................. $50
Total fixed costs ...................... $400,000
Capacity in units ...................... 25,000

Division Y of the same company would like to use the part manufactured
by Division X in one of its products. Division Y currently purchases a
similar part made by an outside company for $70 per unit and would
substitute the part made by Division X. Division Y requires 5,000
units of the part each period. Division X can already sell all of the
units it can produce on the outside market. What should be the lowest
acceptable transfer price from the perspective of Division X?
a. $75.
b. $66.
c. $16.
d. $50.

52. (Appendix) Division X makes a part that it sells to customers outside

D of the company. Data concerning this part appear below:
Medium
Selling price to outside customers $50

444Managerial Accounting, 9/e

 Variable cost per unit ........... $30
Total fixed costs ................ $400,000
Capacity in units ................ 25,000

Division Y of the same company would like to use the part manufactured
by Division X in one of its products. Division Y currently purchases a
similar part made by an outside company for $49 per unit and would
substitute the part made by Division X. Division Y requires 5,000
units of the part each period. Division X has ample excess capacity to
handle all of Division Y's needs without any increase in fixed costs
and without cutting into outside sales. According to the transfer
pricing formula, what is the lower limit on the transfer price?
a. $50.
b. $49.
c. $46.
d. $30.

53. (Appendix) Division A makes a part that it sells to customers outside

D of the company. Data concerning this part appear below:
Hard
Selling price to outside customers .... $40
Variable cost per unit ................ $30
Total fixed costs ..................... $10,000
Capacity in units ..................... 20,000

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

54. (Appendix) Division X of Charter Corporation makes and sells a single

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

Managerial Accounting, 9/e 445

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

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

Reference: 12-1
Ieso Company has two stores: J and K. During November, Ieso Company reported a net
income of $30,000 and sales of $450,000. The contribution margin in Store J was
$100,000, or 40% of sales. The segment margin in Store K was $30,000, or 15% of
sales. Traceable fixed expenses are $60,000 in Store J, and $40,000 in Store K.

57. Sales in Store J totaled:

B a. $400,000.
Medium b. $250,000.
Refer To: c. $150,000.
12-1 d. $100,000.

58. Variable expenses in Store K totaled:

D a. $70,000.
Hard b. $110,000.
Refer To: c. $200,000.
12-1 d. $130,000.

59. Ieso Company's total fixed expenses for the year were:
C a. $40,000.
Hard b. $100,000
Refer To: c. $140,000.
12-1 d. $170,000.

60. The segment margin ratio in Store J was:

A a. 16%.
Hard b. 24%.
Refer To: c. 40%.
12-1 d. 60%.

Reference: 12-2
Canon Company has two sales areas: North and South. During last year, the
contribution margin in the North Area was $50,000, or 20% of sales. The segment

446Managerial Accounting, 9/e

margin in the South was $15,000, or 8% of sales. Traceable fixed costs are $15,000 in
the North and $10,000 in the South. During last year, the company reported total net
income of $26,000.

61. The total fixed costs (traceable and common) for Canon Company for the
A year were:
Hard a. $49,000.
Refer To: b. $25,000.
12-2 c. $24,000.
d. $50,000.

62. The variable costs for the South Area for the year were:
C a. $230,000.
Hard b. $185,000.
Refer To: c. $162,500.
12-2 d. $65,000.

Reference: 12-3
The following information is available on Company A:

Sales ............................. $900,000

Net operating income .............. 36,000
Stockholders' equity .............. 100,000
Average operating assets .......... 180,000
Minimum required rate of return ... 15%

63. Company A's residual income is:

A a. $9,000.
Medium b. $21,000.
Refer To: c. $45,000.
12-3 d. $24,000.

64. Company A's return on investment (ROI) is:

C a. 4%.
Medium b. 15%.
Refer To: c. 20%.
12-3 d. 36%.

Reference: 12-4
The following data are available for the South Division of Redride Products, Inc. and
the single product it makes:

Unit selling price ........... $20

Variable cost per unit ....... $12
Annual fixed costs ........... $280,000
Average operating assets ..... $1,500,000

65. How many units must South sell each year to have an ROI of 16%?
D a. 240,000.
Hard b. 1,300,000.
Refer To: c. 52,000.
12-4 d. 65,000.

66. If South wants a residual income of $50,000 and the minimum required
B rate of return is 10%, the annual turnover will have to be:
Hard a. 0.32.
Refer To: b. 0.80.
12-4 c. 1.25.
d. 1.50.

Managerial Accounting, 9/e 447

Reference: 12-5
The Axle Division of LaBate Company makes and sells only one product. Annual data on
the Axle Division's single product follow:

Unit selling price .................. $50

Unit variable cost .................. $30
Total fixed costs ................... $200,000
Average operating assets ............ $750,000
Minimum required rate of return ..... 12%

67. If Axle sells 15,000 units per year, the residual income should be:
D a. $30,000.
Medium b. $100,000.
Refer To: c. $50,000.
12-5 d. $10,000.

68. If Axle sells 16,000 units per year, the return on investment should
C be:
Medium a. 12%.
Refer To: b. 15%.
12-5 c. 16%.
d. 18%.

69. Suppose the manager of Axle desires a return on investment of 22%. In

C order to achieve this goal, Axle must sell how many units per year?
Hard a. 14,500.
Refer To: b. 16,750.
12-5 c. 18,250.
d. 19,500.

70. Suppose the manager of Axle desires an annual residual income of

B $45,000. In order to achieve this, Axle should sell how many units per
Hard year?
Refer To: a. 14,500.
12-5 b. 16,750.
c. 18,250.
d. 19,500.

Reference: 12-6
Estes Company has assembled the following data for its divisions for the past year:

Division A Division B
Average operating assets ... $500,000 ?
Sales ...................... ? $520,000
Net operating income ....... $100,000 $20,300
Turnover ................... 1.25 4
Margin ..................... ? 3.9%
Minimum required rate
of return ................ 14% ?
Residual income ............ ? $6,000

71. Division A's sales are:

B a. $400,000.
Hard b. $625,000.
Refer To: c. $125,000.
12-6 d. $200,000.

72. Division A's residual income is:

B a. $20,000.
Medium b. $30,000.

448Managerial Accounting, 9/e

Refer To: c. $35,000.
12-6 d. $45,000.

73. Division B's average operating assets is:

D a. $81,200.
Medium b. $2,080,000.
Refer To: c. $1,333,333.
12-6 d. $130,000.

Reference: 12-7
The Holmes Division recorded operating data as follows for the past year:

Sales .......................... $200,000

Net operating income ........... 25,000
Average operating assets ....... 100,000
Stockholders' equity ........... 80,000
Residual income ................ 13,000

74. For the past year, the return on investment was:

C a. 15.75%.
Medium b. 20.50%.
Refer To: c. 25.00%
12-7 d. 31.25%.

75. For the past year, the margin was:

A a. 12.50%.
Medium b. 13.00%.
Refer To: c. 14.75%.
12-7 d. 15.00%.

76. For the past year, the turnover was:

D a. 25.
Medium b. 10.
Refer To: c. 4.
12-7 d. 2.

77. For the past year, the minimum required rate of return was:
B a. 11%.
Hard b. 12%.
Refer To: c. 13%.
12-7 d. 14%.

Reference: 12-8
The Baily Division recorded operating data as follows for the past two years:

Year 1 Year 2
Sales ....................... ? $1,200,000
Stockholders' equity ........ $540,000 720,000
Average operating assets .... $600,000 ?
Margin ...................... 15% ?
Return on investment ........ 22.5% 18%

Baily Division's turnover was exactly the same in both Year 1 and Year 2.

78. Sales in Year 1 amounted to:

B a. $400,000.
Hard b. $900,000.
Refer To: c. $750,000.
12-8 d. $1,200,000.

Managerial Accounting, 9/e 449

79. The net operating income in Year 1 was:
B a. $90,000.
Hard b. $135,000.
Refer To: c. $140,000.
12-8 d. $150,000.

80. The margin in Year 2 was:

D a. 18.75%.
Hard b. 27.00%.
Refer To: c. 22.50%.
12-8 d. 12.00%.

81. The average operating assets in Year 2 were:

C a. $720,000.
Hard b. $750,000.
Refer To: c. $800,000.
12-8 d. $900,000.

Reference: 12-9
The following selected data pertain to the belt division of Allen Corp. for last
year:

Sales ............................ $500,000

Average operating assets ......... $200,000
Net operating income ............. $80,000
Turnover ......................... 2.5
Minimum required return .......... 20%

82. How much is the return on investment?

A a. 40%
Medium b. 16%
CPA c. 20%
adapted d. 15%
Refer To:
12-9

83. How much is the residual income?

C a. $100,000
Medium b. $80,000
CPA c. $40,000
adapted d. $420,000
Refer To:
12-9

Reference: 12-10
The following selected data pertain to Beck Co.'s Beam Division for last year:

Sales ............................. $400,000

Variable expenses ................. $100,000
Traceable fixed expenses .......... $250,000
Average operating assets .......... $200,000
Minimum required rate of return ... 20%

84. How much is the residual income?

C a. $40,000
Medium b. $50,000
CPA c. $10,000
adapted d. $80,000
Refer To:
12-10

450Managerial Accounting, 9/e

85. How much is the return on the investment?
A a. 25%
Medium c. 20%
CPA b. 12.5%
adapted d. 40%
Refer To:
12-10

Reference: 12-11
The Northern Division of the Gordon Company reported the following data for last
year:

Sales ................................. $900,000

Stockholders' Equity .................. $320,000
Operating Expenses .................... $700,000
Average Operating Assets .............. $500,000
Interest Expense ...................... $ 50,000
Tax Expense ........................... $ 60,000
Minimum Required Rate of Return ....... 15%

86. The return on investment last year for the Northern Division was:
C a. 28.125%.
Medium b. 62.5%.
Refer To: c. 40%.
12-11 d. 18%.

87. The residual income for the Northern Division last year was:
B a. $90,000.
Medium b. $125,000.
Refer To: c. $48,000.
12-11 d. $135,000.

Reference: 12-12
Harstin Corporation has provided the following data:

Sales .......................... $625,000

Gross margin ................... 70,000
Net operating income ........... 50,000
Stockholders' equity ........... 90,000
Average operating assets ....... 250,000
Residual income ................ 20,000

88. The margin for the past year was:

D a. 19.2%.
Medium b. 14.4%.
Refer To: c. 11.2%.
12-12 d. 8.0%.

89. The return on investment for the past year was:

B a. 28%.
Medium b. 20%.
Refer To: c. 36%.
12-12 d. 8%.

Managerial Accounting, 9/e 451

90. The turnover for the past year was:
A a. 2.5.
Medium b. 6.94.
Refer To: c. 2.98.
12-12 d. 1.4.

91. The minimum required rate of return for the past year was:
C a. 36%.
Medium b. 8%.
Refer To: c. 12%.
12-12 d. 40%.

Reference: 12-13
The Millard Division's operating data for the past two years are provided below:

Year 1 Year 2
Return on investment ...... 12% 36%
Stockholders' equity ...... $ 800,000 $ 500,000
Net operating income ...... ? 360,000
Turnover .................. ? 3
Margin .................... ? ?
Sales ..................... 3,200,000 ?

Millard Division's margin in Year 2 was 150% of the margin in Year 1.

92. The net operating income for Year 1 was:

B a. $240,000.
Hard b. $256,000.
Refer To: c. $384,000.
12-13 d. $768,000.

93. The turnover for Year 1 was:

B a. 1.2.
Hard b. 1.5.
Refer To: c. 3.0.
12-13 d. 4.0.

94. The sales for Year 2 were:

C a. $1.200,000.
Hard b. $3,200,000.
Refer To: c. $3,000,000.
12-13 d. $3,333,333.

95. The average operating assets for Year 2 were:

A a. $1,000,000.
Hard b. $1,080,000.
Refer To: c. $1,200,000.
12-13 d. $1,388,889.

452Managerial Accounting, 9/e

Reference: 12-14
(Appendix) Division A makes a part with the following characteristics:

Production capacity in units ........ 15,000 units

Selling price to outside customers .. $25
Variable cost per unit .............. $18
Total fixed costs ................... $60,000

Division B, another division of the same company, would like to purchase 5,000 units
of the part each period from Division A. Division B is now purchasing these parts
from an outside supplier at a price of $24 each.

96. Suppose that Division A has ample idle capacity to handle all of
A Division B's needs without any increase in fixed costs and without
Medium cutting into sales to outside customers. If Division B continues to
Refer To: purchase parts from an outside supplier rather then from Division A, the
12-14 company as a whole will be:
a. worse off by $30,000 each period.
b. worse off by $10,000 each period.
c. better off by $15,000 each period.
d. worse off by $35,000 each period.

97. Suppose that Division A is operating at capacity and can sell all of its
C output to outside customers at its usual selling price. If Division A
Medium sells the parts to Division B at $24 per unit (Division B’s outside
Refer To: price), the company as a whole will be:
12-14 a. better off by $5,000 each period.
b. worse off by $15,000 each period,
c. worse off by $5,000 each period.
d. there will be no change in the status of the company as a whole,

Reference: 12-15
(Appendix) Division A produces a part with the following characteristics:

Capacity in units ............. 50,000

Selling price per unit ........ $30
Variable costs per unit ....... $18
Fixed costs per unit .......... $3

Division B, another division in the company, would like to buy this part from
Division A. Division B is presently purchasing the part from an outside source at
$28 per unit. If Division A sells to Division B, $1 in variable costs can be avoided.

98. Suppose Division A is currently operating at capacity and can sell all
B of the units is produces on the outside market for its usual selling
Medium price. From the point of view of Division A, any sales to Division B
Refer To: should be priced no lower than:
12-15 a. $27.
b. $29.
c. $20.
d. $28.

Managerial Accounting, 9/e 453

99. Suppose that Division A has ample idle capacity to handle all of
D Division B's needs without any increase in fixed costs and without
Medium cutting into its sales to outside customers. From the point of view of
Refer To: Division A, any sales to Division B should be priced no lower than:
12-15 a. $29.
b. $30.
c. $18.
d. $17.

Reference: 12-16
(Appendix) The Vega Division of Ace Company makes wheels which can either be sold to
outside customers or transferred to the Walsh Division of Ace Company. Last month the
Walsh Division bought all 4,000 of its wheels from the Vega Division for $42 each.
The following data are available from last month's operations for the Vega Company:

Capacity ...................................... 12,000 wheels

Selling price per wheel to outside customers .. $45
Variable costs per wheel when sold to
outside customers ....................... $30

If the Vega Division sells wheels to the Walsh Division, Vega can avoid $2 per wheel
in sales commissions. An outside supplier has offered to supply wheels to the Walsh
Division for $41 each.

100. Suppose that the Vega Division has ample idle capacity so that transfers
A to the Walsh Division would not cut into its sales to outside customers.
Medium What should be the lowest acceptable transfer price from the perspective
Refer To: of the Vega Division?
12-16 a. $28
b. $30
c. $42
d. $45

101. What is the maximum price per wheel that Walsh should be willing to pay
B Vega?
Medium a. $28
Refer To: b. $41
12-16 c. $42
d. $45

102. Suppose that Vega can sell 9,000 wheels each month to outside consumers,
B so transfers to the Walsh Division cut into outside sales. What should
Hard be the lowest acceptable transfer price from the perspective of the Vega
Refer To: Division?
12-16 a. $28.00
b. $31.75
c. $41.00
d. $42.00

Reference: 12-17
(Appendix) The Post Division of the M.T. Woodhead Company produces basic posts which
can be sold to outside customers or sold to the Lamp Division of the M.T. Woodhead
Company. Last Year the Lamp Division bought all of its 25,000 posts from Post at
$1.50 each. The following data are available for last year's activities of the Post
Division:

Capacity in units .............. 300,000 posts

Selling price per post
to outside customers ........ $1.75
Variable costs per post ........ $0.90
Fixed costs, total ............. $150,000

454Managerial Accounting, 9/e

The total fixed costs would be the same for all the alternatives considered below.

103. Suppose there is ample capacity so that transfers of the posts to the
A Lamp Division do not cut into sales to outside customers. What is the
Medium lowest transfer price that would not reduce the profits of the Post
Refer To: Division?
12-17 a. $0.90.
b. $1.35.
c. $1.41.
d. $1.75.

104. Suppose the transfers of posts to the Lamp Division cut into sales to
C outside customers by 15,000 units. What is the lowest transfer price
Hard that would not reduce the profits of the Post Division?
Refer To: a. $0.90.
12-17 b. $1.35.
c. $1.41.
d. $1.75.

105. Suppose the transfers of posts to the Lamp Division cut into sales to
C outside customers by 15,000 units. Further suppose that an outside
Hard supplier is willing to provide the Lamp Division with basic posts at
Refer To: $1.45 each. If the Lamp Division had chosen to buy all of its posts from
12-17 the outside supplier instead of the Post Division, the change in net
operating income for the company as a whole would have been:
a. $1,250 decrease.
b. $10,250 increase.
c. $1,000 decrease.
d. $13,750 decrease.

Essay

106. The Winter Products Division of American Sports Corporation produces

Medium and markets two products for use in the snow: Sleds and Saucers. The
following data were gathered on activities last month:

Sleds Saucers
Sales in units ................... 2,000 9,000
Selling price per unit ........... $50 $20
Variable production costs per unit $20 $5
Traceable fixed production costs $12,000 $33,000
Variable selling expenses per unit $2 $1
Traceable fixed selling expenses $2,000 $3,000
Allocated division adminis-
trative expenses ............... $40,000 $72,000

Required:

Prepare a segmented income statement in the contribution format for last

month, showing both "Amount" and "Percent" columns for the division as a
whole and for each product.

Answer:
Segments o
Total Company Sleds Saucers o
Sales ........ $280,000 100% $100,000 100% $180,000 100%
Variable
expenses ... 98,000 35 44,000 44 54,000 30
Contribution
margin ... 182,000 65 56,000 56 126,000 70
Traceable fixed

Managerial Accounting, 9/e 455

 expenses ... 50,000 18 14,000 14 36,000 20
Segment
margin ..... 132,000 47 $ 42,000 42% $ 90,000 50%
Common fixed
expenses ... 112,000 40
Net Income ... $ 20,000 7%

107. The IT Corporation produces and markets two types of electronic

Medium calculators: Model 11 and Model 12. The following data were gathered
on activities last month:

Model 11 Model 12
Sales in units ........................ 5,000 3,000
Selling price per unit ................ $50 $100
Variable production costs per unit .... $10 $26
Traceable fixed production costs ...... $100,000 $150,000
Variable selling expenses per unit .... $5 $6
Traceable fixed selling expenses ...... $5,000 $7,500
Allocated division administrative
expenses ............................. $50,000 $60,000

Required:

Prepare a segmented income statement in the contribution format for last

month, showing both "Amount" and "Percent" columns for the division as a
whole and for each product.

Answer:
Segments
Total Company Model 11 Model 12
Sales $550,000 100% $250,000 100% $300,000 100.0%
Variable
expenses .... 171,000 31 75,000 30 96,000 32.0
Contribution
margin ...... $379,000 69% $175,000 70% $204,000 68.0%
Traceable fixed
expenses .... 262,500 48 105,000 42 157,500 52.5
Segment
margin ...... $116,500 21% $ 70,000 28% $ 46,500 15.5%
Common fixed
expenses .... 110,000 20
Net Income .... $ 6,500 1%

108. Financial data for Beaker Company for last year appear below:
Medium
Beaker Company
Statements of Financial Position

Beginning Ending
Balance Balance
Assets:
Cash ................................ $ 50,000 $ 70,000
Accounts receivable ................. 20,000 25,000
Inventory ........................... 30,000 35,000
Plant and equipment (net) ........... 120,000 110,000
Investment in Cedar Company ......... 80,000 100,000
Land (undeveloped) .................. 170,000 170,000
Total assets ....................... $470,000 $510,000

456Managerial Accounting, 9/e

 Liabilities and owners' equity:
Accounts payable .................... $ 70,000 $ 90,000
Long-term debt ...................... 250,000 250,000
Owners' equity ...................... 150,000 170,000
Total liabilities
and owners' equity .............. $470,000 $510,000

Beaker Company
Income Statement
Sales ................................. $414,000
Less operating expenses ............ 351,900
Net operating income ............... 62,100
Less interest and taxes:
Interest expense ................. $30,000
Tax expense ...................... 10,000 40,000
Net Income ......................... $ 22,100

The company paid dividends of $2,100 last year. The "Investment in

Cedar Company" on the statement of financial position represents an
investment in the stock of another company.

Required:

a. Compute the company's margin, turnover, and return on investment

for last year.
b. The Board of Directors of Beaker Company have set a minimum
required return of 20%. What was the company's residual income
last year?

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

Beginning Ending
Balance Balance
Cash .................... $ 50,000 $ 70,000
Accounts receivable ..... 20,000 25,000
Inventory ............... 30,000 35,000
Plant and equipment (net) 120,000 110,000
Total operating assets $220,000 $240,000

Average operating assets = ($220,000 + $240,000) ÷ 2

= $230,000

Margin = Net operating income ÷ Sales

= $62,100 ÷ $414,000
= 15%

Turnover = Sales ÷ Average operating assets

= $414,000 ÷ $230,000
= 1.8

ROI = Margin X Turnover

= 15% X 1.8
= 27%

b. Net operating income ........... $62,100

Minimum required return
(20% X $230,000) ............. 46,000
Residual income ................ $16,100

109. Financial data for Bingham Company for last year appear below:

Managerial Accounting, 9/e 457

Hard
Bingham Company
Statements of Financial Position

Beginning Ending
Balance Balance
Assets:
Cash .............................. $ 135,000 $ 266,000
Accounts receivable ............... 225,000 475,000
Inventory ......................... 314,000 394,000
Plant and equipment (net) ......... 940,000 860,000
Investment in Carr Company ........ 104,000 101,000
Land (undeveloped) ................ 198,000 65,000
Total assets ..................... $1,916,000 $2,161,000

Liabilities and owners' equity:

Accounts payable .................. $ 88,000 $ 119,000
Long-term debt .................... 585,000 665,000
Owners' equity .................... 1,243,000 1,377,000
Total liabilities
and owners' equity ............ $1,916,000 $2,161,000

Bingham Company
Income Statement

Sales ............................ $4,644,000

Less operating expenses .......... 4,291,000
Net operating income ............. 353,000
Less interest and taxes:
Interest expense ............... $ 90,000
Tax expense .................... 129,000 219,000
Net Income ....................... $ 134,000

The "Investment in Carr Company" on the statement of financial

position represents an investment in the stock of another company.

Required:
a. Compute the company's margin, turnover, and return on investment
for last year.
b. The Board of Directors of Beaker Company have set a minimum
required return of 15%. What was the company's residual income
last year?

458Managerial Accounting, 9/e

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

Beginning Ending
Balance Balance
Cash ..................... $ 135,000 $ 266,000
Accounts receivable ...... 225,000 475,000
Inventory ................ 314,000 394,000
Plant and equipment (net) 940,000 860,000
Total operating assets $1,614,000 $1,995,000

Average operating assets = ($1,614,000 + $1,995,000) ÷ 2

= $1,804,500

Margin = Net operating income ÷ Sales

= $353,000 ÷ $4,644,000
= 7.60%

Turnover = Sales ÷ Average operating assets

= $4,644,000 ÷ $1,804,500
= 2.57

ROI = Net operating income

÷ Average operating assets
= $353,000 ÷ $1,804,500
= 19.56%

b. Net operating income .... $353,000

Minimum required return
(15% X $1,804,500) .... 270,675
Residual income ......... $ 82,325

110. The following data have been extracted from the year-end reports of
Medium two companies -- Company X and Company Y:

Company X Company Y
Sales ......................... $800,000 ?
Net operating income .......... $56,000 ?
Average operating assets ...... ? $125,000
Margin ........................ ? 4%
Turnover ...................... ? 6
Return on investment .......... 14% ?

Managerial Accounting, 9/e 459

 Required:

Fill in the missing data on the above table.

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

111. The following data have been extracted from the year-end reports of
Medium two companies -- Company X and Company Y:

Company X Company Y
Sales ......................... $2,700,000 ?
Net operating income .......... $ 256,000 ?
Average operating assets ...... ? $1,725,000
Margin ........................ ? 8%
Turnover ...................... ? 2
Return on investment .......... 16% ?

Required:

Fill in the missing data on the above table.

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

460Managerial Accounting, 9/e

112. (Appendix) Larinore Corporation has a Castings Division which does
Hard casting work of various types. The company's Machine Products Division
has asked the Castings Division to provide it with 20,000 special
castings each year on a continuing basis. The special casting would
require $10 per unit in variable production costs. The Machine
Products Division has a bid from an outside supplier for the castings
of $29 per unit.

In order to have time and space to produce the new casting, the
Castings Division would have to cut back production of another casting
- the RB4 which it presently is producing. The RB4 sells for $30 per
unit, and requires $12 per unit in variable production costs. Boxing
and shipping costs of the RB4 are $4 per unit. Boxing and shipping
costs for the new special casting would be only $1 per unit. The
company is now producing and selling 100,000 units of the RB4 each
year. Production and sales of this casting would drop by 20% if the
new casting is produced.

Required:

a. What is the range of transfer prices within which both the

Divisions' profits would increase as a result of agreeing to the
transfer of 20,000 castings per year from the Castings Division
to the Machine Products Division?

b. Is it in the best interests of Larinore Corporation for this

transfer to take place? Explain.

Answer:

a. From the perspective of the Castings Division, profits would

increase as a result of the transfer providing that:

Transfer price > Variable cost + Opportunity cost

The opportunity cost is the contribution margin on the lost

sales, divided by the number of units transferred:

Opportunity cost = [($30 - $12 - $4) x 20,000]/20,000 = $16

Therefore,

Transfer price > ($10 + $1) + $16 = $27

From the viewpoint of the purchasing division, the transfer

price must be less than the cost of buying the units from the
outside supplier.

Transfer price < $29

Combining the two requirements, we get the following range of

transfer prices:

$27 < Transfer price < $29

b. Yes, the transfer should take place. From the viewpoint of the
entire company, the cost of transferring the units within the
company is $27, but the cost of purchasing them from the outside
supplier is $29. Therefore, the company's profits increase by $2
for each of the castings that is used within the company rather than
being sold on the outside market.

Managerial Accounting, 9/e 461

113. (Appendix) Geneva Corporation has a Castings Division that does
Hard casting work of various types. The company's Machine Products Division
has asked the Castings Division to provide it with 10,000 special
castings each year on a continuing basis. The special casting would
require $20 per unit in variable production costs. The Machine
Products Division has a bid from an outside supplier for the castings
of $30 per unit.

In order to have time and space to produce the new casting, the
Castings Division would have to cut back production of another casting
- the NW2 - which it presently is producing. The NW2 sells for $40 per
unit, and requires $25 per unit in variable production costs. Boxing
and shipping costs of the NW2 are $4 per unit. Boxing and shipping
costs for the new special casting would be only $2 per unit. The
company is now producing and selling 100,000 units of the NW2 each
year. Production and sales of this casting would drop by 10% if the
new casting were produced.

Required:

a. What is the range of transfer prices, if any, within which both

the Divisions' profits would increase as a result of agreeing to the
transfer of 10,000 castings per year from the Castings Division to
the Machine Products Division?

b. Is it in the best interests of Geneva Corporation for this

transfer to take place? Explain.

Answer:

a. From the perspective of the Castings Division, profits would

increase as a result of the transfer providing that:

Transfer price > Variable cost + Opportunity cost

The opportunity cost is the contribution margin on the lost

ales, divided by the number of units transferred:

Opportunity cost = [($40 - $25 - $4) x 10,000]/10,000 = $11

Therefore,

Transfer price > ($20 + $2) + $11 = $33

462Managerial Accounting, 9/e

 From the viewpoint of the purchasing division, the transfer
price must be less than the cost of buying the units from the
outside supplier.

Transfer price < $30

Combining the two requirements, we find that no feasible

range of transfer prices exists under current conditions.

b. No, the transfer should not take place. From the viewpoint of
the entire company, the cost of transferring the units within the
company is $33, but the cost of purchasing them from the outside
supplier is $30. Therefore, the company's profits decrease by $3
for each of the castings that is produced within the company rather
than being purchased in the outside market.

Managerial Accounting, 9/e 463