QUESTIONS :

1.Which of the following performance measures will decrease if there is an increase in the accounts receivable?

Return on Investment

Residual Income

(A)

Yes

Yes

(B)

No

Yes

(C)

Yes

No

(D)

No

No

Choice A
Choice B
Choice C
Choice D

2.Delmar Corporation is considering the use of residual income as a measure of the performance of its divisions. Which major disadvantage of this method should the company consider before deciding to institute it

This method does not take into account differences in the size of divisions.
Investments may be adopted that will decrease the overall return on investment.
The minimum required rate of return may eliminate desirable investments.
Residual income does not measure how effectively the division manager controls costs.

3. Given the following data: What is the return on the investment (ROI)?

Sales

$50.000

Net operating income

$5,000

Contribution margin

$20,000

Average operating assets

$25,000

Stockholder’s equity

$15,000

A. 10%

B. 20%
C. 16.7%
D. 80%

4.(TCO D) Financial data for Beaker Company for last year appear below.

Beaker Company

Statement 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

Liabilities and Owners’ Equity

Accounts payable

$70,000

$90,000

Long-term debt

250,000

250,000

Owner’s equity

150,000

170,000

Total liabilities and owner’s 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

$22,000

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:

i. Compute the company’s margin, turnover, and return on investment for last year.

ii. The board of directors of Beaker Company has set a minimum required return of 20%. What was the company’s residual income last year?

5.Ferro Wares is a division of a major corporation. The following data are for the latest year of operations.

Sales

$33,040,000

Net Operating Income

$1,453,760

Average Operating Assets

$8,000,000

The company’s minimum required rate of return

18%

Required:

i. What is the division’s ROI?

ii. What is the division’s residual income? (Points : 15)

6. Tjelmeland Corporation is considering dropping product S85U. Data from the company’s accounting system appear below.

Sales

$360,000

Variable Expenses

$158,000

Fixed Manufacturing Expenses

$119,000

Fixed Selling and Administrative Expenses

$94,000

All fixed expenses of the company are fully allocated to products in the company’s accounting system. Further investigation has revealed that $55,000 of the fixed manufacturing expenses and $71,000 of the fixed selling and administrative expenses are avoidable if product S85U is discontinued.

Required:

i. According to the company’s accounting system, what is the net operating income earned by product S85U? Show your work!

ii. What would be the effect on the company’s overall net operating income of dropping product S85U? Should the product be dropped? Show your work!

7.(TCO D) Rosiek Corporation uses part A55 in one of its products. The company’s accounting department reports the following costs of producing the 4,000 units of the part that are needed every year.

Per Unit

Direct Materials

$2.80

Direct Labor

$6.30

Variable Overhead

$8.50

Supervisor’s Salary

$2.60

Depreciation of Special Equipment

$6.80

Allocated General Overhead

$6.10

An outside supplier has offered to make the part and sell it to the company for $32.30 each. If this offer is accepted, the supervisor’s salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier’s offer were accepted, only $4,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part A55 could be used to make more of one of the company’s other products, generating an additional segment margin of $26,000 per year for that product.

Required:

i. Prepare a report that shows the effect on the company’s total net operating income of buying part A55 from the supplier rather than continuing to make it inside the company.

ii. Which alternative should the company choose

8.(TCO D) Manning Co. manufactures and sells trophies for winners of athletic and other events. Its manufacturing plant has the capacity to produce 18,000 trophies each month; current monthly production is 15,300 trophies. The company normally charges $141 per trophy. Cost data for the current level of production are shown below.

Variable Costs

Direct Materials

$948,600

Direct Labor

$290,700

Selling and Administrative

$41,300

Fixed Costs

Manufacturing

$579,870

Selling and Administrative

$134,640

The company has just received a special one-time order for 900 trophies at $73 each. For this particular order, no variable selling and administrative costs would be incurred. This order would also have no effect on fixed costs.

Required:

Should the company accept this special order? Why