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Todays FoodChapter 12 Segment Reporting and Decentralization

EXERCISE 12-1 Basic Segmented Income StatementRoyal Lawncare Company produces and sells two packaged products. Weedban and Greengrow. Revenue and cost information relating to the products follow:

Product WeedbanGreengrowSelling price per unit.................. $6.00$7.50Variable expenses per unit ............. $2.40$5.25Traceable fixed expenses per year $45,000$21,000

Common fixed expenses in the company total $33.000 annually. Last year the company produced and sold 15,000 units of Weedban and 28,000 units of Greengrow.Required:Prepare a contribution format income statement segmented by product lines.

Exercise 12-1 (15 minutes)

EXERCISE 12-2 Compute the Return on InvestmentAlyeska Services Company, a division of a major oil company, provides various services to the operators of the North Slope oil field in Alaska. Data concerning the most recent year appear below:

Sales .......................$7,500,000Net operating income ..........$600,000Average operating assets .......$5,000,000Required:Compute the margin for Alyeska Services Company.Compute the turnover for Alyeska Services Company.Compute the return on investment (ROI) for Alyeska Services Company.

Exercise 12-2 (15 minutes) 01.

02.

03.ROI = Margin Turnover = 8% 1.5 = 12%

EXERCISE 12-3 Residual IncomeJuniper Design Ltd. of Manchester, England, is a company specializing in providing design services to residential developers. Last year the company had net operating income of 600,000 on sales of 3,000,000. The company's average operating assets for the year were 2,800,000 and its minimum required rate of return was 18% (The currency used in England is the pound sterling, denoted by .)Required:Compute the company's residual income for the year.

Exercise 12-3 (10 minutes)Average operating assets ........................ 2,800,000 Net operating income.............................. 600,000 Minimum required return: 18% average operating assets........... 504,000 Residual income ..................................... 96,000

EXERCISE 12-6 Segmented Income StatementWingate Company, a wholesale distributor of DVDs. has been experiencing losses for some time, as shown by its most recent monthly contribution format income statement, which follows:Sales ..............................$1,000,000Less Variable expenses .......... 390,000Contribution margin ............. 610,000Less fixed expenses ............. 625,000Net operating income (loss) ..$(15,000)

In an effort to isolate the problem, the president has asked for an income statement segmented by division. Accordingly, the Accounting Department has developed the following information:DivisionEast Central WestSales .....................................$250,000$400,000 $350,000Variable expenses as a percentage of sales 52% 30%40%Traceable fixed expenses ....$160,000$200,000 $175,000

Required:Prepare a contribution format income statement segmented by divisions, as desired by the president.As a result of a marketing study, the president believes that sales in the West Division could be increased by 20% if monthly advertising in that division were increased by $15,000. Would you recommend the increased advertising? Show computations to support your answer.

Exercise 12-6 (30 minutes)

Incremental sales ($350,000 20%) ......... $70,000 Contribution margin ratio............................ 60% Incremental contribution margin ................. 42,000Less incremental advertising expense ......... 15,000 Incremental net operating income ............. $27,000 Yes, the advertising program should be initiated.

EXERCISE 12-7 Computing and Interpreting Return on InvestmentSelected operating data for two divisions of Outback Brewing. Ltd.. of Australia are given below:DivisionQueenslandNew South WalesSales ......................... $4,000,000$7.000,000Average operating assets..........$2,000,000$2,000,000Net operating income............. $360,000 $420,000Property, plant, and equipment .. $950,000 $800,000

Required:Compute the rate of return for each division using the return on investment (ROI) formula stated in terms of margin and turnover.Which divisional manager seems to be doing the better job? Why?

Exercise 12-7 (15 minutes)1. ROI computations: ROI = Margin Turnover

Queensland Division:

New South Wales Division:

2. The manager of the New South Wales Division seems to be doing the better job. Although her margin is three percentage points lower than the margin of the Queensland Division, her turnover is higher (a turnover of 3.5, as compared to a turnover of two for the Queensland Division). The greater turnover more than offsets the lower margin, resulting in a 21% ROI, as compared to an 18% ROI for the other division. Notice that if you look at margin alone, then the Queensland Division appears to be the stronger division. This fact underscores the importance of looking at turnover as well as at margin in evaluating performance in an investment center.

EXERCISE 12-9 (Appendix 12A) Transfer Pricing from the Viewpoint of the Entire CompanDivision A manufactures electronic circuit boards. The boards can be sold either to Division B of the same company or to outside customers. Last year, the following activity occurred in Division A:

Selling price per circuit board ............ $125Variable cost per circuit board.............$90Number of circuit boards: Produced during the year ......... 20,000Sold to outside customers......... 16,000Sold to Division B ............... 4,000

Sales to Division B were at the same price as sales to outside customers. The circuit boards purchased by Division B were used in an electronic instrument manufactured by that division (one board per instrument). Division B incurred SI00 in additional cost per instrument and then sold the instruments for S300 each.

Required:Prepare income statements for Division A. Division B. and the company as a whole.Assume that Division A's manufacturing capacity is 20.000 circuit boards. Next year. Division B wants to purchase 5,000 circuit boards from Division A rather than 4,000. (Circuit boards of this type are not available from outside sources.) From the standpoint of the company as a whole, should Division A sell the 1,000 additional circuit boards to Division B or continue to sell them to outside customers? Explain.

Exercise 12-9 (15 minutes)

2. Division A should transfer the 1,000 additional circuit boards to Division B. Note that Division Bs processing adds $175 to each units selling price (Bs $300 selling price, less As $125 selling price = $175 increase), but it adds only $100 in cost. Therefore, each board transferred to Division B ultimately yields $75 more in contribution margin ($175 $100 = $75) to the company than can be obtained from selling to outside customers. Thus, the company as a whole will be better off if Division A transfers the 1,000 additional boards to Division B.