1. Haida Ltd. manufactures a wide variety of products in multiple locations throughout North America. Its head office is in Vancouver, B.C. and it has a decentralized management structure. The Consumer Products Division is located in Ontario and is responsible for the production of a variety of household products which are then sold to retail companies through the sales staff within the Marketing Division. Performance within the Consumer Products is monitored through variance analysis. Direct materials, direct labour and manufacturing overhead variances are calculated at the end of each month and this information is provided to both the Production Managers within the Consumer Products Division and to the Vice-President Manufacturing, who oversees all manufacturing divisions within the company. Other manufacturing divisions include the manufacture of car parts in the eastern United States, clothing manufacture in the southern United States, seafood and other food processing in the Atlantic provinces in Canada, and lumber products in both western Canada and western United States. 3 2 3 Required: (total marks = 12) a) Describe three advantages to using a decentralized decision-making structure within Haida. b) What type of responsibility centre is the Consumer Products Division? Provide one reasonable explanation for why this type of responsibility centre would be selected for this division. b) Is it possible to evaluate the Consumer Products Division as a profit centre? Identify one advantage and one disadvantage to classifying this division as a profit centre. b) Haida has adopted a management by exception philosophy. Would you recommend using ideal or practical standards for variance analysis in this situation? Provide three relevant factors to support your recommendation. Make sure your answer makes it clear what the difference is between ideal and practical standards. 4 2. Motor Corp. manufactures machine parts for boat engines. The CEO, James Hamilton, is considering an offer from a subcontractor to provide 3,000 units of product AB100 at a price of $230,000. Each year, Motor Corp. manufactures 3,000 units of the part in-house with the following costs per unit: Direct materials $40 Direct labour $25 Variable overhead $15 Fixed overhead $ 8 If the part was to be supplied by the subcontractor, Motor Corp.s fixed costs would be reduced by $10,000. 5 Required: (total marks = 8) What would be the impact on short-term operating profit if the company were to accept the offer from the subcontractor? Show calculations to support your answer. Describe two qualitative considerations that Motor Corp. should consider when deciding whether to accept the offer from the subcontractor. Make sure it is clear why these factors are relevant. 3 3. Three divisions of Jamieson Ltd. report the following sales and operating data: Fitness Spa Athletic Training Services Wear Sales $600,000 $750,000 $400,000 Operating income $ 30,000 $ 37,500 $ 24,000 Net income $ 18,000 $ 22,500 $ 14,400 Average operating assets $200,000 $250,000 $100,000 Minimum required rate of return 10% 12% 10% 3 4 3 Required: (total marks = 18) a) Calculate the ROI for each division using the DuPont method. b) Using the best performance of the three divisions as a benchmark, determine how each of the other two divisions would need to change their investments or operating results to achieve the same ROI using the DuPont method. Note that there are several different ways to achieve this; any that provide the desired results is acceptable. c) Compute the residual income for each division d) Assume that each division is presented with an investment opportunity that would yield a rate of return of 17%. It would require a new investment of $60,000. i) If performance is being measured by ROI, determine whether each division is likely to accept or reject its investment opportunity, and explain why. ii) If performance is being measured by residual income, determine whether each division is likely to accept or reject its investment opportunity and explain why. e) Jamieson can measure its average operating assets on a gross or net basis. Which would you recommend? Explain your rationale for your recommendation making sure it is clear why the one selected is preferable and from whose point of view. 3 3 2