18.

Dimensions of the Balanced Scorecard LO6

The balanced scorecard integrates financial and nonfinancial measures that relate to four perspectives: financial, customer, internal business, and learning and growth. This view of a company places emphasis on both financial and nonfinancial measures, because each contributes to the understanding of a company?s performance.

Required

List two possible performance measures for each of the four perspectives included in the balanced scorecard.

26.

Segment Margin and Contribution Margin LO4

Simon Hinson Company operates two divisions: Gordon and Ronin. A segmented income statement for the company?s most recent year is as follows:

	Total Company	Gordon Division	Ronin Division
Sales	$850,000	$250,000	$600,000
Less: Variable expenses	505,000	145,000	360,000
Contribution margin	$345,000	$105,000	$240,000
Less: Traceable fixed costs	145,000	45,000	100,000
Division segment margin	$200,000	$ 60,000	$140,000
Less: Common fixed costs	130,000
Net income	$ 70,000

Required

A.If the Gordon Division increased its sales by $85,000 per year, how much would the company?s net income change? Assume that all cost behavior patterns remained constant.

B.Assume that the Ronin Division increased sales by $100,000, the Gordon Division sales remained the same, and there was no change in fixed costs.

1.Calculate the division segment margin for each division and the net income for the company as a whole.

2.Calculate the segment margin ratios before and after these changes, and comment on the results. Explain the changes.

C.How do the sales increases and decreases affect the divisional contribution margin ratio and segment margin ratio?

29.

ROI vs. Residual Income: Decision Focus LO5

Raddington Industries produces tool-and-die machinery for various manufacturers. Two years ago, the company expanded vertically by acquiring Regis Steel Company, one of its suppliers of alloy steel plates. In order to manage the two separate businesses, the operations of Regis Steel are reported separately as an investment center.

Raddington monitors its divisions on the basis of both unit contribution and return on average investment (ROI), with the investment defined as average operating assets used. Raddington has a policy of basing all employee bonuses on divisional ROI. All investments in operating assets are expected to earn a minimum return of 11 percent before income taxes.

Regis?s cost of goods sold is considered to be entirely variable, whereas the division?s administrative expenses are not dependent on volume. Selling expenses are a mixed cost, with 40 percent attributed to sales volume. Over the last two years, Regis?s ROI has ranged from 11.8 percent to 14.7 percent. During the fiscal year ended November 30, 2012, Regis contemplated a capital acquisition with an estimated ROI of 11.5 percent; however, division management decided against the investment because it believed that the investment would decrease Regis?s overall ROI.

The 2012 income statement for Regis is presented next. The division?s operating assets were $15,750,000 on November 30, 2012, a 5 percent increase over the 2011 year-end balance.

Regis Steel Division Operating Statement For the Year Ended November 30, 2012 ($000 omitted)
Sales revenue	$25,000
Cost of goods sold	16,500
Gross profit	$ 8,500
Administrative expenses	3,955
Selling expenses	2,700
Income from operations before income taxes	$ 1,845

Required

A.Calculate the unit contribution for Regis Steel Division if 1,484,000 units were produced and sold during the year ended November 30, 2012.

B.Calculate the return on investment (ROI) for Regis Steel Division for 2012.

C.Calculate the residual income, using the average operating assets employed, for 2012 for Regis Steel Division.

D.Explain why the management of Regis Steel Division would have been more likely to accept the contemplated acquisition if residual income rather than ROI were used as a performance measure.

E.Regis Steel Division is a separate investment center within Raddington Industries. Identify several items that Regis Steel should control if it is to be evaluated fairly by either the ROI or the residual income performance measure.

30.

Quality Costing LO7

Rebecca?s Pottery Loft makes a variety of handmade pottery items. She has asked for your advice on one of the items manufactured: a clay pelican. The following information is provided:

Number of defective pelicans	1,100
Number of pelicans returned	150
Number of pelicans reworked	200
Profit per defect-free pelican	$10.00
Processing cost of a returned pelican	$20.00
Profit per defective pelican	$ 5.00
Cost to rework defective pelican	$ 4.00
Total appraisal costs	$3,400
Total prevention costs	$6,000

Required

A.Calculate the total profits lost because Rebecca sold defective pelicans.

B.Calculate the rework cost.

C.Calculate the cost of processing customer returns.

D.Calculate the total failure cost.

E.Calculate the total quality cost.

18. Dimensions of the Balanced Scorecard LO6 The balanced scorecard integrates financial and nonfinancial measures that relate to four perspectives: financial, customer, internal business, and learning and growth. This view of a company places emphasis on both financial and nonfinancial measures, because each contributes to the understanding of a company's performance. Required List two possible performance measures for each of the four perspectives included in the balanced scorecard. 26. Segment Margin and Contribution Margin LO4 Simon Hinson Company operates two divisions: Gordon and Ronin. A segmented income statement for the company's most recent year is as follows: Total Company Gordon Division Ronin Divisio Sales $850,000 $250,000 $600,000 Less: Variable expenses 505,000 145,000 360,000 Contribution margin $345,000 $105,000 $240,000 Less: Traceable fixed costs 145,000 45,000 100,000 Division segment margin $200,000 $ 60,000 $140,000 Total Company Less: Common fixed costs 130,000 Net income $ 70,000 Gordon Division Required A.If the Gordon Division increased its sales by $85,000 per year, how much would the company's net income change? Assume that all cost behavior patterns remained constant. B.Assume that the Ronin Division increased sales by $100,000, the Gordon Division sales remained the same, and there was no change in fixed costs. o 1.Calculate the division segment margin for each division and the net income for the company as a whole. o 2.Calculate the segment margin ratios before and after these changes, and comment on the results. Explain the changes. C.How do the sales increases and decreases affect the divisional contribution margin ratio and segment margin ratio? 29. ROI vs. Residual Income: Decision Focus LO5 Raddington Industries produces tool-and-die machinery for various manufacturers. Two years ago, the company expanded vertically by acquiring Regis Steel Company, one of its suppliers of alloy steel plates. In order to manage the two separate businesses, the operations of Regis Steel are reported separately as an investment center. Raddington monitors its divisions on the basis of both unit contribution and return on average investment (ROI), with the Ronin Divisio investment defined as average operating assets used. Raddington has a policy of basing all employee bonuses on divisional ROI. All investments in operating assets are expected to earn a minimum return of 11 percent before income taxes. Regis's cost of goods sold is considered to be entirely variable, whereas the division's administrative expenses are not dependent on volume. Selling expenses are a mixed cost, with 40 percent attributed to sales volume. Over the last two years, Regis's ROI has ranged from 11.8 percent to 14.7 percent. During the fiscal year ended November 30, 2012, Regis contemplated a capital acquisition with an estimated ROI of 11.5 percent; however, division management decided against the investment because it believed that the investment would decrease Regis's overall ROI. The 2012 income statement for Regis is presented next. The division's operating assets were $15,750,000 on November 30, 2012, a 5 percent increase over the 2011 year-end balance. Regis Steel Division Operating Statement For the Year Ended November 30, 2012 ($000 omitted) Sales revenue $25,000 Cost of goods sold 16,500 Gross profit $ 8,500 Administrative expenses 3,955 Selling expenses 2,700 Income from operations before income taxes $ 1,845 Required A.Calculate the unit contribution for Regis Steel Division if 1,484,000 units were produced and sold during the year ended November 30, 2012. B.Calculate the return on investment (ROI) for Regis Steel Division for 2012. C.Calculate the residual income, using the average operating assets employed, for 2012 for Regis Steel Division. D.Explain why the management of Regis Steel Division would have been more likely to accept the contemplated acquisition if residual income rather than ROI were used as a performance measure. E.Regis Steel Division is a separate investment center within Raddington Industries. Identify several items that Regis Steel should control if it is to be evaluated fairly by either the ROI or the residual income performance measure. 30. Quality Costing LO7 Rebecca's Pottery Loft makes a variety of handmade pottery items. She has asked for your advice on one of the items manufactured: a clay pelican. The following information is provided: Number of defective pelicans 1,100 Number of pelicans returned 150 Number of pelicans reworked 200 Profit per defect-free pelican $10.00 Processing cost of a returned pelican $20.00 Profit per defective pelican $ 5.00 Cost to rework defective pelican $ 4.00 Total appraisal costs $3,400 Total prevention costs $6,000 Required A.Calculate the total profits lost because Rebecca sold defective pelicans. B.Calculate the rework cost. C.Calculate the cost of processing customer returns. D.Calculate the total failure cost. E.Calculate the total quality cost