Activity 1. Now, it's your turn to apply concepts on performance evaluation of an Investment Center.

Problem 1 (adapted)

Elion, a division of Elton Manufacturing, has assets of P450,000 and an operating income of P110,000.

Required:

a. What is the division's ROI?

b. If the minimum rate of return is 12%, what is the division's residual income?

Problem 2 (adapted)

Shapes Corporation operates two (2) autonomous divisions: Circle Company and Square Company. The divisions reported the following data with respect to their 2019 operations:

Circle Square

Net sales P 40M P400M

Segment income 5M 30M

Average assets 25M 160M

Average assets life (years) 5 5

Cost of capital 12% 12%

Required:

1. Return on investment.

2. Residual income.

Problem 3 (adapted)

City Recreation Corporation operates allows its divisions to operate as autonomous units. The operating data for 2019 follow, in thousands:

Hotel Beach Spa

Revenue P2,250 P500 P4,800

Accounts receivable 800 152 1,435

Operating assets 1,000 400 1,750

Net operating income 220 60 480

Taxable income 165 90 385

Required:

1. Compute the asset turnover for each division.

2. Compute the return on sales for each division.

3. Compute the return on investment for each division.

Problem 4 (adapted)

The following data pertain to Jumar Manufacturing:

Interest rate on debt capital 9%

Cost of equity capital 12%

Before-tax operating income P35M

Market value of debt capital P60M

Market value of equity capital P120M

Total assets P150M

Income tax rate 30%

Total current liabilities P15M

Required:

1. Compute the weighted-average cost of capital.

2. Compute the economic value added.

Activity 2. Now, let's apply concepts on allocation of service cost and transfer pricing.

Problem 1 (adapted)

Technicolor Company has two service departments (Black and White) and two producing departments (Red and Yellow). Data provided are as follows:

Service Depts. Operating Depts.

Black White Red Yellow

Direct Costs P150 P300 P5,000 P6,000

Service Performed

by Dept. Black 40% 40% 20%

by Dept. White 20% 70% 10%

Required:

If Technicolor Company uses the direct method to allocate service costs,

1. What amount of the service cost is allocated to Department Yellow?

2. What is the total cost for Department Red?

If Technicolor Company uses the step-down method to allocate service costs,

3. What amount of the service cost is allocated to Department Red?

4. What is the total cost for Department Yellow?

If Technicolor Company uses the reciprocal method to allocate service costs,

5. What amount of the service cost is allocated to Department Yellow?

6. What is the total cost for Department Red?

Problem 2 (adapted)

YMP Tool has three service departments that support the production area. Outlined below is the estimated overhead by department for the upcoming year.

Service Departments Estimated Overhead Number of Employees

Receiving P25,000 2

Repair 35,000 2

Tool 10,000 1

Production Departments

Assembly 25

Bottling 12

The Repair Department supports the greatest number of departments, followed by the Tool Department. Overhead cost is allocated to departments based upon the number of employees.

Required:

a. Using the direct method of allocation, how much of the Repair Department's overhead will be allocated to the Tool Department?

b. Using the step-down method of allocation, the allocation from the Repair Department's overhead to the Tool Department would be __________.

Problem 3 (adapted)

A hospital has a P100,000 expected utility bill this year. The janitorial, accounting and orderlies departments are service functions to the operating, hospital rooms and laboratories departments. Floor space assigned to each department is

Department Square Footage

Janitorial 1,000

Accounting 2,000

Orderlies 7,000

Operating 4,000

Hospital Rooms 30,000

Laboratories 6,000

Required:

How much of the P100,000 utility bill will eventually become the hospital rooms department total costs, assuming a direct allocation based on square footage is used?

Activity 3. Now, let's apply concepts on transfer pricing.

Problem 1 (adapted)

The Quarantine Company has two divisions, ECQ and MECQ. Production manufactures pants, which it sells to both the Marketing Division and to the outside market under a different brand name. Marketing operates numerous pants stores, and it sells both Quarantine pants and other brands. The following facts also pertain to Quarantine:

o Sales price to retailers if sold by Production: P380 per pair

o Variable Cost to produce: P190 per pair

o Fixed Costs: P2,000,000 per month

o Production is operating far below its capacity.

o Sales price to customers if sold by Marketing: P500 per pair

o Variable marketing costs: 5% of sales price

Marketing has decided to reduce the sales price of Quarantine pants. The company's variable manufacturing and marketing costs are differential to this decision, whereas fixed manufacturing and marketing costs are not.

Required:

a. What is the minimum price that can be charged for the pants and still cover differential manufacturing and marketing costs?

b. What is the appropriate transfer price for this decision?

c. What if the transfer price were set at P380? What effect would this have on the minimum price set by the marketing manager?

d. How would you answer to questions a and b change if the Production Division had been operating at full capacity?