CASE 1 Showplace Homes, Inc sells home dcor merchandise through tree retail outlets in Paris, Milan, and Abu Dhabi and operates a general corporate headquarters in Mumbai A review of the company's income statement indicates a record year in terms of sales and profits The owner, though, desires additional insights about the individual stores and has asked the controller to make a segmented income statement The following information has been extracted from Showplace Homes' accounting records The sales volume, sales price, and purchase price data follow PARIS MILAN ABUDHABI Sales Volume 37,000 units 41,000 units 46,000unit Unit selling price 12 11 9 50 Unit purchase price 5 50 5 50 5 50 The following expenses were incurred for sales commissions, local advertising, property taxes, management salaries, and other non controllable (but traceable) costs PARIS MILAN ABUDHABI Sales Commissions 6 6 6 Local advertising 11,000 22,000 48,000 Local property taxes 4,500 2,000 6,000 Sales manager salary 32,000 Store manager salaries 41,000 49,000 48,000 Other non controllable costs 5,800 4,600 17,800 Local advertising decisions are made at the store manager level The sales manager's salary in Abu Dhabi is determined by the Abu Dhabi store manager, in contrast, store manager salaries are set by Showplace Homes' vice president Non traceable fixed corporate expenses total P192,300 The company uses a responsibility accounting system REQUIRED Assume the role of the controller and make a segmented income statement for Showplace Homes, Inc Determine the weakest performing store and present an analysis of the probable causes of poor performance Assume that an opening for a VP of Sales has arisen at the Mumbai corporate headquarters and the company's chief executive officer (CEO) desires to promote one of the three existing store managers In evaluating the store manager's performance, should the CEO use a store's segment contribution margin, the profit margin controllable by the sales manager, or a store's segment profit margin Justify your answer CASE 2 Holiday Entertainment Corporation (HEC), a subsidiary of New Age Industries, manufactures go carts and other recreational vehicles Family recreational centers that feature not only go cart tracks but miniature golf, batting cages, and arcade games as well have increased in popularity As a result, HEC, has been receiving some pressure from New Age's management to diversify into some of these other recreational areas Recreational Leasing, Inc (RLI), one of the largest firms that leases arcade games to family recreational centers, is looking for a friendly buyer New Age's top management believes that RLI's assets could be acquired for an investment of P3 2 Million and has strongly urged Anthony Matutino, division manager of HEC, to consider acquiring RLI Matutino has reviewed RLI's financial statements with his controller, Jennifer Dolly, and they believe the acquisition may not be in the best interest of HEC If we decide not to make this, the New Age people are not going to be happy, said Matutino If we could convince them to base our bonuses on something other than return on investment, maybe this acquisition would look more attractive How would we do if the bonuses were based on residual income, using the company's 15 cost of capital New Age Industries traditionally has evaluated all of its divisions on the basis of return on investment The desired rate of return for each division is 20 The management team of any division reporting an annual increase in the ROI is automatically eligible for a bonus The management of divisions reporting a decline in the ROI must provide convincing explanation for the decline in order to be eligible for a bonus Moreover, this bonus is limited to 50 of the bonus paid to divisions reporting an increase in ROI In the following table are condensed financial statements for both HEC and RLI for the most recent year RLI HEC Sales revenue 9,500,000 Leasing revenue 3,100,000 Variable expenses (1,300,000) (6,000,000) Fixed expenses ( 1,200,000 ) ( 1,500,000 ) Operating income 600,000 2,000,000 Current assets 1,900,000 2,300,000 Long lived assets 1,100,000 5,700,000 Total assets 3,000,000 8,000,000 Current liabilities 850,000 1,400,000 Long term liabilities 1,200,000 3,800,000 Shareholders' equity 950,000 2,800,000 Total Liabilities Shareholders' equity 3,000,000 8,000,000 REQUIRED If New Age Industries continues to use ROI as the sole measure of divisional performance, explain why Holiday Entertainment Corporation would be reluctant to acquire Recreational Leasing, Inc Support your answer with calculations If New Age Industries could be persuaded to use residual income to measure the performance of HEC, explain why HEC would be more willing to acquire RLI Support your answer with calculations Discuss how the behavior of division managers is likely to be affected by the use of the following performance measures a Return on investment and b Residual income CASE 3 InterGlobal Industries is a diversified corporation with separate operating divisions Each division's performance is evaluated on the basis of profit and return on investment The Air Comfort Division manufactures and sells air conditioner units The coming year's budgeted income statement, which follows, is based upon a sales volume of 15,000 units AIR COMFORT DIVISION BUDGETED INCOME STATEMENT (in thousand) Per Unit Total Sales revenue 400 6,000 Manufacturing costs Compressor 70 1,050 Other direct material 37 555 Direct labor 30 450 Variable overhead 45 675 Fixed overhead 32 480 Total manufacturing costs 214 3,210 Gross Margin 186 2,790 Operating expenses Variable selling 18 270 Fixed selling 19 285 Fixed administrative 38 570 Total operating expenses 75 1,125 Net income before taxes 111 1,665 Air Comfort's division manager believes sales can be increased if the price of the air conditioners is reduced A market research study by an independent firm indicates that a 5 reduction in the selling price would increase sales volume 16 , or 2,400 units The division has sufficient production capacity to manage the increased volume with no increase in fixed costs The Air Comfort Division uses a compressor in its units, which it purchases from an outside supplier at a cost of P70 per compressor The Air Comfort Division manager has asked the manager of the Compressor Division about selling compressor units to Air Comfort The Compressor Division currently manufactures and sells a unit to outside firms that is similar to the unit used by the Air Comfort Division The specifications of the Air Comfort Division compressor are slightly different, which would reduce the Compressor Division's direct material cost by P1 50 per unit In addition, the Compressor Division would not incur any variable selling costs in the units sold to the Air Comfort Division The manager of the Air Comfort Division wants all of the compressors it uses to come from one supplier and has offered to pay P50 for each compressor unit The Compressor Division has the capacity to produce 75,000 units Its budgeted income statement for the coming year, which follows, is based on a sales volume of 64,000 units without considering Air Comfort's proposal COMPRESSOR DIVISION BUDGETED INCOME STATEMENT (in thousand) Per Unit Total Sales revenue 100 6,400 Manufacturing costs Direct Material 12 768 Direct Labor 8 512 Variable Overhead 10 640 Fixed overhead 11 704 Total manufacturing costs 41 2,624 Gross Margin 59 3,776 Operating expenses Variable selling 6 384 Fixed selling 4 256 Fixed administrative 7 448 Total operating expenses 17 1,088 Net income before taxes 42 2,688 REQUIRED Should the Air Comfort Division institute the 5 price reduction on its air conditioner units even if it cannot acquire the compressors internally for P50 each Support your conclusion with appropriate calculations Independently of your answer to requirement (1), assume the Air Comfort Division needs 17,400 units Should the Compressor Division be willing to supply the compressor units for P50 each Support your conclusions with appropriate calculations Independently of your answer to requirement (1), assume Air Comfort needs 17,400 units Suppose InterGlobal's top management has specified a transfer price of P50 Would it be in the best interest of InterGlobal Industries for the Compressor Division to supply the compressor units at P50 each to the Air Comfort Division Support your conclusions with appropriate calculations Is P50 a goal congruent transfer price Refer to your answers for requirements (2) and (3)

Question

CASE 1  Showplace Homes, Inc  sells home dcor merchandise through tree retail outlets   in Paris, Milan, and Abu Dhabi   and operates a general corporate headquarters in Mumbai A review of the company's income statement indicates a record year in terms of sales and profits The owner, though, desires additional insights about the individual stores and has asked the controller to make a segmented income statement The following information has been extracted from Showplace Homes' accounting records  The sales volume, sales price, and purchase price data follow  PARIS MILAN ABUDHABI Sales Volume 37,000 units 41,000 units 46,000unit Unit selling price 12 11 9 50 Unit purchase price 5 50 5 50 5 50 The following expenses were incurred for sales commissions, local advertising, property taxes, management salaries, and other non controllable (but traceable) costs  PARIS MILAN ABUDHABI Sales Commissions 6  6  6  Local advertising 11,000 22,000 48,000 Local property taxes 4,500 2,000 6,000 Sales manager salary     32,000 Store manager salaries 41,000 49,000 48,000 Other non controllable costs 5,800 4,600 17,800 Local advertising decisions are made at the store manager level The sales manager's salary in Abu Dhabi is determined by the Abu Dhabi store manager, in contrast, store manager salaries are set by Showplace Homes' vice president  Non traceable fixed corporate expenses total P192,300  The company uses a responsibility accounting system  REQUIRED  Assume the role of the controller and make a segmented income statement for Showplace Homes, Inc  Determine the weakest performing store and present an analysis of the probable causes of poor performance  Assume that an opening for a VP of Sales has arisen at the Mumbai corporate headquarters and the company's chief executive officer (CEO) desires to promote one of the three existing store managers In evaluating the store manager's performance, should the CEO use a store's segment contribution margin, the profit margin controllable by the sales manager, or a store's segment profit margin  Justify your answer  CASE 2 Holiday Entertainment Corporation (HEC), a subsidiary of New Age Industries, manufactures go carts and other recreational vehicles Family recreational centers that feature not only go cart tracks but miniature golf, batting cages, and arcade games as well have increased in popularity As a result, HEC, has been receiving some pressure from New Age's management to diversify into some of these other recreational areas Recreational Leasing, Inc  (RLI), one of the largest firms that leases arcade games to family recreational centers, is looking for a friendly buyer New Age's top management believes that RLI's assets could be acquired for an investment of P3 2 Million and has strongly urged Anthony Matutino, division manager of HEC, to consider acquiring RLI  Matutino has reviewed RLI's financial statements with his controller, Jennifer Dolly, and they believe the acquisition may not be in the best interest of HEC  If we decide not to make this, the New Age people are not going to be happy,  said Matutino  If we could convince them to base our bonuses on something other than return on investment, maybe this acquisition would look more attractive How would we do if the bonuses were based on residual income, using the company's 15  cost of capital   New Age Industries traditionally has evaluated all of its divisions on the basis of return on investment The desired rate of return for each division is 20  The management team of any division reporting an annual increase in the ROI is automatically eligible for a bonus The management of divisions reporting a decline in the ROI must provide convincing explanation for the decline in order to be eligible for a bonus Moreover, this bonus is limited to 50  of the bonus paid to divisions reporting an increase in ROI  In the following table are condensed financial statements for both HEC and RLI for the most recent year  RLI HEC Sales revenue   9,500,000 Leasing revenue 3,100,000 Variable expenses (1,300,000) (6,000,000) Fixed expenses ( 1,200,000 ) ( 1,500,000 ) Operating income 600,000 2,000,000 Current assets 1,900,000 2,300,000 Long lived assets 1,100,000 5,700,000 Total assets 3,000,000 8,000,000 Current liabilities 850,000 1,400,000 Long term liabilities 1,200,000 3,800,000 Shareholders' equity 950,000 2,800,000 Total Liabilities   Shareholders' equity 3,000,000 8,000,000 REQUIRED  If New Age Industries continues to use ROI as the sole measure of divisional performance, explain why Holiday Entertainment Corporation would be reluctant to acquire Recreational Leasing, Inc  Support your answer with calculations  If New Age Industries could be persuaded to use residual income to measure the performance of HEC, explain why HEC would be more willing to acquire RLI  Support your answer with calculations  Discuss how the behavior of division managers is likely to be affected by the use of the following performance measures  a Return on investment and b Residual income  CASE 3 InterGlobal Industries is a diversified corporation with separate operating divisions Each division's performance is evaluated on the basis of profit and return on investment  The Air Comfort Division manufactures and sells air conditioner units The coming year's budgeted income statement, which follows, is based upon a sales volume of 15,000 units  AIR COMFORT DIVISION BUDGETED INCOME STATEMENT (in thousand) Per Unit Total Sales revenue 400 6,000 Manufacturing costs  Compressor 70 1,050 Other direct material 37 555 Direct labor 30 450 Variable overhead 45 675 Fixed overhead 32 480 Total manufacturing costs 214 3,210 Gross Margin 186 2,790 Operating expenses  Variable selling 18 270 Fixed selling 19 285 Fixed administrative 38 570 Total operating expenses 75 1,125 Net income before taxes 111 1,665 Air Comfort's division manager believes sales can be increased if the price of the air conditioners is reduced A market research study by an independent firm indicates that a 5  reduction in the selling price would increase sales volume 16 , or 2,400 units The division has sufficient production capacity to manage the increased volume with no increase in fixed costs  The Air Comfort Division uses a compressor in its units, which it purchases from an outside supplier at a cost of P70 per compressor The Air Comfort Division manager has asked the manager of the Compressor Division about selling compressor units to Air Comfort The Compressor Division currently manufactures and sells a unit to outside firms that is similar to the unit used by the Air Comfort Division The specifications of the Air Comfort Division compressor are slightly different, which would reduce the Compressor Division's direct material cost by P1 50 per unit In addition, the Compressor Division would not incur any variable selling costs in the units sold to the Air Comfort Division The manager of the Air Comfort Division wants all of the compressors it uses to come from one supplier and has offered to pay P50 for each compressor unit  The Compressor Division has the capacity to produce 75,000 units Its budgeted income statement for the coming year, which follows, is based on a sales volume of 64,000 units without considering Air Comfort's proposal  COMPRESSOR DIVISION BUDGETED INCOME STATEMENT (in thousand) Per Unit Total Sales revenue 100 6,400 Manufacturing costs  Direct Material 12 768 Direct Labor 8 512 Variable Overhead 10 640 Fixed overhead 11 704 Total manufacturing costs 41 2,624 Gross Margin 59 3,776 Operating expenses  Variable selling 6 384 Fixed selling 4 256 Fixed administrative 7 448 Total operating expenses 17 1,088 Net income before taxes 42 2,688 REQUIRED  Should the Air Comfort Division institute the 5  price reduction on its air conditioner units even if it cannot acquire the compressors internally for P50 each Support your conclusion with appropriate calculations  Independently of your answer to requirement (1), assume the Air Comfort Division needs 17,400 units Should the Compressor Division be willing to supply the compressor units for P50 each Support your conclusions with appropriate calculations  Independently of your answer to requirement (1), assume Air Comfort needs 17,400 units Suppose InterGlobal's top management has specified a transfer price of P50 Would it be in the best interest of InterGlobal Industries for the Compressor Division to supply the compressor units at P50 each to the Air Comfort Division Support your conclusions with appropriate calculations  Is P50 a goal congruent transfer price  Refer to your answers for requirements (2) and (3)

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CASE 1: Showplace Homes, Inc. sells home dcor merchandise through tree retail outlets - in Paris, Milan, and Abu Dhabi - and operates a general

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