Chapter 21, P3.Evaluating Profit and Investment Center Performance

The managing partner of the law firm Sewell, Bagan, and Clark, LLP, makes asset acquisition and disposal decisions for the firm.As managing partner, she supervises the partners in charge of the firm's three branch offices.Those partners have the authority to make employee compensation decisions.The partners' compensation depends on the profitability of their branch office.Vanessa Smith manages the City Branch, which has the following master budget and actual results for the year ended December 31.

Master Budget Actual Results

Billed hours 5,000 4,900

Revenue $250,000 $254,800

Controllable variable costs:

Direct labor (120,000) (137,200)

Variable overhead (40,000) (34,300)

Contribution margin $90,000 $83,300

Controllable fixed costs:

Rent (30,000) (30,000)

Other administrative expenses

(45,000) (42,000)

Branch operating income $15,000 $11,300

REQUIRED

1.Assume that the City Branch is a profit center.Performance report that includes a flexible budget.Determine the variances between actual results, the flexible budget, and the master budget.

2.ACCOUNTING CONNECTION > Evaluate Vanessa Smith's performance as manager of City Branch.

3.Assume that the branch managers are assigned responsibility for capital expenditures and that the branches are thus investment centers.City Branch is expected to generate a desired ROI of at least 30 percent on average invested assets of $40,000.

a.Compute the branch's return on investment and residual income.(Round percentages to two decimal places.)

b.ACCOUNTING CONNECTION > Using the ROI and residual income, evaluate Vanessa Smith's performance as branch manager.

Enter appropriate amount or item in the shaded cells. Use the drop-down lists when available. An asterisk (*) will appear next to an incorrect entry in the outlined cells. Leave no cells blank. Ensure to enter "0" wherever applicable. Enter the unfavorable variances as a negative value. Sewell, Bagan, and Clark, LLP City Branch Performance Report For the Year Ended December 31 Partner in Charge: Vanessa Smith Actual Flexible Master Variance Variance results budget budget Billed hours 4,900 0 4,900 (100) U 5,000 Revenue $254,800 $9,800 F $245,000 $5,000 F $250,000 Controllable variable costs: Direct labor (137,200) (19,600) (117,600) 2,400 (120,000) Variable overhead (34,300) 4,900 (39,200) 300 (40,000) Contribution margin $83,300 ($4,900) * U $88,200 ($1,800) * $90,000 Controllable fixed costs: Rent (30,000) 0 (30,000) 0 (30,000) Other administrative expenses 42,000) 3,000 (45,000) 0 (45,000) Branch operating income $11,300 ($1,900) U $13,200 * ($1,800) U $15,000 la. Actual Flexible Master ROI = $11,300 * $40,000 $13,200 $40,000 $15,000 $40,000 * 28.25% 33.00% 37.50% Residual Income = $11,300 * $12,000 $13,200 $12,000 $15,000 $12,000 ($700) * $1,200 $3,000