Division A manufactures electronic circuit boards. The boards can be sold either to Division B of the same company or to outside customers. Last year, the following activity occurred in Division A:

Selling price per circuit board	$ 176
Variable cost per circuit board	$ 111
Number of circuit boards:
Produced during the year	20,200
Sold to outside customers	14,800
Sold to Division B	5,400

Sales to Division B were at the same price as sales to outside customers. The circuit boards purchased by Division B were used in an electronic instrument manufactured by that division (one board per instrument). Division B incurred $260 in additional variable cost per instrument and then sold the instruments for $650 each.

Required:

1. Calculate the net operating incomes earned by Division A, Division B, and the company as a whole.

2. Assume Division As manufacturing capacity is 20,200 circuit boards. Next year, Division B wants to purchase 6,400 circuit boards from Division A rather than 5,400. (Circuit boards of this type are not available from outside sources.) From the standpoint of the company as a whole, should Division A sell the 1,000 additional circuit boards to Division B or continue to sell them to outside customers?

Selected sales and operating data for three divisions of different structural engineering firms are given as follows:

	Division A	Division B	Division C
Sales	$ 12,600,000	$ 35,750,000	$ 20,600,000
Average operating assets	$ 3,150,000	$ 7,150,000	$ 5,150,000
Net operating income	$ 516,600	$ 572,000	$ 597,400
Minimum required rate of return	9.00%	9.50%	11.60%

Required:

1. Compute the margin, turnover, and return on investment (ROI) for each division.

2. Compute the residual income (loss) for each division.

3. Assume that each division is presented with an investment opportunity that would yield a 10% rate of return.

a. If performance is being measured by ROI, which division or divisions will probably accept the opportunity?

b. If performance is being measured by residual income, which division or divisions will probably accept the opportunity?

The contribution format income statement for Huerra Company for last year is given below:

	Total	Unit
Sales	$ 998,000	$ 49.90
Variable expenses	598,800	29.94
Contribution margin	399,200	19.96
Fixed expenses	319,200	15.96
Net operating income	80,000	4.00
Income taxes @ 40%	32,000	1.60
Net income	$ 48,000	$ 2.40

The company had average operating assets of $507,000 during the year.

Required:

1. Compute the companys margin, turnover, and return on investment (ROI) for the period.

For each of the following questions, indicate whether the margin and turnover will increase, decrease, or remain unchanged as a result of the events described, and then compute the new ROI figure. Consider each question separately, starting in each case from the data used to compute the original ROI in (1) above.

2. Using Lean Production, the company is able to reduce the average level of inventory by $107,000.

3. The company achieves a cost savings of $14,000 per year by using less costly materials.

4. The company purchases machinery and equipment that increases average operating assets by $121,000. Sales remain unchanged. The new, more efficient equipment reduces production costs by $4,000 per year.

5. As a result of a more intense effort by sales people, sales are increased by 15%; operating assets remain unchanged.

6. At the beginning of the year, obsolete inventory carried on the books at a cost of $16,000 is scrapped and written off as a loss, thereby lowering net operating income.

7. At the beginning of the year, the company uses $176,000 of cash (received on accounts receivable) to repurchase some of its common stock.