E-9 As sales manager, Joe Batista was given the following static budget report for selling expenses in the Clothing Department of Soria Company for the month of October.

SORIA COMPANY Clothing Department Budget Report For the Month Ended October 31, 2017 Difference Favorable F Budget Actual Unfavorable U Sales in units 8,000 10,000 2,000 F Variable expenses Sales commissions $ 2,400 $ 2,600 $ 200 U Advertising expense 720 850 130 U Travel expense 3,600 4,100 500 U Free samples given out 1,600 1,400 200 F Total variable 8,320 8,950 630 U Fixed expenses Rent 1,500 1,500 0 Sales salaries 1,200 1,200 0 Ofce salaries 800 800 0 Depreciationautos (sales staff) 500 500 0 Total xed 4,000 4,000 0 Total expenses $12,320 $12,950 $ 630 U

As a result of this budget report, Joe was called into the presidents ofce and congratu-lated on his ne sales performance. He was reprimanded, however, for allowing his costs to get out of control. Joe knew something was wrong with the performance report that he had been given. However, he was not sure what to do, and comes to you for advice.

(a) Prepare a budget report based on exible budget data to help Joe. (b) Should Joe have been reprimanded? Explain.

P-7A Sentinel Industries has manufactured prefabricated houses for over 20 years. The houses are constructed in sections to be assembled on customers lots. Sentinel expanded into the precut housing market when it acquired Jensen Company, one of its suppliers. In this market, various types of lumber are precut into the appropriate lengths, banded into packages, and shipped to customers lots for assembly. Sentinel designated the Jensen Division as an investment center. Sentinel uses return on investment (ROI) as a performance measure with investment dened as average operating assets. Management bonuses are based in part on ROI. All investments are expected to earn a minimum rate of return of 18%. Jensens ROI has ranged from 20.1% to 23.5% since it was acquired. Jensen had an investment opportunity in 2017 that had an estimated ROI of 19%. Jensen management decided against the investment because it believed the investment would decrease the divisions overall ROI. Selected nancial information for Jensen are presented below. The divisions average operating assets were $12,300,000 for the year 2017.

SENTINEL INDUSTRIES Jensen Division Selected Financial Information For the Year Ended December 31, 2017 Sales $24,000,000 Contribution margin 9,100,000 Controllable margin 2,460,000

(a) Calculate the following performance measures for 2017 for the Jensen Division. (1) Return on investment (ROI). (2) Residual income.

(b) Would the management of Jensen Division have been more likely to accept the investment opportunity it had in 2017 if residual income were used as a performance measure instead of ROI? Explain your answer.(CMA adapted)