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E24-16 Using responsibility reports to evaluate cost, revenue, and profit centers Learning Objective 3 The accountant for a subunit of Accel Sports Company went on vacation before completing the subunit's monthly responsibility report. This is as far as she got: AccelSubunit X Actual Flexible Budget Flexible Sales Volume Static Revenue by Product Results Variance Budget Variance Budget Downhill-RI $ 323,000 (a) (b) $ 20,000 F $ 298,000 Downhill-RII 152,000 (c) $ 164,000 (d) 147,000 Cross-EXI 281,000 $ 1,000 U 282,000 (e) 300,000 Cross-EXII 253,000 (f) 248,000 16,500 U 264,500 Snow-LXI 426,000 4,000 F (g) (h) 405,000 Total $ (i) (j) (k) $ 1,435,000 Requirements 1. Complete the responsibility report for this subunit. 2. Based on the data presented, what type of responsibility center is this subunit? 3. Which items should be investigated if part of management's decision criteria is to investigate all variances exceeding $10,000? E24-17 Using ROI and RI to evaluate investment centers Learning Objective 4 1. Residential's ROI 32.50% 1,414,500 Zoes, a national manufacturer of lawn-mowing and snow-blowing equipment, segments its business according to customer type: professional and residential. The following divisional information was available for the past year: Net Sales Operating Income Average Total Asset Residential $ 540,000 $ 58,500 $ 180,000 Professional 1,070,000 152,000 380,000 Management has a 23% target rate of return for each division. Requirements 1. Calculate each division's ROI. Round all of your answers to four decimal places. 2. Calculate each division's profit margin ratio. Interpret your results. 3. Calculate each division's asset turnover ratio. Interpret your results. 4. Use the expanded ROI formula to confirm your results from Requirement 1. What can you conclude? Note: Exercise E24-17 must be completed before attempting Exercise E2418. E24-18 Using ROI and RI to evaluate investment centers Learning Objective 4 Professional's RI $64,600 Refer to the data in Exercise E24-17. Calculate each division's RI. Interpret your results. E24-19 Determining transfer pricing Learning Objective 5 The Watkins Company is decentralized, and divisions are considered investment centers. Watkins specializes in sports equipment, and one division manufactures netting that is used for basketball hoops, soccer goals, and other sports equipment. The Netting Division reports the following information for a heavy-duty basketball hoop net: Sales Price per Unit $ 18 Variable Cost per Unit 6 Contribution Margin per Unit $ 12 The Basketball Equipment Division can purchase a similar heavy-duty net from an outside vendor for $15. Requirements 1. Determine the negotiable range for the transfer price. 2. What is the minimum transfer price the Netting Division should consider if operating at capacity? Below capacity? 3. What is the maximum transfer price the Basketball Equipment Division should consider? FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition E24-16 Requirements 1. Complete the responsibility report for this subunit. 2. Based on the data presented, what type of responsibility center is this subunit? 3. Which items should be investigated if part of management's decision criteria is to investigate all variances exceeding $10,000? Solution: Requirement 1 MountainSubunit X Revenue by Product Downhill-RI Downhill-RII Cross-EXI Cross-EXII Snow-LXI Total Actual Results xx xx xx xx xx $ 1,435,000 Flexible Budget Flexible Variance Budget (a) F (b) ( c) 164,000 1000 U xx (f) F 248,000 4000 F (g) (i) (j) Chapter 24: Responsibility Accounting and Performance Evaluation Sales Volume Variance 20000 F (d) F (e) U 16500 U (h) F (k) Static Budget xx xx xx xx xx $ 1,414,500 Page 1 of 8 FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition a. b. c. d. e. f. g. h. i. j. k. Calculation 323000- 318000 (from b) 20000 + xx 152000 - xx 164000 - xx 282000 - xx 253000 - xx 426000 - xx 422000 (from g) - xx Net of the column Sum of the column Net of the column Amount $ 5,000 xx xx xx xx xx xx xx xx xx xx Requirement 2 Requirement 3 Chapter 24: Responsibility Accounting and Performance Evaluation Page 2 of 8 FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition E24-17 Requirements 1. Calculate each division's ROI. Round all of your answers to four decimal places. 2. Calculate each division's profit margin ratio. Interpret your results. 3. Calculate each division's asset turnover ratio. Interpret your results. 4. Use the expanded ROI formula to confirm your results from Requirement 1. What can you conclude? Solution: Requirement 1 ROI = operating income/average total assets Residentials ROI = xx / xx = 32.5% Professionals ROI = xx / xx = xx% Requirement 2 Profit Margin Ratio = Operating Income / Net Sales Residentials Profit margin Ratio = xx / xx = 10.83 % Professionals profit margin ratio = xx / xx = xx% Professional's profit margin ratio ________ that of the Residential Division. The Residential Division is earning about ______ on each dollar of sales, while the Professional Division is earning about ______ more. Chapter 24: Responsibility Accounting and Performance Evaluation Page 3 of 8 FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Requirement 3 Asset turnover ratio = Net Sales / Average total assets Residential asset turnover ratio = xx / xx = xx Professionals asset turnover ratio = xx / xx = xx The Residential Division is generating about ______ of sales for every dollar of average total assets invested. The Professional Division is generating about _____ of sales for each dollar of average total assets invested. The Residential Division is more efficient. Requirement 4 Profit margin ratio Chapter 24: Responsibility Accounting and Performance Evaluation Asset = turnover ratio ROI Page 4 of 8 FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition E24-18 Calculate each division's RI. Interpret your results. Solution: R1 = Operating income - (Target rate of return x Average total assets) Residentail's R1 = = = xx xx xx - (23% * xx) $41,400 Professional's R1 = = = xx xx xx - (23% * xx) - $87,400 Both divisions have positive residual income. This means that the divisions are earning income at a rate that ______ managements _______ expectations. These results are consistent with the ROI calculations. Chapter 24: Responsibility Accounting and Performance Evaluation Page 5 of 8 FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition s are earning e results are Chapter 24: Responsibility Accounting and Performance Evaluation Page 6 of 8 FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Requirements 1. Determine the negotiable range for the transfer price. 2. What is the minimum transfer price the Netting Division should consider if operating at capacity? Below capacity? 3. What is the maximum transfer price the Basketball Equipment Division should consider? Requirement 1 The negotialbe range for the transfer price is _____ to _____ Requirement 2 The minimum transfer price the Netting Division shold consider, if operating at capacity, is ________. If they are below capicty, then the minimum transfer price would be ______. Requirement 3 The maximum transfer price the Basketball Equipment Division should consider is ______. Chapter 24: Responsibility Accounting and Performance Evaluation Page 7 of 8 FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition ating at capacity? Chapter 24: Responsibility Accounting and Performance Evaluation Page 8 of 8 SEE PAGE BELOW - PAGE TWO Case Study Thomas Perdue had built up a successful development company. When he became city commissioner, everyone said it was good to have a businessperson on the commission. They said businesspeople know how to control costs and make sound economic decisions, and Thomas could help the city tighten its belt. One of his first projects was an analysis of the human resources department. He claimed that if the whole function was outsourced, it would save the taxpayers money. A year later, after painful layoffs and a bumpy transition, the new contractor, NewSoft, was in place. Two years later, NewSoft's billing rates had steadily increased, and there were complaints about service. After five years, the supposed savings had vanished, and Thomas had moved on to state government, his campaigns fueled by \"generous\" campaign contributions from companies like NewSoft. Requirements 1. Although this case differs from \"fraud\" in the usual sense, describe the conflict of interest in this case. Who benefitted, and who did not? 2. When making business decisions of this sort, some factors are quantitative, and some are not. Discuss some of the non-quantitative factors related to this case