RESPONSIBILITY ACCOUNTING

Problem 1

Alyssa Company is a decentralized company with five autonomous divisions.Operating results for the company's Division A are given below:

SalesP24,500,000

Less:Variable costs14,700,000

Contribution margin9,800,000

Less:Fixed costs8,000,000

Net operating incomeP1,800,000

The company had an overall ROI of 24% last year.Division A used an investment of P6,000,000 at the start of the year.Division A has an opportunity to add a new product line that would require an investment of P4,000,000.The cost and revenue characteristics of the new product line per year would be:

SalesP8,000,000

Variable costs60% of sales

Fixed costsP2,240,000

Required:

1.Compute Division A's ROI for last year.

2.Compute Division A's ROI if the new product is added.

3.If you were Division A's manager, would you accept the new product line?

4.If you were the Chief Executive Officer (CEO) of Alyssa Company, would you adviseDivision A manager to add the new product line?

5.Suppose that the company sets a minimum return of 20% on its invested assets, and that the divisional performance is evaluated using the residual income approach:

a.Determine the residual income of Division A last year and its new residual income if the new product line is accepted.

b.Under these circumstances, if you are the Division A manager, would you accept the new product line?

Problem 2

The following excerpted data were taken from a report published by retailing industry:

RED COMPANYBLUE COMPANYWHITE COMPANY

SalesP6,000,000P4,800,000P?

Net operating income1,200,000720,000?

Average operating assets3,000,000?8,000,000

Return on sales??8%

Assets turnover??3

Return on investment?12%?

Required:Compute for the missing information.