The table is the actual results for the year. Round amounts to dollars and percentages to one decimal.

 

Note that there are several cost centres, profit centres and investment centres in the actuals results. The “Total” column is the entire company managed by a chief executive officer while Plants, Departments (e.g., Dept 1 and 2) and specific period costs are managed by other managers given their assigned responsibilities. Within the Plants, there are two departments per Plant (e.g., Plant A has departments 1 and 2 and Plant B also has departments 1 and 2, separately managed). Period costs are allocated based on an activity-based accounting driver and are not separate cost centres within the Plants.

The company manages with four investments centres, four profit centres and nine costs centres. The company has set goals for return on sales of 10%, return on investment of 10% and positive residual income using 10%.

Questions:

1. Briefly describe why responsibility centres are used including a major requirement that enhances usefulness and motivation to managers. 
2. For the appropriate responsibility centres, based on the actual results, calculate: 
   1. Return on Investment
   2. Residual Income
   3. The Dupont returns (show Margin X Asset Turnover)
3. Using the calculations in 2, are the centres you chose good or bad and why?
    

 

Actual Plant B 1,400,000 400,000 Total Plant A Plant C Sales 6,400,000 600,000 11,000,000 3,200,000 1,100,000 Direct Material (Note 2) 2,100,000 Direct Labour (Note 2) Factory Overhead Cost of Goods Sold 3,000,000 800,000 500,000 250,000 1,150,000 1,700,000 300,000 2,200,000 1,700,000 1,150,000 3,450,000 6,800,000 Dept 1 700,000 600,000 1,300,000 Dept 2 1,500,000 550,000 2,150.000 Grass Profit 4,200,000 1,000,000 250,000 2,950,000 100,000 375,000 Advertising Selling Corporate Period Expenses Operating Profit 150,000 800,000 25,000 00,000 250,000 575,000 425,000 25,000 125,000 725,000 25,000 450,000 1,675,000 2,525,000 175,000 75,000 925,000 2,025,000 es Net Income 635,000 1,890,000 Invested Assets 11,000,000 3,000,000 1,500,000 6,500,000 Note 2 Price Volume Iatal Direct Material 12.00 175,000 units 2,100,000 Direct Labour 15.00 200,000 hours 3,000,000