Performance Evaluation and Decentralization

PROBLEM

1. Pollux Company had the following income statement for last year:

Sales $360,000
Less: Cost of goods sold 195,000
Gross margin $165,000
Less: Selling & administrative expense 78,600
Operating income $ 86,400

Beginning assets were $565,000 and ending assets were $597,000.

(Carry computations out to three decimal places.)

A. What are average operating assets?

B. What is margin?
C. What is turnover?
D. What is ROI?

2. Noble Company has two divisions, the Domestic Division and the International Division. Last year, the
Domestic Division earned $360,000 using average operating assets of $1,440,000. Sales for the
Domestic Division were $3,600,000. Last year, the International Division earned $560,000 using
average operating assets of $2,800,000. Sales for the International Division were $7,000,000.

A. For the Domestic Division, margin is __________________ Turnover is

__________________ and ROI is __________________.
B. For the International Division, margin is __________________ Turnover is
__________________ and ROI is __________________.
C. If these are the only two divisions of Noble Company, what is ROI for Noble Company?

3. Chase Company had the following income statement for last year:

Sales $180,000
Less: Cost of goods sold 97,500
Gross margin $ 82,500
Less: Selling & Admin. Expense 39,300
Operating income $ 43,200

Beginning assets were $279,500 and ending assets were $296,500.

A. Average operating assets were $__________________.

B. Margin was __________________.
C. Turnover was __________________.
D. Return on investment was __________________%.

4. Given the following information for the Reardon Division:

Asset base $500,000

Sales Revenues $725,000
 Expenses $662,500

Required:
A. What are the margin, turnover, and ROI for Reardon Division?
B. Reardon has an option to make an additional investment that would add $100,000 to the
asset base. It would generate an additional $50,000 in sales revenue and no additional
expenses. What would be the effect on margin, turnover and ROI?
C. Another option (independent of alternative B) for Reardon is to run an advertising
campaign that would require additional advertising expenses of $37,500, but the best
estimate is the campaign would generate an additional $75,000 of revenue. What would
be the effect on margin, turnover and ROI?

5. Provide the missing data in the following situations:

Phi Delta Theta

Division Division Division
Sales $ (A) $250,000 $ (G)
Operating assets $ (B) $ (D) $800,000
Net operating income $400,000 $10,000 $144,000
Margin 0.08 (E) 0.12
Turnover (C) (F) 1.5
Return on investment 16% 10% (H)

Figure 12-7
Monfett Manufacturing earned operating income last year as shown in the following income statement:

Sales $620,000
Cost of goods sold $316,000
Gross margin $304,000
Selling and administrative expense $219,000
Operating income $85,000
Less: Income taxes (at 40%) $34,000
Net income $51,000

At the beginning of the year, the value of operating assets was $263,000. At the end of the year, the
value of operating assets was $336,000. Monfett Manufacturing requires a minimum rate of return of
15%. Total capital employed equal $350,000 and actual cost of capital is 6%.

6. Refer to Figure 12-7. Calculate the following:

A. Average operating assets

B. Margin
C. Turnover
D. Return on investment

(Carry computations out to two decimal places.)

7. Refer to Figure 12-7. Calculate the following:

A. Residual income
 B. EVA

8. Red Earth Company has two divisions, the Okla Division and the Homa Division. Last year, the Okla
Division earned $66,000 using average operating assets of $550,000. Last year, the Homa Division
earned $260,000 using average operating assets of $2,000,000. Minimum required rate of return for Red
Earth is 9%.

A. For the Okla Division, residual income is __________________.

B. For the Homa Division, residual income is __________________.

Now assume that the minimum required rate of return for Red Earth is 12%.
C. For the Okla Division, residual income is __________________.
D. For the Homa Division, residual income is __________________.

9. The Southern Division of Jenkins Company had income of $48,300, average assets of $345,000 and
sales of $241,500. The minimum rate of return for Jenkins Company is 12%.

A. What is margin for the Southern Division?

B. What is turnover for the Southern Division?
C. What is ROI for the Southern Division?
D. What is residual income for the Southern Division?

10. Dixie Company has the following data for 2011:

Division A Division B
Sales $400,000 $300,000
Contribution margin $160,000 $125,000
Operating income $80,000 $30,000
Average operating assets $320,000 $200,000
Cost of capital 15% 15%

Dixie Company has a target ROI of 20%.

Required: Calculate the following amounts for each division:

A. Margin ratio
B. Turnover ratio
C. ROI
D. Residual income
E. EVA

11. Paige Inc. has a division that makes paint and another division that constructs subdivision houses. The
paint division incurs the following costs for one gallon of paint:

Direct materials $1.10

Direct labor 1.45
Variable overhead 0.90
Fixed overhead 1.15
Total $4.60
 The Paint Division can make 1,000,000 gallons per year, and is at capacity. The Construction Division
currently buys its paint from an outside supplier for $5.20 per gallon (the same price that the Paint
Division receives).

A. The maximum transfer price per gallon of paint is $__________________; this price is
set by which of the two divisions?
B. The minimum transfer price per gallon of paint is $__________________; this price is
set by which of the two divisions?

12. Paige Inc. has a division that makes paint and another division that constructs subdivisions. The paint
division incurs the following costs for one gallon of paint:

Direct materials $1.10

Direct labor 1.45
Variable overhead 0.90
Fixed overhead 1.15
Total $4.60

The Paint Division can make 1,000,000 gallons per year, and expects to produce 800,000 gallons next
year. The Construction Division currently buys 200,000 gallons of paint from an outside supplier for
$5.30 per gallon (the same price that the Paint Division receives).

A. The maximum transfer price per gallon of paint is $__________________.

B. The minimum transfer price per gallon of paint is $__________________.
C. Assume that the transfer takes place at $5 per gallon; calculate the amount by which each
of the following will be better off with the transfer than without it.
Paint Division $__________________
Construction Division $__________________
Paige Inc.,as a whole $__________________

13. Paige Inc. has a division that makes paint and another division that constructs subdivisions. The paint
division incurs the following costs for one gallon of paint:

Direct materials $1.10

Direct labor 1.45
Variable overhead 0.90
Fixed overhead 1.15
Total $4.60

The Paint Division can make 1,000,000 gallons per year, and expects to produce 1,000,000 gallons next
year. The construction division currently buys 200,000 gallons of paint from an outside supplier for
$5.20 per gallon (the same price that the Paint Division receives).

A. The maximum transfer price per gallon of paint is $__________________.

B. The minimum transfer price per gallon of paint is $__________________.
C. Does it matter whether or not the two divisions transfer?

14. The Dear Division of Zimmer Company sells all of its output to the Finishing Division of the company.
The only product of the Dear Division is chair legs that are used by the Finishing Division. The retail
price of the legs is $20 per leg. Each chair completed by the Finishing Division requires four legs.
Production quantity and cost data for 2011 are as follows:
 Chair legs 30,000
Direct materials $135,000
Direct labor $ 90,000
Overhead (25% is variable) $ 90,000

Required: Compute the transfer price for a chair leg using:

A. market price.
B. variable product costs plus a fixed fee of 20%.
C. full cost plus 20% markup.
D. variable costs.

Figure 12-8
Bostonian Inc. has a number of divisions, including Delta Division and ListenNow Division. The
ListenNow Division owns and operates a line of MP3 players. Each year the ListenNow Division
purchases component AZ in order to manufacture the MP3 players. Currently it purchases this
component from an outside supplier for $6.50 per component. The manager of the Delta Division has
approached the manager of the ListenNow Division about selling component AZ to the ListenNow
Division. The full product cost of component AZ is $3.10. The Delta Division can sell all of the
components AZ it makes to outside companies for $6.50. The ListenNow Division needs 18,000
component AZs per year; the Delta Division can make up to 60,000 components per year.

15. Refer to Figure 12-8.

Required:
A. Which division sets the maximum transfer price? Which division sets the minimum transfer price?

B. Suppose the company policy is that all transfer take place at full cost. What is the transfer price?

16. Refer to Figure 12-8. Assume that the company policy is that all transfer prices are negotiated by the
divisions involved.

Required:
A. What is the maximum transfer price? Which division sets it?
B. What is the minimum transfer price? Which division sets it?
C. If the transfer takes place, what will be the transfer price?

17. Refer to Figure 12-8. Although the Delta Division has been operating at capacity (60,000 components
per year), it expects to produce and sell only 45,000 components for $6.50 each next year. The Delta
Division incurs variable costs of $1.50 per component. The company policy is that all transfer prices
are negotiated by the divisions involved.

Required:
A. What is the maximum transfer price? Which division sets it?
B. What is the minimum transfer price? Which division sets it?
C. Suppose that the two divisions agree on a transfer price of $5.75. What is the change in operating
income for the Delta Division? For the ListenNow Division? For Bostonian Inc. as a whole?

18. Each month, the vacuum cleaner manufacturing cell has 800 hours of time available. During that time,
the cell could have manufactured up to 2,400 vacuums; but only 1,600 vacuums were actually
manufactured. Calculate the following:
 A. Theoretical cycle time in minutes.
B. Theoretical velocity per hour.
C. Actual cycle time in minutes.
D. Actual velocity per hour.

19. The pager manufacturing cell has 1,200 hours of time available per quarter. The cell could make 7,200
pagers but only made 6,000 during that time. Calculate the following:

A. Theoretical cycle time in minutes.

B. Theoretical velocity per hour.
C. Actual cycle time in minutes.
D. Actual velocity per hour.
E. MCE is __________________ % (round your answer two digits).

Figure 12-6.
The First National Bank has a mortgage loan office with conversion cost of $73,950 per month. There
are five employees who each work 170 hours per month. Last month, 1,020 loan applications were
processed, but the staff believes that system improvements could lead to the processing of as many as
1,700 per month.

20. Refer to Figure 12-6. Calculate the following:

A. Actual cycle time in minutes.

B. Theoretical cycle time in minutes.
C. Actual velocity per hour.
D. Theoretical velocity per hour.

21. Refer to Figure 12-6. Calculate the following:

A. Conversion cost in minutes.

B. Theoretical conversion cost per unit.
C. Actual conversion cost per unit.
D. How much more is the department spending per application than it should be if perfect
efficiency could be attained?

22. Marshal Company has the following data for one of its manufacturing plants:

Maximum units produced in a quarter = 425,000 units

Actual units produced in a quarter = 354,500 units
Productive hours in one quarter = 35,450 hours

Required:
A. Computer the theoretical cycle time (in minutes).
B. Computer the actual cycle time (in minutes).
C. Compute the theoretical velocity in units per hour.
D. Compute the actual velocity in units per hour.

ESSAY
 You decide

1. Explain the differences between centralized and decentralized decision making. Also list some of the
reasons why a company would choose to decentralize.

2. What are the advantages and disadvantages of return on investment (ROI)?

3. How is EVA (Economic Value Added) different from standard residual income calculations?

4. The Glass Division of a company makes glass vases which have the following unit costs:

Direct materials $0.20

Direct labor 0.35
Variable overhead 0.15
Fixed overhead 1.30
Selling commission 0.50

The Florist Division of the company sells cut flowers and uses the glass vases. The Florist Division uses
10,000 vases per year and currently buys them from an outside supplier for $4 each. The Glass Division
produces and sells 100,000 glass vases per year and sells them on the outside market for $4 each. Vases
sold outside incur the sales commission; this commission would not be paid on internal transfers. The
Glass Division and the Florist Division managers just met and agreed on a transfer price of $3.75 per
vase. Is this a good idea for each division? Explain.

5. Describe the four perspectives of the Balanced Scorecard.