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Exam 9: Responsibility Accounting

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Question 61

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Responsibility reports should be simple,show variances between the budgeted and actual amounts of controllable revenue and expense items,and be timely.

A) True
B) False

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Question 62

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Unless there are other factors to be considered,an investment opportunity with a return on investment that equals or exceeds the company's required rate of return would be accepted.

A) True
B) False

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Question 63

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Indicate whether each of the following statements is true or false. Margin is calculated by dividing operating income by net income.______ Turnover is a measure of the profits generated from sales.______ Return on investment can be improved by increasing sales,decreasing expenses,or decreasing the asset base.______ If return on investment increases when sales increase,that change usually is due at least in part to the effect of fixed costs (operating leverage).______ Return on investment blends many aspects of managerial performance into a single ratio.______

Perfect Products provided the following selected information about its consumer products division for the current year: $\begin{array} { | l | l r | } \hline \text { Desired ROI } & & 14 \% \\\hline \text { Net income } & \$ & 220,000 \\\hline \text { Residual income } & \$ & 15,000 \\\hline\end{array}$ Required: Based on this information,calculate the company's investment amount.Round your answer to the nearest dollar.

Hinton Corporation includes two divisions,Filter Division and Motor Division.The Filter Division makes specialized filters,including one that could be used by the Motor Division.Costs for the filter are variable costs,$16; fixed costs,$20.Filter Division has capacity to make 20,000 of the filters,and it is operating at capacity.It sells the filters to other companies for $52 each.The Motor Division needs 8,000 filters per year,and it has been purchasing them from another company for $45 each. Required: 1)Businesses traditionally have used different bases for establishing transfer prices.What basis should be used in this case? 2)If a transfer were to occur between Filter Division and Motor Division,what is the maximum that Motor Division should be willing to pay for the filters? 3)If a transfer were to occur between Filter Division and Motor Division,what is the minimum price that Filter Division should be willing to accept? 4)Do you recommend that a transfer occur between Filter Division and Motor Division? If the transfer did occur,what would be the effect on the overall profits of Hinton Corporation?

The manager of the production department for Romulus Manufacturing has responsibility for all stages of the production process and does not have time to review all the operational details of his department.He has found it to be more productive to focus on the significant deviations from budget.This kind of management is called:

Which of the following would increase residual income? (Assume all other things are equal)

Reno Company is a decentralized company that has two divisions,Division A and Division B.Division A has the capacity to manufacture 24,000 units of a product that could be used by Division B.Division A currently is selling 16,000 units of the product to customers outside the company,incurring the following costs: variable costs of $7 per unit and total fixed costs of $48,000.The selling price to these customers is $16 per unit. Division B needs 4,000 units of the product that Division A makes.It currently is purchasing the units from an outside supplier at a price of $15 each.Division B offers to purchase the units from Division A at a price of $12; the managers of Division A say the price must be at least $14.The managers of the two divisions appear to have reached a stalemate,which threatens to prevent the transfer from occurring within the company. Required: 1)Is it in the best interest of Reno Company for Division B to purchase the units from Division A? Show quantitative support for your answer. 2)If the transfer is in the best interest of the company as a whole,should the top managers of Reno Company order the division managers to come to terms? How might the top management of Reno handle the situation other than by ordering the division managers to make the transfer?

The New Products Division of Testar Company had operating income of $8,000,000 and operating assets of $44,800,000 during the current year.The New Products Division has developed a potential new product that would require $8,500,000 in operating assets and would be expected to provide $1,400,000 in operating income each year.Testar has set a target return on investment (ROI) of 16% for each of its divisions.Assuming that the new product is put into production,calculate the division's ROI.

For Year 1,one division of Apex Company reported operating assets of $5,000,000 and operating income of $750,000.Apex has established a target return on investment (ROI)of 14% for the division. Required: 1)Calculate the division's ROI for Year 1.Did it achieve the target set by the company? 2)Assuming that operating assets for Year 2 increase by 10%,by how much would operating income have to increase to reach the target of 14%?

Terra Company has two divisions,the Retail Division and the Wholesale Division.The following information was gathered for the two divisions for the current year: $\begin{array} { l l c } & \text { Retail Division } & \text { Wholesale Division } \\\text { Operating income } & \$ 2,500,000 & \$ 6,000,000 \\\text { Operating assets } & \$ 16,000,000 & \$ 36,000,000\end{array}$ Terra Company has set a target return on investment (ROI) of 15% for both divisions.Based on ROI,which division appears to have performed better?

In a decentralized firm,a responsibility report should be prepared for investment center managers,but are not useful for profit center managers.

Vanessa Grant is responsible for controlling expenses,but is not responsible for generating revenues.Vanessa Grant is a manager of a(n) :

To avoid suboptimization,many companies prefer to evaluate their investment centers using:

In a responsibility reporting system,the reports of a particular manager contain summary information about the revenue and cost items directly under his or her control and detailed data on the activities of the responsibility centers that fall under his or her chain of authority.

Thanks to generous financial support from an anonymous donor,the Department of Accounting and Law at Northern University plans to create a center for accounting research.The Center,which will be an administrative unit of the department,will maintain a collection of accounting books and journals and electronic databases that will be used by faculty doing research.The search committee charged with recruiting a director for the center has requested an organization chart to show the lines of authority and responsibility among the various units of the university.The following units have been identified: Center for Accounting Research (newly created) College of Business Administration (COBA) College of Education (COE) College of Liberal Arts and Social Sciences (CLASS) College of Science and Technology (COST) Department of Accounting and Law (DAL) Department of Finance and Economics (DFE) Department of Management and Information Systems (DMIS) Department of Marketing and Logistics (DML) President of the University Vice President for Academic Affairs (VPAA) Vice President for Business Affairs (VPBA) Vice President for Student Affairs (VPSA) Required: 1)Construct an organization chart that depicts the units identified above.Because of space limitations,you may want to use the unit abbreviations.Note that deans of academic colleges report to the Vice President for Academic Affairs. 2)Describe several costs that might be controllable by the new center's director.

Joseph Company has an investment in assets of $450,000,operating income that is 10% of sales,and an ROI of 18%.From this information the amount of operating income would be:

The Electronics Division of Anton Company reports the following results for the current year: $\begin{array} { l c c } \text { Reveruses } & \$ & 800,000 \\\text { Operating expenses } & \$ & 656,000 \\\text { Operating income } & \$ & 144,000 \\\text { Operating assets } & \$ & 1,200,000\end{array}$ Anton Company has set a target return on investment (ROI) of 11% for the Electronics Division. The Electronic Division's return on investment is:

Packrall Company makes computer chips.Curtis is manager of the company's maintenance department.Because his maintenance technicians are so well trained in maintaining expensive and sensitive circuit board stamping equipment,Curtis has been authorized to contract to perform maintenance for outside customers.In this company,the maintenance department is likely organized as:

Carver Company's balance sheet and income statement are provided below: $\begin{array}{c}\text {Carver Company}\\\text {Balance Sheet }\\\text {December 31 , Year 1}\\\begin{array}{lr}\text { Assets }\\\text { Cash } & \$ 40,000 \\\text { Accounts receivable } & 52,000 \\\text { Inventory } & 80,000 \\\text { Plant and equipment, net of depreciation } & 280,000 \\\text { Land held for future plant expansion } & \underline{76,000} \\\text { Total assets } &\underline{ \$ 528,000}\\\\\text { Liabilities and Stockholders'Equity }\\\text { Accounts payable } & \$ 45,000 \\\text { Notes payable } & 58,000 \\\text { Capital stock, no par } & 240,000 \\\text { Retained earnings } & \underline{185,000}\\\text { Total liabilities and stockholders' equity } & \underline{\$ 528,000}\end{array}\end{array}$ $\begin{array}{c} \text { Carver Company}\\ \text { Income Statement }\\ \text { For the Year Ended December 31. Year}\\\begin{array}{lrr} \text { Sales} &\$330,000\\ \text { Less variable costs:} &\\ \text { Manufacturing } &68,000\\ \text { Selling and administrative} &\underline{48,000}\\ \text { Contribution margin} &\$214,000\\ \text { Less fixed costs:} &\\ \text { Manufacturing} &68,000\\ \text { Selling and administrative } &\underline{56,000}\\ \text { Net income } &\underline{\$90,000}\\\end{array}\end{array}$ Required: 1)Compute the margin,turnover,and return on investment for Carver Company. 2)What is the advantage of expanding the ROI formula to measure margin and turnover separately?