Exam 11: How Do Managers Evaluate Performance in Decentralized Organizations

Exhibit 11-4 The following information is for two divisions at Wiley Company. Couch Division Chair Division Sales ? \ 6,000,000 Operating income ? \ 560,000 Operating profit margin 11.0\% ? Average operating assets \ 1,250,000 \ 4,000,000 Asset turnover 2.0 ? ROI ? ? -Refer to Exhibit 11-4.What is the operating profit margin for the Chair Division (rounded to the nearest tenth of a percent)?

Katsen Company can sell its products to an external market for $150 per unit.The division's variable manufacturing costs are $45 per unit and fixed manufacturing costs are $9 per unit.If the division is operating at full capacity,what would be the opportunity cost of selling internally?

Operating assets would include office buildings leased to other companies.

Exhibit 11-2 Manford Inc.has two divisions -Refrigerators and Dish Washer. Manford Company Segmented Income Statements For the Current Fiscal Year Ended December 31 Refrigerator Dish Washer Division Division Sales \ 10,000,000 \ 5,400,000 Cost of goods sold 4,200,000 2,660,000 Gross margin 5,800,000 2,740,000 Allocated overhead (from corporate) 940,000 740,000 Selling and administrative expenses 780,000 360,000 Operating income 4,080,000 1,640,000 Income tax expense (45\%) 1,836,000 738,000 Net income \ 2.244,000 \ 902.000 -Refer to Exhibit 11-2.Assume the Refrigerator Division has average operating assets totaling $24,000,000 for the year and the company's cost of capital rate is 15 percent.What is the residual income for the Refrigerator division?

All of the following are disadvantages of decentralizing except:

An organizational segment that is responsible for costs and revenues is known as:

Exhibit 11-1 Ashville Company has two divisions - Bikes and Trikes. Ashville Company Segmented Income Statements For the Current Fiscal Year Ended December 31 Bikes Division Trikes Division Sales \ 2,400,000 \ 1,000,000 Cost of goods sold 1,400,000 530,000 Gross margin 1,000,000 470,000 Allocated overhead (from corporate) 270,000 170,000 Selling and administrative expenses 190,000 140,000 Operating income 540,000 160,000 Income tax expense (40\%) Net income \ 324,000 \ 96,000 -Refer to Exhibit 11-1.Assume the Trikes Division has average operating assets totaling $400,000 for the year and the company's cost of capital rate is ten percent.What is the residual income for the Trikes division?

Exhibit 11-3 Dillon Company has the following information available for one of its divisions: Average operating assets \ 4,000,000 Sales \ 4,800,000 Return on investment (ROI) 30\% -Refer to Exhibit 11-3.Dillon requires a minimum return on its investments of 25%. Based on this information,what is the division's asset turnover (rounded to two decimal places)?

Exhibit 11-4 The following information is for two divisions at Wiley Company. Couch Division Chair Division Sales ? \ 6,000,000 Operating income ? \ 560,000 Operating profit margin 11.0\% ? Average operating assets \ 1,250,000 \ 4,000,000 Asset turnover 2.0 ? ROI ? ? -Refer to Exhibit 11-4.What is the ROI for the Couch Division (rounded to the nearest tenth of a percent)?

Exhibit 11-4 The following information is for two divisions at Wiley Company. Couch Division Chair Division Sales ? \ 6,000,000 Operating income ? \ 560,000 Operating profit margin 11.0\% ? Average operating assets \ 1,250,000 \ 4,000,000 Asset turnover 2.0 ? ROI ? ? -Refer to Exhibit 11-4.What is the ROI for the Chair Division (rounded to the nearest tenth of a percent)?

If decisions within a company are made by top management at headquarters,which of the following terms best describes this company?

Residual income is the portion of income produced by the division that is not related to its daily activities.

When defining operating income for return on investment (ROI)purposes,many organizations do not include which of the following?

Residual income is the dollar amount of division operating profit in excess of the division's cost of acquiring capital to purchase operating assets.

Exhibit 11-1 Ashville Company has two divisions - Bikes and Trikes. Ashville Company Segmented Income Statements For the Current Fiscal Year Ended December 31 Bikes Division Trikes Division Sales \ 2,400,000 \ 1,000,000 Cost of goods sold 1,400,000 530,000 Gross margin 1,000,000 470,000 Allocated overhead (from corporate) 270,000 170,000 Selling and administrative expenses 190,000 140,000 Operating income 540,000 160,000 Income tax expense (40\%) Net income \ 324,000 \ 96,000 -Refer to Exhibit 11-1.Using the segmented income statements,what is the profit margin ratio for the Trikes Division (to the nearest tenth of a percent)?

Genoa Equipment Company has three separate divisions: Tractors,Trailers,and Trucks.Information about the three divisions follows: Tractors Trailers Trucks Operating income \ 10,125,000 \ 19,500,000 \ 3,600,000 Operating assets \ 15,000,000 \ 78,000,000 \ 13,500,000 The company has recently implemented a new performance evaluation system.Based on this new system,a division manager would only receive a bonus if the ROI of the division was greater than 45% and residual income was in excess of $6,000,000.If management uses a cost of capital rate of 22%,which division manager(s)would be eligible for a bonus?

Return on investment (ROI)can be calculated several different ways depending on the company.

Exhibit 11-2 Manford Inc.has two divisions -Refrigerators and Dish Washer. Manford Company Segmented Income Statements For the Current Fiscal Year Ended December 31 Refrigerator Dish Washer Division Division Sales \ 10,000,000 \ 5,400,000 Cost of goods sold 4,200,000 2,660,000 Gross margin 5,800,000 2,740,000 Allocated overhead (from corporate) 940,000 740,000 Selling and administrative expenses 780,000 360,000 Operating income 4,080,000 1,640,000 Income tax expense (45\%) 1,836,000 738,000 Net income \ 2.244,000 \ 902.000 -Refer to Exhibit 11-2.Assume the Refrigerator Division has average operating assets totaling $24,000,000 for the year.What is the division's return on investment (to the nearest hundredth of a percent)?

Cambridge Products manufactures and sells cat toys and cat beds.The Bed Division incurs the following costs for the production of a single cat bed when 5,000 beds are produced each year. Direct materials \ 8.00 Direct labor 5.50 Variable overhead 2.50 Fixed overhead 2.00 Total cost \ 18.00 The company sells cat beds to various pet stores for $26.00.The Toy Division is doing a promotion whereby each customer that purchases ten cat toys during the months of January,February,and March will receive a free cat bed.The Toy Division would like to purchase these beds from the Bed Division. Assuming the Bed Division is at full capacity,what is the optimal transfer price?

The percent cost of capital is typically the company's percentage cost to obtain investment funds.