R&D is assumed to have a two-year life in the AC Division and a nine-year life in the SO division. All R&D expenditures are spent at thebeginning of the year. Assume there are no current liabilities and (unrealistically) that no R&D investments had taken place before thisyear.Required:a. Compute EVA for the two divisions. (Do not round intermediate calculations.)Economic value addedAC Division SO Division Colonial Pharmaceuticals is a small firm specializing in new products. It is organized into two divisions, which are based on theproducts they produce. AC Division is smaller and the life of the products it produces tend to be shorter than those produced by thelarger SO Division. Selected financial data for the past year is shown as follows. Divisional investment is as of the beginning of theyear. Colonial Pharmaceuticals uses a 8 percent cost of capital and uses beginning-of-the-year investment when computing ROI andresidual income. Ignore income taxes.Allocated corp. overheadCost of goods soldDivisional investmentR&DSalesSG&AAC Division$ 6703,34010,4002,70010,800910SO Division$ 1,1005,60073,0003,60020,000830

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R&D is assumed to have a two-year life in the AC Division and a nine-year life in the SO division. All R&D expenditures are spent at the beginning of the year. Assume there are no current liabilities and (unrealistically) that no R&D investments had taken place before this year. Required: a. Compute EVA for the two divisions. (Do not round intermediate calculations.) Economic value added AC Division SO Division

R&D is assumed to have a two-year life in the AC Division and a nine-year life in the SO division. All R&D expenditures are spent at the beginning of the year. Assume there are no current liabilities and (unrealistically) that no R&D investments had taken place before this year. Required: a. Compute EVA for the two divisions. (Do not round intermediate calculations.) Economic value added AC Division SO Division

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter10: Decentralization: Responsibility Accounting, Performance Evaluation, And Transfer Pricing

Section: Chapter Questions

Problem 11E: Xenold, Inc., manufactures and sells cooktops and ovens through three divisions: Home, Restaurant,...

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Last Resort Industries Inc. is a privately held diversified company with five separate divisions organized as investment centers. A condensed income statement for the Specialty Products Division for the past year, assuming no support department allocations, along with asset information is as follows: The manager of the Specialty Products Division was recently presented with the opportunity to add an additional product line, which would require invested assets of 14,400,000. A projected income statement for the new product line is as follows: The Specialty Products Division currently has 27,000,000 in invested assets, and Last Resort Industries Inc.s overall return on investment, including all divisions, is 10%. Each division manager is evaluated on the basis of divisional return on investment. A bonus is paid, in 8,000 increments, for each whole percentage point that the divisions return on investment exceeds the company average. The president is concerned that the manager of the Specialty Products Division rejected the addition of the new product line, even though all estimates indicated that the product line would be profitable and would increase overall company income. You have been asked to analyze the possible reasons the Specialty Products Division manager rejected the new product line. a. Determine the return on investment for the Specialty Products Division for the past year. b. Determine the Specialty Products Division managers bonus for the past year. c. Determine the estimated return on investment for the new product line. Round percentages to one decimal place and the investment turnover to two decimal places. d. Why might the manager of the Specialty Products Division decide to reject the new product line? Support your answer by determining the projected return on investment for 20Y6, assuming that the new product line was launched in the Specialty Products Division and 20Y6 actual operating results were similar to those of 20Y5. e. Suggest an alternative performance measure for motivating division managers to accept new investment opportunities that would increase the overall company income and return on investment.
Forchen, Inc., provided the following information for two of its divisions for last year: Required: 1. For the Small Appliances Division, calculate: a. Average operating assets b. Margin c. Turnover d. Return on investment (ROI) 2. For the Cleaning Products Division, calculate: a. Average operating assets b. Margin c. Turnover d. Return on investment (ROI) 3. What if operating income for the Small Appliances Division was 2,000,000? How would that affect average operating assets? Margin? Turnover? ROI? Calculate any changed ratios (round to four significant digits).
The three divisions of Yummy Foods are Snack Goods, Cereal, and Frozen Foods. The divisions are structured as investment centers. The following responsibility reports were prepared for the three divisions for the prior year: a. Which division is making the best use of invested assets and should be given priority for future capital investments? b. b. Assuming that the minimum acceptable return on new projects is 19%, would all investments that produce a return in excess of 19% be accepted by the divisions? Explain. c. c. Identify opportunities for improving the companys financial performance.
Materials used by the Instrument Division of Ziegler Inc. are currently purchased from outside suppliers at a cost of 1,350 per unit. However, the same materials are available from the Components Division. The Components Division has unused capacity and can produce the materials needed by the Instrument Division at a variable cost of 900 per unit. a. If a transfer price of 1,000 per unit is established and 75,000 units of materials are transferred, with no reduction in the Components Divisions current sales, how much would Ziegler Inc.s total operating income increase? b. How much would the Instrument Divisions operating income increase? c. How much would the Components Divisions operating income increase?
Dantrell Palmer has just been appointed manager of Kirchner Glass Products Division. He has two years to make the division profitable. If the division is still showing a loss after two years, it will be eliminated, and Dantrell will be reassigned as an assistant divisional manager in another division. The divisional income statement for the most recent year is as follows: Upon arriving at the division, Dantrell requested the following data on the divisions three products: He also gathered data on a proposed new product (Product D). If this product is added, it would displace one of the current products; the quantity that could be produced and sold would equal the quantity sold of the product it displaces, although demand limits the maximum quantity that could be sold to 20,000 units. Because of specialized production equipment, it is not possible for the new product to displace part of the production of a second product. The information on Product D is as follows: Required: 1. Prepare segmented income statements for Products A, B, and C. 2. Determine the products that Dantrell should produce for the coming year. Prepare segmented income statements that prove your combination is the best for the division. By how much will profits improve given the combination that you selected? (Hint: Your combination may include one, two, or three products.)
Xenold, Inc., manufactures and sells cooktops and ovens through three divisions: Home, Restaurant, and Specialty. Each division is evaluated as a profit center. Data for each division for last year are as follows (numbers in thousands): The income tax rate for Xenold, Inc., is 40 percent. Xenold, Inc., has two sources of financing: bonds paying 5 percent interest, which account for 25 percent of total investment, and equity accounting for the remaining 75 percent of total investment. Xenold, Inc., has been in business for over 15 years and is considered a relatively stable stock, despite its link to the cyclical construction industry. As a result, Xenold stock has an opportunity cost of 5 percent over the 4 percent long-term government bond rate. Xenolds total capital employed is 5.04 million (2,600,000 for the Home Division, 1,700,000 for the Restaurant Division, and the remainder for the Specialty Division). Required: 1. Prepare a segmented income statement for Xenold, Inc., for last year. 2. Calculate Xenolds weighted average cost of capital. (Round to four significant digits.) 3. Calculate EVA for each division and for Xenold, Inc. 4. Comment on the performance of each of the divisions.
Banyan Industries has two divisions, a tax rate of 30%, and a minimum rate of return of 20%. Division A has a weighted average cost of Capital of 9.5% and is looking at a new project that will generate a profit of $1,200,000 from a machine that costs $4,000,000. Division B has a weighted average cost of capital of 9.5% and is looking at a new project that will generate a profit of $1,350,000 from a machine that costs $5,000.000. A. Calculate the EVA for each of Banyans divisions. B. Calculate the RI for each of Banyans division. C. If Banyan uses EVA to evaluate the projects, which division has the better project and by how much? D. If Banyan uses RI, which division has the better project and by how much? E. What are some of the reasons for the similarity or difference that you found in the use of EVA versus RI?
Katayama Company produces a variety of products. One division makes neoprene wetsuits. The divisions projected income statement for the coming year is as follows: Required: 1. Compute the contribution margin per unit, and calculate the break-even point in units. Repeat, using the contribution margin ratio. 2. The divisional manager has decided to increase the advertising budget by 140,000 and cut the average selling price to 200. These actions will increase sales revenues by 1 million. Will this improve the divisions financial situation? Prepare a new income statement to support your answer. 3. Suppose sales revenues exceed the estimated amount on the income statement by 612,000. Without preparing a new income statement, determine by how much profits are underestimated. 4. How many units must be sold to earn an after-tax profit of 1.254 million? Assume a tax rate of 34 percent. (Round your answer up to the next whole unit.) 5. Compute the margin of safety in dollars based on the given income statement. 6. Compute the operating leverage based on the given income statement. (Round to three significant digits.) If sales revenues are 20 percent greater than expected, what is the percentage increase in profits?
Jarriot, Inc., presented two years of data for its Furniture Division and its Houseware Division. Required: 1. Compute the ROI and the margin and turnover ratios for each year for the Furniture Division. (Round your answers to four significant digits.) 2. Compute the ROI and the margin and turnover ratios for each year for the Houseware Division. (Round your answers to four significant digits.) 3. Explain the change in ROI from Year 1 to Year 2 for each division.
Morrill Company produces two different types of gauges: a density gauge and a thickness gauge. The segmented income statement for a typical quarter follows. Includes depreciation. The density gauge uses a subassembly that is purchased from an external supplier for 25 per unit. Each quarter, 2,000 subassemblies are purchased. All units produced are sold, and there are no ending inventories of subassemblies. Morrill is considering making the subassembly rather than buying it. Unit-level variable manufacturing costs are as follows: No significant non-unit-level costs are incurred. Morrill is considering two alternatives to supply the productive capacity for the subassembly. 1. Lease the needed space and equipment at a cost of 27,000 per quarter for the space and 10,000 per quarter for a supervisor. There are no other fixed expenses. 2. Drop the thickness gauge. The equipment could be adapted with virtually no cost and the existing space utilized to produce the subassembly. The direct fixed expenses, including supervision, would be 38,000, 8,000 of which is depreciation on equipment. If the thickness gauge is dropped, sales of the density gauge will not be affected. Required: 1. Should Morrill Company make or buy the subassembly? If it makes the subassembly, which alternative should be chosen? Explain and provide supporting computations. 2. Suppose that dropping the thickness gauge will decrease sales of the density gauge by 10 percent. What effect does this have on the decision? 3. Assume that dropping the thickness gauge decreases sales of the density gauge by 10 percent and that 2,800 subassemblies are required per quarter. As before, assume that there are no ending inventories of subassemblies and that all units produced are sold. Assume also that the per-unit sales price and variable costs are the same as in Requirement 1. Include the leasing alternative in your consideration. Now, what is the correct decision?
Navarre Energy Research specializes in developing and commercializing new products. It is organized into two divisions, which are based on the products they produce. Canal Division is smaller, and the lives of the products it produces tend to be shorter than those produced by the larger Lake Division. Selected financial data for the past year are shown in the following table. Divisional investment is as of the beginning of the year. Navarre uses an 8 percent cost of capital and beginning-of-the-year investment when computing ROI and residual income. Ignore income taxes. Division Canal ($000) Lake ($000) Allocated corporate overhead $ 4,100 $ 9,600 Cost of goods sold 20,000 30,000 Divisional investment 60,100 400,000 R&D 12,000 32,000 Sales 50,000 100,000 Selling, general and administrative (excluding R&D) 4,500 8,000 Required: Compute divisional income for the two divisions. Calculate the operating margin, which is equivalent to the return on sales,…
Navarre Energy Research specializes in developing and commercializing new products. It is organized into two divisions, which are based on the products they produce. Canal Division is smaller, and the lives of the products it produces tend to be shorter than those produced by the larger Lake Division. Selected financial data for the past year are shown in the following table. Divisional investment is as of the beginning of the year. Navarre uses an 8 percent cost of capital and beginning-of-the-year investment when computing ROI and residual income. Ignore income taxes. Division Canal ($000) Lake ($000) Allocated corporate overhead $ 4,100 $ 9,600 Cost of goods sold 20,000 30,000 Divisional investment 60,100 400,000 R&D 12,000 32,000 Sales 50,000 100,000 Selling, general and administrative (excluding R&D) 4,500 8,000 R&D is assumed to have a three-year life in Canal Division and an eight-year life in Lake Division. All R&D expenditures are spent…