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Evaluating division performance Last Resort Industries Inc. is a privately held diversified company with live separate divisions organized as investment centers. A condensed income statement for the Specialty Products Division for the past year, assuming no service department charges, is as follows: Last Resort Industries Inc.—Specialty Products Division Income Statement For the Year Ended December 31,20Y5 Sales $32,400,000 Cost of goods sold 24,300,000 Gross profit $8,100,000 Operating expenses 3,240,000 Income from operations $4,860,000 Invested assets $27,000,000 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: New Product Line Projected Income Statement For the Year Ended December 31,20Y6 Sales $12,960,000 Cost of goods sold 7,500,000 Gross profit $5,460,000 Operating expenses 3,127,200 Income from operations $ 2,332,800 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 58,000 increments, for each whole percentage point that the division’s 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. 1. Determine the return on investment for the Specialty Products Division for the past year. 2. Determine the Specialty Products Division manager’s bonus for the past year. 3. Determine the estimated return on investment for the new product line. Round whole percents to one decimal place and investment turnover to two decimal places. 4. 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. 5. 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.

BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 24, Problem 24.6CP
Textbook Problem

Evaluating division performance

 Last Resort Industries Inc. is a privately held diversified company with live separate divisions organized as investment centers. A condensed income statement for the Specialty Products Division for the past year, assuming no service department charges, is as follows:

Last Resort Industries Inc.—Specialty Products Division

Income Statement

For the Year Ended December 31,20Y5

Sales $32,400,000
Cost of goods sold 24,300,000
Gross profit $8,100,000
Operating expenses 3,240,000
Income from operations $4,860,000
Invested assets $27,000,000

 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:

New Product Line

Projected Income Statement

For the Year Ended December 31,20Y6

Sales $12,960,000
Cost of goods sold 7,500,000
Gross profit $5,460,000
Operating expenses 3,127,200
Income from operations $ 2,332,800

 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 58,000 increments, for each whole percentage point that the division’s 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.

  1. 1. Determine the return on investment for the Specialty Products Division for the past year.
  2. 2. Determine the Specialty Products Division manager’s bonus for the past year.
  3. 3. Determine the estimated return on investment for the new product line. Round whole percents to one decimal place and investment turnover to two decimal places.
  4. 4. 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.
  5. 5. 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.

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Chapter 24 Solutions

Accounting
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Ch. 24 - Budgetary performance for cost center Caroline...Ch. 24 - Budgetary performance for cost center Conley...Ch. 24 - Service department charges The centralized...Ch. 24 - Service department charges The centralized...Ch. 24 - Income from operations for profit center Using the...Ch. 24 - Income from operations for profit center Using the...Ch. 24 - Profit margin, investment turnover, and ROI Cash...Ch. 24 - Profit margin, investment turnover and ROI Briggs...Ch. 24 - Residual income The Consumer Division of Galena...Ch. 24 - Residual income The Commercial Division of Herring...Ch. 24 - Transfer pricing The materials used by the North...Ch. 24 - Transfer pricing The materials used by the...Ch. 24 - Budget performance reports for cost centers...Ch. 24 - Divisional income statements The following data...Ch. 24 - Service department charges and activity bases For...Ch. 24 - Activity bases for service department charges For...Ch. 24 - Service department charges In divisional income...Ch. 24 - Service department charges and activity bases...Ch. 24 - Divisional income statements with service...Ch. 24 - Corrections to service department charges for a...Ch. 24 - Profit center responsibility reporting Glades...Ch. 24 - Return on investment The income from operations...Ch. 24 - Residual income Based on the data in Exercise...Ch. 24 - Determining missing items in return computation...Ch. 24 - Profit margin, investment turnover, and return on...Ch. 24 - Return on investment The Walt Disney Company has...Ch. 24 - Determining missing items in return and residual...Ch. 24 - Determining missing items from computations Data...Ch. 24 - Return on investment, residual income for a...Ch. 24 - Balanced scorecard for a service company American...Ch. 24 - Building a balanced scorecard Hit-n-Kun Inc. owns...Ch. 24 - Decision on transfer pricing Materials used by the...Ch. 24 - Decision on transfer pricing Based on T_Kong...Ch. 24 - Budget performance report for a cost center...Ch. 24 - Profit center responsibility reporting for a...Ch. 24 - Divisional income statements and return on...Ch. 24 - Effect of proposals on divisional performance A...Ch. 24 - Divisional performance analysis and evaluation The...Ch. 24 - Transfer pricing Garcon Inc. manufactures...Ch. 24 - Budget performance report for a cost center The...Ch. 24 - Profit center responsibility reporting for a...Ch. 24 - Divisional income statements and return on...Ch. 24 - Effect of proposals on divisional performance A...Ch. 24 - Divisional performance analysis and evaluation The...Ch. 24 - Transfer pricing Exoplex Industries Inc. is a...Ch. 24 - Ethics in Action Sembotix Company has several...Ch. 24 - Communication The Norsk Division of Gridiron...Ch. 24 - Service department charges The Customer Service...Ch. 24 - Evaluating divisional performance The three...Ch. 24 - Evaluating division performance Last Resort...

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