Chapter 23

ABC Corporation has three service departments with the following costs and activity base: Service DepartmentCostActivity Base for Allocation Graphics Production$200,000 number of copies Accounting500,000 number of invoices processed Personnel Department400,000 number of employees ABC has three operating divisions, Micro, Macro and Super. Their revenue, cost and activity information are as follows: MicroMacroSuper Direct revenues$700,000 $850,000 $650,000 Direct operating expenses50,000 70,000 100,000 Number of copies made20,000 30,000 50,000 Number of invoices processed700 800 500 Number of employees130 145 125 What is the service department charge rate for the Personnel Department?

$1,000 (400,000/(125+145+130))

Mason Corporation had $650,000 in invested assets, sales of $700,000, income from operations amounting to $99,000, and a desired minimum rate of return of 15%. The residual income for Mason is

$1,500 (650,000x 15%=97,500) (99,000-97,500)

The following financial information was summarized from the accounting records of Train Corporation for the current year ended December 31: RailsDivision LocomotiveDivision CorporateTotal Cost of goods sold$ 47,200 $30,720 Direct operating expenses27,200 20,040 Sales 108,000 78,000 Interest expense $ 2,040 General overhead 18,160 Income tax 4,700 The income from operations for the Rails Division is

$33,600 (108,000-47,200-27,200)

The following financial information was summarized from the accounting records of Train Corporation for the current year ended December 31: RailsDivision LocomotiveDivision CorporateTotal Cost of goods sold$ 47,200 $30,720 Direct operating expenses27,200 20,040 Sales 108,000 78,000 Interest expense $ 2,040 General overhead 18,160 Income tax 4,700 The net income for Train Corporation is

$35,940 (108,000+78,000-47,200-27,200-30,720-20,040-2,040-18,160-4,700)

Budgetary Performance for Cost Center Vinton Company's costs were under budget by $36,000. The company is divided into North and South regions. The North Region's costs were over budget by $45,000. Determine the amount that the South Region's costs were over or under budget.

$81,000 under budget (-36,000=45,000 + X) (-36,000-45,000= -81,000)

Residual Income The Commercial Division of Galena Company has income from operations of $130,240 and assets of $407,000. The minimum acceptable return on assets is 10%. What is the residual income for the division?

$89,540 (407,000x10%= 40,700) (130,240-40,700)

Blaser Corporation had $275,000 in invested assets, sales of $330,000, income from operations amounting to $33,000 and a desired minimum rate of return of 7.5%. The rate of return on investment for Blaser Corporation is

12% PM(33,000/330,000 = 0.1 = 10%) IT (330,000/275,000 = 1.2) ROI (0.10x1.2 = 0.12 = 12%) or(33,000/275,000)

The Clydesdale Company has sales of $4,500,000. It also has invested assets of $2,000,000 and operating expenses of $3,600,000. The company has established a minimum rate of return of 7%. What is Clydesdale Company's rate of return on investment?

45% IFO(4,500,000-3,600,000) ROI (900,000/2,000,000)

Which of the following expressions is termed the profit margin factor as used in determining the rate of return on investment?

Income from operations/Sales

Transfer Pricing The materials used by the Multinomah Division of Isbister Company are currently purchased from outside suppliers at $43 per unit. These same materials are produced by the Pembroke Division. The Pembroke Division can produce the materials needed by the Multinomah Division at a variable cost of $21 per unit. The division is currently producing 63,000 units and has capacity of 90,000 units. The two divisions have recently negotiated a transfer price of $32 per unit for 27,000 units. By how much will each division's income increase as a result of this transfer?

Pembroke Division: $297,000 Multinomah Division: $297,000 ($32-$21)x 27,000units) ($43-$32)x27,000)

Service Department Charges The centralized computer technology department of Hardy Company has expenses of $320,000. The department has provided a total of 4,000 hours of service for the period. The Retail Division has used 2,750 hours of computer technology service during the period, and the Commercial Division has used 1,250 hours of computer technology service. How much should each division be charged for computer technology department services? Do not round interim calculations. Retail Division $ Commercial Division $

Retail Division: $220,000 Commercial Division: $100,000 (320,000/4,000=80) (80 x 2,750) (80 x 1,250)

Profit Margin, Investment Turnover, and ROI Briggs Company has income from operations of $29,155, invested assets of $245,000, and sales of $416,500. Use the DuPont formula to compute the return on investment. If required, round your answers to two decimal places. a. Profit margin b. Investment turnover c. Return on investment

a. 7% (29,155/416,500) b. 1.7 (416,500/245,000) c. 11.9% (7%x1.7) a. Divide income from operations by sales. b. Divide sales by invested assets. c. Multiply (a) and (b), or divide income from operations by invested assets.

Which of the following would be most effective in a small owner/manager-operated business?

centralization

Operating expenses directly traceable to or incurred for the sole benefit of a specific department and usually subject to the control of the department manager are

direct operating expenses

A responsibility center in which the department manager has responsibility for and authority over costs and revenues is called a(n)

profit center

The excess of divisional income from operations over a minimum acceptable amount of divisional income from operations is

residual income

Income from Operations for Profit Center The centralized computer technology department of Hardy Company has expenses of $320,000. The department has provided a total of 4,000 hours of service for the period. The Retail Division has used 2,750 hours of computer technology service during the period, and the Commercial Division has used 1,250 hours of computer technology service. Additional data for the two divisions is following below: Retail Division Commercial Division Sales $2,150,000 $1,200,000 Cost of goods sold 1,300,000 800,000 Selling expenses 150,000 175,000 Determine the divisional income from operations for the Retail Division and the Commercial Division. Do not round interim calculations. Hardy Company Divisional Income from Operations

sales cost of goods sold gross profit selling expenses income from operations before service department charges income from operations Retail Division Commercial Division 2,150,000 1,200,000 1,300,000 800,000 850,000 400,000 150,000 175,000 700,000 225,000 220,000 100,000 480,000 125,000