Responsibility Accounting and Transfer Pricing

(A. Decentralization and Performance Evaluation)

D. The term segment is sometimes used to identify areas of responsibility in decentralized had an opportunity to invest in a project that requires an additional investment of P250,000
operations. and increased net income by P40,000. After the investment, the company's ROI will be
A. 16.0% C. 19.2%
PROBLEMS: B. 18.0% D. 20.2%
DuPont Model
Return on sales 4
. The following data relate to the Motor Division of Eurosun Company:
1
. The Dela Merced Company’s Household Products Division reported in 2007 sales of Sales P10,000,000
P15,000,000, an asset turnover ratio of 3.0, and a rate of return on average assets of 18 Variable costs 3,000,000
percent. The percentage of net income to sales is Direct fixed costs 5,000,000
A. 6 percent. C. 3 percent Invested capital 8,000,000
B. 12 percent. D. 5 percent. Allocated actual interest costs 800,000
Capital charge 12%
Return on assets The divisional return on investment is:
Required unit sales A. 15 percent C. 13 percent
2
. The Valve Division of Industrial Company produces a small valve that is used by various B. 25 percent D. 20 percent
companies as a component part in their products. Industrial Company operates its divisions
as autonomous units, giving its divisional manager great discretion in pricing and other Required sales
decisions. Each division is expected to generate a rate of return of at least 14 percent on its 5
. The manager of the Mac Division of Power Company expects the following results in 2006
operating assets. The Valve Division has average operating assets of P700,000. The valves (pesos in millions):
are sold for P5 each. Variable costs are P3 per valve, and fixed costs total P462,000 per year. Sales P49.60
The Division has a capacity of 300,000 units. Variable costs (60%) 29.76
How many valves must the Valve Division sell each year to generate the desired rate of return Contribution margin P19.84
on its assets? Fixed costs 12.00
A. 280,000 C. 355,385 Profit P 7.84
B. 350,000 D. 265,000 Investment:
Plant equipment P19.51
Divisional ROI Working capital 14.88 P34.39
3
. Marsh Company that had current operating assets of one million and net income of P200,000

1
. Answer: A 4
. Answer: B
Return on Sales: 18% ÷ 3 = 6% Operating income: 10M – 3M – 5M = P2 Million
ROI = P2M ÷ P8M = 25%
2
. Answer: A
Operating profit: (0.14 x P700,000) P98,000 5
. Answer: C
Units sold = (Fixed costs + Profit) ÷ UCM (P462,000 + P98,000) ÷ P2 280,000 Let S = Sales
0.3(19,510,000 + 0.3S) = (.4S – 12,000,000)
3
. Answer: C S = 57,590,322.58
New ROI: (200,000 + 40,000) ÷ (1M + 0.25M) 19.2%
7
 Responsibility Accounting and Transfer Pricing
(A. Decentralization and Performance Evaluation)

ROI P7.84/P34.39 22.80% foreign customer has approached Matipid’s manager with an offer to buy 10,000 units at P7
The division has a target ROI of 30 percent, and the manager has asked you to determine how each. If Matipid accepts the order, it would not lose any of the 70,000 units at the regular price.
much sales volume the division would need to reach that. He states that the sales mix is Accepting the order would increase fixed costs by P10,000 and investment by P40,000.
relatively constant so variable costs and equipment should be close to 60 percent of sales, What is the minimum price that Matipid could accept for the order and still maintain its
fixed cost and plant and equipment should remain constant, and working capital (cash, expected residual income?
receivables, and inventories) should vary closely with sales in the percentage reflected above. A. P5.00 C. P5.60
The peso sales that the division needs in order to reach the 30 percent ROI target is B. P4.75 D. P9.00
A. P19,829,032 C. P57,590,322
B. P44,373,871 D. P59,510,000 Maximum lost unit sales
8
. Magastos Division of Expenditures Company expects the following results for 2006:
Residual income Unit sales 70,000
6
. The current income for a subunit is P36,000. Its current invested capital is P200,000. The Unit selling price P 10
subunit is considering purchasing for P20,000 equipment that will increase annual income by Unit variable cost P 4
an estimated P2,800. The firm's cost of capital is 12%. If the equipment is purchased, the Total fixed cost
residual income of the subunit will Total fixed costs P 300,000
A. increase by P2,800 C. increase by P400 Total investment P 500,000
B. increase by P16,000 D. increase by 4% The minimum required ROI is 15 percent, and divisions are evaluated on residual income. A
foreign customer has approached Magastos’ manager with an offer to buy 10,000 units at P7
Minimum selling price each. Magastos Division has capacity of 75,000 units and the foreign customer will not accept
7
. Matipid Division of Expenditures Company expects the following results for 2007: fewer than 10,000 units. Accepting the order would increase fixed costs by P10,000 and
Unit sales 70,000 investment by P40,000.
Unit selling price P 10 At the price of P7 offered by foreign customer, what is the maximum number of units in regular
Unit variable cost P 4 sales that Magastos Division could sacrifice and still maintain its expected residual income?
Total fixed costs P300,000 A. 2,333 C. 3,333
Total investment P500,000 B. 2,667 D. 3,667
The minimum required ROI is 15 percent, and divisions are evaluated on residual income. A
Economic Value Added
6
. Answer: C
9
. Consider the following:
Increase in annual income P2,800
Additional required returns (P20,000 x 0.12) 2,400 8
. Answer: A
Increase in residual value P 400 Contribution provided by 10,000 units
10,000 x (7.00 – 5.60) 14,000
7
. Answer: C Divided by regular contribution margin per unit ÷ 6
Unit variable cost P4.00 Maximum decrease in regular sales 2,333
Incremental unit fixed cost (P10,000/10) 1.00
Minimum return per P1 of additional asset requirement 40,000 x 0.15 /10,000 0.60 9
. Answer: B
Minimum selling price P5.60 EVA = Investment center's after-tax operating income - (Investment center's total assets -
Investment center's current liabilities) x Weighted-average cost of capital].
8
 Responsibility Accounting and Transfer Pricing
(A. Decentralization and Performance Evaluation)

Investment center’s after-tax operating profit P 50,000 A. increase by 30% C. decrease by 10%
Investment center’s total assets 800,000 B. decrease by 37% D. none of the above
Investment center’s current liabilities 80,000
Weighted-average cost of capital 6.5% Comprehensive
What is the economic value added (EVA)? Use the following information to answer questions 2 thru 6:
A. P60,000 C. P 6,000 Carlyle Company had the following information pertaining to 2005:
B. P 3,200 D. P50,000 Profit P100,000
Sales P1,000,000
Segmented Income Statement Asset Turnover ratio 2 times
Controllable segment profit margin The desired minimum rate of return is 15 percent.
10
. Segment A generated sales revenues of P400,000 and variable operating expenses of
P180,000. Its controllable fixed expenses were P40,000. It was assigned 20% of P200,000 of 13
. What is the ROI?
fixed costs controlled by others. The common fixed costs were P25,000. What was Segment A. 10 percent C. 20 percent
A's controllable segment profit margin? B. 5 percent D. 15 percent
A. P220,000 C. P140,000
B. P180,000 D. P160,000 14
. What is the return on sales?
A. 10 percent C. 20 percent
Sensitivity Analysis B. 5 percent D. 15 percent
11
. If the investment turnover increased by 30% and ROS decreased by 20%, the ROI would
A. increase by 30% C. increase by 6% 15
. What is the amount of assets?
B. increase by 4% D. none of these A. P250,000 C. P1,000,000
B. P500,000 D. P2,000,000
12
. If the investment turnover decreased by 10% and ROS decreased by 30%, the ROI would

Net operating profit P50,000

Cost of investment (P800,000 – P80,000) x 0.075 46,800 13
. Answer: C
Economic Value Added P 3,200 ROI = Operating Profit ÷ Average investment
Average Operating assets: (P1,000,000 ÷ 2) = P500,000
10
. Answer: B ROI: (P100,000 ÷ P500,000) = 20%
Controllable segment profit margin = Revenue - (Segment's variable operating costs +
Controllable fixed costs). 14
. Answer: A
(P400,000 – P180,000 – P40,000) P180,000 Return on sales = Profit ÷ Net sales
P100,000 ÷ P1,000,000 = 10%
11
. Answer: B
(1.3 x 0.8) – 100% = 4.0% 15
. Answer: B
Total assets = Sales ÷ Asset turnover
12
. Answer: B P1,000,000 ÷ 2 = P500,000
Decrease in ROI: (0.90 x 0.70) – 1.00 = 37.0%
9
 Responsibility Accounting and Transfer Pricing
(A. Decentralization and Performance Evaluation)

16
. The manager of Carlyle is paid a bonus based on ROI. Would the manager invest in a project
that will pay a return on investment of 18 percent?
A. Yes, because the project's ROI exceeds the desired minimum rate of return.
B. Yes, because the project's ROI is greater than the company's current ROI.
C. Yes, because the project's ROI is equal than the company's current ROI.
D. No, because the project's ROI is less than the company's current ROI.
17
. What is Carlyle's residual income?
A. P 25,000 C. P(200,000)
B. P( 50,000) D. P 150,000

16
. Answer: D
No, because the manager's bonus would go down because the company's ROI is 20 percent
only.

17
. Answer: A
Operating profit P100,000
Less Required return on average assets: (P500,000 x 15%) 75,000
Residual income P 25,000

10