CHAPTER10:DIVISIONALPERFORMANCEMEASUREMENT

MultipleChoice
c1.BothROIandRIcanbeusedforperformanceevaluationof
a.costcenters.
b.profitcenters.
c.investmentcenters.
d.alloftheabove.
b2.Thebesttransferpriceisusually
a.actualcostplusapercentagemarkup.
b.areliablemarketprice.
c.budgetedfullcostplusapercentagemarkup.
d.budgetedvariablecostplusapercentagemarkup.
d3.ThisyearDivisionAmadesalestoDivisionBatahighertransferprice
thanwasusedlastyear.Allotherthingsequal,whichofthefollowing
istrue?
a.A'sprofitthisyearshouldbeaboutthesameaslastyear.
b.B'sprofitthisyearshouldbeaboutthesameaslastyear.
c.Thecompany'stotalprofitshouldbehigherthisyearthanlastyear.
d.Thecompany'stotalprofitshouldbeaboutthesamethisyearaslast
year.
b4.GoalcongruenceisespeciallyrelevanttoallofthefollowingEXCEPT
a.settingtransferpricesforanartificialprofitcenter.
b.quotingpricesforoutsidecustomersofaninvestmentcenter.
c.selectingcoststobeincludedinperformancereports.
d.settingtransferpricesforaninvestmentcenter.
d5.Foradivision,ROI
a.isusuallylessthanROIforthecompanyasawhole.
b.eliminatesthedistortionthatcostallocationcanproduceinother
measuresofperformance.
c.usuallycannotbecomputedifdivisionalassetsarevaluedattheir
replacementcosts.
d.isaperformancemeasureinferior,forsomepurposes,toresidual
income.
a6.DivisionalROIisusually
a.higherthanthatforthecompanyasawhole.
b.lowerthanthatforanoutsidecompanyoperatinginthesame
industry.
c.lowerthanreturnonsalesforthedivision.
d.lowerthanthatfortheenterpriseasawhole.

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c7.Divisionalprofitsshould
a.excluderevenuesandexpensesrelatedtodealingswithother
divisionswithinthesameenterprise.
b.becomputedsothatthetotalprofitsofallthedivisionsequalsthe
totalprofitforthecompany.
c.bebasedontheprincipleofcontrollability.
d.bebasedoncashflowsratherthanaccrualbasisaccounting.
c8.Divisionalprofit
a.iscomputedinessentiallythesamewayasisincomeforthecompany
asawhole.
b.shouldincludeadeductionforanappropriateshareofthecompany's
commoncosts.
c.normallyincludestheresultsofintracompanysales.
d.isnotaffectedbydepreciationmethods.
d9.UsingreplacementcostsforassetsincomputingROIandRI
a.isprohibitedbecauseitviolatesgenerallyacceptedaccounting
principles.
b.willincreasebothROIandRIforadivision.
c.isunfairtodivisionalmanagers.
d.islesspopularthantheuseofbookvaluesinthosecomputations.
c10.Usingresidualincomeforevaluatingperformance
a.penalizesmanagerswhosesegmentshavelowROIs.
b.penalizesmanagersofrelativelylargesegments.
c.encouragesmanagerstomaximizedollarsofprofitafterarequired
ROIhasbeenachieved.
d.encouragesmanagerstomaximizeROIforthecompany.
c11.WhichitemisusuallyNOTrelevanttoadecisionbyadivisionalmanager
toreduceatransferpricetomeetapriceofferedtoanotherdivision
byanoutsidesupplier?
a.Opportunitycost.
b.Variablemanufacturingcosts.
c.Fixeddivisionaloverhead.
d.Thepriceofferedbytheoutsidesupplier.
c12.DivisionAearns$6,000onaninvestmentof$36,000.Onaninvestment
of$84,000,DivisionBearns$12,000.Whichofthefollowingistrue?
a.DivisionA'sprofitsaretoolow.
b.Iftherearefurthercoststhatarecommontobothdivisions,the
totalcompany'sROIisprobablygreaterthan15%.
c.IftheminimumdesiredROIis10%,DivisionA'sresidualincomeis
lowerthanthatofDivisionB.
d.ROIforDivisionBisgreaterthanROIforDivisionA.
d13.WhichequationdescribesROI?(I=investment,S=sales,and
N=income)
a.S/I
b.S/IxN
c.S/IxS/N
d.N/SxS/I

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a14.Whichequationdescribesresidualincome?(I=investment,N=income,
andK=minimumrequiredROI)
a.N(KxI)
b.(KxI)N
c.N/IK
d.(KxI)(N/I)
c15.IfDivisionChasa10%returnonsales,incomeof$10,000,andan
investmentturnoverof4times,itssalesare
a.$10,000.
b.$40,000.
c.$100,000.
d.$400,000.
b16.IfDivisionChasa10%returnonsales,incomeof$10,000,andan
investmentturnoverof4times,divisionalinvestmentis
a.$10,000.
b.$25,000.
c.$40,000.
d.$100,000.
c17.IfDivisionChasa10%returnonsales,incomeof$10,000,andan
investmentturnoverof4times,itsROIis
a.5000%.
b.100%.
c.40%.
d.10%.
b18.Ifadivision'sROIandtheminimumrequiredROIarethesame,the
division'sresidualincomeis
a.positive.
b.zero.
c.negative.
d.noneoftheabove.
a19.IfresidualincomeforDivisionQofCompanyZisnegative,whichofthe
followingistrue?
a.Q'sROIislessthanZ'sminimumrequiredROI.
b.Q'sROIequalsZ'sminimumrequiredROI.
c.Q'sROIishigherthanZ'sminimumrequiredROI.
d.Noneoftheabove.
b20.Marketbasedtransferpricesarebestfor
a.thecompanywhenthesellingdivisionisoperatingbelowcapacity.
b.thecompanywhenthesellingdivisionisoperatingatcapacity.
c.thebuyingdivisionifitisoperatingatcapacity.
d.thebuyingdivision.
d21.Theworsttransferpricingmethodistobasethepriceson
a.marketprices.
b.budgetedvariablecosts.
c.budgetedtotalcosts.
d.actualtotalcosts.

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d22.Allotherthingsremainingconstant,ifadivisiondoublesits
investmentturnover,itsROIwill
a.decrease.
b.remainconstant.
c.increase.
d.double.
c23.Residualincome
a.isalwaysthebestmeasureofdivisionalperformance.
b.isnotasgoodameasureofperformanceasROI.
c.overcomessomeoftheproblemsassociatedwithROI.
d.cannotbeusedbydivisionsthatdealwithothersinthesame
company.
b24.IftwodivisionsearnthesameROIandRI,whichofthefollowingis
true?
a.Theirmanagersmustbeaboutequallyskillful.
b.Theirincomesandinvestmentsmustbethesame.
c.Bothdivisionsaredoingaswellastheyshouldbe.
d.Alloftheabove.
c25.Whichofthefollowingismostlikelytobeincludedincalculating
divisionalprofit?
a.Interestoncorporatedebt.
b.Incometaxes.
c.Salestootherdivisionswithinthecompany.
d.Ashareofcorporateadministrationexpenses.
b26.Ifsalesincrease,whileincomeandinvestmentremainconstant,whichof
thefollowingistrue?
a.Investmentturnoverdecreases.
b.ROSdecreases.
c.ROIincreases.
d.ROIcouldincreaseordecrease.
c27.Comparedtoajewelrystore,asupermarkethas
a.highermarginandhigherturnover.
b.highermarginandlowerturnover.
c.lowermarginandhigherturnover.
d.lowermarginandlowerturnover.
c28.Ifincomeincreaseswhilesalesandinvestmentremainconstant,whichof
thefollowingistrue?
a.Investmentturnoverincreases.
b.ROSdecreases.
c.ROIincreases.
d.ROIcouldincreaseordecrease.
a29.Whichtransferpriceisidealforthecompanywhenthesellingdivision
isatcapacity?
a.Marketprice.
b.Incrementalcost.
c.Budgetedfullcost.
d.Actualvariablecostplusapercentageprofit.
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c30.Fromthestandpointofthecompany,theimportantquestionintransfer
pricingis
a.whatisfairtothedivisions.
b.howtodeterminetheprofitofthedivisions.
c.whetherornotthetransfershouldtakeplace.
d.whenthetransfershouldbemade.
d31.TheROIofDivisionArelativetothatofDivisionBcanbeinfluenced
by
a.theindustryinwhicheachdivisionoperates.
b.thetransferpriceusedforsalestoDivisionB.
c.thetaxstructuresofthecountriesinwhichthedivisionsoperate.
d.alloftheabove.
c32.Consideringliabilitiesincomputingdivisionalinvestment
a.encouragesmanagersofdivisionstopaytheirbillsfaster.
b.discouragesmanagersofdivisionsfromacquiringlongtermfinancing.
c.raisesdivisionalROIabovewhatitwouldotherwisebe.
d.isabadmanagerialpractice.
d33.Interdivisionalsales
a.lowerthecompany'spublicimage.
b.minimizeincometaxes.
c.areignoredwhencomputingdivisionalROI.
d.dononeoftheabove.
a34.Whichofthefollowingistrueabouttransferpricesforsalesbetween
divisionslocatedindifferentcountries?
a.Theyshouldconsiderthetaxstructuresinthetwocountries.
b.Theyareusuallysetbythegovernmentsofthetwocountries.
c.Theycannotaffectthetotalincomeofthecompany.
d.Alloftheabove.
d35.Multinationalcompaniesfacespecialproblemsinwhichofthefollowing
areasofmanagerialpractice?
a.Performanceevaluation.
b.Transferprices.
c.Allocatingcommoncosts.
d.Alloftheabove.
b36.WhichofthefollowingdescribesthecomputationofROI?
a.ReturnonSalesxInvestment
b.InvestmentTurnoverxReturnonSales
c.Income(InvestmentxMinimumRI)
d.SalesxInvestmentTurnover
b37.Iftheinvestmentturnoverincreasedby20%andROSdecreasedby30%,
theROIwould
a.increaseby20%.
b.decreaseby16%.
c.increaseby4%.
d.noneoftheabove.

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b38.ScottsoDivisionhasthefollowingresultsfortheyear:

Revenues$1,080,000
Variableexpenses440,000
Fixedexpenses400,000

Totaldivisionalassetsare$1,600,000.Thecompany'sminimumrequired
rateofreturnis14percent.ResidualincomeforScottsois
a.$(64,000).
b.$16,000.
c.$151,200.
d.$224,000.
c39.ScottsoDivisionhasthefollowingresultsfortheyear:

Revenues$1,080,000
Variableexpenses440,000
Fixedexpenses400,000
Totaldivisionalassetsare$1,600,000.Thecompany'sminimumrequired
rateofreturnis14percent.ReturnoninvestmentforScottsois
a.54%.
b.18%.
c.15%.
d.10%.
b40.MonroviaDivisionhasnetincomeof$240,000onsalesof$3,200,000.If
theinvestmentis$1,600,000whatisROS?
a.15.0%
b.7.5%
c.10.0
d.2.0
c41.ScottsoDivisionhasthefollowingresultsfortheyear:

Revenues$1,080,000
Variableexpenses440,000
Fixedexpenses400,000
Totaldivisionalassetsare$1,600,000.Thecompany'sminimumrequired
rateofreturnis14percent.ReturnonsalesforScottsois
a.1.5%.
b.15.0%.
c.22.2%.
d.67.5%.
d42.MonroviaDivisionhasnetincomeof$240,000onsalesof$3,200,000.If
theinvestmentis$1,600,000whatisassetturnover?
a.15.0%
b.7.5%
c.10.0
d.2.0

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a43.MonroviaDivisionhasnetincomeof$240,000onsalesof$3,200,000.If
theinvestmentis$1,600,000whatisROI?
a.15.0%
b.7.5%
c.10.0
d.2.0
b44.AlcatrazDivisionofXYZCorp.sells80,000unitsofpartXtothe
outsidemarket.PartXsellsfor$40,hasavariablecostof$22,anda
fixedcostperunitof$10.Alcatrazhasacapacitytoproduce100,000
unitsperperiod.CaponeDivisioncurrentlypurchases10,000unitsof
partXfromAlcatrazfor$40.Caponehasbeenapproachedbyanoutside
supplierwillingtosupplythepartsfor$36.Whatistheeffecton
XYZ'soverallprofitifAlcatrazREFUSEStheoutsidepriceandCapone
decidestobuyoutside?
a.nochange
b.$140,000decreaseinXYZprofits
c.$80,000decreaseinXYZprofits
d.$40,000increaseinXYZprofits
a45.AlcatrazDivisionofXYZCorp.sells80,000unitsofpartXtothe
outsidemarket.PartXsellsfor$40,hasavariablecostof$22,anda
fixedcostperunitof$10.Alcatrazhasacapacitytoproduce100,000
unitsperperiod.CaponeDivisioncurrentlypurchases10,000unitsof
partXfromAlcatrazfor$40.Caponehasbeenapproachedbyanoutside
supplierwillingtosupplythepartsfor$36.Whatistheeffecton
XYZ'soverallprofitifAlcatrazACCEPTStheoutsidepriceandCapone
continuestobuyinside?
a.nochange
b.$140,000decreaseinXYZprofits
c.$80,000decreaseinXYZprofits
d.$40,000increaseinXYZprofits
c46.Iftheinvestmentturnoverdecreasedby20%andROSdecreasedby30%,
theROIwould
a.increaseby30%.
b.decreaseby20%.
c.decreaseby44%.
d.noneoftheabove.
c47.Iftheinvestmentturnoverincreasedby10%andROSincreasedby20%,
theROIwould
a.increaseby10%.
b.increaseby20%.
c.increaseby30%.
d.increaseby32%.

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b48.DurandDivisionhasthefollowingresultsfortheyear:

Revenues$470,000
Netincome130,000
Totaldivisionalassetsare$625,000.Thecompany'sminimumrequired
rateofreturnis12percent.ResidualincomeforDurandis
a.$3,760.
b.$55,000.
c.$73,600.
d.cannotbedeterminedwithoutfurtherinformation.
c49.DurandDivisionhasthefollowingresultsfortheyear:

Revenues$470,000
Netincome130,000
Totaldivisionalassetsare$625,000.Thecompany'sminimumrequired
rateofreturnis12percent.ReturnoninvestmentforDurandis
a.9.0%.
b.18.3%.
c.20.8%.
d.27.7%.
d50.DurandDivisionhasthefollowingresultsfortheyear:

Revenues$470,000
Netincome130,000
Totaldivisionalassetsare$625,000.Thecompany'sminimumrequired
rateofreturnis12percent.ReturnonsalesforDurandis
a.9.0%.
b.18.3%.
c.20.8%.
d.27.7%.

TrueFalse
F1.Multinationalcompaniescannotusetransferprices.
T2.LongtermdebtisseldomconsideredindeterminingdivisionalROI.
F3.Themeasuremostcommonlyusedforevaluatingdivisionalperformanceis
investmentturnover.
T4.Allocatingallcommonassets,liabilities,andcoststodivisionsdoes
notaffecttheROIofthecompanyasawhole.
T5.Usingresidualincomeasacriterionforevaluatingdivisional
performancerequiresthatthecompanyestablishaminimumdesiredrate
ofreturnoninvestment.
F6.Returnoninvestmentistheproductofreturnonsalesandinventory
141

turnover.

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F7.Returnoninvestmentforamultidivisioncompanywillbelowerthanthe
ROIforthedivisionwiththelowestROI.
T8.Transferpricesequaltomarketpricesareleastappropriatewhenthe
sellingdivisionhasexcessproductivecapacity.
F9.Multinationalcompaniesmustusetransferpricesbasedonactualcosts.
F10.Returnoninvestmentisdefinedasnetincomedividedbystockholders'
equity.

Problems

1. Thefollowinginformationisavailableaboutthestatusandoperationsof
AKlopCompany,whichhasaminimumrequiredROIof15%.ANSWEREACHITEM
INDEPENDENTLYOFTHEOTHERS.
DivisionDivision
AB

Divisionalinvestment$500,000$1,500,000
Divisionalprofit$150,000$540,000
Divisionalsales$1,000,000$3,600,000

a.ComputeROIforDivisionA.
b.ComputeresidualincomeforDivisionB.

c.DivisionAcouldincreaseitsprofitby$40,000byincreasingits
investmentby$150,000.Computeitstotalresidualincome.

d.DivisionAcouldincreaseitsreturnonsalesbyonepercentagepoint,
whilekeepingthesametotalsalesandinvestment.ComputeitsROI.

e.DivisionBcouldreduceitsinvestmentsothatitsassetturnover
increasedbyonetime,whileholdingtotalsalesconstant.Computeits
ROI.

SOLUTION:
a.ROIforA:30%($150,000/$500,000)
b.RIforB:$315,000[$540,000($1,500,000x15%)]
c.RIforA:$92,500[$150,000+$40,00015%x($500,000+$150,000)]
d.ROIforA:32%[$150,000/$1,000,000=15%ROS+1%=16%,turnover=2
($1,000,000/$500,000),so16%x2=32%]
e.ROIforB:51%[$3,600,000/1,500,000=2.4times+1=3.4timesxROSof
15%($540,000/$3,600,000)=51%]

143

144

2.DivisionAofGetzCompanyexpectsthefollowingresults.ANSWEREACH
QUESTIONINDEPENDENTLY.
ToDivisionBToOutsiders

Sales(40,000x$10)$400,000
(40,000x$12)$480,000
Variablecostsat$6240,000240,000

Contributionmargin$160,000$240,000
Fixedcosts,allcommon,allocated
onthebasisofrelativeunits120,000120,000

Profit$40,000$120,000
===============

DivisionBhastheopportunitytobuyitsneedsfor40,000unitsfroman
outsidesupplierat$8each.

a.DivisionArefusestomeetthe$8price,salestooutsiderscannotbe
increased,andDivisionBbuysfromtheoutsidesupplier.Computethe
effectontheincomeofGetz.

b.DivisionAcannotincreaseitssalestooutsiders,doesmeetthe$8
price,andDivisionBcontinuestobuyfromA.Computetheeffecton
theincomeofGetz.
c.SupposethatDivisionAcouldsellthe40,000unitsnowtakenby
DivisionBtooutsidersat$9eachwithoutdisturbingsalesatthe
regular$12price.DivisionBbuysoutsideat$8andDivisionA
increasesitsoutsidesales.FindtheeffectontheincomeofGetz.

SOLUTION:
a.Getz'sincome:Decreases$80,000[40,000unitsx($8outsideprice$6
variablecost)]
b.Getz'sincome:Nochange
c.Getz'sincome:$40,000increase($360,000addedrevenuefromoutsiders
$320,000paidtotheoutsiderbyB)

3.ThefollowinginformationrelatestoZimmerDivisionofPurdyInc.Purdy's
desiredROIforitssegmentsis20%.
Sales$2,000,000Variablecosts1,500,000
Directfixedcosts300,000Investment500,000
a.FindZimmer'sROI.
b.FindZimmer'sresidualincome.

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SOLUTION:
a.ROI:40%[($2,000,000$1,500,000$300,000)/$500,000]
b.RI:$100,000[$200,000($500,000x20%)]

4.BayfieldDivisionofAshlandInc.hasacapacityof200,000unitsand
expectsthefollowingresults.
Sales(160,000unitsat$4)$640,000
Variablecosts,at$2(320,000)
Fixedcosts(260,000)

Income$60,000
========
WashburnDivisionofAshlandInc.currentlypurchases50,000unitsofa
partforoneofitsproductsfromanoutsidesupplierfor$4perunit.
Washburn'smanagerbelieveshecoulduseaminorvariationofBayfield's
productinstead,andofferstobuytheunitsfromBayfieldat$3.50.
MakingthevariationdesiredbyWashburnwouldcostBayfieldanadditional
$0.50perunitandwouldincreaseBayfield'sannualcashfixedcostsby
$20,000.BAYFIELD'SMANAGERAGREESTOTHEDEALOFFEREDBYWASHBURN'S
MANAGER.
a.FindtheeffectofthedealonWashburn'sincomeandcirclethecorrect
direction.(increasedecreasenone)
b.FindtheeffectofthedealonBayfield'sincomeandcirclethecorrect
direction.(increasedecreasenone)
c.FindtheeffectofthedealontheincomeofAshlandInc.andcirclethe
correctdirection.(increasedecreasenone)

SOLUTION:
a.Washburn'sincome,+$25,000[50,000x($4$3.50)]
b.Bayfield'sincome,+$10,000{50,000x($3.50$2$0.50)[lost
contributionmarginof10,000x($4$2)]$20,000newfixedcosts}
c.Ashland'sincome,+$35,000($25,000+$10,000)

5.CrosbyDivisionhasthefollowinginformationforthemostrecentperiod:
Divisionalincome
Divisionalinvestment
Divisionalsales

$1,500,000
$6,500,000
$12,000,000

Crosbyhasaminimumrequiredreturnof18%.

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a.ComputeCrosby'sreturnoninvestment.
b.ComputeCrosby'sinvestmentturnover.
c.ComputeCrosby'sresidualincome.
d.ComputeCrosby'sreturnonsales.

SOLUTION:
a.ROI:23.1%($1,500,000/$6,500,000)
b.IT:1.85($12,000,000/$6,500,000)
c.RI:$330,000[$1,500,000(18%x$6,500,000)]
d.ROS:12.5%($1,500,000/$12,000,000)

6. Thefollowinginformationisavailableaboutthestatusandoperationsof
StillsCompany,whichhasaminimumrequiredROIof20%.ANSWEREACHITEM
INDEPENDENTLYOFTHEOTHERS.
DivisionDivision
AB

Divisionalinvestment$400,000$1,250,000
Divisionalprofit$120,000$580,000
Divisionalsales$800,000$2,600,000

a.ComputeROIforDivisionB.
b.ComputeresidualincomeforDivisionA.

c.DivisionBcouldincreaseitsprofitby$80,000byincreasingits
investmentby$300,000.Computeitstotalresidualincome.

d.DivisionAcouldincreaseitsreturnonsalesbyonepercentagepoint,
whilekeepingthesametotalsales.ComputeitsROI.

e.DivisionAcouldincreaseitssalessothatitsassetturnoverincreased
byonetime,whileholdingtotalassetsconstant.ComputeitsROI.

SOLUTION:
a.ROIforB:46.4%($580,000/$1,250,000)
b.RIforA:$20,000[$120,000($400,000x20%)]
c.RIforB:$350,000[$580,000+$80,00020%x($1,250,000+$300,000)]
d.ROIforA:32%[$120,000/$800,000=15%ROS+1%=16%,turnover=2
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($800,000/$400,000),so16%x2=32%]
e.ROIforA:45%[$800,000/400,000=2times+1=3timesxROSof15%
($120,000/$800,000)=45%]

148

7.DivisionAofNashCompanyexpectsthefollowingresults.ANSWEREACH
QUESTIONINDEPENDENTLY.
ToDivisionBToOutsiders

Sales(5,000x$60)$300,000
(25,000x$72)$1,800,000
Variablecostsat$36180,000900,000

Contributionmargin$120,000$900,000
Fixedcosts,allcommon,allocated
onthebasisofrelativeunits60,000300,000

Profit$60,000$600,000
==================

DivisionBhastheopportunitytobuyitsneedsfor5,000unitsfroman
outsidesupplierat$45each.

a.DivisionArefusestomeetthe$45price,salestooutsiderscannotbe
increased,andDivisionBbuysfromtheoutsidesupplier.Computethe
effectontheincomeofNash.

b.DivisionAcannotincreaseitssalestooutsiders,doesmeetthe$45
price,andDivisionBcontinuestobuyfromA.Computetheeffecton
theincomeofNash.
c.SupposethatDivisionAcouldsellthe5,000unitsnowtakenbyDivision
Btooutsidersat$57eachwithoutdisturbingsalesattheregular$72
price.DivisionBbuysoutsideat$45andDivisionAincreasesits
outsidesales.FindtheeffectontheincomeofNash.

SOLUTION:
a.Nash'sincome:Decreases$45,000[5,000unitsx($45outsideprice$36
variablecost)]
b.Nash'sincome:Nochange
c.Nash'sincome:$60,000increase($285,000addedrevenuefromoutsiders
$225,000paidtotheoutsiderbyB)

8.ThefollowinginformationrelatestoBradleyDivisionofAllenCompany.
Allen'sminimumcostofcapitalforitssegmentsis15%.
Sales$4,000,000Variablecosts1,400,000
Directfixedcosts1,800,000Investment4,800,000
a.FindBradley'sROI.
b.FindBradley'seconomicvalueadded.

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SOLUTION:
a.ROI:16.7%[($4,000,000$1,400,000$1,800,000)/$4,800,000]
b.EVA:$80,000[$800,000($4,800,000x15%)]

9.RosalieDivisionofLacheneInc.hasacapacityof100,000unitsand
expectsthefollowingresultsfor.
Sales(90,000unitsat$30)$2,700,000
Variablecosts,at$20(1,800,000)
Fixedcosts(700,000)

Income$200,000
==========
KatarinaDivisionofLacheneInc.currentlypurchases20,000unitsofa
partforoneofitsproductsfromanoutsidesupplierat$32perunit.
Katarina'smanagerbelieveshecoulduseaminorvariationofRosalie's
productinstead,andofferstobuytheunitsfromRosalieat$26.Making
thevariationdesiredbyKatarinawouldcostRosalieanadditional$5per
unitandwouldincreaseRosalie'sannualcashfixedcostsby$80,000.
ROSALIE'SMANAGERAGREESTOTHEDEALOFFEREDBYKATARINA'SMANAGER.
a.FindtheeffectofthedealonKatarina'sincomeandcirclethecorrect
direction.(increasedecreasenone)
b.FindtheeffectofthedealonRosalie'sincomeandcirclethecorrect
direction.(increasedecreasenone)
c.FindtheeffectofthedealontheincomeofLacheneInc.andcirclethe
correctdirection.(increasedecreasenone)

SOLUTION:
a.Katarina'sincome,+$120,000[20,000x($32$26)]
b.Rosalie'sincome,$160,000{20,000x($26$20$5)[lost
contributionmarginof10,000x($30$20)]$80,000newfixedcosts)}
c.Lachene'sincome,$40,000($120,000$160,000)

10.YoungDivisionhasthefollowinginformationforthemostrecentperiod:
Divisionalincome
Divisionalinvestment
Divisionalsales

$11,000,000
$85,000,000
$100,000,000

Younghasaminimumrequiredreturnof15%
a.ComputeYoung'sreturnoninvestment.
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b.ComputeYoung'sinvestmentturnover.
c.ComputeYoung'sresidualincome.
d.ComputeYoung'sreturnonsales.

SOLUTION:
a.ROI:12.9%($11,000,000/$85,000,000)
b.IT:1.18($100,000,000/$85,000,000)
c.RI:($1,750,000)[$11,000,000(15%x$85,000,000)]
d.ROS:11.0%($11,000,000/$100,000,000)

151