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Exam 14: Business Unit Performance Measurement

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Question 1

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The Maxim Corporation reported the following operating results for its three divisions: South, West, and East. $\begin{array}{lrrrrr}&\text { South Division }&\text { West Division}&\text { East Division }\\\text { Sales } & \$ 380,000 & \$ 1,700,000 & \$ 2,000,000 \\\text { After-tax income } & \$ 20,000 & \$50,000& \$ 100,000\\\text { Divisional assets } & \$ 200,000 & \$ 625,00 0& \$ 800,000\end{array}$ - Which division has the smallest return on investment (ROI) ?

A) South.
B) West.
C) East.
D) All three divisions have the same ROI.

E) B) and C)
F) A) and D)

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What are two disadvantages of using divisional income as a performance measure?

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First, there may be size diffe...

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La Mesa Foods has the following data for its two divisions for the year: $\begin{array} { l r r } & \text { Uno } &{ \text { Dos } } \\\text { Reverues } & \$ 6 0 0 , 0 0 0 & \$ 1,900,000 \\\text { Cost of sales } & 384,750 & 950,000 \\\text { Allocated copporate overhead } & 36,000 & 114,000 \\\text { Other general \& adrniristration } & 79,250 & 550,000\end{array}$ Required: a. Compute divisional operating income for each of the divisions. Assume taxes are 30%. b. Calculate the gross margin ratio for each division. c. Calculate the operating margin ratio for each division. d. Calculate the profit margin ratio for each division.

Financial data for Windsor, Inc. for last year appear below: $\begin{array} {c}\text {Windsor, Inc.}\\\text {Income Statement}\\\begin{array} { l r r } \text { Sales } & \$ 1,750,000 \\\text { Less operating expenses } & 1,470,000\\\text { Net operating income } & 280,000\\ \text { Less interest and taxes: } & & \\\text { Interest expense } & \$ 96,000 \\\text { Tax expense } & 70,000 & 166,000 \\\text { Net income } & &\$ 114,000 \\\end{array}\end{array}$ The company paid dividends of $104,000 last year. The "Investment in Pine Company" on the statement of financial position represents an investment in the stock of another company. Required: a. Compute the company's margin, turnover, and return on investment for last year. b. The Board of Directors of Windsor, Inc. has set a minimum required return of 25%. What was the company's residual income last year?

The following information is available for Sweet Dreams Company: $\begin{array} { l r r } \text { Sales } & \$ 100,000 \\\text { Operating expenses } & \$ 94,000 \\\text { Operating assets } & \$ 40,000 \\\text { Stockholder's equity } & \$ 25,000 \\\text { Cost of capital } & 10 \%\end{array}$ What is Sweet Dreams Company's return on investment (ROI) ?

How does the use of residual income overcome the limitations of using return on investment?

Bleu Stone is a division of a major corporation. The following data are for the latest year of operations: $\begin{array}{l}\text { Sales } & \$ 30,000,000 \\\text { Net operating income } & \$ 1,170,000 \\\text { Average operating assets } & \$ 8,000,000\\\text { The company's minimum required rate of return }&18\%\end{array}$ Required: a. What is the division's margin? b. What is the division's turnover? c. What is the division's return on investment (ROI)? d. What is the division's residual income?

How will decreases in the following items affect return on investment (ROI) ? $\begin{array} { l c c } & \text { Decrease in Sales } & \text { Decrease in Equipment } \\\end{array}$ A) $\begin{array} { l c c } & \text { Decrease ROI } && \text { Decrease ROI } \\\end{array}$ B) $\begin{array} { l c c } & \text { Decrease ROI } && \text { Increase ROI } \\\end{array}$ C) $\begin{array} { l c c } & \text { Increase ROI } && \text { Decrease ROI } \\\end{array}$ D) $\begin{array} { l c c } & \text { Increase ROI } && \text { Increase ROI } \\\end{array}$

The Maxim Corporation reported the following operating results for its three divisions: South, West, and East. $\begin{array}{lrrrrr}&\text { South Division }&\text { West Division}&\text { East Division }\\\text { Sales } & \$ 380,000 & \$ 1,700,000 & \$ 2,000,000 \\\text { After-tax income } & \$ 20,000 & \$50,000& \$ 100,000\\\text { Divisional assets } & \$ 200,000 & \$ 625,00 0& \$ 800,000\end{array}$ - Which division has the largest asset turnover?

The High Seas, Inc. manufactures water vessels and is organized into three large divisions: jet skis, fishing boats, and yachts. The following information presents operating revenues, operating incomes, and invested assets of the company over the last three years: $\begin{array}{lrrr}\text { Operating Revenues }\\\text { (all amounts in } \$ 000 \mathrm{~s}) & 2020 & 2021 & 2022 \\\text { Jet Skis } & \$ 2,000 & \$ 3,000& \$ 4,000 \\\text { Fishing Boats } & 5,000 & 5,000& 4,000 \\\text { Yachts } & 8,000 & 7,000& 8,000\\\\\text { Operating Income }\\\text { Jet Skis } & \$ 500 & \$ 700 & \$ 1,000 \\\text { Fishing Boats } & 3,000 & 2,500 & 2,000 \\\text { Yachts } & 4,000 & 3,000 & 3,500\\\\\text {Invested Assets}\\\text {Jet Skis}&\$1,200&\$1,500&\$2,000\\\text {Fishing Boats}&\$2,000&\$1,500&\$1,5000\\\text {Yachts}&3,000&2,500&3,000\end{array}$ The following table shows the number of managers covered by the current compensation package of The High Seas, Inc.: $\begin{array} { | l | r | r | r | } \hline \text { Nurnber of Marnagers } & { 2020 } & 2021 & { 2022 } \\\hline \text { Jet Skis } & 50 & 60 & 70 \\\hline \text { Fishirng Boats } & 200 & 180 & 160 \\\hline \text { Yachts } & 250 & 200 & 250 \\\hline\end{array}$ The current compensation package is an annual bonus award. The managers share in the bonus pool. The pool is calculated as 10% of the annual residual income of the company. The residual income is defined as operating income minus an interest charge of 14% of invested assets. Required: (1) Compute the bonus amount to be paid during each year. Also, compute the (average) individual executive bonus amounts. (2) If the bonus was calculated by divisional residual income, what would be the bonus amounts?

Which of the following items would not be an example of an economic value added (EVA) adjustment to eliminate accounting distortions?

Rex Company's sales last year totaled $150,000 and its return on investment (ROI) was 12%. If the company's turnover was 3, then its net operating income for the year must have been:

The following data are available for the South Division of Manhattan Products, Inc. and the single product it makes: $\begin{array}{lrr} \text { Unit selling price } &\$20\\ \text { Variable cost per unit } &\$12\\ \text { Annual fixed costs} &\$280,000\\ \text { Average operating assets } &\$1,500,000\\\end{array}$ How many units must South sell each year to have an ROI of 16%?

Mallory, Inc. has the following data available for two of its divisions for last year: $\begin{array} { l c r } && \text { Europearn } \\& \text { Asian Division } & \text {Division } \\ \text { Sales } & \$ 460,000 & \$ 900,000 \\\text { Contribution Margin } & 184,000 & 470,000 \\\text { Operating income } & 92,000 & 90,000 \\\text { Average operating assets } & 368,000 & 750,000 \\\text { Weighted average cost of capital } & 14 \% & 14 \%\end{array}$ The tax rate for Mallory, Inc. is 18%. Required: (1) Compute the following for each division: (a) Profit margin. (b) Asset turnover. (c) ROI. (d) Residual income. (e) EVA (assume there are no current liabilities). (2) Briefly discuss which division appears most successful and why?

The following information pertains to Artemis Co. for the year ended December 31: (CPA adapted) $\begin{array} { l l } \text { Sales } & \$ 600,000 \\\text { Income } & \$ 100,000 \\\text { Capital irvestrnent } & \$ 400,000\end{array}$ Which of the following equations should be used to compute Artemis' return on investment (ROI) ?

The following information was presented by Outdoors Manufacturing Company for an asset purchased at the beginning of the previous year. $\begin{array} { l c } \text { Original cost of the asset } & \$ 20,000 \\\text { Useful life of the asset } & 10 \text { years } \\\text { Annual operating profit, including depreciation } & \$ 4,000 \\\text { Salvage value } &\$ - 0 -\end{array}$ What is the return on investment (ROI) assuming Outdoors uses (a) the straight-line method for depreciation and (b) beginning-of-year net book values to compute ROI?

Big Sky Industries is a division of a major corporation. The following data are for the latest year of operations: $\begin{array} { l r } \text { Sales } & \$ 24,900,000 \\\text { Net operating income } & \$ 1,319,700 \\\text { Average operating assets } & \$ 6,000,000\\\text { The company's minimum required rate of return }&12\%\end{array}$ Required: a. What is the division's margin? b. What is the division's turnover? c. What is the division's return on investment (ROI)? d. What is the division's residual income?

The Maxim Corporation reported the following operating results for its three divisions: South, West, and East. $\begin{array}{lrrrrr}&\text { South Division }&\text { West Division}&\text { East Division }\\\text { Sales } & \$ 380,000 & \$ 1,700,000 & \$ 2,000,000 \\\text { After-tax income } & \$ 20,000 & \$50,000& \$ 100,000\\\text { Divisional assets } & \$ 200,000 & \$ 625,00 0& \$ 800,000\end{array}$ - Which division has the highest profit margin?

Which of the following statement(s) is/are false? (A) Residual income can be used to compare divisions of different sizes. (B) Residual income can be used to compare divisions that are profit centers.

Bleu Stone is a division of a major corporation. The following data are for the latest year of operations: $\begin{array}{l}\text { Sales } & \$ 33,040,000 \\\text { Net operating income } & \$ 1,453,760 \\\text { Average operating assets } & \$ 8,000,000\\\text { The company's minimum required rate of return }&18\%\end{array}$ Required: a. What is the division's return on investment (ROI)? b. What is the division's residual income?