Accounting Problems 12-29, 13-27, 13-28 and 13-29

12-29
Countywide Cable Services, Inc. is organized with three segments: Metro, Suburban, and Outlying.
Data for these segments for the year just ended follow.
Metro Suburban Outlying
Service revenue .................................................................... $1,000,000 $800,000 $400,000
Variable expenses ................................................................ 200,000 150,000 100,000
Controllable fixed expenses .................................................400,000 320,000 150,000
Fixed expenses controllable by others .................................230,000 200,000 90,000

In addition to the expenses listed above, the company has $95,000 of common fixed expenses.
Income-tax expense for the year is $145,000.
Required:

1. Prepare a segmented income statement for Countywide Cable Services, Inc. Use the contribution
format.

13-27

Golden Gate Construction Associates, a real estate developer and building contractor in San Francisco,
has two sources of long-term capital: debt and equity. The cost to Golden Gate of issuing debt is the
after-tax cost of the interest payments on the debt, taking into account the fact that the interest payments
are tax deductible. The cost of Golden Gate’s equity capital is the investment opportunity rate of Golden
Gate’s investors, that is, the rate they could earn on investments of similar risk to that of investing in
Golden Gate Construction Associates. The interest rate on Golden Gate’s $60 million of long-term
debt is 10 percent, and the company’s tax rate is 40 percent. The cost of Golden Gate’s equity capital is
15 percent. Moreover, the market value (and book value) of Golden Gate’s equity is $90 million.

Required: Calculate Golden Gate Construction Associates’ weighted-average cost of capital.

13-28
Refer to the data in the preceding exercise for Golden Gate Construction Associates. The company has
two divisions: the real estate division and the construction division. The divisions’ total assets, current
liabilities, and before-tax operating income for the most recent year are as follows:
Division Total Assets
Current
Liabilities
Before-Tax
Operating Income
Real estate ....................................................................... $100,000,000 $6,000,000 $20,000,000
Construction .................................................................... 60,000,000 4,000,000 18,000,000
Required: Calculate the economic value added (EVA) for each of Golden Gate Construction Associates’
divisions. (You will need to use the weighted-average cost of capital, which was computed in the
preceding exercise.)


13-29 (parts 1 – 2)
Wyalusing Industries has manufactured prefabricated houses for over 20 years. The houses are constructed
in sections to be assembled on customers’ lots. Wyalusing expanded into the precut housing market
when it acquired Fairmont Company, one of its suppliers. In this market, various types of lumber are
precut into the appropriate lengths, banded into packages, and shipped to customers’ lots for assembly.
Wyalusing designated the Fairmont Division as an investment center. Wyalusing uses return on investment
(ROI) as a performance measure with investment defined as average productive assets. Management
bonuses are based in part on ROI. All investments are expected to earn a minimum return of 15 percent
before income taxes. Fairmont’s ROI has ranged from 19.3 to 22.1 percent since it was acquired. Fairmont
had an investment opportunity in 20x1 that had an estimated ROI of 18 percent. Fairmont’s management
decided against the investment because it believed the investment would decrease the division’s overall
ROI. The 20x1 income statement for Fairmont Division follows. The division’s productive assets were
$12,600,000 at the end of 20x1, a 5 percent increase over the balance at the beginning of the year.
FAIRMONT DIVISION
Income Statement
For the Year Ended December 31, 20x1
(in thousands)
Sales revenue ................................................................................................................................................. $24,000
Cost of goods sold ........................................................................................................................................... 15,800
Gross margin .............................................................................................................................................. $ 8,200
Operating expenses:
Administrative ............................................................................................................................ $2,140
Selling ........................................................................................................................................ 3,600 5,740
Income from operations before income taxes .................................................................................................... $ 2,460
? Exercise 13–29

Required:
1. Calculate the following performance measures for 20x1 for the Fairmont Division.
a. Return on investment (ROI).
b. Residual income.
2. Would the management of Fairmont Division have been more likely to accept the investment
Opportunity it had in 20x1 if residual income were used as a performance measure instead of ROI?
Explain your answer