finance data bank
122.When the Bronx Company formed three divisions a year ago, the president told the division managers an annual bonus would be given to the most profitable division. The bonus would be based on either the return on investment (ROI) or residual income (RI) of the division. Investment is to be measured using gross book value (GBV) or net book value (NBV). The following data are available:
All the assets are long-lived assets that were purchased 15 years ago and have 15 years of useful life remaining. A zero terminal disposal price is predicted. Bronx's minimum rate of return (cost of capital) used for computing RI is 10%.
Which method for computing profitability would each manager likely choose? Show supporting calculations. Round percentage answers to 2 decimal places, e.g., 0.1234 as 12.34%. Where applicable, assume straight-line depreciation.
123.T-shirts R Us Inc. operates two divisions that each manufactures t-shirts for universities. Each division has its own manufacturing facility. The historical-cost accounting system reports the following data for 2013.
T-shirts R Us Inc. estimates the useful life of each manufacturing facility to be 15 years. The company uses straight line depreciation, with a depreciation charge of $70,000 per year for each division and no salvage value at the end of 15 years. The manufacturing facility is the only long-lived asset of either division. Current assets are $300,000 in each division. At the end of 2013 the Atlantic Coast Division is 4 years old and the Big 10 Division is 6 years old. An index of construction costs, replacement cost, and liquidation values for manufacturing facilities for production of t-shirts for the 7-year period that T-shirts R Us Inc. has been operating is as follows:
Round answers to 2 decimal places where appropriate.
1. Compute return on investment (ROI) for each division using net book value (NBV). Interpret the results.
2. Compute return on investment (ROI) for each division, incorporating current-cost estimates as follows, using:
(a) Gross book values (GBV) under historical cost;
(b) GBV at historical cost restated to current cost using the index of construction costs;
(c) NBV of long-lived assets restated at current cost using the index of construction costs (the facility was constructed the year before the first year of use);
(d) Current replacement cost; and
(e) Current liquidation value.
3. Which of the measures calculated in (2) above would you choose for (a) performance evaluation of each division manager, and (b) deciding which division is most profitable for the overall firm. What are the strategic advantages and disadvantages to the firm of each measure for both (a) and (b)?
124.1. Describe at least three problems that Domi Products could encounter when using return on investment (ROI) as the basis of performance measurement.
2a. Define the residual income (RI) approach to segment performance measurement.
2b. Determine if Domi Products should implement this approach instead of the ROI approach.
3. Discuss the behavioral implications of the division managers' involvement in the corporate budgeting process, and the decision to more equitably allocate common costs.
Domi Products, a multi-divisional manufacturing company, measures performance and awards bonuses to division managers based upon divisional operating income. Under the current bonus plan, common company-wide operating expenses are allocated evenly to all five of its divisions. For example, if rent were $50,000, each division would be charged $10,000. In planning next year's budget, corporate management has requested that the division managers recommend how common expenses should be distributed to the divisions. The division managers met and jointly developed an incentive plan that would more equitably distribute common expenses on the basis of resources used and measure each division manager's performance based on return on assets (ROI), with divisional bonuses based on a target ROI. They jointly presented their recommendation to corporate management.
125.Eikelberry, Inc. has the following financial results for 2013 for its three regional divisions:
Calculate return on investment (ROI), asset turnover (AT), and return on sales (ROS) for each division for 2013. The sales in the North, Mid and South Atlantic regions are $2,350,000, $1,450,000, and $500,000, respectively. Calculate ROI and asset turnover (AT) for each of the four measures of investment (i.e., for each of four possible denominators in determining ROI and AT). Round all answers except ROI to 2 decimal places, e.g., round 0.12487 to 12.49%. Round ROI to whole percentage amounts, e.g., 0.1998 to 20%.
126.1. How would Division B selling to Division A affect Division A's purchasing costs?
2. How would intercompany sales affect Division B?
3. What solution would be best for Edwards Inc., assuming Division B has the ability to operate at full capacity?
Edwards Inc. manufactures electronics. It consists of several divisions operating investment centers. Division A desires to purchase materials from Division B at a price of $85 per unit. Division B can produce 25,000 units at full capacity, and is currently operating at 90% capacity with a variable cost of $80 per unit. Division B currently sells only to outside customers who pay $115 per unit. Division A pays an outside company $110 per unit. If purchased from Division B, B's variable costs would be $10 less because it would save on marketing expenses for these internal transfers. Division A requires 10,000 units.
127.1. Assume the transfer price is $12 per unit.
a. How would this affect the purchasing costs of Division N?
b. How would this affect the profits of Division M?
c. How would this affect Max Ltd. as a whole?
2. What if the transfer price was $13 per unit?
Max Ltd. produces kitchen tools, and operates several divisions as investment centers. Division M produces a product that it sells to other companies for $16 per unit. It is currently operating at its full capacity of 45,000 units per year. Variable manufacturing cost is $9 per unit, and variable marketing cost is $3 per unit. The company wishes to create a new division, Division N, to produce an innovative new tool that requires the use of Division B's product (or one very similar). Division N will produce 30,000 units. Currently, Division N can purchase a product equivalent to Division M's from Company X for $15 per unit. However, Max Ltd. is considering transferring the necessary product from Division M.