Chapter 24 differential analysis and product pricing

Accounting: Service Dept Charges, Residual Income, Budget Performances, Profit Center Responsibility Reporting, Product Cost Markup Percentage, Bottleneck Profit

&8.,,3 EE24-1 r; ii0

&8J.3 EE24-1 r, iir)'

08J.3 EE24-2 t; ir(

Chapter 24 Performance Evaluation for Decentralized Operations 1125

PE 24-1A Budgetary performance for cost center Bahrke Company's costs were over budget by $300,000. The company is divided into West and East regions. The East Region's costs were under budget by $60,000. Determine the amount that the 'Sfest Region's costs were over or under budget.

PE 24-1B Budgetary performance for cost center Vonn Motion Company's costs were under budget by $175,000. The company is divided into North and South regions. The North Region's costs were over budget by $60,000. Determine the amount that the South Region's costs were over or under budget.

The centralized employee travel department of Ohno Company has expenses of $210,000. The department has serviced a total of 3,000 travel reservations for the period. The North- east Division has made 1,250 reservations during the period, and the Pacific Division has made L,75O reselvations. How much should each division be charged for travel services?

SB"r.3 EE24-2 u litt PE 24-28 Service department charges The centralized computer technology department of Kearney Company has expenses of $170,000. The department has provided a total of 4,250 hours of service for the period. The Retail Division has used 2,250 hours of computer technology service during the pe- riod, and the Commercial Division has used 2,000 hours of computer technology service. How much should each division be charged for computer technology department services?

s3.'.3 EE24-3 1t ii i, PE 24-3A lncome from operations for profit center Using the data for Ohno Company from Practice Exercise 24-2A along with the data provided below, determine the divisional income from operations for the Northeast and Pacific divisions.

NortheastDivision Pacifi

Cost of goods sold

Selling expenses

s82s,000 422,O00

16s,000

s860,000 470,000

180,000

66",.3 EE24-3 , it) t PE 24-38 lncome from operations for profit center Using the data for Kearney Company from Practice Exercise 24-28 along with the data provided below, determine the divisional income from operations for the Retail Division and the Commercial Division.

RetailDivision CommercialDivision Sales

Cost of goods sold

Selling expenses

51 ,3s0,000 720,000

224,000

s 1 ,380,000 799,000

250,000

1126 Chapter24

Learning ExamPle O&jerrives Exercises

oBJ' 4 EE24-4 rt i i] t

OBJ. ?

r' a. k) 53,960

oBJ. 4 EE24-4 t) i i i ) PE 24-478 Profit margin, investment turnover, and Rol Roark company has income from operations of $40,000, invested assets of $160,000'

anc

sales of $3iO,OOO. Use the DuPont formula to compute the rate of return on investmer::

and show (a) the profit margin, (b) the investment turnover, and (c) the rate of retur-

on investment.

OBJ.4 EE24-5 l.titil Residual income fn--#orrtr-er Division of McPhie Company has income from operations of $75,000 an:

assets of $500,000. The minimum accepiable rate of return on assets is !1o/o' V/hat is thc

residual income for the division?

OEJ.4 EE24-5 r'iii] PE 24-58 Residual income The Commercial Division of Morse Company has income from operations of $160'U': and assets of $700,000. The minimum acceptable rate of return on assets is 9%' what

::

the residual income for the division?

OB"!.5 EE24-6 tt iit':l

oBJ.5 EE24-6 t) i | | PE 24-6A Transfer pricing The materials used by the vancouver Division of Roberts company are currently Pu:-

chased from outside suppliers at #45 per unit' These same materials are produced t'1

Roberts, Tucson oivlslon. the Tucson Division can produce the materials needed b1- the

Vancouver Division at avariable cost of $30 per unii. The division is currently producins

1.00,000 units and has capacity of 130,000 .r.titt. Th" two divisions have recently negoi:-

ated a transf'er price of 6,aA pL. unit for 25,OOO units. By how much will each division.:

income increase as a result of this transfer?

PE24-68 TransferPricing The materials used by the Burlington Division of Wilson Company are currently

purchasec

from outside supplieis at $100 p"er unit' These same materials are produced by the Racine

Division. The Racine Division ian produc. the materials needed by the Burlington Divt-

sion at avariable cost of $70 per unit. The division is currently producing 169,000 urYL:

and has capacity of 200,000 .r.ritr. Th" tlvo divisions have recently negotiated a transte:

pd." "f $Si p.. unit for 40,000 units. By how much will each division's income increa-

as a result of this transfer?

Performance Evaluation for Decentralized Operations

EX24-1 Budget Performance reports for cost centers partially completed budget performance repofis for Gehring company, a manufacturer o:

air conditioners, are provided on the following page'

PE24-4A Profit margin, investment turnover, and ROI

Celski Company has income from operations of $60,000, invested assets of $250,000, and

salesof$s00,000.UsetheDuPontformulatocomputetherateofreturnoninvestmen: and show (a) the profit margin, (b) the investment turnover, and

(c) the rate of return

on investment.

1134 Chapter 24 Performance Evaluation for Decentralized Operations

GSJ.5

/ b. ss00,000 EX24-21 Decision on transfer pricing Based on Goldman Motors' datain Exercise 24-20, assume that a transfer price o;5r-rl has been established and that 25,OOO units of materials are transferred, with no reducr.n

in the Components Division's current sales'

a. How much would Goldmon Motors' total income from operations increase?

tr. How much would the Truck Division's income from operations increase?

c. How much would the Components Division's income from operations increase? j. * If the negotiated price approach is used, what would be the range of acc

able transfer prices and whY?

*8J.2

w M?Iilf,ec Company sells electronics over the Internet. The International Divisior- :' organizedas a cost center. The budget for the International Division for the month en'!:

Budget performance report for a cost center

March 31,, 20'1.2, is as follows (in thousands):

Customer service salaries

lnsurance and ProPertY taxes

Distribution salaries

Marketing salaries

Engineer salaries

Warehouse wages

EquiPment dePreciation

Total

During March, the costs incurred in the International

08.!.3 / 1. lncome from operations, central Division, S390,000

Customer service salaries

lnsurance and property taxes

Distribution salaries

Marketing salaries

Engineer salaries

Warehouse wages

Equipment dePreciation

Total

s 32s,500 68,250

519,250

612,125

498,12s

348,800 '109,400

?49t89 Division were as follows:

S 416,700 66,200

514,000

685,500

488,1 00

334,900

109,375

52,614,77s

5 720,000 860,000

1,560,000

4s6,150 s11,700

943,s50

1 12,000

38s,000

152,000

240,000

Revenues-East Revenues-West Revenues-Centra I

Operating Expenses-East

Operati ng Expenses-West

Operating Expenses-Central

Corporate Expenses-shareholder Relations

Corporate Expenses-Customer Support

Corporate ExPenses-Legal

General Corporate Offi cers' Salaries

*VDN\T -hstructions

fi) e..p"." a budget performance report for the director of the International Division ::r \-/ the month of March.

2. For which costs might the director be expected to request supplemental reports?

Profit center responsibility reporting

ioa-rrso-r, p.oducts Inc. has three regional divisions organized as profit centers' The ci-:e

executiveofficer(CEO)evaluatesdivisionalperformance,usingincomefromoperatic'= as a percent of revenues. The following quarterly income and expense accounts \r<": provided from the trialbalance as of December 31,2O\2:

Chapter 24 Performance Evaluation for Decentralized Operations I 135

The company operates three service departments: Shareholder Relations, Customer Support, and Legal. The Shareholder Relations Department conducts a variety of services for shareholders of the company. The Customer Support Department is the company's point of contact for new service, complaints, and requests for repair. The department believes that the number of customer contacts is an activity base for this work. The Legal Department provides legal services for division management. The department believes that the number of hours billed is an activity base for this work. The following additional information has been gathered:

q?

og"l.4 y' 2. Mutual Fund Division, ROl, 18o/o

-L,h i

'oatk' \/ lnstructions

Number of customer contacts

Number of hours billed 5,250 7,875 1,520 1,330

East

4,375

950

1.. Prepare quafierly income statements showing income from operations for the three r 6 divisions. Use three column headings: East, 'W'est, and Central.

4+'// hraentify the most successful division according to the profit rnargin. \ r J.

-

Provide a recommendation to the CEO for a better method for evaluating the O$\Y performance of the divisions. In your recommendation, identify the ma;'or weaknessI of the present method.

PR 24-3A Divisional income statements and rate of return on investment analysis Edward Baird Company is a diversified investment company with three operating divi- sions organized as investment centers. Condensed data taken frorn the records of the three divisions for the year ended June 30, 2072, are as follows:

Mutual Fund Division

Electronic lnvestment Brokerage Banking Division Division

53,4s0,000 2,415,OOO

5,750,000

The management of Edward Baird Company planning a future expansion of operations.

lnstructions 1. Prepare condensed divisional income statements for tiie three divisions, assuming that

there were no service department charges. 2. Using the DuPont formula for rate of return on investment, compute the profit margin,

investment turnover, and rate of return on investment for each division. j.

-

If available funds permit the expansion of operations of only one division, which of the divisions would you recommend for expansion, based on parts (1) and (2)? Explain.

PR 24-4A Effect of proposals on divisional performance A condensed income statement for the Golf Division of Rewind Sports Inc. for the year ended December 37, 2072, is as follows:

Fee revenue

Operating expenses Invested assets

s2,800,000 s3,800,000 2,632,000 2,8s0,000 800,000 4,750,000

is evaluating each division as a basis for

OBJ.4

y' 1.ROt,'t5.60/o

ts Sales Cost of goods sold

Gross profit Operating expenses lncome from operations I nvested assets

52,400,000 1,663,000

5 737,000 42s,000

t 1?{99 52,000,000

Assume that the Golf Division received no charges from service departments. The president of Rewind Sports has indicated that the division's rate of (eturn on a $2,000,000

Chapter 25 Differential Analysis, Product Pricing, and Activity-Based Costing 1177

learning Example O*j*cfives Exercises

*s.t" r EE 2s-4 , PE 25-4A Replace equipment A machine with a book value of $250,000 has an estimated six-year life. A proposal is offered to sell the old machine for $216,000 and replace it with a new machine at a cost of fi282,O00. The new machine has a six-year life with no residual value. The new machine would reduce annual direct labor costs from $50,000 to $40,000. Prepare a dif- ferential analysis dated February 18,2012, on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2).

*E-1. 1 EE 2s-4 PE 25-4B Replace equipment A machine with a book value of $75,000 has an estimated five-year life. A proposal is offered to sell the old machine for $64,000 and replace it with a new machine at a cost of $80,000. The new machine has a five-year life with no residual value. The new ma- chine would reduce annual direct labor costs from $9,500 to $5,500. Prepare a differential analysis dated April "J.1, 2072, on whether to continue with the old machine (Alternative L) or replace the old machine (Alternative 2).

csJ" t E= 2s-s PE 25-5A Process or sell Product T is produced for $3.50 per pound. Product T can be sold without additional processing for $4.15 per pound, or processed further into Product U at an additional cost of $O.44 per pound. Product U can be sold for #4.50 per pound. Prepare a differential analysis dated September 77,2012, on whether to seIl Product T (Alternative 1) or process further into Product U (Alternative 2).

oBi. 1 EE?s-s ,. I PE 25-58 Process or sell Product D is producedfor $52 per gallon. Product D can be sold without additional processing for $80 per gallon, or processed further into Product E at

^fi additional cost of $19 per gallon.

Product E can be sold for $102 per gallon. Prepare a differential analysis datedJune 9,2072, on whether to sell Product D (Altemative l.) or process further into Product E (Altemative 2).

6SJ,t EE25-6, ii PE 25-6A Accept business at special price Product R is normally sold for $45 per unit. A special price of $32 is offered for the export market. The variable production cost is $25 per unit. An additional export tariff of 1,5% of revenue must be paid for all export products. Assume there is sufficient capacity for the special order. Prepare a differential analysis dated July 7, 20L2, on whether to reject (Alternative 1) or accept (Alternative 2) the special order.

*Bi, X EE 25-6 r, I r PE 25-68 Accept business at special price Product A is normally sold for $8.90 per unit. A special price of $6.60 is offered for the export market. The variable production cost is $5.10 per unit. An additional export tariff of 25o/o of revenue must be paid for all export products. Assume there is sufficient capacity for the special order. Prepare a differential analysis dated January 22, 2012, on whether to reject (Alternative 1) or accept (Alternative 2) the special order.

OBJ.2 EE25-f 1: itf i Product cost markup percentage nt tighting Inc. produces and sells lighting fixtures. An entry light has a total cost

of $60 per unit, of which $32 is product cost and $28 is selling and administrative ex- penses. In addition, the total cost of $60 is made up of $40 variable cost and $20 fixed cost. The desired profit is $12 per unit. Determine the markup percentage on product cost.

CBJ.2 ZE25-7 ; ji, :t PE25-78 Product Cost markup percentage Eden Garden Tools Inc. produces and sells home and garden tools and equipment. A lawnmower has a total cost of $200 per unit, of which $140 is product cost and $60 is selling and administrative expenses. In addition, the total cost of $200 is made up of $150 variable cost and $50 fixed cost. The desired profit is $38 per unit. Determine the markup percentage on product cost.

TI

I

1178 Chapter 25

Learning Example Abjectives Exercises

OBJ,3 EE25-8 l ti,,;

Differential Analysis, Product Pricing, and Activity-Based Costing

Bottleneck profit A has a unit contribution margin of $27. Product B has a unit contribution margin

of $55. Product A requires three testing hours, while Product B requires five testing hours- Determine the most profitable product, assuming the testing is a constraint.

OBJ.3 EE25-8 tt it PE 25-88 Bottleneck profit Product K has a unit contribution margin of $160. Product L has a unit contribution mar- gin of $80. Product K requires eight furnace hours, while Product L requires five furnace hours. Determine the most profitable product, assuming the furnace is a constraint.

oBJ.4 EE2s-9 it ii,ti PE 25-9A Activity-based costing Maritime Marine Company has total estimated factory overhead for the year of $900,000. divided into four activities: fabrication, $33O,OOO; assembly, $180,000; setup, $140,000: and inspection, $250,000. Maritime manufactures two types of boats: a speedboat and a bass boat. The activity-base usage quantities for each product by each activity are as follows:

Fabrication Assembly Setup lnspection Speedboat 1,000 dlh Bass boat 1,500

2,s00 dlh

1,500 dlh 50 setups 100 inspections 1,000 90 400 ?,59q dlh !19 setups I99 inspections

Each product is budgeted for 25O units of production for the year. Determine (a) the activity rates for each activity and (b) the factory overhead cost per unit for each producr using activity-based costing.

oBJ.4 EE25-e 1t i ii i PE 25-98 Activity-based costing Urban Styles Inc. has total estimated factory overhead for the year of $360,000, divided into four activities: cutting, $120,000; sewing, $60,000; setup, $100,000; and inspection. $80,000. Urban Styles manufactures two types of men's pants: jeans and khakis. The activity-based usage quantities for each product by each activity are as follows:

Cutting Sewing Setup lnspection

Jeans

Khakis

1,000 dlh

2,000

3,000 dlh

2,000 dlh

1,000

lpgg dlh

1,600 setups

400

2,000 setups

3,500 inspections

500

4,999 inspections

Each product is budgeted for 20,000 units of production for the year. Determine (a) the activity rates for each activity and (b) the factory overhead cost per unit for each product using activity based costing.

OBJ. 1

y' a. Differential revenue from selling, -s9,000

EX 25-1 Differential analysis for a lease or sell decision Sure-Bilt Construction Company is considering selling excess machinery with a book value of $280,000 (original cost of $400,000 less accumulated depreciation of $120,000) for $276,000, less a 5o/obrokerage commission. Alternatively, the machinery can be leased for a total of $285,000 for five years, after which it is expected to have no residual value. During the period of the lease, Sure-Bilt Construction Company's costs of repairs, insur- ance, and properry tax expenses are expected to be #25,5OO. a. Prepare a differential analysis, dated January 3, 2012, to determine whether Sure-Bilt

should lease (Alternative 1) or sell (Alternative 2) the machinery.