Module 23 Exercises
1. M23-21. ROI and Residual Income: Impact of a New Investment (LO3)
The Mustang Division of Detroit Motors had an operating income of $900,000 and net assets of $4,000,000. Detroit Motors has a target rate of return of 16 percent. Required
a. Compute the return on investment.
b. Compute the residual income.
c. The Mustang Division has an opportunity to increase operating income by $200,000 with an $850,000 investment in assets.
1. Compute the Mustang Division's return on investment if the project is undertaken. (Round your answer to three decimal places.)
2. Compute the Mustang Division's residual income if the project is undertaken.
2. Nelson Company is a two-division firm and has the following information available for this year:
Common fixed costs / $ 800,000Direct fixed costs of Division A / 200,000
Direct fixed costs of Division B / 400,000
Sales revenue of Division A / 800,000
Sales revenue of Division B / 1,200,000
Variable costs of Division A / 240,000
Variable costs of Division B / 360,000
What is Division A's contribution margin?
What is Division B’s segment margin?
3. The following information pertains to the Pink Division, which operates as an investment center:
Sales / $16,000,000Division income / $2,880,000
Return on Investment / 12%
What was Pink Division assets?
4. Information for Pipe division is as follows:
Net earnings for division / $40,000Asset base for division / $100,000
Target rate of return / 14%
Operating income margin / 12%
Weighted average cost of capital / 8%
What is Pipe’s residual income?
5. Ruby Division had the following information:
Current Liabilities / $ 4,000,000Assets / 30,000,000
Net operating income before taxes / 6,000,000
Tax rate / 30%
Cost of capital / 10%
Calculate Ruby Division's economic value added.
6. Provide the missing data for the following divisions.
CD Division / MP3 DivisionAsset base / $ (a) / $ (e)
Income / $96,000 / $480,000
Investment turnover / (c) / (f)
Return on sales ratio / (b) / 0.12
Return on investment / 12% / 15%
Sales / $1,200,000 / $ (d)
7. M23-19. Transfer Prices at Full Cost with Excess Capacity: Divisional Viewpoint (LO2) Koji Cameras, Inc., has a Disposables Division that produces a camera that sells for $10 per unit in the open market. The cost of the product is $6 (variable manufacturing of $4, plus fixed manufacturing of $2). Total fixed manufacturing costs are $140,000 at the normal annual production volume of 70,000 units. The Overseas Division has offered to buy 15,000 units at the full cost of $6. The Disposables Division has excess capacity, and the 15,000 units can be produced without interfering with the current outside sales of 70,000 units. The total fixed cost of the Disposables Division will not change.
Required
Explain whether the Disposables Division should accept or reject the offer. Show calculations.
8. Transfer Pricing with Excess Capacity: Divisional and Corporate Viewpoints (LO2) Eclectic Art Company has a Print Division that is currently producing 100,000 prints per year but has a capacity of 150,000 prints. The variable costs of each print are $30, and the annual fixed costs are $1,350,000. The prints sell for $45 in the internet market. The company's Retail Division wants to buy 50,000 prints at $29 each. The Print Division manager refuses the order because the price is below variable cost by $1 and goes on to insists that the price should be $45 per print.
The Retail Division manager argues that the order should be accepted because it will lower the fixed cost per print from $9 to $6. The retail division manager plans to frame the picture at a cost of $10 per unit and sell for $53.
Required
a. What is the validity of the Retail Division Manager’s argument about lowering fixed costs per unit?
b. From the viewpoint of the Print Division, should they sell at $29 per unit to the Retail Division? Show your calculations.
c. From the viewpoint of the Retail Division, should they purchase at a $45 per unit market price? Show your calculations.
d. From the viewpoints of the Electric Art Company, should the order be accepted and the prints transferred? Show your calculations
e. What action should the company President take, assuming she believes in divisional autonomy?