Optional Extra Credit Assignment Instructions

1.  Answer the following Questions, Exercises, and Problems based on Chapter 12 (Segment Reporting and Decentralization) of the Garrison text (either 11th, 12th or 13th edition will suffice).

2.  The criteria used to allocate points to this assignment are:

a.  Completion

b.  Neatness, clear labeling, and demonstration of effort

3.  Based on my strict discretion:

a.  20 points will be earned if both criteria are fully met.

b.  10 points will be earned if the criteria are substantially (but not fully) met.

c.  0 points will be earned if the criteria are not substantially met.

4.  Points earned will be added only to the numerator (not the denominator) of your total point percentage in the course. Mathematically, this is to your advantage (as opposed to also adding the 20 points possible to your denominator).

5.  A hard copy of this assignment is due and should be submitted to my office (TAH 2098) on or before the date of your final exam.

6.  There is no penalty for not doing this assignment. It is completely optional.

7.  All answers must originate from the individual student. No copying, collaboration, answer borrowing, or consulting with others is allowed.


12-1 What is meant by the term decentralization?

12-2 What benefits result from decentralization?

12-3 Distinguish between a cost center, a profit center, and an investment center.

12-4 What is a segment of an organization? Give several examples of segments.

12-5 What costs are assigned to a segment under the contribution approach?

12-6 Distinguish between a traceable cost and a common cost. Give several examples of each.

12-7 Explain how the segment margin differs from the contribution margin.

12-8 Why aren't common costs allocated to segments under the contribution approach?

12-9 How is it possible for a cost that is traceable to a segment to become a common cost if the segment is divided into further segments?

12-10 What is meant by the terms margin and turnover in ROI calculations?

12-11 What is meant by residual income?

12-12 In what way can the use of ROI as a performance measure for investment centers lead to bad decisions? How does the residual income approach overcome this problem?


EXERCISE 12–3

Midlands Design Ltd. of Manchester, England, is a company specializing in providing design services to residential developers. Last year the company had net operating income of £400,000 on sales of £2,000,000. The company's average operating assets for the year were £2,200,000 and its minimum required rate of return was 16%.

Required:

Compute the company's residual income for the year.


EXERCISE 12–6 Segmented Income Statement

Bovine Company, a wholesale distributor of DVDs, has been experiencing losses for some time, as shown by its most recent monthly contribution format income statement below:

In an effort to isolate the problem, the president has asked for an income statement segmented by geographic market. Accordingly, the Accounting Department has developed the following data:

Required:

1.  Prepare a contribution format income statement segmented by geographic market, as desired by the president.

2.  The company's sales manager believes that sales in the Central geographic market could be increased by 15% if monthly advertising were increased by $25,000. Would you recommend the increased advertising? Show computations to support your answer.


EXERCISE 12–7

Selected operating data on the two divisions of York Company are given below:

Required:

1.  Compute the rate of return for each division using the return on investment (ROI) formula stated in terms of margin and turnover.

2.  Which divisional manager seems to be doing the better job? Why?


PROBLEM 12–23

“I know headquarters wants us to add that new product line,” said Fred Halloway, manager of Kirsi Products' East Division. “But I want to see the numbers before I make a move. Our division's return on investment (ROI) has led the company for three years, and I don't want any letdown.”
Kirsi Products is a decentralized wholesaler with four autonomous divisions. The divisions are evaluated on the basis of ROI, with year-end bonuses given to divisional managers who have the highest ROI. Operating results for the company's East Division for last year are given below:

The company had an overall ROI of 18% last year (considering all divisions). The company's East Division has an opportunity to add a new product line that would require an investment of $3,000,000. The cost and revenue characteristics of the new product line per year would be as follows:

Required:

1.  Compute the East Division's ROI for last year; also compute the ROI as it would appear if the new product line is added.

2.  If you were in Fred Halloway's position, would you accept or reject the new product line? Explain.

3.  Why do you suppose headquarters is anxious for the East Division to add the new product line?

4.  Suppose that the company's minimum required rate of return on operating assets is 15% and that performance is evaluated using residual income.

a.  Compute the East Division's residual income for last year; also compute the residual income as it would appear if the new product line is added.

b.  Under these circumstances, if you were in Fred Halloway's position would you accept or reject the new product line? Explain.

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