What are the advantages of using an ROI-type measure rather than the absolute value of division profits as a performance evaluation technique for business units?
> Missouri Corporation shows the following information concerning the work in process at its plant: • Beginning inventory was partially complete (materials are 100 percent complete; conversion costs are 60 percent complete). • Started this month, 180,000 u
> Hall O’ Fame Products is a nationwide sporting goods manufacturer. The company operates with a widely based manufacturing and distribution system that has led to a highly decentralized management structure. Each division manager is resp
> SPG Company manufactures and sells metal products that are used in many manufacturing operations. The management at SPG believes strongly in decentralized decision making and using performance evaluation and compensation to encourage high-performing mana
> In the late 1980s, General Electric Company (GE), whose CEO at the time was Jack Welch, acquired Kidder Peabody, an investment banking firm founded in 1824. In 1991, Kidder hired a bond trader named Joseph Jett. Jett’s job was trading STRIPS, which are s
> “We can’t drop our prices below $210 per hundred pounds,” exclaimed Greg Berman, manager of Forwarders, a division of Custom Freight Systems. “Our margins are already razor thin. Our
> Refer to Problem 15-41. Suppose Health Services could sell time on the machine to other companies in the area on a per-hour basis. Further, it can sell all the time available for $30 per hour. In Problem 15-41 CHS is a large multidivision fi rm. One div
> CHS is a large multidivision fi rm. One division, Health Services, is well known inside CHS for its efficient information technology (IT). A smaller division, Optics, has approached Health Services with a proposal that it provide IT support in the form o
> Refer to the data in Problem 15-39. At the end of the year, the following data are available on actual operations at the landfill. Volume of trash . . . . . . . . . . . . . . . . . . . . . . 1,250 tons (400 loads) Preparation costs (per load) . . . . .
> Mathes Corporation manufactures paper products. The company operates a landfill, which it uses to dispose of nonhazardous trash. The trash is hauled from the two nearby manufacturing facilities in trucks that can carry up to five tons of trash in a load.
> Gage Corporation has two operating divisions in a semiautonomous organizational structure. Adams Division, located in the United States, produces a specialized electrical component that is an input to Bute Division, located in the south of England. Adams
> Western States Supply, Inc. (WSS), consists of three divisions—California, Northwest, and Southwest—that operate as if they were independent companies. Each division has its own sales force and production facilities. Each division manager is responsible
> Refer to the data in Exercise 8-16. Assume that beginning inventory is 50 percent complete with respect to materials and 30 percent complete with respect to conversion costs. In Exercise 8-16. Clean Corporation manufactures liquid window cleaner. The fo
> Oriole, Inc. is a large consumer products company, which manufactures health and beauty products sold at grocery and drug stores throughout the country. One division, PS, does both manufacturing and shipping and operates a warehouse and transportation ac
> Cochise Corporation’s Southern Division is operating at capacity. It has been asked by Northern Division to supply it a thermal switch, which Southern sells to its regular customers for $60 each. Northern, which is operating at 70 percent capacity, is wi
> Skane Shipping Ltd. (SSL) operates a fleet of container ships in international trade between Sweden and Singapore. All of the shipping income (that is, that related to SSL’s ships) is deemed to be earned in Sweden. SSL also owns a dock facility in Singap
> Refer to the data in Problem 15-29. Division managers are evaluated using residual income using a 15 percent cost of capital. In Problem 15-29 Athena Company has two divisions. Spartan Division, which has an investment base of $8,400,000, produces and s
> Athena Company has two divisions. Spartan Division, which has an investment base of $8,400,000, produces and sells 450,000 units of a product at a market price of $28 per unit. Its variable costs total $8 per unit. The division also charges each unit $14
> Perth Corporation has two operating divisions, a casino and a hotel. The two divisions meet the requirements for segment disclosures. Before transactions between the two divisions are considered, revenues and costs are as follows: The casino and the ho
> Leapin’ Larry’s Pre-Owned Cars has two divisions, Operations and Financing. Operations is responsible for selling Larry’s inventory as quickly as possible and purchasing cars for future sale. Financing Division takes loan applications and packages loans
> Refer to the information in Exercise 15-25. Suppose Manufacturing is located in Country A with a tax rate of 60% and Assembly in Country B with a tax rate of 40%. All other facts remain the same. In Exercise 15-25 Mountain Industries operates a Manufact
> Mountain Industries operates a Manufacturing Division and an Assembly Division. Both divisions are evaluated as profit centers. Assembly buys components from Manufacturing and assembles them for sale. Manufacturing sells many components to third parties
> Refer to the data in Exercise 15–17. Suppose that Government Division will charge the client interested in implementing an activity-based costing system by the hour based on cost plus a fixed fee, where the cost is primarily the consultant’s hourly pay.
> Clean Corporation manufactures liquid window cleaner. The following information concerns its work in process: • Beginning inventory, 12,000 partially complete gallons. • Transferred out, 63,000 gallons. • Ending inventory (materials are 20 percent comple
> Trans Atlantic Metals has two operating divisions. Its forging operation in Finland forges raw metal, cuts it, and then ships it to the United States where the company’s Gear Division uses the metal to produce finished gears. Operating expenses amount to
> Carmen Seville and Don Turco jointly own Bright Green Temp Services (BGTS). Carmen owns 60 percent and Don owns 40 percent. The company provides temporary clerical services at a rate of $40 per hour. During the past year, its clients used 14,000 hours of
> Seattle Transit Ltd. operates a local mass transit system. The transit authority is a state governmental agency. It has an agreement with the state government to provide rides to senior citizens for 50 cents per trip. The government will reimburse Seattl
> Division A offers its product to outside markets for $60. It incurs variable costs of $22 per unit and fixed costs of $75,000 per month based on monthly production of 4,000 units. Division B can acquire the product from an alternate supplier for $62 per
> A company permits its decentralized units to “lease” space to one another. Uptown Division has leased some of its idle warehouse space to Downtown Division for $60 per square foot per month. Recently, Uptown obtained a new five-year contract, which will
> Mississippi Company has two decentralized divisions, Illinois and Iowa. Illinois always has purchased certain units from Iowa at $60 per unit. Because Iowa plans to raise the price to $80 per unit, Illinois is considering buying these units from outside
> Best Practices, Inc., is a management consulting fi rm. Its Corporate Division advises private firms on the adoption and use of cost management systems. Government Division consults with state and local governments. Government Division has a client that
> In what ways is transfer pricing like cost allocation? In what ways is it different?
> When setting a transfer price for goods that are sold across international boundaries, what factors should management consider?
> How does the choice of a transfer price affect the operating profits of both segments involved in an intracompany transfer? Why is the choice of a transfer price important if the total profits of the firm are unaffected by this choice?
> Would process costing work well for a service firm? Why or why not?
> Alpha Division and Beta Division are both profit centers. Alpha has no external markets for its one product, an electrical component. Beta uses the component but cannot purchase it from any other source. What transfer pricing system would you recommend f
> What should an effective transfer pricing system accomplish in a decentralized organization?
> What is the general transfer pricing rule? What is the transfer price that results from this rule when: a. There is a perfect market for the product? b. The selling division is operating below capacity?
> What are the advantages and disadvantages of a negotiated transfer price system?
> What is the basis for choosing between actual and standard costs for cost-based transfer pricing?
> When would you advise a firm to use prices other than market prices for interdivisional transfers?
> When would you advise a firm to use direct intervention to set transfer prices? What are the disadvantages of such a practice?
> What are the limitations of market-based transfer prices? What are the limitations of cost-based transfer prices?
> Assume that all of the information is the same as in Integrative Case 15-43, but instead of receiving only one outside bid, Logistics receives two. The new bid is from World Services for $195 per hundred pounds. World has offered to use Air Cargo for tra
> By using economic value-added, we avoid managers focusing on short-term gains like they would with accounting income. Do you agree with this statement?
> When using the weighted-average method of process costing, total equivalent units produced for a given period equal: a. The number of units started and completed during the period plus the number of units in beginning work in process plus the number of u
> “If every division manager maximizes divisional income, we will maximize firm income. Therefore, divisional income is the best performance measure.” Comment.
> A company prepares the master budget by taking each division manager’s estimate of revenues and costs for the coming period and entering the data into the budget without adjustment. At the end of the year, division managers are given a bonus if their act
> What are the dangers of using only business unit measures to evaluate the performance of business unit managers?
> How does EVA differ from residual income?
> By using economic value-added, we avoid managers focusing on short-term gains like they would with accounting income. Do you agree with this statement?
> “If every division manager maximizes divisional income, we will maximize firm income. Therefore, divisional income is the best performance measure.” Comment.
> A company prepares the master budget by taking each division manager’s estimate of revenues and costs for the coming period and entering the data into the budget without adjustment. At the end of the year, division managers are given a bonus if their act
> What are the dangers of using only business unit measures to evaluate the performance of business unit managers?
> How does EVA differ from residual income?
> In computing the cost per equivalent unit, the weighted-average method considers: a. Current costs only. b. Current costs plus costs in beginning WIP inventory. c. Current costs plus the cost of ending WIP inventory. d. Current costs less costs in beginn
> What are the advantages of using an ROI-type measure rather than the absolute value of division profits as a performance evaluation technique for business units?
> I thought evaluating performance would be easier than this. I have three vice presidents, operating the same business in three different countries. I need to be able to compare them in order to prepare compensation recommendations to the board. The probl
> Biddle Company uses EVA to evaluate the performance of division managers. For the Wallace Division, after-tax divisional income was $400,000 in year 3. The company adjusts the after-tax income for advertising expenses. First, it adds the annual advertisi
> Suwon Pharmaceuticals invests heavily in research and development (R&D), although it must currently treat its R&D expenditures as expenses for financial accounting purposes. To encourage investment in R&D, Suwon evaluates its division managers using EVA.
> Several years ago, Seville Company acquired Salvador Components. Prior to the acquisition, Salvador manufactured and sold automotive components to third-party customers. Since becoming a division of Seville, Salvador has manufactured components only for
> Division managers at Asher Company are granted a wide range of decision authority. With the exception of managing cash, which is done at corporate headquarters, divisions are responsible for sales, pricing, production, costs of operations, and management
> Refer to the facts in Problem 14–39. Assume that Pitt’s performance measurement and bonus plans are based on residual income instead of ROI. Pitt uses a cost of capital of 12 percent in computing residual income. In Problem 14–39 Refer to the facts in P
> Refer to the facts in Problem 14–37. Assume that Pitt’s performance measurement and bonus plans are based on residual income instead of ROI. Pitt uses a cost of capital of 12 percent in computing residual income. In Problem 14–37 Oscar Clemente is the m
> Oscar Clemente (Problem 14–37) is still assessing the problem of whether to acquire LSI’s assembly machine. He learns that the new machine could be acquired next year, but if he waits until then, it will cost 15 percent more. The salvage value would stil
> Refer to the data in Exercise 14-34. In Exercise 14-34 Back Mountain Industries (BMI) has two divisions: East and West. BMI has a cost-of-capital of 15%. Selected financial information (in thousands of dollars) for the first year of business follows:
> By mistake, the production supervisor transposed the digits on the production report and reported a higher percentage of completion for each inventory component. Assume that there was no beginning inventory. What is the effect of this error on the follow
> Refer to the data in Exercise 14-34. In Exercise 14-34 Back Mountain Industries (BMI) has two divisions: East and West. BMI has a cost-of-capital of 15%. Selected financial information (in thousands of dollars) for the first year of business follows:
> Back Mountain Industries (BMI) has two divisions: East and West. BMI has a cost-of-capital of 15%. Selected financial information (in thousands of dollars) for the first year of business follows: a R&D is assumed to benefit two periods. All R&D
> Upper Division of Lower Company acquired an asset with a cost of $600,000 and a four-year life. The cash flows from the asset, considering the effects of inflation, were scheduled as follows: Year ________________Cash Flow 1 . . . . . . . . . . . . . .
> Refer to the information in Exercise 14-30. In computing ROI, this division uses end-of-year asset values. Assume that all cash flows increase 10 percent at the end of each year. This has the following effect on the assets’ replacement
> Refer to the data in Exercise 14-30. Assume that the division uses beginning-of-year asset values in the denominator for computing ROI. In Exercise 14-30 The Caribbean Division of Mega-Entertainment Corporation just started operations. It purchased depr
> The Caribbean Division of Mega-Entertainment Corporation just started operations. It purchased depreciable assets costing $30 million and having a four-year expected life, after which the assets can be salvaged for $6 million. In addition, the division h
> Refer to the facts in Exercise 14-28, but assume that Noonan has been leasing the machine for $60,000 annually. Assume also that the machine generates income of $42,000 annually after the lease payment. Noonan can cancel the lease on the machine without
> Noonan Division has total assets (net of accumulated depreciation) of $3,300,000 at the beginning of year 1. One of the assets is a machine that has a net book value of $300,000. Expected divisional income in year 1 is $495,000 including $42,000 in incom
> Refer to the information in Exercises 14-25 and 14-26. In Exercises 14-25 and 14-26 Ocean Division currently earns $780,000 and has divisional assets of $3.9 million. The division manager is considering the acquisition of a new asset that will add to pr
> Ocean Division currently earns $780,000 and has divisional assets of $3.9 million. The division manager is considering the acquisition of a new asset that will add to profit. The investment has a cost of $675,000 and will have a yearly cash flow of $168,
> Under which of the following conditions will the first-in, first-out (FIFO) method of process costing produce the same cost of goods manufactured as the weighted-average method? a. When goods produced are homogeneous. b. When there is no beginning invent
> The following data are available for two divisions of Solomons Company: The cost of capital for the company is 8 percent. Ignore taxes. Required a. If Solomons measures performance using ROI, which division had the better performance? b. If Solomons m
> A division is considering the acquisition of a new asset that will cost $720,000 and have a cash flow of $252,000 per year for each of the four years of its life. Depreciation is computed on a straight-line basis with no salvage value. Ignore taxes. Req
> Refer to Exercise 14-20. The results for year 2 have just been posted: In Exercise 14-20 Eastern Merchants shows the following information for its two divisions for year 1: Required Compute divisional operating income for the two divisions. How well
> Eastern Merchants shows the following information for its two divisions for year 1: Required Compute divisional operating income for the two divisions. Ignore taxes. How well have these divisions performed? Eastern Western Sales revenue Cost of sal
> “Residual income solves some of the problems with ROI, but because it is an absolute number, it is difficult to compare divisions. We should use residual income divided by assets and then we would have the best of both measures.” Do you agree with this s
> “Every one of our company’s divisions has a return on investment in excess of our cost of capital. Our company must be a blockbuster.” Comment on this statement.
> Management of Division A is evaluated based on residual income measures. The division can either rent or buy a certain asset. Might the performance evaluation technique have an impact on the rent-or-buy decision? Why or why not? Will your answer change i
> “I think that EVA is the best performance measure. I am going to recommend that we evaluate all managers, of plants, divisions, subsidiaries, up to the chief executive officer (CEO), using it.” Do you think this statement is appropriate? Explain.
> How would you respond to the following comment? “Residual income and economic value added are identical.”
> “Failure to invest in projects is not a problem when you use ROI. If there is a good project, corporate headquarters will just tell the division manager to invest.” What are the difficulties with this view?
> A friend owns and operates a consulting firm that works for a single client under one consulting agreement. The consulting firm bills the client monthly for charges incurred. She asks you whether you would recommend a job costing or process costing syste
> The chapter identified some problems with ROI-type measures and suggested that residual income reduces some of them. Why do you think that ROI is a more common performance measure in practice than residual income?
> What problems might there be if the same methods used to compute firm income are used to compute divisional income? Does your answer depend on the type of business a firm is in?
> What impact does the use of gross book value or net book value in the investment base have on the computation of ROI?
> How does residual income differ from ROI?
> Give an example in which the use of ROI measures might lead the manager to make a decision that is not in the firm’s interests.
> How is divisional income like income computed for the firm? How is it different?
> What are the advantages of divisional income as a business unit performance measure? What are the disadvantages?
> The following exchange occurred just after the finance staff at Diversified Electronics rejected a capital investment proposal. David Parker (Product Development): I just don’t understand why you rejected my proposal. We can expect to m
> Refer to Problem 9-51. Jean Sharpe decides to gather additional data to identify the cause of overhead costs and figure out which products are most profitable. She notices that $30,000 of the overhead originated from the equipment used. She decides to in
> Chocolate Bars, Inc. (CBI), manufactures creamy deluxe chocolate candy bars. The firm has developed three distinct products: Almond Dream, Krispy Krackle, and Creamy Crunch. CBI is profitable, but management is quite concerned about the profitability of
> We have discussed two methods for process costing, weighted average and FIFO. Your colleague recommends last-in, first-out (LIFO) process costing to the controller as a new system. The controller is concerned about the recommendation because the cost rec
> Brighton, Inc., manufactures kitchen tiles. The company recently expanded, and the controller believes that it will need to borrow cash to continue operations. It began negotiating for a one-month bank loan of $500,000 starting May 1. The bank would char
