350 ORIE Homework #12 Due Nov. 21, 2006 1. Westfall Industries has two divisions, Cortland and Bradford. Each is run as an investment center. In the past year, the following data was collected: Cortland $4,500,000 315,000 110,250 204,750 1,500,000 Bradford $10,000,000 900,000 315,000 585,000 5,000,000
Sales Net Operating Income Less: Income Tax Net Income Average Operating Assets
a. Compute the ROI for each division. Cortland: ROI = 315,000 / 1,500,000 = 21% Bradford: ROI = 900,000 / 5,000,000 = 18% b. Compute the residual income for each division, assuming the minimum acceptable return is 15% Cortland: Residual Income = 315,000 (1,500,000)(0.15) = $90,000 Bradford: Residual Income = 900,000 (5,000,000)(0.15) = $150,000
c. Which division is better, based on ROI? The Cortland Division is better, since it has the higher ROI. d. Which division is better, based upon residual income? One cannot make this assessment, since residual income cannot be used to rank order two or more divisions with non-negative residual incomes.
2. Tyra Banks Industries makes swimwear, broken up into Fashion and Competition divisions. During the past year, the financial data for the Competition Division were as follows: Sales Cost of Goods Sold Division Selling and G&A Expenses Allocated Corporate Expenses: Interest Allocated Corporate Expenses: Headquarters Division Operating Assets, 1st quarter Division Operating Assets, 2nd and 3rd quarters Division Operating Assets, 4th quarter $13,600,000 6,160,000 4,100,000 1,250,000 1,000,000 12,000,000 13,250,000 16,000,000
a) What is the controllable margin for the Competition Division? Controllable margin = 13,600,000 6,160,000 4,100,000 = $3,340,000 b) What was the return on investment for the Competition Division? Please express your answer in terms of a percentage. AOA = (12,000,000 + (2)(13,250,000) + 16,000)/4 = 13,625,000 ROI = 3,340,000 / 13,625,000 = 24.51%
3. Financial data for Bridger Inc. for last year follows: Bridger Inc. Balance Sheet Dec. 31, 2005 Assets Cash Accounts Rec. Inventory Plant and Equip. (net) Investment, AFSS Total Assets Liabilities Accounts Payable Long-Term Debt Total Liabilities Stockholder's Equity Common Stock Retained Earnings Total Stockholder's Equity Total Liab. & SE $130,000 480,000 490,000 820,000 680,000 $2,600,000 Dec. 31, 2004 $125,000 340,000 570,000 845,000 650,000 $2,530,000
$340,000 1,000,000 $1,340,000
$380,000 1,000,000 $1,380,000
$600,000 660,000 $1,260,000 $2,600,000 Bridger Inc. Income Statement Year Ended Dec. 31, 2005
$600,000 550,000 $1,150,000 $2,530,000
Sales Less: Operating Expenses Net Operating Income Less: Interest Expense Less: Tax Expense Net Income Earnings per share
$4,180,000 3,553,000 627,000 120,000 200,000 $307,000 $1.02
3 (cont). The company paid dividends of $197,000 last year. The account entitled Investment, AFSS is an investment in the stock of another corporation. a. Compute the company's ROI for last year. b. The CEO of Bridger Inc. has set a minimum required rate of return of 20%. What was the company's residual income last year? Operating Assets, start of year: $1,880,000 Operating Assets, end of year: $1,920,000 Operating Assets, average: $1,900,000 ROI = 627,000 / 1,900,000 = 33% b. The CEO of Bridger Inc. has set a minimum required rate of return of 20%. What was the company's residual income last year? Residual income = 627,000 (1,900,000)(0.20) = $247,000
4. Family Leisure Corporation (FLC), a subsidiary of New Age Industries, manufactures go-carts used for miniature race tracks at family recreation centers. New Age Industries management has been pressuring FLC to diversify into other products that could be sold to family recreation centers, such as batting cages and miniature golf equipment. Recreational Leasing Inc. (RLI) is just such a company. New Age Industries has heard that RLI could be acquired for $3.2 million, and is pressuring FLC to make the acquisition. Jennifer Smith, division manager of FLC, is not so sure that this is a good idea. "If we make this acquisition, it looks like our division ROI will decline," she explains. "Perhaps we could convince management to use residual income, instead of ROI, using the corporate hurdle rate of 15%, when figuring out division manager annual bonuses." New Age Industries has typically awarded annual bonuses division to managers based upon division ROI, with a desired division ROI of 20% or more. Below is condensed information from FLC and RLI: FLC $9,500,000 --6,000,000 1,500,000 2,000,000 2,300,000 5,700,000 8,000,000 1,400,000 3,800,000 2,800,000 8,000,000 RLI --$3,100,000 1,300,000 1,200,000 600,000 1,900,000 1,100,000 3,000,000 850,000 1,200,000 950,000 3,000,000
Sales Leasing Revenue Variable Expenses Fixed Expenses Operating Income Current Assets Long-Term Assets Total Assets Current Liabilities Long-Term Liabilities Stockholder's Equity Total Liab. & SE
a. If New Age uses ROI as the sole measure of divisional performance, show your calculations and explain why FLC may not wish to acquire RLI. For FLC alone: ROI = $2,000,000 / 8,000,000 = 25% For FLC + RLI: ROI = 2,600,000 / 11,200,000 = 23.2% Since the assets of FLC were purchased for $3.2 million, this would increase the asset base of the combined company by $3.2 million. So, the ROI would decrease, and FLC's managers would not like to make the acquisition.
b. If New Age can be persuaded to use residual income, will FLC be more willing to acquire RLI? Show calculations and explain your answer. FLC: Residual income = 2,000,000 (8,000,000)(0.15) = $800,000 RLI: Residual income = 600,000 (3,200,000)(0.15) = $120,000 Yes, residual income of the RLI project (or acquisition) is positive, so bonuses would have increased.
5. Biff Diggerence is actually a character in a David Foster Wallace novel, The Broom of the System, but we have borrowed him for this problem. Biff is manager of operations at Frequent and Vigorous Manufacturing. F & V has just received an order for 200 turbine subassemblies. The standard direct material requirement is 5 kilograms of steel per subassembly. The standard cost of this special steel is $5 per kilogram. The standard direct labor requirement is 4 hours per subassembly, and the standard direct labor cost is $26.50 per hour. Manufacturing overhead is applied at the standard rate of $21 per direct labor hour. a) Using the standard costs, determine the total cost of manufacturing the 200 subassemblies. Also calculate the cost per unit. Biff finds that after the batch of 200 subassemblies has been manufactured that the actual data were slightly different. He finds: Direct material: 980 kilograms of steel used, purchased at $4.80 per kilogram. Direct labor: 915 hours charged to the job, at a total cost of $22,875 Manuf. Overhead: Actual overhead expenses were $19,215 for the period. b) Find the Material Price Variance, the Material Quantity Variance, and the Total Material Variance. For each, find the quantity and note whether it is favorable or unfavorable. c) Find the Labor Price Variance, the Labor Quantity Variance, and the Total Labor Variance. For each, find the quantity and note whether each is favorable or unfavorable. d) What was the actual cost per unit? steel needed = 200 turbines * 5kg steel per turbine = 1000kg steel total cost of steel = $5 per kg steel * 1000kg steel = $5,000 labor needed = 200 turbines * 4 hours per turbine = 800 hours total labor cost = $26.50 per hour * 800 hours = $21,200 manufacturing OH cost = $21 per hour * 800 hours = $16,800 total cost = 5,000 + 21,200 + 16,800 = $43,000
cost per unit = $43,000 / 200 units = $215/unit b) Find the Material Price Variance, the Material Quantity Variance, and the Total Material Variance. For each, find the quantity and note whether it is favorable or unfavorable. MPV = AQ(AP SP) = 980kg($4.80/kg $5/kg) = $196 favorable MQV = SP(AQ SQ) = $5/kg(980kg 1000kg) = $100 favorable TMV = MPV + MQV = $196f + $100f = $296 favorable c) Find the Labor Price Variance, the Labor Quantity Variance, and the Total Labor Variance. For each, find the quantity and note whether each is favorable or unfavorable. actual rate = $22,875 / 915 hrs = $25/hr LPV = AH(AR SR) = 915hrs($25/hr $26.5/hr) = $1,372.5 favorable LQV = SR(AH SH) = $26.5/hr(915hrs 800hrs) = $3,047.5 unfavorable TLV = $1372.5f + 3047.5u = $1675 unfavorable d) What was the actual cost per unit? direct materials cost = 980kg * $4.8/kg = $4704 direct labor cost = $22,875 manufacturing overhead cost = $19,215 total cost = $4,704 + $22,875 + $19,215 = $46,704 cost per unit = $46,704 / 200 units = $233.97 per unit
6. E21-5 from the text
7. E21-6 from the text
8. P21-1A from the text.