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chapter-8 - This Accounting Materials are brought to you by...

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P1,800,000 P6,000,000 This Accounting Materials are brought to you by www.everything.freelahat.com CHAPTER 8 RESPONSIBILITY ACCOUNTING, SEGMENT EVALUATION AND TRANSFER PRICING [Problem 1] 1. ROI of Div A (past year) = = 30% 2. ROI of Div A (with new product) = = 27.6% *(P960,000 = P8,000 x 40% - P2,240,000) 3. No; because the new product line would decrease the overall ROI of Division A. 4. Yes; because the new product line’s ROI is 24% (i.e., P960,000 + P4,000,000) and is not lower than the overall ROI of the company. 5. a. Last year With new product . Operating income (P1,800,000 + P960,000) P1,800,000 P2,760,000 Less: Minimum income (P6M x 20%) 1,200,000 (P10M x 20%) 2,000,000 Residual income P 600,000 P 760,000 b. Yes; the new product is acceptable because the residual income is increased by P160,000 that is derived from the operations of the new product. [Problem 2] Values of the unknown data: Red Blue White Company Company Company Sales (P8,000,000 x 3) P 24,000,000 Net operating income P1,800,000 + P960,000* P6,000,000 + P4,000,000

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This Accounting Materials are brought to you by www.everything.freelahat.com (P24,000,000 x 8%) 1,920,000 Average operating assets (P720,000 / 12%) P 6,000,000 Return on sales P1,200,000 20% P6,000,000 P220,000 15% P4,800,000 P1,920,000 8% P24,000,000 Asset turnover P6,000,000 2 P3,000,000 P4,800,000 0.8 P6,000,000 Return on investment P1,200,000 40% P3,000.000 P1,920,000 24% P8,000,000 [Problem 3] 1. Advantages of the expanded ROI equation: a. It gives a two-way perspective for the manager to maximize ROI. b. It gives an opportunity to manage assets by maximizing assets turnover and return on sales. c. It reminds to increase income by increasing sales and reducing costs and expenses. 2. Values of the unknown data:
This Accounting Materials are brought to you by www.everything.freelahat.com Companies A B C Revenue (P5,000,000 x 2) P 10,000,000 Income (P10,000,000 x 0.5%) 50,000 Investment (P50,000 / 1%) P 5,000,000 Return on sales P100,000 10% P1,000,000 P50,000 10% P500,000 Investment turnover P1,000,000 2 P500,000 P50,000 0.1 P5,000,000 Return on investment P100,000 25% P500,000 P500,000 1% P5,000,000 COMMENTS: a. Company A shows the best performance in terms of return on investment having the highest ROI at 25%. This results due to the 10% return on sale and 2 times asset turnover. Companies B and C both registered a ROI of 1%. However, the return on sale of 10% reported by Company B is better off than that

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This Accounting Materials are brought to you by www.everything.freelahat.com of Company C’s 0.5%. Company B’s performance is weakened by a very low asset turnover of 0.10 as compared to the asset turnover of 2 of Company C. Company B, therefore, should focus on increasing its sales and reducing its investment at the same time. Company C should endeavor to reduce its costs and expenses and reduce its investment exposure simultaneously, if possible. These are all for
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