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294 final 2

# 294 final 2 - Sauder School of Business Practice Final...

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1 Sauder School of Business Practice Final Examination Busi/Comm 294 Name: ....................................................... Signature: ........................................................ Student number: ...................................... Time: 180 minutes Total Marks: 138 This examination booklet contains fourteen pages (including this page). Check to ensure this paper is complete. No programmable calculators are permitted. Please show all your calculations in an orderly format for part marks. Time management is crucial. Be sure to answer each question. No questions will be permitted during this examination. If you need to make an assumption, state it and continue. Read the questions carefully before making any assumptions.

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2 Question 1 (8 marks; suggested time 10 minutes) Budgeting “In the midst of all of the scandals and mistrust of accounting, it is nice to have a basic tool such as a budget so that a company can always get an accurate assessment of how it is performing”. Provide a thoughtful response. Identify and fully discuss two ideas. (8 marks) Question 2 (18 marks, suggested time 22 minutes) ROI and Residual Income The Montross Corporation is organized into three separate divisions. Each division manager is responsible for controlling working capital and net fixed assets. Currently, the company evaluates managers based on return on investment. Information for each of the three divisions is as follows: Division A Division B Division C Sales revenue Variable costs Fixed costs Average Current assets Average Net fixed assets \$400,000 225,000 150,000 75,000 125,000 \$800,000 370,000 330,000 435,000 650,000 \$600,000 360,000 175,000 310,000 685,000 The minimum required rate of return is 10%. Required: a. Which division is performing best based on return on investment? (5 marks) b. Which division is performing best based on residual income? (5 marks) c. When calculating either ROI or RI, operating income (EBIT) is used as the starting figure for determining the measure of income. If a division is to be evaluated fairly by either the ROI or residual income performance measures, why should operating income (EBIT) be used as the basis for the income measure. (3 marks) d. Residual income is sometimes called EVA (Economic Value Added) or wealth creation. How is wealth creation different from earning net income? Which is more essential to the company in the long run? Fully explain your conclusion. (5 marks) Question 3 (23 marks; suggested time 30 minutes) Segmented Reporting "Rats! We're still in the red," said Bugs Bunny, executive vice president of Cartoons Company (“Cartoons”). "I know," said Daffy Duck, the controller. "Just look at this income statement for March (a typical month). We don't need to worry at all about East District; but, we've really got to shake things up in West District." The statement to which Daffy Duck was referring is shown below: Total Company East District West District Sales (\$20 per unit) \$500,000 \$300,000 \$200,000 Cost of good sold (\$9 per unit) 225,000 135,000 90,000 Gross margin 275,000 165,000 110,000
3 Less operating expenses: Marketing expenses: Shipping 26,000 11,000 15,000 Warehouse rent * 40,000 24,000 16,000 Sales salaries and commissions 56,000 34,000 22,000 District advertising 50,000 20,000 30,000 Total marketing expenses 172,000 89,000 83,000 Administrative expenses: District management salaries 25,000 10,000 15,000 Central office expenses * 80,000 48,000 32,000 Total admin. expenses 105,000 58,000 47,000

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294 final 2 - Sauder School of Business Practice Final...

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