Ch 10 EFILE - Chapter10...

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Chapter 10 Segment Reporting, Decentralization, and the  Balanced Scorecard Exercise 10-7  (15 minutes) Division Alpha Bravo Charlie Sales. ................................... $4,000,000 $11,500,000 * $3,000,000 Net operating income. .......... $160,000 $920,000 * $210,000 * Average operating assets. ... $800,000 * $4,600,000 $1,500,000 Margin. ................................. 4%* 8%   7%* Turnover. .............................. 5*    2.5      2     Return on investment (ROI). 20%   20%* 14%* Note that Divisions Alpha and Bravo apparently have different strategies to  obtain the same 20% return. Division Alpha has a low margin and a high  turnover, whereas Division Bravo has just the opposite. *Given. 10-1
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Exercise 10-8  (30 minutes) 1. ROI computations: ROI = Margin × Turnover Net operating income Sales  ×  Sales Average operating assets Division A: $600,000 $12,000,000 ROI =   ×  $12,000,000 $3,000,000 = 5% × 4 = 20% Division B: $560,000 $14,000,000 ROI =   ×  $14,000,000 $7,000,000 = 4% × 2 = 8% Division C: $800,000 $25,000,000 ROI =   ×  $25,000,000 $5,000,000 = 3.2% × 5 = 16% 2. Division A Division B Division C Average operating assets. ......... $3,000,000 $7,000,000 $5,000,000 Required rate of return. ..............   ×            14%       ×          10%       × 16%     Minimum required return. .......... $      420,000     $        700,000     $        800,000     Actual net operating income. ..... $  600,000 $  560,000 $  800,000 Minimum required return  (above). ...................................       420,000           700,000           800,000     Residual income. ....................... $        180,000     $(140,000 ) $                          0    10-2
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Exercise 10-8  (continued) 3. a. and b. Division A Division B Division  C Return on investment (ROI). .......... 20%  8% 16% Therefore, if the division is  presented with an investment  opportunity yielding 15%, it  probably would. ........................... Reject Accept Reject Minimum required return for  computing residual income. ........ 14% 10% 16% Therefore, if the division is  presented with an investment  opportunity yielding 15%, it  probably would. ........................... Accept Accept Reject If performance is being measured by ROI, both Division A and Division  C probably would reject the 15% investment opportunity. These  divisions’ ROIs currently exceed 15%; accepting a new investment with a  15% rate of return would reduce their overall ROIs. Division B probably  would accept the 15% investment opportunity because accepting it  would increase the division’s overall rate of return. If performance is measured by residual income, both Division A and 
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This note was uploaded on 02/02/2011 for the course ACCT 226 taught by Professor Smith during the Fall '10 term at South Carolina.

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Ch 10 EFILE - Chapter10...

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