11_AdditionalStudyQuestions

11_AdditionalStudyQu - ACC 333(Farrell Class 11 Fall 2011 Additional Study Questions Responsibility Accounting and Performance Measurement 1 Under

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ACC 333 (Farrell) Class 11 Fall 2011 Page 1 of 6 Additional Study Questions Responsibility Accounting and Performance Measurement 1) Under what conditions would you expect a division in a decentralized firm to be organized as: a) a profit center? b) a cost center? 2) Zed is one of the divisions of XYZed Company. Zed Division is a cost center in which the manager is instructed to minimize the average cost of output. List and explain an example of how this arrangement may lead to counterproductive behavior from the perspective of XYZed’s shareholders. Explain how to structure the cost center to reduce this counterproductive behavior. 3) Identify and explain one advantage and one disadvantage of typing CEO compensation to a firm’s overall residual income. 4) Calculate the missing data for each of the three independent companies listed below. Assume that the cost of capital is 12% for each of the firms. Company A Company B Company C Revenue $ 10,000 $ 30,000 $ 192,000 Expenses $ 8,000 ? $ 180,000 Net Income $ 2,000 $ 12,000 ? Assets $ 20,000 ? $ 96,000 Gross Margin % ? 40 % ? ROI ? 15 % ? Residual Income ? ? ?
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ACC 333 (Farrell) Class 11 Fall 2011 Page 2 of 6 5) Raddington Industries produces tool and die machinery for manufacturers. Several years ago the company expanded vertically by acquiring one of its suppliers of alloy steel plates, Regis Steel Company. To manage the two separate businesses, the operations of Regis are reported separately as an investment center. Raddington monitors its divisions on the basis of both unit contribution and return on average investment (ROI), with investment defined as average operating assets employed. Management bonuses are determined on ROI. All investments in operating assets are expected to earn a minimum return of 11% before income taxes. Regis’s cost of goods sold is considered to be entirely variable, while the division’s administrative expenses are not dependent on volume. Selling expenses are a mixed cost with 40% attributed to sales volume. Regis contemplated a capital acquisition with an estimated ROI of 11.5%, but Regis’ management decided against it because they believed the investment would decrease Regis’ overall ROI. The 20XX operating statement for Regis is below. The division’s operating assets employed were $15,750,000 at year end, a 5% increase over the prior year’s ending balance. Regis Steel Division Operating Statement For the Year Ended December 31, 20XX ($000 omitted) Sales revenue $ 25,000 Less Expenses: Cost of goods sold $ 16,500 Administrative expenses 3,955 Selling expenses 2,700 23,155 Income from operations before income taxes $ 1,845 a) Calculate the following performance measures for 20XX for Regis Steel: i) ROI computed as the ratio of pretax return to average investment in operating assets employed.
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This note was uploaded on 03/19/2012 for the course ACCACC 333 taught by Professor Anne during the Fall '11 term at Miami University.

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11_AdditionalStudyQu - ACC 333(Farrell Class 11 Fall 2011 Additional Study Questions Responsibility Accounting and Performance Measurement 1 Under

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