Chapter 12 Segment Reporting and Decentralization True/False Questions

Required:

Prepare a segmented income statement in the contribution format for the company. Omit percentages; show only dollar amounts.
Ans:

	Total	Retail	Wholesale
Sales	$1,130,000	$730,000	$400,000
Variable expenses	629,000	409,000	220,000
Contribution margin	501,000	321,000	180,000
Traceable fixed expenses	165,000	117,000	48,000
Segment margin	336,000	$204,000	$132,000
Common fixed expenses	218,000
Net operating income	$118,000

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting; Measurement LO:  1 Level:  Easy

	Sales revenues, Apparel	$370,000
	Variable expenses, Apparel	$185,000
	Traceable fixed expenses, Apparel	$48,000
	Sales revenues, Accessories	$670,000
	Variable expenses, Accessories	$275,000
	Traceable fixed expenses, Accessories	$114,000

Common fixed expenses totaled $309,000 and were allocated as follows: $142,000 to the Apparel business segment and $167,000 to the Accessories business segment.

Required:

Prepare a segmented income statement in the contribution format for the company. Omit percentages; show only dollar amounts.

Ans:

	Total	Apparel	Accessories
Sales	$1,040,000	$370,000	$670,000
Variable expenses	460,000	185,000	275,000
Contribution margin	580,000	185,000	395,000
Traceable fixed expenses	162,000	48,000	114,000
Segment margin	418,000	$137,000	$281,000
Common fixed expenses	309,000
Net operating income	$109,000

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting; Measurement LO:  1 Level:  Easy

	Sales revenues, Fibers	$750,000
	Sales revenues, Feedstocks	$620,000
	Variable expenses, Fibers	$368,000
	Variable expenses, Feedstocks	$254,000
	Traceable fixed expenses, Fibers	$98,000
	Traceable fixed expenses, Feedstocks	$112,000

Common fixed expenses totaled $344,000 and were allocated as follows: $175,000 to the Fibers business segment and $169,000 to the Feedstocks business segment.

Required:

Prepare a segmented income statement in the contribution format for the company. Omit percentages; show only dollar amounts.

Ans:

	Total	Fibers	Feedstocks
Sales	$1,370,000	$750,000	$620,000
Variable expenses	622,000	368,000	254,000
Contribution margin	748,000	382,000	366,000
Traceable fixed expenses	210,000	98,000	112,000
Segment margin	538,000	$284,000	$254,000
Common fixed expenses	344,000
Net operating income	$194,000

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting; Measurement LO:  1 Level:  Easy

	Return on investment (ROI)	20%
	Sales	$800,000
	Margin	5%
	Minimum required rate of return	16%

Required:

1. 
   Compute the company's average operating assets.
   
2. 
   Compute the company's residual income for the year.
   

1. 
   ROI = Margin × Turnover
   

Turnover = 20% ÷ 5% = 4

Turnover = Sales ÷ Average operating assets

4 = $800,000 ÷ Average operating assets

Average operating assets = $800,000 ÷ 4 = $200,000

2. 
   Before the residual income can be computed, we must first compute the company’s net operating income for the year:
   

5% = Net operating income ÷ $800,000

Net operating income = 5% × $800,000 = $40,000

	Average operating assets	$200,000
	Minimum required rate of return	16%
	Minimum required net operating income	$32,000
	Actual net operating income	$40,000
	Minimum required net operating income	32,000
	Residual income	$8,000

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2; 3 Level:  Medium

	Sales	$29,120,000
	Net operating income	$1,514,240
	Average operating assets	$8,000,000
	The company’s minimum required rate of return	18%

Required:

1. 
   What is the division's margin?
   
2. 
   What is the division's turnover?
   
3. 
   What is the division's return on investment (ROI)?
   
4. 
   What is the division's residual income?
   

Ans:

1. 
   Margin = Net operating income ÷ Sales = $1,514,240 ÷ $29,120,000 = 5.2%
   

2. 
   Turnover = Sales ÷ Average operating assets = $29,120,000 ÷ $8,000,000 = 3.6
   

3. 
   ROI = Net operating income ÷ Average operating assets = $1,514,240 ÷ $8,000,000 = 18.9%
   

4. 
   Residual income = Net operating income − Minimum required rate of return × Average operating assets = $1,514,240 − 18% × $8,000,000 = $74,240
   

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2; 3 Level:  Easy

Required:

1. 
   Calculate the company's return on investment (ROI) and residual income (RI).
   
2. 
   Clipper Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950. Would it be in the best interests of the company to make this investment?
   
3. 
   Clipper Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950. If the division planning to make the investment currently has a return on investment of 20% and its manager is evaluated based on the division's ROI, will the division manager be inclined to request funds to make this investment?
   
4. 
   Clipper Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950. If the division planning to make the investment currently has a residual income of $50,000 and its manager is evaluated based on the division's residual income, will the division manager be inclined to request funds to make this investment?
   

Ans:

1. 
   Return on investment = Net operating income ÷ Average operating assets = $380,000 ÷ $2,000,000 = 19%
   

2. 
   Return on investment = Net operating income ÷ Average operating assets = $12,950 ÷ $70,000 = 18.5%. Since the return on investment of the project exceeds the company’s minimum required rate of return, the project should be accepted. It would increase both the company’s residual income and its return on investment.
   

3. 
   The manager of the division would not be inclined to request funds to make the investment in the new project since its return on investment is only 18.5%, which is less than the division’s current return on investment of 20%. The new project would drag down the division’s return on investment.
   

4. 
   The manager of the division would be inclined to request funds for the new project. The project’s return on investment of 18.5% exceeds the minimum required rate of return of 18%, which would result in an increase in residual income if the project were accepted.
   

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Decision Making; Reporting LO:  2; 3 Level:  Medium

Required:

1. 
   What is the division's margin?
   
2. 
   What is the division's turnover?
   
3. 
   What is the division's return on investment (ROI)?
   

Ans:

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Easy
126. Ide Industries is a division of a major corporation. The following data are for the latest year of operations:

Required:

What is the division's residual income?
Ans:
Residual income = Net operating income − Minimum required rate of return × Average operating assets = $1,743,000 - 18% × $7,000,000 = $483,000
AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  3 Level:  Easy
127. Brodrick Corporation uses residual income to evaluate the performance of its divisions. The minimum required rate of return for performance evaluation purposes is 19%. The Games Division had average operating assets of $140,000 and net operating income of $25,900 in August.

Required:

What was the Games Division's residual income in August?
Ans:

Net operating income	$25,900
Minimum required return (19% × $140,000)	26,600
Residual income	($700)

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  3 Level:  Easy

Required:

What was the Casket Division's residual income in January?
Ans:

Net operating income	$135,200
Minimum required return (13% × $950,000)	123,500
Residual income	$11,700