Accounting 225 Quiz Section #13

Chapter 6-2 & 11 Class Exercises Solution

1. Kulp Corporation has two major business segments-East and West. In July, the East business
segment had sales revenues of $900,000, variable expenses of $441,000, and traceable fixed
expenses of $171,000. During the same month, the West business segment had sales revenues of
$450,000, variable expenses of $234,000, and traceable fixed expenses of $45,000. The common
fixed expenses totaled $321,000 and were allocated as follows: $180,000 to the East business
segment and $141,000 to the West business segment.

*Given
Solve in the following steps:
$450,000 - $234,000 = $216,000
$900,000 - $441,000 = $459,000; $450,000 - $234,000 = $216,000
$459,000 - $171,000 = $288,000; $216,000 - $45,000 = $171,000
$288,000 + $171,000 = $459,000
$459,000 - $321,000 = $138,000
a) The contribution margin of the West business segment is: $216,000
b) A properly constructed segmented income statement in a contribution format would show that
the segment margin of the East business segment is: $288,000
c) A properly constructed segmented income statement in a contribution format would show that
the net operating income of the company as a whole is: $138,000
2. A company's average operating assets are $220,000 and its net operating income is $44,000.
The company invested in a new project, increasing average assets to $250,000 and increasing its
net operating income to $49,550. What is the project's residual income if the required rate of
return is 20%?
Project average operating assets = $250,000 - $220,000 = $30,000
Project net operating income = $49,550 - $44,000 = $5,550
Residual income = Net operating income - Minimum required rate of return x Average operating
assets = $5,550 - (20% x $30,000) = ($450)

Accounting 225 Quiz Section #13

Chapter 6-2 & 11 Class Exercises Solution
3. Financial data for Beaker Company for last year appear below:

The company paid dividends of $2,100 last year. The "Investment in Cedar Company" on the
statement of financial position represents an investment in the stock of another company.

a. Compute the company's margin, turnover, and return on investment for last year.
Average operating assets = ($220,000 + $240,000)

2 = $230,000

Margin = Net operating income / Sales = $62,100

$414,000 = 15%

Turnover = Sales / Average operating assets = $414,000

$230,000 = 1.8

ROI = Net Operating Income / Average Operating Assets = 62100/ 230000 = 27%

b. The Board of Directors of Beaker Company has set a minimum required return of 20%. What
was the company's residual income last year?