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True/False Questions

1. Allocating common fixed costs to segments on segmented income statements reduces


the usefulness of such statements.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking


AICPA FN: Reporting; Measurement LO: 1 Level: Easy

2. A segment is any part or activity of an organization about which a manager seeks cost,
revenue, or profit data.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking


AICPA FN: Reporting; Measurement LO: 1 Level: Easy

3. A responsibility center is a business segment whose manager has control over costs,
revenues, or investments in operating assets.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking


AICPA FN: Reporting; Measurement LO: 1 Level: Easy

4. Residual income is used in the numerator to compute turnover in an ROI analysis.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2 Level: Easy

5. Net operating income is earnings before interest and taxes.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking


AICPA FN: Reporting; Measurement LO: 2 Level: Easy

6. Land held for possible plant expansion would be included as an operating asset in the
ROI calculation.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2 Level: Medium

7. Margin equals Stockholders' Equity divided by Sales.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2 Level: Easy
8. The use of return on investment (ROI) as a performance measure may lead managers
to reject a project that would be favorable for the company as a whole.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2 Level: Medium

9. Residual income is equal to the difference between total revenues and operating
expenses.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 3 Level: Medium

10. When using residual income as a measure of performance, it is not meaningful to


compare the residual incomes of divisions of different sizes.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 3 Level: Easy

11. The transfer price used for internal transfers between divisions of the same company
can increase or decrease each division's reported profits.

Ans: True AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting Appendix: 12A LO: 4 Level: Medium

12. For performance evaluation purposes, the lump-sum amount of fixed service
department costs charged to an operating department should usually be based on either
the operating department's peak-period or long-run average needs.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking


AICPA FN: Reporting Appendix: 12B LO: 5 Level: Easy

13. In service department cost allocations, sales dollars should be used as an allocation
base whenever possible.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking


AICPA FN: Reporting Appendix: 12B LO: 5 Level: Easy

14. A cost center is also a responsibility center.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 6 Level: Easy
15. The basic objective of responsibility accounting is to charge each manager with those
costs and/or revenues over which he has control.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 6 Level: Easy

Multiple Choice Questions

16. The impact on net operating income of short-run changes in sales for a segment can be
most clearly predicted by analyzing:
A) the contribution margin ratio.
B) the segment margin.
C) the ratio of the segment margin to sales.
D) net sales less segment fixed costs.

Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 1 Level: Medium

17. In a segmented contribution format income statement, what is the best measure of the
long-run profitability of a segment?
A) its gross margin
B) its contribution margin
C) its segment margin
D) its segment margin minus an allocated portion of common fixed expenses

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting; Measurement LO: 1 Level: Medium

18. In order to properly report segment margin as a guide to long-run segment profitability
and performance, fixed costs must be separated into two broad categories. One
category is common fixed costs. What is the other category?
A) discretionary fixed costs
B) committed fixed costs
C) traceable fixed costs
D) specialized fixed costs

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting; Measurement LO: 1 Level: Easy
19. Which of the following segment performance measures will decrease if there is an
increase in the interest expense for that segment?

Return on Investment Residual Income


A) Yes Yes
B) No Yes
C) Yes No
D) No No

Ans: D AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2; 3 Level: Hard

20. Which of the following segment performance measures will increase if there is a
decrease in the selling expenses for that segment?

Return on Investment Residual Income


A) Yes Yes
B) No Yes
C) Yes No
D) No No

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2; 3 Level: Medium

21. Some investment opportunities that should be accepted from the viewpoint of the
entire company may be rejected by a manager who is evaluated on the basis of:
A) return on investment.
B) residual income.
C) contribution margin.
D) segment margin.

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2 Level: Medium
22. Consider the following three conditions:

I. An increase in sales
II. An increase in operating assets
III. A reduction in expenses

Which of the above conditions provide a way in which a manager can improve return
on investment?
A) Only I
B) Only I and II
C) Only I and III
D) Only II and III

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2 Level: Medium

23. When calculating a segment's return on investment (ROI), which of the following
assets of that segment would be considered a part of average operating assets?
A) cash
B) accounts receivable
C) plant and equipment
D) all of the above

Ans: D AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2 Level: Medium

24. Which of the following measures of performance encourages continued expansion by


an investment center so long as it is able to earn a return in excess of the minimum
required return on average operating assets?
A) return on investment
B) transfer pricing
C) the contribution approach
D) residual income

Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 3 Level: Easy
25. Residual income is:
A) Net operating income plus the minimum required return on average operating
assets.
B) Net operating income less the minimum required return on average operating
assets.
C) Contribution margin plus the minimum required return on average operating
assets.
D) Contribution margin less the minimum required return on average operating
assets.

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 3 Level: Easy

26. Which of the following is NOT a common approach used to set transfer prices?
A) market price
B) variable cost
C) negotiation
D) suboptimization

Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking


AICPA FN: Reporting Appendix: 12A LO: 4 Level: Easy

27. For performance evaluation purposes, the variable costs of a service department
should be charged to operating departments using:
A) the actual variable rate and the budgeted level of activity for the period.
B) the budgeted variable rate and the actual level of activity for the period.
C) the budgeted variable rate and the budgeted level of activity for the period.
D) the actual variable rate and the peak-period or long-run average servicing
capacity.

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting Appendix: 12B LO: 5 Level: Medium
28. Which of the following companies is following a policy with respect to the costs of
service departments that is not recommended?
A) To charge operating departments with the depreciation of forklifts used at its
central warehouse, Shalimar Electronics charges predetermined lump-sum
amounts calculated on the basis of the long-term average use of the services
provided by the warehouse to the various segments.
B) Manhattan Electronics uses the sales revenue of its various divisions to allocate
costs connected with the upkeep of its headquarters building.
C) Rainier Industrial does not allow its service departments to pass on the costs of
their inefficiencies to the operating departments.
D) Golkonda Refinery separately allocates fixed and variable costs incurred by its
service departments to its operating departments.

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting Appendix: 12B LO: 5 Level: Medium
Source: CMA; adapted

29. A segment of a business responsible for both revenues and expenses would be called:
A) a cost center.
B) an investment center.
C) a profit center.
D) residual income.

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 6 Level: Easy
30. Devlin Company has two divisions, C and D. The overall company contribution
margin ratio is 30%, with sales in the two divisions totaling $500,000. If variable
expenses are $300,000 in Division C, and if Division C's contribution margin ratio is
25%, then sales in Division D must be:
A) $50,000
B) $100,000
C) $150,000
D) $200,000

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 1 Level: Hard

Solution:

Total company contribution margin = $500,000 × 30% = $150,000


Total company variable expenses = $500,000 − $150,000 = $350,000

Division C contribution margin ratio = (Sales − $300,000) ÷ Sales = 0.25


Sales − $300,000 = 0.25 × Sales
(0.75 × Sales) ÷ 0.75 = $300,000 ÷ 0.75
Sales = $400,000

Division D sales = Total company sales − Division C sales


= $500,000 − $400,000 = $100,000

Divisions
Total
Company Division C Division D
Sales................................... $500,000 $400,000 $100,000
Less variable expenses....... 350,000 300,000 50,000
Contribution margin........... $150,000 $100,000 $ 50,000
Contribution margin ratio. . 0.30 0.25 0.50
31. Toxemia Salsa Company manufactures five flavors of salsa. Last year, Toxemia
generated net operating income of $40,000. The following information was taken from
last year's income statement segmented by flavor (brackets indicate a negative
amount):

Wimpy Mild Medium Hot Atomic


$50,00 $162,00
Contribution margin. $(2,000) $45,000 $35,000 0 0
$(16,000 $10,00
Segment margin........ ) $(5,000) $7,000 0 $94,000
Segment margin less
allocated common $(26,000 $(15,000 $(3,000
fixed expenses....... ) ) ) $0 $84,000

Toxemia expects similar operating results for the upcoming year. If Toxemia wants to
maximize its profitability in the upcoming year, which flavor or flavors should
Toxemia discontinue?
A) no flavors should be discontinued
B) Wimpy
C) Wimpy and Mild
D) Wimpy, Mild, and Medium

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Decision Making; LO: 1 Level: Medium

Solution:

The segment margin is a better indication of profitability of individual products than


the segment margin less allocated common fixed expenses. The products with
negative segment margins should be discontinued to maximize profit: Wimpy and
Mild.
32. Uchimura Corporation has two divisions: the AFE Division and the GBI Division. The
corporation's net operating income is $42,000. The AFE Division's divisional segment
margin is $15,700 and the GBI Division's divisional segment margin is $175,400.
What is the amount of the common fixed expense not traceable to the individual
divisions?
A) $149,100
B) $57,700
C) $217,400
D) $191,100

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 1 Level: Medium

Solution:
Total
Company
Divisional segment margin.................. $191,100 ($15,700 + $175,400)
Less common fixed costs not
traceable to the individual divisions X
Net operating income.......................... $ 42,000

Common fixed costs not traceable to the individual divisions


= $191,100 − $42,000 = $149,100
33. Younie Corporation has two divisions: the South Division and the West Division. The
corporation's net operating income is $26,900. The South Division's divisional
segment margin is $42,800 and the West Division's divisional segment margin is
$29,900. What is the amount of the common fixed expense not traceable to the
individual divisions?
A) $56,800
B) $69,700
C) $72,700
D) $45,800

Ans: D AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 1 Level: Medium

Solution:
Total
Company
Divisional segment margin.................. $72,700 ($42,800 + $29,900)
Less common fixed costs not
traceable to the individual divisions. X
Net operating income........................... $26,900

Common fixed costs not traceable to the individual divisions


= $72,700 − $26,900 = $45,800
34. Dukelow Corporation has two divisions: the Governmental Products Division and the
Export Products Division. The Governmental Products Division's divisional segment
margin is $255,000 and the Export Products Division's divisional segment margin is
$59,800. The total amount of common fixed expenses not traceable to the individual
divisions is $163,700. What is the company's net operating income?
A) $314,800
B) ($314,800)
C) $151,100
D) $478,500

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting; Measurement LO: 1 Level: Easy

Solution:
Total
Company
Divisional segment margin.................. $314,800 *
Less common fixed costs not
traceable to the individual divisions. 163,700
Net operating income........................... $151,100

*$255,000 + $59,800 = $314,800


35. Miscavage Corporation has two divisions: the Beta Division and the Alpha Division.
The Beta Division has sales of $580,000, variable expenses of $301,600, and traceable
fixed expenses of $186,500. The Alpha Division has sales of $510,000, variable
expenses of $178,500, and traceable fixed expenses of $222,100. The total amount of
common fixed expenses not traceable to the individual divisions is $235,500. What is
the company's net operating income?
A) $374,400
B) $201,300
C) $609,900
D) ($34,200)

Ans: D AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting; Measurement LO: 1 Level: Easy

Solution:
Divisions
Total Alpha Beta
Company Division Division
$1,090,00 $510,00
Sales............................................... 0 0 $580,000
Less: variable expenses.................. 480,100 178,500 301,600
Contribution margin...................... 609,900 331,500 278,400
Less: traceable fixed expenses....... 408,600 222,100 186,500
$109,40
Divisional segment margin............ 201,300 0 $91,900
Less common fixed expenses........ 235,500
Net operating income..................... ($34,200)
36. J Corporation has two divisions. Division A has a contribution margin of $79,300 and
Division B has a contribution margin of $126,200. If total traceable fixed costs are
$72,400 and total common fixed costs are $34,900, what is J Corporation's net
operating income?
A) $168,000
B) $170,600
C) $133,100
D) $98,200

Ans: D AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting; Measurement LO: 1 Level: Easy

Solution:

Total Company
Contribution margin....................... $205,500 *
Less: traceable fixed expenses....... 72,400
Divisional segment margin............ 133,100
Less common fixed expenses......... 34,900
Net operating income..................... $ 98,200

*$79,300 + $126,200 = $205,500

37. Kop Corporation has provided the following data:

Return on investment (ROI)................ 15%


$120,00
Sales..................................................... 0
Average operating assets..................... $60,000
Minimum required rate of return......... 12%
Margin on sales.................................... 7.5%

Kop Corporation's residual income is:


A) $1,800
B) $5,400
C) $2,700
D) $3,600

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2; 3 Level: Medium
Solution:

Net operating income = Sales × Margin on sales = $120,000 × 7.5% = $9,000


Residual income = Net operating income − (Average operating assets × Minimum
required rate of return) = $9,000 − ($60,000 × 12%) = $9,000 − $7,200 = $1,800

38. Spar Company has calculated the following ratios for one of its investment centers:

Margin................... 25%
Turnover................ 0.5 times

What is Spar's return on investment for this investment center?


A) 50.0%
B) 12.5%
C) 15.0%
D) 25.0%

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2 Level: Easy Source: CPA; adapted

Solution:

Return on investment = Margin × Turnover = 25% × 0.5 times = 12.5%

39. Mike Corporation uses residual income to evaluate the performance of its divisions.
The company's minimum required rate of return is 14%. In January, the Commercial
Products Division had average operating assets of $970,000 and net operating income
of $143,700. What was the Commercial Products Division's residual income in
January?
A) $7,900
B) -$20,118
C) $20,118
D) -$7,900

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 3 Level: Easy

Solution:

Residual income = Net operating income − (Average operating assets × Minimum


required rate of return) = $143,700 − ($970,000 × 14%) = $143,700 − $135,800 =
$7,900
40. In November, the Universal Solutions Division of Keaffaber Corporation had average
operating assets of $480,000 and net operating income of $46,200. The company uses
residual income, with a minimum required rate of return of 11%, to evaluate the
performance of its divisions. What was the Universal Solutions Division's residual
income in November?
A) -$6,600
B) $5,082
C) $6,600
D) -$5,082

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 3 Level: Easy

Solution:

Residual income = Net operating income − (Average operating assets × Minimum


required rate of return) = $46,200 − ($480,000 × 11%) = $46,200 − $52,800 = -$6,600

41. If operating income is $60,000, average operating assets are $240,000, and the
minimum required rate of return is 20%, what is the residual income?
A) 40%
B) 25%
C) $12,000
D) $48,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 3 Level: Easy

Solution:

Residual income = Net operating income − (Average operating assets × Minimum


required rate of return) = $60,000 − ($240,000 × 20%) = $60,000 − $48,000 = $12,000
42. Division A makes a part that it sells to customers outside of the company. Data
concerning this part appear below:

Selling price to outside customers............. $40


Variable cost per unit................................. $30
$10,00
Total fixed costs......................................... 0
Capacity in units........................................ 20,000

Division B of the same company would like to use the part manufactured by Division
A in one of its products. Division B currently purchases a similar part made by an
outside company for $38 per unit and would substitute the part made by Division A.
Division B requires 5,000 units of the part each period. Division A is already selling
all of the units it can produce to outside customers. If Division A sells to Division B
rather than to outside customers, the variable cost per unit would be $1 lower. What is
the lowest acceptable transfer price from the standpoint of the selling division?
A) $40
B) $39
C) $38
D) $37

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Decision Making; Reporting Appendix: 12A LO: 4 Level: Hard

Solution:

Transfer price ≥ Variable cost per unit + (Total contribution margin on lost sales ÷
Number of units transferred) = ($30 − $1) + [($40 − $30) × 5,000] ÷ 5,000 = $29 +
$10 = $39
43. Product A, which is produced by the Parts Division of BYP Corporation, sells for
$14.25 on the outside market. The costs to make Product A as recorded by the
company's cost accounting system are:

$7.2
Direct materials.......................................... 5
$2.2
Direct labor................................................ 5
$1.5
Variable manufacturing overhead.............. 0
$2.5
Fixed manufacturing overhead.................. 0

The Assembly Division of BYP Corporation requires a part much like Product A to
make one of its products. The Assembly Division can buy this part from an outside
supplier for $14.15. However, the Assembly Division could use Product A instead of
this part purchased from an outside supplier. What is the most the Assembly Division
would be willing to pay the Parts Division for Product A?
A) $13.50
B) $14.25
C) $14.15
D) $14.00

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Decision Making; Reporting Appendix: 12A LO: 4 Level: Easy

Solution:

Transfer price ≤ Cost of buying from outside supplier = $14.15


44. Macumber Corporation has two operating divisions-an Atlantic Division and a Pacific
Division. The company's Logistics Department services both divisions. The variable
costs of the Logistics Department are budgeted at $36 per shipment. The Logistics
Department's fixed costs are budgeted at $234,000 for the year. The fixed costs of the
Logistics Department are determined based on peak-period demand.

Percentage of Peak Actual


Period Capacity Required Shipments
Atlantic Division.......... 30% 1,100
Pacific Division........... 70% 3,400

How much Logistics Department cost should be charged to the Altlantic Division at
the end of the year for performance evaluation purposes?
A) $198,000
B) $109,800
C) $118,800
D) $96,800

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting Appendix: 12B LO: 5 Level: Easy

Solution:

Labor department cost charged to Atlantic Division


= (1,100 shipments × $36 per shipment) + ($234,000 × 30%)
= $39,600 + $70,200 = $109,800
45. Erholm Corporation has two operating divisions-an Atlantic Division and a Pacific
Division. The company's Logistics Department services both divisions. The variable
costs of the Logistics Department are budgeted at $31 per shipment. The Logistics
Department's fixed costs are budgeted at $411,800 for the year. The fixed costs of the
Logistics Department are determined based on peak-period demand.

Percentage of Peak Period Budgeted


Capacity Required Shipments
Atlantic Division................ 35% 1,900
Pacific Division.................. 65% 5,200

At the end of the year, actual Logistics Department variable costs totaled $290,700
and fixed costs totaled $431,950. The Atlantic Division had a total of 3,900 shipments
and the Pacific Division had a total of 5,100 shipments for the year. How much
Logistics Department cost should be charged to the Pacific Division at the END of the
year for performance evaluation purposes?
A) $391,453
B) $425,770
C) $445,498
D) $409,502

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting Appendix: 12B LO: 5 Level: Medium

Solution:

Logistics department cost charged to Pacific Division


= (5,100 shipments × $31 per shipment) + ($411,800 × 65%)
= $158,100 + $267,670 = $425,770
46. Gretter Corporation has two operating divisions-an Atlantic Division and a Pacific
Division. The company's Logistics Department services both divisions. The variable
costs of the Logistics Department are budgeted at $36 per shipment. The Logistics
Department's fixed costs are budgeted at $399,600 for the year. The fixed costs of the
Logistics Department are determined based on peak-period demand.

Percentage of Peak Period Budgeted


Capacity Required Shipments
Atlantic Division.......... 25% 1,600
Pacific Division........... 75% 5,800

At the end of the year, actual Logistics Department variable costs totaled $305,040
and fixed costs totaled $418,680. The Atlantic Division had a total of 2,600 shipments
and the Pacific Division had a total of 5,600 shipments for the year. For performance
evaluation purposes, how much actual Logistics Department cost should NOT be
charged to the operating divisions at the END of the year?
A) $28,920
B) $9,840
C) $19,080
D) $0

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting Appendix: 12B LO: 5 Level: Medium

Solution:

Actual Logistics Department cost incurred = $305,040 + $418,680 = $723,720


Logistics Department charged to operating divisions
= [$36 per shipment × (2,600 shipments + 5,600 shipments)] + $399,600
= [$36 per shipment × 8,200 shipments] + $399,600
= $295,200 + $399,600 = $694,800
Actual Logistics Department cost not charged to operating divisions
= $723,720 − $694,800 = $28,920
47. Bockoven Corporation has two operating divisions-a Consumer Division and a
Commercial Division. The company's Customer Service Department provides services
to both divisions. The variable costs of the Customer Service Department are budgeted
at $46 per order. The Customer Service Department's fixed costs are budgeted at
$181,500 for the year. The fixed costs of the Customer Service Department are
determined based on the peak period orders.

Percentage of Peak Period Actual


Capacity Required Orders
Consumer Division............ 40% 1,100
Commercial Division......... 60% 2,200

How much Customer Service Department cost should be charged to the Consumer
Division at the beginning of the year for performance evaluation purposes?
A) $123,200
B) $166,650
C) $111,100
D) $133,320

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting Appendix: 12B LO: 5 Level: Easy

Solution:

Customer Service Department cost charged to Consumer Division


= ($46 per order × 1,100 orders) + ($181,500 × 40%)
= $50,600 + $72,600 = $123,200
48. Levar Corporation has two operating divisions-a Consumer Division and a
Commercial Division. The company's Order Fulfillment Department provides services
to both divisions. The variable costs of the Order Fulfillment Department are budgeted
at $73 per order. The Order Fulfillment Department's fixed costs are budgeted at
$470,400 for the year. The fixed costs of the Order Fulfillment Department are
determined based on the peak period orders.

Percentage of Peak Period Budgeted


Capacity Required Orders
Consumer Division............ 25% 1,800
Commercial Division......... 75% 6,600

At the end of the year, actual Order Fulfillment Department variable costs totaled
$621,600 and fixed costs totaled $473,970. The Consumer Division had a total of
1,840 orders and the Commercial Division had a total of 6,560 orders for the year. For
purposes of evaluation performance, how much Order Fulfillment Department cost
should be charged to the Commercial Division at the END of the year?
A) $831,680
B) $855,588
C) $840,918
D) $846,240

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting Appendix: 12B LO: 5 Level: Easy

Solution:

Order Fulfillment Department cost charged to Commercial Division


= ($73 per order × 6,560 orders) + ($470,400 × 75%)
= $478,880 + $352,800 = $831,680
49. Schabel Corporation has two operating divisions-a Consumer Division and a
Commercial Division. The company's Customer Service Department provides services
to both divisions. The variable costs of the Customer Service Department are budgeted
at $72 per order. The Customer Service Department's fixed costs are budgeted at
$695,400 for the year. The fixed costs of the Customer Service Department are
determined based on the peak period orders.

Percentage of Peak Period Budgeted


Capacity Required Orders
Consumer Division............ 25% 2,600
Commercial Division......... 75% 9,600

At the end of the year, actual Customer Service Department variable costs totaled
$891,089 and fixed costs totaled $709,820. The Consumer Division had a total of
2,610 orders and the Commercial Division had a total of 9,580 orders for the year. For
performance evaluation purposes, how much actual Customer Service Department
cost should NOT be charged to the operating divisions at the END of the year?
A) $13,409
B) $0
C) $14,420
D) $27,829

Ans: D AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting Appendix: 12B LO: 5 Level: Medium

Solution:

Actual Customer Service Department cost incurred


= $891,089 + $709,820 = $1,600,909
Customer Service Department cost charged to operating divisions
= [$72 per order × (2,610 orders + 9,580 orders)] + $695,400
= [$72 per order × 12,190 orders] + $695,400
= $877,680 + $695,400 = $1,573,080
Actual Customer Service Department cost not charged to operating divisions
= $1,600,909 − $1,573,080 = $27,829
50. Mangiamele Corporation's Maintenance Department provides services to the
company's two operating divisions-the Paints Division and the Stains Division. The
variable costs of the Maintenance Department are budgeted based on the number of
cases produced by the operating departments. The fixed costs of the Maintenance
Department are budgeted based on the number of cases produced by the operating
departments during the peak period. Data appear below:

Maintenance Department
Budgeted variable cost....................................... $4 per case
Budgeted total fixed cost.................................... $693,000

Paints Division
Percentage of peak period capacity required...... 30%
Actual cases........................................................ 18,000

Stains Division
Percentage of peak period capacity required...... 70%
Actual cases........................................................ 59,000

For performance evaluation purposes, how much Maintenance Department cost should
be charged to the Paints Division at the end of the year?
A) $234,000
B) $500,500
C) $279,900
D) $300,300

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting Appendix: 12B LO: 5 Level: Medium

Solution:

Maintenance Department cost charged to Paints Division


= ($4 per case × 18,000 cases) + ($693,000 × 30%)
= $72,000 + $207,900 = $279,900
51. Tabarez Corporation's Maintenance Department provides services to the company's
two operating divisions-the Paints Division and the Stains Division. The variable costs
of the Maintenance Department are budgeted based on the number of cases produced
by the operating departments. The fixed costs of the Maintenance Department are
budgeted based on the number of cases produced by the operating departments during
the peak period. Data appear below:

Maintenance Department
Budgeted variable cost........................................ $2 per case
$1,140,00
Budgeted total fixed cost.................................... 0
Actual total variable cost.................................... $239,400
$1,157,98
Actual total fixed cost......................................... 0

Paints Division
Percentage of peak period capacity required...... 30%
Budgeted cases.................................................... 29,000
Actual cases........................................................ 29,040

Stains Division
Percentage of peak period capacity required...... 70%
Budgeted cases.................................................... 85,000
Actual cases........................................................ 84,960

For performance evaluation purposes, how much Maintenance Department cost should
be charged to the Stains Division at the END of the year?
A) $989,002
B) $1,041,416
C) $967,920
D) $1,019,520

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting Appendix: 12B LO: 5 Level: Medium

Solution:

Maintenance Department cost charged to Stains Division


= ($2 per case × 84,960 cases) + ($1,140,000 × 70%)
= $169,920 + $798,000 = $967,920
Use the following to answer questions 52-56:

O'Neill, Incorporated's income statement for the most recent month is given below.

Total Store A Store B


$300,00 $100,00 $200,00
Sales...................................... 0 0 0
Variable expenses................. 192,000 72,000 120,000
Contribution margin.............. 108,000 28,000 80,000
Traceable fixed expenses...... 76,000 21,000 55,000
Segment margin.................... 32,000 $ 7,000 $ 25,000
Common fixed expenses....... 27,000
Net operating income............ $ 5,000

For each of the following questions, refer back to the original data.

52. If Store B sales increase by $20,000 with no change in traceable fixed expenses, the
overall company net operating income should:
A) increase by $2,500
B) increase by $5,000
C) increase by $8,000
D) increase by $12,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting; Measurement LO: 1 Level: Medium

Solution:

Store B contribution margin ratio = $80,000 ÷ $200,000 = 40%


Additional net operating income = $20,000 × 40% = $8,000
53. The marketing department believes that a promotional campaign at Store A costing
$5,000 will increase sales by $15,000. If its plan is adopted, overall company net
operating income should:
A) decrease by $800
B) decrease by $5,800
C) increase by $5,800
D) increase by $10,000

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting; Measurement LO: 1 Level: Medium

Solution:

Store A contribution margin ratio = $28,000 ÷ $100,000 = 28%


Change in net operating income = ($15,000 × 28%) − $5,000
= $4,200 − $5,000 = $800 decrease

54. A proposal has been made that will lower variable expenses in Store A to 62% of
sales. However, this reduction can only be accomplished by an increase in fixed
expenses of $8,000. If this proposal is implemented and sales remain constant, overall
company net operating income should:
A) remain the same
B) decrease by $4,200
C) increase by $2,000
D) increase by $8,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting; Measurement LO: 1 Level: Medium

Solution:

New amount for Store A variable expenses = $100,000 × 62% = $62,000


Change in net operating income = ($72,000 − $62,000) − $8,000
= $10,000 − $8,000 = $2,000 increase
55. If sales in Store B increase by $30,000 as a result of a $7,000 expenditure in fixed
expenses:
A) the contribution margin should increase by $18,000
B) the segment margin should increase by $12,000
C) the contribution margin should increase by $11,000
D) the segment margin should increase by $5,000

Ans: D AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 1 Level: Hard

Solution:

Store B contribution margin ratio = $80,000 ÷ $200,000 = 40%


Change in segment margin = ($30,000 × 40%) − $7,000
= $12,000 − $7,000 = $5,000 increase

56. Currently the sales clerks receive a salary of $7,000 per month in Store B. A proposal
has been made to change from a fixed salary to a sales commission of 5%. Assume
that this proposal is adopted, and that as a result sales increase by $20,000. The new
segment margin for Store B should be:
A) $29,000
B) $32,000
C) $39,000
D) $45,000

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting; Measurement LO: 1 Level: Hard

Solution:

$220,00
Sales...................................... 0 ($200,000 + $20,000)
Sales commissions................ 11,000 ($220,000 × 5%)
132,00
Other variable expenses........ 0 ($220,000 × 60%*)
Contribution margin.............. 77,000
48,00
Traceable fixed expenses...... 0 ($55,000 − $7,000)
$
Segment margin.................... 29,000

*Variable expenses ÷ Sales = $120,000 ÷ $200,000 = 60%


Use the following to answer questions 57-59:

Higgins Company sells three products, Product A, Product B, and Product C. Sales during
June totaled $1,500,000 in the company. The company's overall contribution margin ratio was
38%, and its fixed expenses totaled $525,000 for the year. Sales by product were: Product A,
$750,000; Product B, $450,000; and Product C, $300,000. Traceable fixed expenses were:
Product A, $180,000; Product B, $150,000; and Product C, $90,000. The variable expenses
were: Product A, $450,000; Product B, $270,000; and Product C, $___?___.

57. The net operating income for the company as a whole for June was:
A) $45,000
B) $105,000
C) $150,000
D) $570,000

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting; Measurement LO: 1 Level: Medium

Solution:

$1,500,00
Sales...................................... 0
Contribution margin ratio..... × 38%
Contribution margin.............. $570,000
Fixed expenses...................... 525,000
Net operating income............ $ 45,000

58. The contribution margin ratio for Product C for June was:
A) 0%
B) 30%
C) 38%
D) 70%

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 1 Level: Hard

Solution:

Company variable expenses = $1,500,000 × (100% − 38%)


= $1,500,000 × 62% = $930,000
Product C variable expenses = $930,000 − $450,000 − $270,000 = $210,000
Product C contribution margin = $300,000 − $210,000 = $90,000
Product C contribution margin ratio = $90,000 ÷ $300,000 = 30%
59. Common fixed expenses for Higgins Company for June were:
A) $45,000
B) $420,000
C) $150,000
D) $105,000

Ans: D AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 1 Level: Hard

Solution:

Common fixed expenses = Total fixed expenses – Traceable fixed expenses


= $525,000 – ($180,000 + $150,000 + $90,000)
= $525,000 – $420,000 = $105,000

Use the following to answer questions 60-62:

Azuki Corporation operates in two sales territories, urban and rural. Shown below is last
year's income statement segmented by territory:

Urban Rural
$320,00
Sales............................................... 0 $80,000
Variable expenses.......................... 208,000 56,000
Contribution margin...................... 112,000 24,000
Traceable fixed expenses............... 48,000 30,000
Segment margin............................. $64,000 $(6,000)

Azuki's common fixed expenses were $25,000 last year.

60. What was Azuki Corporation's overall net operating income for last year?
A) $33,000
B) $45,000
C) $58,000
D) $83,000

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting; Measurement LO: 1 Level: Easy

Solution:

$58,00
Segment margin............................. 0 ($64,000 + -$6,000)
Common fixed expenses................ 25,00
0
$33,00
Net operating income..................... 0
61. If urban sales were 10% higher last year, by approximately how much would Azuki's
net operating income have increased? (Assume no change in the revenue or cost
structure.)
A) $4,400
B) $6,400
C) $11,200
D) $32,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 1 Level: Medium

Solution:

Urban contribution margin ratio = $112,000 ÷ $320,000 = 35%


Increase in net operating income = $320,000 × 10% × 35% = $11,200

62. If operations in rural areas would have been discontinued at the beginning of last year,
how would this have changed the net operating income of Azuki Company as a
whole?
A) $5,000 increase
B) $6,000 increase
C) $11,000 increase
D) $24,000 decrease

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Rural segment margin = Contribution margin − Traceable fixed expenses


= $24,000 − $30,000 = ($6,000)

Net operating income would have increased by $6,000 if operations in rural areas
would have been discontinued at the beginning of last year.
Use the following to answer questions 63-65:

Tubaugh Corporation has two major business segments—East and West. In December, the
East business segment had sales revenues of $690,000, variable expenses of $352,000, and
traceable fixed expenses of $104,000. During the same month, the West business segment had
sales revenues of $140,000, variable expenses of $56,000, and traceable fixed expenses of
$24,000. The common fixed expenses totaled $162,000 and were allocated as follows:
$89,000 to the East business segment and $73,000 to the West business segment.

63. The contribution margin of the West business segment is:


A) $84,000
B) $234,000
C) $422,000
D) $145,000

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 1 Level: Easy

Solution:

West contribution margin = Sales − Variable expenses


= $140,000 − $56,000 = $84,000

64. A properly constructed segmented income statement in a contribution format would


show that the segment margin of the East business segment is:
A) $352,000
B) $145,000
C) $234,000
D) $249,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting; Measurement LO: 1 Level: Easy

Solution:

$690,00
Sales............................................... 0
352,00
Variable expenses.......................... 0
Contribution margin...................... 338,000
104,00
Traceable fixed expenses............... 0
$234,00
Segment margin............................. 0
65. A properly constructed segmented income statement in a contribution format would
show that the net operating income of the company as a whole is:
A) $294,000
B) $422,000
C) $132,000
D) -$30,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting; Measurement LO: 1 Level: Easy

Solution:
Total
Company East West
$140,00
Sales................................... $830,000 $690,000 0
Variable expenses.............. 408,000 352,000 56,000
Contribution margin........... 422,000 338,000 84,000
Traceable fixed expenses... 128,000 104,000 24,000
Segment margin................. 294,000 $234,000 $60,000
Common fixed expenses.... 162,000
Net operating income......... $132,000

Use the following to answer questions 66-68:

Data for January for Bondi Corporation and its two major business segments, North and
South, appear below:

$660,00
Sales revenues, North.......................... 0
$383,00
Variable expenses, North..................... 0
Traceable fixed expenses, North......... $79,000
$510,00
Sales revenues, South.......................... 0
$291,00
Variable expenses, South..................... 0
Traceable fixed expenses, South......... $66,000

In addition, common fixed expenses totaled $179,000 and were allocated as follows: $93,000
to the North business segment and $86,000 to the South business segment.
66. The contribution margin of the South business segment is:
A) $198,000
B) $496,000
C) $219,000
D) $105,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 1 Level: Easy

Solution:

$510,00
Sales............................................... 0
291,00
Variable expenses.......................... 0
$219,00
Contribution margin...................... 0

67. A properly constructed segmented income statement in a contribution format would


show that the segment margin of the North business segment is:
A) $105,000
B) $383,000
C) $198,000
D) $184,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting; Measurement LO: 1 Level: Easy

Solution:

North
Sales................................... $660,000
Variable expenses.............. 383,000
Contribution margin........... 277,000
Traceable fixed expenses... 79,000
Segment margin................. $198,000
68. A properly constructed segmented income statement in a contribution format would
show that the net operating income of the company as a whole is:
A) -$7,000
B) $172,000
C) $351,000
D) $496,000

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting; Measurement LO: 1 Level: Easy

Solution:

Total
Company North South
$1,170,00 $510,00
Sales................................... 0 $660,000 0
Variable expenses.............. 674,000 383,000 291,000
Contribution margin........... 496,000 277,000 219,000
Traceable fixed expenses... 145,000 79,000 66,000
$153,00
Segment margin................. 351,000 $198,000 0
Common fixed expenses.... 179,000
Net operating income......... $172,000

Use the following to answer questions 69-71:

Ferrar Corporation has two major business segments-Consumer and Commercial. Data for the
segment and for the company for March appear below:

$680,00
Sales revenues, Consumer......................... 0
$280,00
Sales revenues, Commercial...................... 0
$394,00
Variable expenses, Consumer.................... 0
$143,00
Variable expenses, Commercial................ 0
$102,00
Traceable fixed expenses, Consumer........ 0
Traceable fixed expenses, Commercial..... $45,000

In addition, common fixed expenses totaled $210,000 and were allocated as follows:
$122,000 to the Consumer business segment and $88,000 to the Commercial business
segment.
69. The contribution margin of the Commercial business segment is:
A) $137,000
B) $184,000
C) $62,000
D) $423,000

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Sales................................... $280,000
Variable expenses.............. 143,000
Contribution margin........... $137,000

70. A properly constructed segmented income statement in a contribution format would


show that the segment margin of the Consumer business segment is:
A) $164,000
B) $62,000
C) $394,000
D) $184,000

Ans: D AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting; Measurement LO: 1 Level: Easy

Solution:

Consumer
Sales................................... $680,000
Variable expenses.............. 394,000
Contribution margin........... 286,000
Traceable fixed expenses... 102,000
Segment margin................. $184,000
71. A properly constructed segmented income statement in a contribution format would
show that the net operating income of the company as a whole is:
A) $66,000
B) -$144,000
C) $423,000
D) $276,000

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting; Measurement LO: 1 Level: Easy

Solution:

Segments
Total
Company Consumer Commercial
Sales................................... $960,000 $680,000 $280,000
Variable expenses.............. 537,000 394,000 143,000
Contribution margin........... 423,000 286,000 137,000
Traceable fixed expenses... 147,000 102,000 45,000
Segment margin................. 276,000 $184,000 $92,000
Common fixed expenses.... 210,000
Net operating income......... $66,000

Use the following to answer questions 72-73:

The Tipton Division of Dudley Company reported the following data last year:

Return on investment........................ 20%


Minimum required rate of return...... 12%
$50,00
Residual income............................... 0
72. Tipton Division's average operating assets last year were:
A) $625,000
B) $250,000
C) $416,677
D) $333,333

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2; 3 Level: Hard

Solution:

Residual income = Average operating assets × (ROI − Minimum required rate of


return)
Average operating assets = Residual income ÷ (ROI − Minimum required rate of
return)
= $50,000 ÷ (20% − 12%) = $50,000 ÷ 8% = $625,000

73. The division's net operating income last year was:


A) $250,000
B) $125,000
C) $100,000
D) $75,000

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2; 3 Level: Hard

Solution:

ROI = Net operating income ÷ Average operating assets


Net operating income = ROI × Average operating assets
= 20% × $625,000 = $125,000
Use the following to answer questions 74-75:

The following data pertain to Turk Company's operations last year:

$900,00
Sales............................................... 0
Net operating income..................... $36,000
$150,00
Contribution margin....................... 0
$180,00
Average operating assets................ 0
$100,00
Stockholders’ equity...................... 0
$120,00
Plant, property, & equipment......... 0

74. Turk's return on investment for the year was:


A) 4%
B) 15%
C) 36%
D) 20%

Ans: D AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2 Level: Medium

Solution:

ROI = Net operating income ÷ Average operating assets


= $36,000 ÷ $180,000 = 20%

75. If the residual income for the year was $9,000, the minimum required rate of return
must have been:
A) 15%
B) 4%
C) 20%
D) 36%

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 3 Level: Hard

Solution:

Residual income = Net operating income − (Average operating assets × Minimum


required rate of return)
= $9,000 = $36,000 − ($180,000 × Minimum required rate of return)
= $27,000 ÷ $180,000
Minimum required rate of return = 15%
Use the following to answer questions 76-77:

The Hum Division of the Ho Company reported the following data for last year:

$800,00
Sales..................................................... 0
$650,00
Operating expenses.............................. 0
Interest expense................................... $50,000
Tax expense......................................... $30,000
$200,00
Stockholders’ equity............................ 0
$600,00
Average operating assets..................... 0
Minimum required rate of return......... 12%

76. The residual income for the Hum Division last year was:
A) $126,000
B) $46,000
C) $78,000
D) $22,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 3 Level: Medium

Solution:

$800,00
Sales..................................................... 0
650,00
Operating expenses.............................. 0
$150,00
Net operating income........................... 0

Residual income = Net operating income − (Average operating assets × Minimum


required rate of return) = $150,000 − ($600,000 × 12%) = $150,000 − $72,000 =
$78,000
77. The return on investment last year for the Hum Division was:
A) 75%
B) 25%
C) 35%
D) 12%

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2 Level: Medium

Solution:

ROI = Net operating income ÷ Average operating assets


= $150,000 ÷ $600,000 = 25%

Use the following to answer questions 78-79:

The following selected data pertain to Beck Co.'s Beam Division for last year:

$2,000,00
Sales........................................................ 0
Variable expenses................................... $800,000
Traceable fixed expenses........................ $900,000
Average operating assets......................... $500,000
Minimum required rate of return............ 20%

Note: the traceable fixed expenses do not include any interest expense.
78. How much is the residual income?
A) $400,000
B) $200,000
C) $300,000
D) $500,000

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 3 Level: Medium Source: CPA; adapted

Solution:

$2,000,00
Sales........................................................ 0
Variable expenses................................... 800,000
900,00
Traceable fixed expenses........................ 0
$
Net operating income.............................. 300,000

Residual income = Net operating income − (Average operating assets × Minimum


required rate of return) = $300,000 − ($500,000 × 20%) = $300,000 − $100,000 =
$200,000

79. How much is the return on the investment?


A) 25%
B) 45%
C) 20%
D) 60%

Ans: D AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2 Level: Medium Source: CPA; adapted

Solution:

ROI = Net operating income ÷ Average operating assets


= $300,000 ÷ $500,000 = 60%
Use the following to answer questions 80-81:

Edith Carolina is president of the Deed Corporation. The company is decentralized, and
leaves investment decisions up to the discretion of the division managers. Michael Sanders,
manager of the Cosmetics Division, has had a return on investment of 14% for his division for
the past three years and expects the division to have the same return in the coming year.
Sanders has the opportunity to invest in a new line of cosmetics which is expected to have a
return on investment of 12%.
80. Suppose Deed Corporation evaluates managerial performance using return on
investment. Edith Carolina, as president of the company, may view the opportunity for
taking on the cosmetics line differently from Michael Sanders, manager of the
Cosmetics Division. What action would each of them prefer with respect to the
decision of whether to take on the new cosmetics line?

Carolina Sanders
A) accept reject
B) reject accept
C) accept accept
D) reject reject

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Decision Making; Reporting LO: 2 Level: Easy

81. If the Deed Corporation evaluates managerial performance using residual income
based on the corporate minimum required rate of return of 8%, what decision would
be preferred by Edith Carolina and Michael Sanders?

Carolina Sanders
A) accept reject
B) reject accept
C) accept accept
D) reject reject

Ans: C AACSB: Analytic AICPA BB: Decision Making


AICPA FN: Reporting LO: 3 Level: Easy

Use the following to answer questions 82-83:

The following information relates to the Quilt Division of TDS Corporation for last year:

$200,00
Sales............................................... 0
Contribution margin...................... $90,000
Net operating income..................... $65,000
$500,00
Average operating assets............... 0
Minimum desired rate of return..... 10%
82. What was the Quilt Division's return on investment (ROI) for last year?
A) 13%
B) 18%
C) 40%
D) 45%

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2 Level: Easy

Solution:

ROI = Net operating income ÷ Average operating assets


= $65,000 ÷ $500,000 = 13%

83. Assume that Quilt was being evaluated solely on the basis of residual income. Which
of the following investment opportunities would Quilt want to invest in?

An investment that An investment that


generates a return of 12% generates a return of 16%
A) Yes Yes
B) No Yes
C) Yes No
D) No No

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Decision Making; Reporting LO: 3 Level: Medium

Use the following to answer questions 84-87:

Cecille Products is a division of a major corporation. Last year the division had total sales of
$7,940,000, net operating income of $254,080, and average operating assets of $2,000,000.
The company's minimum required rate of return is 12%.
84. The division's margin is closest to:
A) 3.2%
B) 25.2%
C) 12.7%
D) 28.4%

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting Level: Easy

Solution:

Margin = Net operating income ÷ Sales = $254,080 ÷ $7,940,000 = 3.2%

85. The division's turnover is closest to:


A) 0.13
B) 3.52
C) 3.97
D) 31.25

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2 Level: Easy

Solution:

Turnover = Sales ÷ Average operating assets = $7,940,000 ÷ $2,000,000 = 3.97

86. The division's return on investment (ROI) is closest to:


A) 2.6%
B) 12.7%
C) 0.4%
D) 50.4%

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2 Level: Easy

Solution:

ROI = Net operating income ÷ Average operating assets


= $254,080 ÷ $2,000,000 = 12.7%
87. The division's residual income is closest to:
A) $(698,720)
B) $494,080
C) $254,080
D) $14,080

Ans: D AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 3 Level: Easy

Solution:

Residual income = Net operating income − (Average operating assets × Minimum


required rate of return) = $254,080 − ($2,000,000 × 12%) = $254,080 − $240,000 =
$14,080

Use the following to answer questions 88-91:

Deanda Products is a division of a major corporation. The following data are for the last year
of operations:

$28,630,00
Sales............................................................................. 0
Net operating income................................................... $1,145,200
Average operating assets.............................................. $7,000,000
The company’s minimum required rate of return........ 18%

88. The division's margin is closest to:


A) 4.0%
B) 16.4%
C) 24.4%
D) 28.4%

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2 Level: Easy

Solution:

Margin = Net operating income ÷ Sales = $1,145,200 ÷ $28,630,000 = 4.0%


89. The division's turnover is closest to:
A) 4.09
B) 0.16
C) 25.00
D) 3.51

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2 Level: Easy

Solution:

Turnover = Sales ÷ Average operating assets = $28,630,000 ÷ $7,000,000 = 4.09

90. The division's return on investment (ROI) is closest to:


A) 16.4%
B) 3.2%
C) 67.1%
D) 0.6%

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2 Level: Easy

Solution:

ROI = Net operating income ÷ Average operating assets


= $1,145,200 ÷ $7,000,000 = 16.4%

91. The division's residual income is closest to:


A) $(4,008,200)
B) $2,405,200
C) $(114,800)
D) $1,145,200

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 3 Level: Easy

Solution:

Residual income = Net operating income − (Average operating assets × Minimum


required rate of return) = $1,145,200 − ($7,000,000 × 18%) = $1,145,200 −
$1,260,000 = $(114,800)
Use the following to answer questions 92-94:

Last year the Uptown Division of Gorcen Enterprises had sales of $300,000 and a net
operating income of $24,000. The average operating assets at Uptown last year amounted to
$120,000.

92. Last year at Uptown the return on investment was:


A) 8%
B) 12%
C) 20%
D) 40%

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2 Level: Easy

Solution:

ROI = Net operating income ÷ Average operating assets


= $24,000 ÷ $120,000 = 20%

93. Last year at Uptown the margin amounted to:


A) 8%
B) 12%
C) 20%
D) 40%

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2 Level: Easy

Solution:

Margin = Net operating income ÷ Sales = $24,000 ÷ $300,000 = 8%


94. At Uptown the turnover last year was:
A) 0.4
B) 2.5
C) 3.2
D) 5.0

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2 Level: Easy

Solution:

Turnover = Sales ÷ Average operating assets = $300,000 ÷ $120,000 = 2.5

Use the following to answer questions 95-97:

Ahartz Industries is a division of a major corporation. Data concerning the most recent year
appears below:

$7,820,00
Sales...................................... 0
Net operating income............ $445,740
$2,000,00
Average operating assets...... 0

95. The division's margin is closest to:


A) 22.3%
B) 25.6%
C) 5.7%
D) 31.3%

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2 Level: Easy

Solution:

Margin = Net operating income ÷ Sales = $445,740 ÷ $7,820,000 = 5.7%


96. The division's turnover is closest to:
A) 3.20
B) 17.54
C) 0.22
D) 3.91

Ans: D AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2 Level: Easy

Solution:

Turnover = Sales ÷ Average operating assets = $7,820,000 ÷ $2,000,000 = 3.91

97. The division's return on investment (ROI) is closest to:


A) 18.2%
B) 4.5%
C) 22.3%
D) 1.3%

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2 Level: Easy

Solution:

ROI = Net operating income ÷ Average operating assets


= $445,740 ÷ $2,000,000 = 22.3%

Use the following to answer questions 98-100:

Beade Industries is a division of a major corporation. Last year the division had total sales of
$16,760,000, net operating income of $770,960, and average operating assets of $4,000,000.
98. The division's margin is closest to:
A) 28.5%
B) 23.9%
C) 4.6%
D) 19.3%

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2 Level: Easy

Solution:

Margin = Net operating income ÷ Sales = $770,960 ÷ $16,760,000 = 4.6%

99. The division's turnover is closest to:


A) 21.74
B) 4.19
C) 3.51
D) 0.19

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2 Level: Easy

Solution:

Turnover = Sales ÷ Average operating assets = $16,760,000 ÷ $4,000,000 = 4.19

100. The division's return on investment (ROI) is closest to:


A) 16.1%
B) 0.9%
C) 19.3%
D) 3.7%

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2 Level: Easy

Solution:

ROI = Net operating income ÷ Average operating assets


= $770,960 ÷ $4,000,000 = 19.3%
Use the following to answer questions 101-102:

The West Division of Cecchetti Corporation had average operating assets of $240,000 and net
operating income of $42,200 in August. The minimum required rate of return for performance
evaluation purposes is 19%.

101. What was the West Division's minimum required return in August?
A) $45,600
B) $42,200
C) $53,618
D) $8,018

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 3 Level: Easy

Solution:

Minimum required return = Minimum required rate of return × Average operating


assets = 19% × $240,000 = $45,600

102. What was the West Division's residual income in August?


A) -$8,018
B) $3,400
C) -$3,400
D) $8,018

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 3 Level: Easy

Solution:

Residual income = Net operating income − (Average operating assets × Minimum


required rate of return) = $42,200 − ($240,000 × 19%) = $42,200 − $45,600 = -$3,400

Use the following to answer questions 103-104:

The Consumer Products Division of Goich Corporation had average operating assets of
$800,000 and net operating income of $81,300 in May. The minimum required rate of return
for performance evaluation purposes is 10%.
103. What was the Consumer Products Division's minimum required return in May?
A) $81,300
B) $8,130
C) $88,130
D) $80,000

Ans: D AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 3 Level: Easy

Solution:

Minimum required return = Minimum required rate of return × Average operating


assets = 10% × $800,000 = $80,000

104. What was the Consumer Products Division's residual income in May?
A) -$1,300
B) $8,130
C) $1,300
D) -$8,130

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 3 Level: Easy

Solution:

Residual income = Net operating income − (Average operating assets × Minimum


required rate of return) = $81,300 − ($800,000 × 10%) = $81,300 − $80,000 = $1,300
Use the following to answer questions 105-108:

(Appendix 12A) Division P of the Nyers Company makes a part that can either be sold to
outside customers or transferred internally to Division Q for further processing. Annual data
relating to this part are as follows:

80,00
Annual production capacity................................... 0 units
Selling price of the item to outside customers....... $35
Variable cost per unit............................................. $23
Fixed cost per unit.................................................. $5

Division Q of the Nyers Company requires 15,000 units per year and is currently paying an
outside supplier $33 per unit. Consider each part below independently.

105. If outside customers demand only 50,000 units per year, then according to the formula
in the text, what is the lowest acceptable transfer price from the viewpoint of the
selling division?
A) $35
B) $33
C) $28
D) $23

Ans: D AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Decision Making; Reporting LO: 4 Level: Medium

Solution:

Transfer price ≥ Variable cost per unit + (Total contribution margin on lost sales ÷
Number of units transferred) = $23 + ($0 ÷ 15,000) = $23
106. If outside customers demand 80,000 units, then according to the formula in the text,
what is the lowest acceptable transfer price from the viewpoint of the selling division?
A) $35
B) $33
C) $28
D) $23

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Decision Making; Reporting LO: 4 Level: Medium

Solution:

Transfer price ≥ Variable cost per unit + (Total contribution margin on lost sales ÷
Number of units transferred) = $23 + [($35 − $23) × 15,000] ÷ 15,000 = $23 + $12 =
$35

107. If outside customers demand 80,000 units and if, by selling to Division Q, Division P
could avoid $4 per unit in variable selling expense, then according to the formula in
the text, what is the lowest acceptable transfer price from the viewpoint of the selling
division?
A) $35
B) $21
C) $31
D) $33

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Decision Making; Reporting LO: 4 Level: Hard

Solution:

Transfer price ≥ Variable cost per unit + (Total contribution margin on lost sales ÷
Number of units transferred) = $23 + [($35 − $23 − $4) × 15,000] ÷ 15,000 = $23 + $8
= $31
108. If outside customers demand 70,000 units, then according to the formula in the text,
what is the lowest acceptable transfer price from the viewpoint of the selling division
for each of the 15,000 units needed by Q?
A) $33
B) $27
C) $28
D) $29

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Decision Making; Reporting LO: 4 Level: Hard

Solution:

Transfer price ≥ Variable cost per unit + (Total contribution margin on lost sales ÷
Number of units transferred)
= $23 + [($35 − $23) × 5,000*] ÷ 15,000 = $23 + ($12 ÷ 3)
= $23 + $4 = $27

*Lost sales units = 15,000 − (80,000 − 70,000) = 15,000 − 10,000 = 5,000

Use the following to answer questions 109-110:

(Appendix 12A) Two of the decentralized divisions of Gamberi Electronics Corporation are
the Plastics Division and the Components Division. The Plastics Division sells molded parts
to both the Components Division and to customers outside the corporation.

109. Assume that the Plastics Division is currently operating at full capacity. Also assume
that the Components Division wants to increase the number of parts it purchases from
Plastics. In order to maintain its current level of profitability, the Plastics Division
should not accept any transfer price on these additional parts that is below the:
A) variable cost of the additional parts.
B) full (absorption) cost of the additional parts.
C) variable cost of the additional parts plus the lost contribution margin on all units
that could no longer be sold to customers outside the corporation.
D) full (absorption) cost of the additional parts plus the lost contribution margin on
all units that could no longer be sold to customers outside the corporation.

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Decision Making; Reporting LO: 4 Level: Medium
110. Assume that the Plastics Division is currently operating with idle capacity. Also
assume that the Components Division wants to purchase from Plastics all of the
additional parts that could be made with this idle capacity. In order to increase its
current level of profitability, the Plastics Division should accept any transfer price on
these additional parts that is above the:
A) variable cost of the additional parts.
B) full (absorption) cost of the additional parts.
C) variable cost of the additional parts plus the lost contribution margin on all units
that could no longer be sold to customers outside the corporation.
D) full (absorption) cost of the additional parts plus the lost contribution margin on
all units that could no longer be sold to customers outside the corporation.

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Decision Making; Reporting LO: 4 Level: Medium

Use the following to answer questions 111-112:

(Appendix 12B) Ampulla Production Studios charges the Sound Effects Department's costs to
two operating departments, Audio and Video. Charges are made on the basis of labor-hours.
Information pertaining to the labor-hours for the year follow:

Audio Video
18,00 27,00
Budgeted labor-hours for the year............................... 0 0
14,70 27,30
Actual labor-hours for the year.................................... 0 0
15,00 25,00
Annual long-run average capacity in labor-hours....... 0 0

The following costs pertain to the Sound Effects Department:

Budgeted For Year Actual For Year


Variable costs........ $315,000 $273,000
Fixed costs............. $756,000 $819,000
111. How much of the Sound Effects Department's variable cost should be charged to the
Video Department at year-end for performance evaluation purposes?
A) $175,000
B) $175,500
C) $177,450
D) $191,100

Ans: D AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 5 Level: Medium

Solution:

Variable cost charged to Video Department


= Budgeted variable cost per lab-hour × Actual labor-hours
= [$315,000 ÷ (18,000 + 27,000)] × 27,300 = ($315,000 ÷ 45,000) × 27,300
= $7 × 27,300 = $191,100

112. How much of the Sound Effects Department's fixed cost should be charged to the
Audio department at year-end for performance evaluation purposes?
A) $264,600
B) $283,500
C) $302,400
D) $307,125

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 5 Level: Medium

Solution:

Fixed cost charged to Audio department


= Audio’s percent of total capacity × Budgeted fixed costs
= [15,000 ÷ (15,000 + 25,000)] × $756,000 = (15,000 ÷ 40,000) × $756,000
= 37.5% × $756,000 = $283,500
Use the following to answer questions 113-114:

(Appendix 12B) Wollan Corporation has two operating divisions-an East Division and a West
Division. The company's Logistics Department services both divisions. The variable costs of
the Logistics Department are budgeted at $44 per shipment. The Logistics Department's fixed
costs are budgeted at $237,600 for the year. The fixed costs of the Logistics Department are
determined based on peak-period demand.

Percentage of Peak Budgeted


Period Capacity Required Shipments
East Division.......... 40% 1,300
West Division........ 60% 3,100

At the end of the year, actual Logistics Department variable costs totaled $332,880 and fixed
costs totaled $253,960. The East Division had a total of 4,300 shipments and the West
Division had a total of 3,000 shipments for the year.

113. How much Logistics Department cost should be allocated to the West Division at the
end of the year?
A) $289,176
B) $229,644
C) $241,167
D) $274,560

Ans: D AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 5 Level: Easy

Solution:

Logistics Department cost allocated to West Division


= (Budgeted variable cost per unit × Actual shipments) + (Budgeted fixed costs ×
Percent of peak capacity required)
= ($44 per shipment × 3,000 shipments) + (($237,600 × 60%)
= $132,000 + $142,560 = $274,560
114. How much actual Logistics Department cost should not be allocated to the operating
divisions at the end of the year?
A) $28,040
B) $0
C) $16,360
D) $11,680

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 5 Level: Easy

Solution:

Actual cost = $332,880 + $253,960 = $586,840


Cost allocated to operating divisions
= [$44 per shipment × (4,300 + 3,000 shipments)] + $237,600
= [$44 per shipment × 7,300 shipments] + $237,600 = $321,200 + $237,600
= $558,800
Actual Logistics Department cost not allocated to operating divisions
= $586,840 − $558,800 = $28,040

Use the following to answer questions 115-116:

(Appendix 12B) Azotea Corporation has two operating divisions-a Consumer Division and a
Commercial Division. The company's Order Fulfillment Department provides services to both
divisions. The variable costs of the Order Fulfillment Department are budgeted at $56 per
order. The Order Fulfillment Department's fixed costs are budgeted at $233,700 for the year.
The fixed costs of the Order Fulfillment Department are budgeted based on the peak period
orders.
Percentage of Peak Period Budgeted
Capacity Required Orders
Consumer Division............ 40% 1,200
Commercial Division......... 60% 2,900

At the end of the year, actual Order Fulfillment Department variable costs totaled $237,390
and fixed costs totaled $239,140. The Consumer Division had a total of 1,240 orders and the
Commercial Division had a total of 2,860 orders for the year.
115. How much Order Fulfillment Department cost should be allocated to the Commercial
Division at the end of the year?
A) $300,380
B) $309,078
C) $332,409
D) $323,180

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 5 Level: Easy

Solution:

Order Fulfillment Department cost allocated to Commercial Division


= ($56 per order × 2,860 orders) + ($233,700 × 60%)
= $160,160 + $140,220 = $300,380

116. How much actual Order Fulfillment Department cost should not be allocated to the
operating divisions at the end of the year?
A) $7,790
B) $5,440
C) $13,230
D) $0

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 5 Level: Easy

Solution:

Actual cost = $237,390 + $239,140 = $476,530


Cost allocated to operating divisions
= [$56 per order × (1,240 + 2,860 orders)] + $233,700
= [$56 per order × 4,100 orders] + $233,700
= $229,600 + $233,700 = $463,300
Actual Order Fulfillment cost not allocated to operating divisions
= $476,530 − $463,300 = $13,230
Use the following to answer questions 117-118:

(Appendix 12B) Frame Corporation's Maintenance Department provides services to the


company's two operating divisions-the Paints Division and the Stains Division. The variable
costs of the Maintenance Department are budgeted based on the number of cases produced by
the operating departments. The fixed costs of the Maintenance Department are determined by
the number of cases produced by the operating departments during the peak period. Data
appear below:

Maintenance Department
Budgeted variable cost....................................... $6 per case
Budgeted total fixed cost.................................... $328,000
Actual total variable cost.................................... $254,014
Actual total fixed cost......................................... $331,940

Paints Division
Percentage of peak period capacity required...... 35%
Budgeted cases................................................... 12,000
Actual cases........................................................ 12,010

Stains Division
Percentage of peak period capacity required...... 65%
Budgeted cases................................................... 29,000
Actual cases........................................................ 28,960

117. How much Maintenance Department cost should be allocated to the Stains Division at
the end of the year?
A) $395,313
B) $414,187
C) $405,610
D) $386,960

Ans: D AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 5 Level: Easy

Solution:

Maintenance Department cost allocated to Stains Division


= ($6 per case × 28,960 cases) + ($328,000 × 65%)
= $173,760 + $213,200 = $386,960
118. How much actual Maintenance Department cost should not be allocated to the
operating divisions at the end of the year?
A) $12,134
B) $8,194
C) $0
D) $3,940

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 5 Level: Easy

Solution:

Actual cost = $254,014 + $331,940 = $585,954


Maintenance Department cost allocated to operating divisions
= [$6 per case × (12,010 + 28,960 cases)] + $328,000
= [$6 per case × 40,970 cases] + $328,000
= $245,820 + $328,000 = $573,820
Maintenance Department cost not allocated to operating divisions
= $585,954 − $573,820 = $12,134
Essay Questions

119. Fausnaught Corporation has two major business segments—Retail and Wholesale. In
October, the Retail business segment had sales revenues of $730,000, variable
expenses of $409,000, and traceable fixed expenses of $117,000. During the same
month, the Wholesale business segment had sales revenues of $400,000, variable
expenses of $220,000, and traceable fixed expenses of $48,000. Common fixed
expenses totaled $218,000 and were allocated as follows: $122,000 to the Retail
business segment and $96,000 to the Wholesale business segment.

Required:

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

Ans:

Total Retail Wholesale


$1,130,00 $730,00
Sales............................................... 0 0 $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
$204,00
Segment margin............................. 336,000 0 $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
120. Spiess Corporation has two major business segments—Apparel and Accessories. Data
concerning those segments for December appear below:

$370,00
Sales revenues, Apparel............................. 0
$185,00
Variable expenses, Apparel....................... 0
Traceable fixed expenses, Apparel............ $48,000
$670,00
Sales revenues, Accessories...................... 0
$275,00
Variable expenses, Accessories................. 0
$114,00
Traceable fixed expenses, Accessories...... 0

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


$1,040,00 $370,00
Sales............................................... 0 0 $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
$137,00
Segment margin............................. 418,000 0 $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
121. Data for September concerning Greenberger Corporation's two major business
segments—Fibers and Feedstocks—appear below:

$750,00
Sales revenues, Fibers................................ 0
$620,00
Sales revenues, Feedstocks........................ 0
$368,00
Variable expenses, Fibers.......................... 0
$254,00
Variable expenses, Feedstocks.................. 0
Traceable fixed expenses, Fibers............... $98,000
$112,00
Traceable fixed expenses, Feedstocks....... 0

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


$1,370,00 $750,00
Sales................................... 0 0 $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
$284,00
Segment margin................. 538,000 0 $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
122. The following data pertains to Timmins Company's operations last year:

Return on investment (ROI).............. 20%


$800,00
Sales.................................................. 0
Margin............................................... 5%
Minimum required rate of return...... 16%

Required:

a. Compute the company's average operating assets.


b. Compute the company's residual income for the year.
Ans:

a. ROI = Margin × Turnover


20% = 5% × Turnover
Turnover = 20% ÷ 5% = 4
Turnover = Sales ÷ Average operating assets
4 = $800,000 ÷ Average operating assets
Average operating assets = $800,000 ÷ 4 = $200,000

b. Before the residual income can be computed, we must first compute the
company’s net operating income for the year:
Margin = Net operating income ÷ Sales
5% = Net operating income ÷ $800,000
Net operating income = 5% × $800,000 = $40,000

$200,00
Average operating assets................................. 0
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
123. Ebel Wares is a division of a major corporation. The following data are for the latest
year of operations:

$29,120,00
Sales................................................................................ 0
Net operating income...................................................... $1,514,240
Average operating assets................................................. $8,000,000
The company’s minimum required rate of return........... 18%

Required:

a. What is the division's margin?


b. What is the division's turnover?
c. What is the division's return on investment (ROI)?
d. What is the division's residual income?

Ans:

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

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


3.6

c. ROI = Net operating income ÷ Average operating assets = $1,514,240 ÷


$8,000,000 = 18.9%

d. 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
124. The Clipper Corporation had net operating income of $380,000 and average operating
assets of $2,000,000. The corporation requires a return on investment of 18%.

Required:

a. Calculate the company's return on investment (ROI) and residual income (RI).
b. 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?
c. 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?
d. 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:

a. Return on investment = Net operating income ÷ Average operating assets =


$380,000 ÷ $2,000,000 = 19%
Residual income = Net operating income − (Average operating assets × Minimum
required rate of return) = $380,000 − ($2,000,000 × 0.18) = $20,000

b. 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.

c. 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.

d. 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
125. Geballe Industries is a division of a major corporation. Last year the division had total
sales of $21,420,000, net operating income of $2,270,520, and average operating
assets of $6,000,000. The company's minimum required rate of return is 10%.

Required:

a. What is the division's margin?


b. What is the division's turnover?
c. 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:

$25,90
Net operating income............................................. 0
Minimum required return (19% × $140,000)........ 26,600
Residual income..................................................... ($700)

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting


LO: 3 Level: Easy

128. The Casket Division of Saal Corporation had average operating assets of $950,000 and
net operating income of $135,200 in January. The company uses residual income to
evaluate the performance of its divisions, with a minimum required rate of return of
13%.

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

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting


LO: 3 Level: Easy
129. Ulrich Company has a Castings Division which does casting work of various types.
The company's Machine Products Division has asked the Castings Division to provide
it with 20,000 special castings each year on a continuing basis. The special casting
would require $12 per unit in variable production costs.

In order to have time and space to produce the new casting, the Castings Division
would have to cut back production of another casting - the RB4 which it presently is
producing. The RB4 sells for $40 per unit, and requires $18 per unit in variable
production costs. Boxing and shipping costs of the RB4 are $6 per unit. Boxing and
shipping costs for the new special casting would be only $1 per unit, thereby saving
the company $5 per unit in cost. The company is now producing and selling 100,000
units of the RB4 each year. Production and sales of this casting would drop by 25
percent if the new casting is produced. Some $240,000 in fixed production costs in the
Castings Division are now being covered by the RB4 casting; 25 percent of these costs
would have to be covered by the new casting if it is produced and sold to the Machine
Products Division.

Required:

According to the formula in the text, what is the lowest acceptable transfer price from
the viewpoint of the selling division? Show all computations.
Ans:

Transfer Price = Variable cost + Lost contribution margin per unit on outside sales

Variable costs:
Variable production costs............................. $12
Boxing and shipping..................................... 1
Total.............................................................. $13

Lost contribution margin on outside sales:


RB4 selling price per unit............................. $40
Variable costs per unit ($18 + $6)................ 24
Contribution margin per unit........................ $16
Loss in production (100,000 × 0.25)............. × 25,000
$400,00
Total lost contribution margin...................... 0

$400,000 ÷ 20,000 new castings = $20 per casting.

Therefore, the lower limit on the transfer price should be:

Transfer price = $13 + $20 = $33 per casting.

AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Decision Making; Reporting Appendix: 12A LO: 4 Level: Hard
130. Ishtaki Corporation has a Parts Division that does work for other Divisions in the
company as well as for outside customers. The company's Equipment Division has
asked the Parts Division to provide it with 20,000 special parts each year. The special
parts would require $16.00 per unit in variable production costs.

The Equipment Division has a bid from an outside supplier for the special parts at
$25.00 per unit. In order to have time and space to produce the special part, the Parts
Division would have to cut back production of another part-the PW27 that it presently
is producing. The PW27 sells for $38.00 per unit, and requires $29.00 per unit in
variable production costs. Packaging and shipping costs of the PW27 are $2.00 per
unit. Packaging and shipping costs for the new special part would be only $0.50 per
unit. The Parts Division is now producing and selling 40,000 units of the PW27 each
year. Production and sales of the PW27 would drop by 40% if the new special part is
produced for the Equipment Division.

Required:

a. What is the range of transfer prices within which both the Divisions' profits would
increase as a result of agreeing to the transfer of 20,000 special parts per year from
the Parts Division to the Equipment Division?
b. Is it in the best interests of Ishtaki Corporation for this transfer to take place?
Explain.
Ans:

a. From the perspective of the Parts Division, profits would increase as a result of
the transfer if and only if:
Transfer price > Variable cost + Opportunity cost
The opportunity cost is the contribution margin on the lost sales, divided by the
number of units transferred:
Opportunity cost = [($38.00-$29.00-$2.00)×16,000*]/20,000 = $5.60
* 40%×40,000 = 16,000
Therefore, Transfer price > ($16.00+$0.50)+$5.60 = $22.10.

From the viewpoint of the Equipment Division, the transfer price must be less than
the cost of buying the units from the outside supplier. Therefore, Transfer price <
$25.00.
Combining the two requirements, we get the following range of transfer prices:
$22.10 < Transfer price < $25.00.

b. Yes, the transfer should take place. From the viewpoint of the entire company,
the cost of transferring the units within the company is $22.10, but the cost of
purchasing the special parts from the outside supplier is $25.00. Therefore, the
company’s profits increase on average by $2.90 for each of the special parts that is
transferred within the company, even though this would cut into production and
sales of another product.

AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Decision Making; Reporting Appendix: 12A LO: 4 Level: Hard
131. Division G has asked Division F of the same company to supply it with 5,000 units of
part WD26 this year to use in one of its products. Division G has received a bid from
an outside supplier for the parts at a price of $19.00 per unit. Division F has the
capacity to produce 25,000 units of part WD26 per year. Division F expects to sell
21,000 units of part WD26 to outside customers this year at a price of $18.00 per unit.
To fill the order from Division G, Division F would have to cut back its sales to
outside customers. Division F produces part WD26 at a variable cost of $12.00 per
unit. The cost of packing and shipping the parts for outside customers is $2.00 per
unit. These packing and shipping costs would not have to be incurred on sales of the
parts to Division G.

Required:

a. What is the range of transfer prices within which both the Divisions' profits would
increase as a result of agreeing to the transfer of 5,000 parts this year from
Division G to Division F?
b. Is it in the best interests of the overall company for this transfer to take place?
Explain.
Ans:

a. From the perspective of Division G, profits would increase as a result of the


transfer if and only if:
Transfer price > Variable cost + Opportunity cost
The opportunity cost is the contribution margin on the lost sales, divided by the
number of units transferred:
Opportunity cost = [($18.00 - $12.00 - $2.00)×1,000*]/5,000 = $0.80

* 21,00
Demand from outside customers................................ 0
Units required by Division G..................................... 5,000
26,00
Total requirements..................................................... 0
25,00
Capacity..................................................................... 0
Required reduction in sales to outside customers...... 1,000

Therefore, Transfer price > $12.00 + $0.80 = $12.80.

From the viewpoint of Division F, the transfer price must be less than the cost of
buying the units from the outside supplier. Therefore,
Transfer price < $19.00.
Combining the two requirements, we get the following range of transfer prices:
$12.80 < Transfer price < $19.00.

b. Yes, the transfer should take place. From the viewpoint of the entire company,
the cost of transferring the units within the company is $12.80, but the cost of
purchasing them from the outside supplier is $19.00. Therefore, the company’s
profits increase on average by $6.20 for each of the special parts that is transferred
within the company.

AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Decision Making; Reporting Appendix: 12A LO: 4
Level: Medium
132. Cannata Corporation has two operating divisions-a North Division and a South
Division. The company's Logistics Department services both divisions. The variable
costs of the Logistics Department are budgeted at $32 per shipment. The Logistics
Department's fixed costs are budgeted at $372,300 for the year. The fixed costs of the
Logistics Department are determined based on peak-period demand.

Percentage of Peak Budgeted


Period Capacity Required Shipments
North Division....... 25% 1,700
South Division....... 75% 5,600

At the end of the year, actual Logistics Department variable costs totaled $335,000
and fixed costs totaled $382,850. The North Division had a total of 4,700 shipments
and the South Division had a total of 5,300 shipments for the year.

Required:

a. Prepare a report showing how much of the Logistics Department's costs should be
charged to each of the operating divisions at the end of the year.
b. How much of the actual Logistics Department costs should not be charged to the
operating divisions at the end of the year? Who should be held responsible for
these uncharged costs?
Ans:

a. The amount of cost that would be charged to each of the operating divisions at
the end of the year would be as follows:
North Division South Division
Variable cost allocation:
$32 × 4,700 shipments.......... $150,400
$32 × 5,300 shipments.......... $169,600
Fixed cost allocation:
25% × $372,300.................... 93,075
75% × $372,300.................... 279,225
Total cost charged.................... $243,475 $448,825

b. The uncharged costs are:


Variable Fixed
$335,00 $382,85
Total actual costs incurred....... 0 0
Costs charged........................... 320,000 372,300
Spending variance.................... $15,000 $10,550

The spending variance represents the difference between the Logistics Department’s
actual costs and what those costs should have been, given the actual level of activity.
This difference is properly the responsibility of the Logistics Department and should
not be charged to the operating divisions.

AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting; Measurement Appendix: 12B LO: 5 Level: Medium
133. Sauseda Corporation has two operating divisions-an Inland Division and a Coast
Division. The company's Customer Service Department provides services to both
divisions. The variable costs of the Customer Service Department are budgeted at $38
per order. The Customer Service Department's fixed costs are budgeted at $433,200
for the year. The fixed costs of the Customer Service Department are determined
based on the peak period orders.

Percentage of Peak Period Budgeted


Capacity Required Orders
Inland Division....... 40% 2,400
Coast Division........ 60% 5,200

At the end of the year, actual Customer Service Department variable costs totaled
$303,240 and fixed costs totaled $450,280. The Inland Division had a total of 2,430
orders and the Coast Division had a total of 5,170 orders for the year.

Required:

a. Prepare a report showing how much of the Customer Service Department's costs
should be charged to each of the operating divisions at the end of the year.
b. How much of the actual Customer Service Department costs should not be charged
to the operating divisions at the end of the year? Who should be held responsible
for these uncharged costs?
Ans:

a. The amount of cost that would be charged to each of the operating divisions at
the end of the year would be as follows:
Inland Division Coast Division
Variable cost allocation:
$38 × 2,430 orders.......... $92,340
$38 × 5,170 orders.......... $196,460
Fixed cost allocation:
40% × $433,200.............. 173,280
60% × $433,200.............. 259,920
Total cost charged.............. $265,620 $456,380

b. The uncharged costs are:


Variable Fixed
$303,24 $450,28
Total actual costs incurred.... 0 0
Costs charged........................ 288,800 433,200
Spending variance................. $14,440 $17,080

The spending variance represents the difference between the Customer Service
Department’s actual costs and what those costs should have been, given the actual
level of activity. This difference is properly the responsibility of the Customer Service
Department and should not be charged to the operating divisions.

AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting; Measurement Appendix: 12B LO: 5 Level: Medium
134. Nealon Corporation's Maintenance Department provides services to the company's
two operating divisions-the Paints Division and the Stains Division. The variable costs
of the Maintenance Department are budgeted based on the number of cases produced
by the operating departments. The fixed costs of the Maintenance Department are
determined based on the number of cases produced by the operating departments
during the peak period. Data appear below:

Maintenance Department
Budgeted variable cost....................................... $7 per case
Budgeted total fixed cost.................................... $600,000
Actual total variable cost.................................... $432,072
Actual total fixed cost......................................... $602,860

Paints Division
Percentage of peak period capacity required...... 30%
Budgeted cases................................................... 15,000
Actual cases........................................................ 15,020

Stains Division
Percentage of peak period capacity required...... 70%
Budgeted cases................................................... 45,000
Actual cases........................................................ 44,990

Required:

a. Prepare a report showing how much of the Maintenance Department's costs should
be charged to each of the operating divisions at the end of the year.
b. How much of the actual Maintenance Department costs should not be charged to
the operating divisions at the end of the year? Who should be held responsible for
these uncharged costs?
Ans:

a. The amount of cost that would be charged to each of the operating divisions at
the end of the year would be as follows:
Paints Division Stains Division
Variable cost allocation:
$7 × 15,020 orders.......... $105,140
$7 × 44,990 orders.......... $314,930
Fixed cost allocation:
30% × $600,000.............. 180,000
70% × $600,000.............. 420,000
Total cost charged.............. $285,140 $734,930

b. The uncharged costs are:


Variable Fixed
$432,07 $602,86
Total actual costs incurred....... 2 0
Costs charged........................... 420,070 600,000
Spending variance.................... $12,002 $2,860

The spending variance represents the difference between the Maintenance


Department’s actual costs and what those costs should have been, given the actual
level of activity. This difference is the responsibility of the Maintenance
Department and should not be charged to the operating divisions.

AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting; Measurement Appendix: 12B LO: 5 Level: Easy

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