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Question;122.When the Bronx Company formed three divisions a;year ago, the president told the division managers an annual bonus would be;given to the most profitable division. The bonus would be based on either the;return on investment (ROI) or residual income (RI) of the division. Investment;is to be measured using gross book value (GBV) or net book value (NBV). The;following data are available;All;the assets are long-lived assets that were purchased 15 years ago and have 15;years of useful life remaining. A zero terminal disposal price is predicted.;Bronx's minimum rate of return (cost of capital) used for computing RI is 10%.;Required;Which method for computing profitability would each;manager likely choose? Show supporting calculations. Round percentage answers;to 2 decimal places, e.g., 0.1234 as 12.34%. Where applicable, assume;straight-line depreciation.;123.T-shirts;R Us Inc. operates two divisions that each manufactures t-shirts for;universities. Each division has its own manufacturing facility. The;historical-cost accounting system reports the following data for 2013.;T-shirts;R Us Inc. estimates the useful life of each manufacturing facility to be 15;years. The company uses straight line depreciation, with a depreciation charge;of $70,000 per year for each division and no salvage value at the end of 15;years. The manufacturing facility is the only long-lived asset of either;division. Current assets are $300,000 in each division. At the end of 2013 the;Atlantic Coast Division is 4 years old and the Big 10 Division is 6 years old.;An index of construction costs, replacement cost, and liquidation values for;manufacturing facilities for production of t-shirts for the 7-year period that;T-shirts R Us Inc. has been operating is as follows;Required;Round answers to 2 decimal places where;appropriate.;1.;Compute return on investment (ROI) for;each division using net book value (NBV). Interpret the results.;2.;Compute return on investment (ROI) for;each division, incorporating current-cost estimates as follows, using;(a) Gross book;values (GBV) under historical cost;(b);GBV at historical cost restated to;current cost using the index of construction costs;(c) NBV;of long-lived assets restated at current cost using the index of construction;costs (the facility was constructed the year before the first year of use);(d);Current replacement cost, and;(e);Current liquidation value.;3. Which of the measures calculated in (2) above;would you choose for (a) performance evaluation of each division manager, and;(b) deciding which division is most profitable for the overall firm. What are;the strategic advantages and disadvantages to the firm of each measure for both;(a) and (b)?;124.1. Describe at least;three problems that Domi Products could encounter when using return on;investment (ROI) as the basis of performance measurement.;2a. Define the residual income;(RI) approach to segment performance measurement.;2b. Determine if Domi;Products should implement this approach instead of the ROI approach.;3.;Discuss the behavioral implications of the division managers' involvement in;the corporate budgeting process, and the decision to more equitably allocate;common costs.;Domi;Products, a multi-divisional manufacturing company, measures performance and;awards bonuses to division managers based upon divisional operating income.;Under the current bonus plan, common company-wide operating expenses are;allocated evenly to all five of its divisions. For example, if rent were;$50,000, each division would be charged $10,000. In planning next year's;budget, corporate management has requested that the division managers recommend;how common expenses should be distributed to the divisions. The division;managers met and jointly developed an incentive plan that would more equitably;distribute common expenses on the basis of resources used and measure each;division manager's performance based on return on assets (ROI), with divisional;bonuses based on a target ROI. They jointly presented their recommendation to;corporate management.;Required;125.Eikelberry;Inc. has the following financial results for 2013 for its three regional;divisions;Required;Calculate return on investment (ROI), asset turnover;(AT), and return on sales (ROS) for each division for 2013. The sales in the;North, Mid and South Atlantic regions are $2,350,000, $1,450,000, and $500,000;respectively. Calculate ROI and asset turnover (AT) for each of the four;measures of investment (i.e., for each of four possible denominators in;determining ROI and AT). Round all answers except ROI to 2 decimal places;e.g., round 0.12487 to 12.49%. Round ROI to whole percentage amounts, e.g.;0.1998 to 20%.;126.1.;How would Division B selling to Division A affect Division A's purchasing;costs?;2.;How would intercompany sales affect;Division B?;3. What;solution would be best for Edwards Inc., assuming Division B has the ability to;operate at full capacity?;Edwards;Inc. manufactures electronics. It consists of several divisions operating;investment centers. Division A desires to purchase materials from Division B at;a price of $85 per unit. Division B can produce 25,000 units at full capacity;and is currently operating at 90% capacity with a variable cost of $80 per;unit. Division B currently sells only to outside customers who pay $115 per;unit. Division A pays an outside company $110 per unit. If purchased from;Division B, B's variable costs would be $10 less because it would save on;marketing expenses for these internal transfers. Division A requires 10,000;units.;Required;127.1. Assume;the transfer price is $12 per unit.;a. How would this;affect the purchasing costs of Division N?;b.;How would this affect the profits of;Division M?;c.;How would this affect Max Ltd. as a;whole?;2. What if the transfer price was;$13 per unit?;Max;Ltd. produces kitchen tools, and operates several divisions as investment;centers. Division M produces a product that it sells to other companies for $16;per unit. It is currently operating at its full capacity of 45,000 units per;year. Variable manufacturing cost is $9 per unit, and variable marketing cost;is $3 per unit. The company wishes to create a new division, Division N, to;produce an innovative new tool that requires the use of Division B's product;(or one very similar). Division N will produce 30,000 units. Currently;Division N can purchase a product equivalent to Division M's from Company X for;$15 per unit. However, Max Ltd. is considering transferring the necessary;product from Division M.;Required

 

Paper#51015 | Written in 18-Jul-2015

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