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Chapter 24: Q5RQ (page 1355)
Usually, which outweighs the other in decentralization鈥攁dvantages ordisadvantages?
Answer
The advantages outweigh the other in decentralization.
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What is a transfer price?
Wolf Paints is a national paint manufacturer and retailer. The company is segmented into five divisions: Paint Stores (branded retail locations), Consumer (paint sold through home improvement stores), Automotive (sales to auto manufacturers), International, and Administration. The following is selected divisional information for its two largest divisions: Paint Stores and Consumer.
Net Sales Operating Average
Revenue Income Total Assets
Paint Stores \( 3,980,000 \) 476,000 $ 1,380,000
Consumer 1,315,000 195,000 1,600,000
Management has specified a 21% target rate of return.
Requirements
1. Calculate each division鈥檚 ROI. Round all of your answers to four decimal places.
2. Calculate each division鈥檚 profit margin ratio. Interpret your results.
3. Calculate each division鈥檚 asset turnover ratio. Interpret your results.
4. Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results.
5. Calculate each division鈥檚 RI. Interpret your results, and offer a recommendation for any division with negative RI.
6. Describe some of the factors that management considers when setting its minimum target rate of return.
Consider the following condensed financial statements of Forever Free, Inc. The company鈥檚 target rate of return is 40%.
Forever Free, Inc | |
Income Statement | |
For the year ended December 31, 2018 | |
Net Sales revenue | \( 3,500,000 |
Cost of Goods Sold | 2,200,000 |
Gross Profit | 1,300,000 |
Operating Expenses | 950,000 |
Operating Income | 350,000 |
Other income and (expenses) | |
Interest Expense | (27,000) |
Income before income tax expense | 323,000 |
Income tax expense | 113,050 |
Net Income | \) 209,950 |
Forever Free, Inc | ||
Income Statement | ||
For the year ended December 31, 2018 | ||
2018 | 2017 | |
Assets | ||
Cash | \( 64,000 | \) 52,000 |
Accounts Receivable | 49,200 | 17,800 |
Supplies | 1,000 | 400 |
Property, Plant, and Equipment, net | 331,800 | 229,800 |
Patents, net | 135,000 | 119,000 |
Total Assets | \( 581,000 | \) 419,000 |
Liabilities and Stockholders鈥� Equity | ||
Accounts Payable | \( 17,000 | \) 19,000 |
Short-term Notes Payable | 136,000 | 42,000 |
Long-term Notes Payable | 184,000 | 114,500 |
Common Stock, no Par | 232,000 | 242,000 |
Retained Earnings | 12,000 | 1,500 |
Total Liabilities and Stockholders鈥� Equity | \( 581,000 | \) 419,000 |
Requirements
1. Calculate the company鈥檚 ROI. Round all of your answers to four decimal places.
2. Calculate the company鈥檚 profit margin ratio. Interpret your results.
3. Calculate the company鈥檚 asset turnover ratio. Interpret your results.
4. Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results.
5. Calculate the company鈥檚 RI. Interpret your results.
What is the typical focus of responsibility reports for cost centers, revenue centers, and profit centres?
Question:Each of the following managers works for a national chain of hotels and has been given certain decision-making authority. Classify each of the managers according to the type of responsibility center he or she probably manages.
a. Manager of the Central Reservation Office
b. Managers of various corporate-owned hotel locations
c. Managers of the Northeast and Southeast Corporate Divisions
d. Manager of the Housekeeping Department at one hotel
e. Manager of the complimentary breakfast buffet at one hotel
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