Managerial Accounting
3rd Edition
ISBN: 9780077826482
Author: Stacey M Whitecotton Associate Professor, Robert Libby, Fred Phillips Associate Professor
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 10, Problem 7E
Evaluating Managerial Performance Using
Orange Corp. has two divisions: Fruit and Flower. The following information for the past year is available for each division:
Orange has established a hurdle rate of 12 percent.
Required:
- Compute each division’s return on investment (ROI) and residual income for last year. Determine which manager seems to be performing better.
- Suppose Orange is investing in new technology that will increase each division’s operating income by $144,000. The total investment required is $1,600,000, which will be split evenly between the two divisions. Calculate the ROI and return on investment for each division after the investment is made.
- Determine whether both managers will support the investment. Explain how their support will differ depending on which performance measure (ROI or residual investment) is used.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Chick-Fil-A are the Lord’s Calories (CLC) has the following divisions within their company that achieved the reported ROIs for the previous year:
Division ROI
A 15%
B 20%
C 18%
CLC has been approached with a $350,000 investment opportunity. Which division will AFA choose to invest in, and how much operating income will be generated from the investment?
A. AFA will invest in Division A; the investment will earn operating income of $52,000
B. AFA will invest in Division C; the investment will earn operating income of $63,000
C. AFA will invest in Division B; the investment will earn operating income of $70,000
D. AFA will invest in Division A; the investment will earn operating income of $63,000
Coolbrook Company has the following information
available for the past year: Sales revenue Cost of
goods sold and operating expenses Net operating
income Average invested assets The company's
hurdle rate is 7.26 percent. Required: Calculate
return on investment (ROI) and residual income
for each division for last year. Recalculate ROI and
residual income for each division for each
independent situation that follows: a. Operating
income increases by 11 percent. b. Operating
income decreases by 10 percent. c. The company
invests $259,000 in each division, an amount that
generates $112,000 additional income per
division. d. Coolbrook changes its hurdle rate to
5.26 percent. Complete this question by entering
your answers in the tabs below. Calculate return
on investment (ROI) and residual income for each
division for last year. Note: Enter your ROI answers
as a percentage rounded to two decimal places, (i
.e., 0.1234 should be entered as 12.34% .)
Sales revenue
Cost of goods sold and…
Exercise 25.4 (Algo) ROI versus EVA Measures (LO25-2, LO25-3, LO25-4)
Bailey uses ROI to measure the performance of its operating divisions and to reward its division managers. A summary of the annual
eports from two of Bailey's divisions is shown provided below. The company's weighted-average cost of capital is 11 percent.
Division A
Division B
$6,220,000
$4
650,000
$ 1,060,000
$ 8,530,000
$ 1,850,000
$ 1,182,100
Total assets
Current liabilities
After-tax operating income
ROI
21%
13%
a. Based on ROI, Division A generates more profit per dollar of invested capital than Division B. Compute the EVA for Division A and
Division B.
c. Suppose the manager of Division A was offered a one-year project that would increase her investment base by $340,000 and
increase her divisional operating income by $34,000. Would she be motivated to invest in this project?
Comple
this question by entering your answers in the tabs below.
Required A
Required B
Based on ROI, Division A generates more profit per…
Chapter 10 Solutions
Managerial Accounting
Ch. 10 - Explain how centralized and decentralized...Ch. 10 - Why does decentralization create the need for...Ch. 10 - What is the controllability principle and why is...Ch. 10 - Prob. 4QCh. 10 - Prob. 5QCh. 10 - Prob. 6QCh. 10 - Prob. 7QCh. 10 - Prob. 8QCh. 10 - Return on investment may be separated into two...Ch. 10 - Prob. 10Q
Ch. 10 - Prob. 11QCh. 10 - Prob. 12QCh. 10 - Prob. 13QCh. 10 - Prob. 14QCh. 10 - Prob. 15QCh. 10 - Prob. 16QCh. 10 - Prob. 17QCh. 10 - Why must a company consider its incentive and...Ch. 10 - Prob. 19QCh. 10 - Prob. 20QCh. 10 - Prob. 21QCh. 10 - Prob. 22QCh. 10 - Prob. 23QCh. 10 - Prob. 24QCh. 10 - Prob. 25QCh. 10 - What are negotiated transfer prices? Explain two...Ch. 10 - Sally Thorne is a profit center manager for ABC...Ch. 10 - Prob. 2MCCh. 10 - Which of the following statements is true? a. A...Ch. 10 - Prob. 4MCCh. 10 - Prob. 5MCCh. 10 - Prob. 6MCCh. 10 - Prob. 7MCCh. 10 - Prob. 8MCCh. 10 - Which of the following is not a component of the...Ch. 10 - Prob. 10MCCh. 10 - Using Terms to Complete Sentences about...Ch. 10 - Prob. 2MECh. 10 - Prob. 3MECh. 10 - Applying Balanced Scorecard to Real World Company...Ch. 10 - Applying Balanced Scorecard to Online Company...Ch. 10 - Prob. 6MECh. 10 - Prob. 7MECh. 10 - Prob. 8MECh. 10 - Prob. 9MECh. 10 - Prob. 10MECh. 10 - Prob. 11MECh. 10 - Prob. 12MECh. 10 - Prob. 13MECh. 10 - Prob. 2ECh. 10 - Prob. 3ECh. 10 - Prob. 4ECh. 10 - Calculating Return on Investment, Residual Income,...Ch. 10 - Prob. 6ECh. 10 - Evaluating Managerial Performance Using Return on...Ch. 10 - Evaluating Managerial Performance Using Return on...Ch. 10 - Prob. 9ECh. 10 - Determining the Impact of Various Transactions on...Ch. 10 - Determining Different Types of Responsibility...Ch. 10 - Prob. 14ECh. 10 - Prob. 15ECh. 10 - Prob. 16ECh. 10 - Matching Measures of Performance with the Correct...Ch. 10 - Determining Minimum, Maximum, Negotiated Transfer...Ch. 10 - Prob. 19ECh. 10 - Prob. 20ECh. 10 - Calculating Return on Investment, Residual Income,...Ch. 10 - Prob. 1.2GAPCh. 10 - Calculating Unknowns, Predicting Relationship...Ch. 10 - Calculating Unknowns, Predicting Relationship...Ch. 10 - Prob. 2.3GAPCh. 10 - Prob. 2.4GAPCh. 10 - Prob. 2.5GAPCh. 10 - Prob. 2.6GAPCh. 10 - Prob. 3.1GAPCh. 10 - Prob. 3.2GAPCh. 10 - Prob. 3.3GAPCh. 10 - Prob. 3.4GAPCh. 10 - Prob. 3.5GAPCh. 10 - Prob. 3.6GAPCh. 10 - Prob. 4.1GAPCh. 10 - Prob. 4.2GAPCh. 10 - Prob. 4.3GAPCh. 10 - Prob. 4.4GAPCh. 10 - Prob. 4.5GAPCh. 10 - Prob. 5.1GAPCh. 10 - Prob. 5.2GAPCh. 10 - Prob. 5.3GAPCh. 10 - Prob. 5.4GAPCh. 10 - Prob. 6GAPCh. 10 - Prob. 1.1GBPCh. 10 - Prob. 1.2GBPCh. 10 - Prob. 2.1GBPCh. 10 - Prob. 2.2GBPCh. 10 - Prob. 2.3GBPCh. 10 - Prob. 2.4GBPCh. 10 - Prob. 2.5GBPCh. 10 - Prob. 2.6GBPCh. 10 - Prob. 3.1GBPCh. 10 - Prob. 3.2GBPCh. 10 - Prob. 3.3GBPCh. 10 - Prob. 3.4GBPCh. 10 - Prob. 3.5GBPCh. 10 - Prob. 3.6GBPCh. 10 - Prob. 4.1GBPCh. 10 - Prob. 4.2GBPCh. 10 - Prob. 4.3GBPCh. 10 - Prob. 4.4GBPCh. 10 - Prob. 4.5GBPCh. 10 - Prob. 5.1GBPCh. 10 - Prob. 5.2GBPCh. 10 - Prob. 5.3GBPCh. 10 - Prob. 5.4GBPCh. 10 - Prob. 6GBP
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- Katayama Company produces a variety of products. One division makes neoprene wetsuits. The divisions projected income statement for the coming year is as follows: Required: 1. Compute the contribution margin per unit, and calculate the break-even point in units. Repeat, using the contribution margin ratio. 2. The divisional manager has decided to increase the advertising budget by 140,000 and cut the average selling price to 200. These actions will increase sales revenues by 1 million. Will this improve the divisions financial situation? Prepare a new income statement to support your answer. 3. Suppose sales revenues exceed the estimated amount on the income statement by 612,000. Without preparing a new income statement, determine by how much profits are underestimated. 4. How many units must be sold to earn an after-tax profit of 1.254 million? Assume a tax rate of 34 percent. (Round your answer up to the next whole unit.) 5. Compute the margin of safety in dollars based on the given income statement. 6. Compute the operating leverage based on the given income statement. (Round to three significant digits.) If sales revenues are 20 percent greater than expected, what is the percentage increase in profits?arrow_forwardDantrell Palmer has just been appointed manager of Kirchner Glass Products Division. He has two years to make the division profitable. If the division is still showing a loss after two years, it will be eliminated, and Dantrell will be reassigned as an assistant divisional manager in another division. The divisional income statement for the most recent year is as follows: Upon arriving at the division, Dantrell requested the following data on the divisions three products: He also gathered data on a proposed new product (Product D). If this product is added, it would displace one of the current products; the quantity that could be produced and sold would equal the quantity sold of the product it displaces, although demand limits the maximum quantity that could be sold to 20,000 units. Because of specialized production equipment, it is not possible for the new product to displace part of the production of a second product. The information on Product D is as follows: Required: 1. Prepare segmented income statements for Products A, B, and C. 2. Determine the products that Dantrell should produce for the coming year. Prepare segmented income statements that prove your combination is the best for the division. By how much will profits improve given the combination that you selected? (Hint: Your combination may include one, two, or three products.)arrow_forwardThe three divisions of Yummy Foods are Snack Goods, Cereal, and Frozen Foods. The divisions are structured as investment centers. The following responsibility reports were prepared for the three divisions for the prior year: a. Which division is making the best use of invested assets and should be given priority for future capital investments? b. b. Assuming that the minimum acceptable return on new projects is 19%, would all investments that produce a return in excess of 19% be accepted by the divisions? Explain. c. c. Identify opportunities for improving the companys financial performance.arrow_forward
- Jarriot, Inc., presented two years of data for its Furniture Division and its Houseware Division. Required: 1. Compute the ROI and the margin and turnover ratios for each year for the Furniture Division. (Round your answers to four significant digits.) 2. Compute the ROI and the margin and turnover ratios for each year for the Houseware Division. (Round your answers to four significant digits.) 3. Explain the change in ROI from Year 1 to Year 2 for each division.arrow_forwardThe following selected data pertain to the Argent Division for last year: Required: 1. How much is the residual income? 2. How much is the return on investment? (Rounded to four significant digits.)arrow_forward1. Calculate return on investment (ROI) and residual income for each division for last year. 2. Recalculate ROI and residual income for the division for each independent situation that follows: a. Operating income increases by 10 percent. b. Operating income decreases by 11 percent. c. The company invests $245,000 in each division, an amount that generates $119,000 additional income per division. d. Coolbrook changes its hurdle rate to 4.76 percent.arrow_forward
- Hardin Company is a division of a major corporation. The following data are for the latest year ofoperations:Sales $ 19,600,000 Net operating income $ 470,400 Average operating assets $ 5,000,000 The company's minimum required rate of return 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)?d. What is the division's residual income?arrow_forwardSunland Corporation recently announced a bonus plan to reward the manager of its most profitable division. The three divisional managers are to decide which performance measure will be used to evaluate profitability. Sunland Corporation requires a 10% minimum return on investment. The following information is available for the year just ended. Divisional Divisional Operating Invested Division Operating Assets Income Capital Ashton $870,000 $93,090 $197,000 Drye 790,000 88,480 67,000 Poole 485,000 57,230 117,000arrow_forwardCoolbrook company has the following information available for the past year:(Chart in photo below) Required:1. calculate return on Investment (ROI) and residual income for each divison for the last year2. Recalculate ROI and residual income for the division for each independent situration that follows:a.) operating income increases by 9 percentb.) operating Income decreases by 9 percentc.) The company invests 255,000 in each division, an amount that generates 106,000 additional income per division.d.) Coolbrook changes its hurdle rate to 5.26 percentarrow_forward
- The Willard Division's operating data for the past two years are provided below: Return on investment Net operating income Turnover Margin Sales The sales for Year 2 were: $ For the past year, the return on investment was: For the past year, the turnover used in ROI calculations was: For the past year, the minimum required rate of return was: Year 1 The Willard Division's margin in Year 2 was 150% of the margin in Year 1. The net operating income for Year 1 was: 12 ? ? ? 3,200,000 % $ Year 2 36 360,000 3 ? ?arrow_forwardColonial Pharmaceuticals is a small firm specializing in new products. It is organized into two divisions, which are based on the products they produce. AC Division is smaller and the life of the products it produces tend to be shorter than those produced by the larger SO Division. Selected financial data for the past year is shown as follows. Divisional Investment is as of the beginning of the year. Colonial Pharmaceuticals uses a 10 percent cost of capital and uses beginning-of-the-year Investment when computing ROI and residual income. Ignore Income taxes. Allocated corp. overhead Cost of goods sold Divisional investment R&D Sales SG&A AC Division $ 620 3,240 9,400 2,200 8,800 760 SO Division $ 1,600 6,600 78,000 3,400 18,000 1,330 Required: a. Compute divisional Income for the two divisions. b. Calculate the operating margin, which is equivalent to the return on sales, for the two divisions. c. Calculate ROI for the two divisions. d. Compute residual income for the two divisions.arrow_forwardHardin Company is a division of a major corporation. The following data are for the latest year ofoperations: (35 points)Sales $ 19,600,000 Net operating income $ 470,400 Average operating assets $ 5,000,000 The company's minimum required rate of return 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)?d. What is the division's residual income?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning
Financial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,
Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub
Cornerstones of Cost Management (Cornerstones Ser...
Accounting
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Cengage Learning
Financial And Managerial Accounting
Accounting
ISBN:9781337902663
Author:WARREN, Carl S.
Publisher:Cengage Learning,
Managerial Accounting
Accounting
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:South-Western College Pub
Introduction to Divisional performance measurement - ACCA Performance Management (PM); Author: OpenTuition;https://www.youtube.com/watch?v=pk8Mzoqr4VA;License: Standard Youtube License