Variable Manufacturing Overhead. Fixed Manufacturing Overhead, traceable. Fixed Manufacturing Overhead, allocated

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1 MANAGERIAL ACCOUNTING TEORI: Balanced Score Card : an integrated set of performance measures that are derived from and support the organization s strategy. Transfer Pricing : the price charged when one segment of a company provides goods/services to another segment of the same company. Differential Cost : the cost that differs between alternatives. Costs & benefits that differ between alternatives relevant costs. HITUNGAN: 1. Troy Engines, Ltd. manufactures a variety of engines for use in heavy equipment. The company has always produced all of the necessary parts for its engines, including all of the carburetors. An outside supplier has offered to sell one type of carburetor to Troy Engines for a cost of $35 per carburetor. To evaluate this offer, Troy Engines has gathered the following information relating to its own cost of producing the carburetor internally: Per Unit 15,000 Units per Year $14 $210, , ,000 Fixed Manufacturing Overhead, traceable 6* 90,000 Fixed Manufacturing Overhead, allocated 9 135,000 $42 $630,000 Direct Materials Direct Labor Variable Manufacturing Overhead Total Cost *One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value) Required: a. Assuming that the company has no alternative use for the facilities that are now being used to produce the carburetors, should the outside supplier s offer be accepted? Show all computations. b. Suppose that if the carburetors were purchased, Troy Engines, Ltd., could use the freed capacity to launch a new product. The segment margin of the new product would be $150,000 per year. Should Troy Engines, Ltd., accept the offer to buy the carburetors for $35 per unit? Show all computations.

2 2. Selected sales and operating data for three divisions of different structural engineering firms are given as follows: Division A Division B Division C Sales $12,000,000 $14,000,000 $25,000,000 Average operating assets $3,000,000 $7,000,000 $5,000,000 Net operating income $600,000 $560,000 $800,000 Minimum required rate of return 14% 10% 16% Required: a. Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. b. Compute the residual income for each division. c. Assume that each division is presented with an investment opportunity that would yield a 15% rate of return. i. If performance is being measured by ROI, which division or divisions will probably accept the opportunity? Reject? Why? ii. If performance is being measured by residual income, which division or divisions will probably accept the opportunity? Reject? Why? 3. Maria Lorenzi owns an ice cream stand that she operates during the summer months in West Yellowstone, Montana. Her store caters primarily to tourists passing through town on their way to Yellowstone National Park. Maria is unsure of how she should price her ice cream cones and has experimented with two prices in successive weeks during the busy August season. The number of people who entered the store was roughly the same each week. During the first week, she priced the cones at $1.89 and 1,500 cones were sold. During the second week, she priced the cones at $1.49 and 2,340 cones were sold. The variable cost of a cone is $0.43 and consists solely of the costs of the ice cream and of the cone itself. The fixed expenses of the ice cream stand are $675 per week. Required: a. Did Maria make more money selling the cones for $1.89 or for $1.49? b. Estimate the price elasticity of demand for the ice cream cones. c. Estimate the profit-maximizing price for ice cream cones.

3 4. Division A manufactures electronic circuit boards. The boards can be sold either to Division B of the same company or to outside customers. Last year, the following activity occurred in Division A: Selling price per circuit board $125 Variable cost per circuit board $90 Number of circuit boards: Produced during the year 20,000 Sold to outside customers 16,000 Sold to Division B 4,000 Sales to Division B were at the same price as sales to outside customers. The circuit boards purchased by Division B were used in an electronic instrument manufactured by that division (one board per instrument). Division B incurred $100 in additional variable cost per instrument and then sold the instruments for $300 each. Required: a. Prepare income statements for Division A, Division B, and the company as a whole. b. Assume that Division A s manufacturing capacity is 20,000 circuit boards. Next year, Division B wants to purchase 5,000 circuit boards from Division A rather than 4,000. (Circuit boards of this type are not available from outside sources). From the standpoint of the company as a whole, should Division A sell the 1,000 additional circuit boards to Division B or continue to sell them to outside customers? Explain.

4 Answers: 1. a. Cost per Unit Cost of 15,000 units Make Outside purchase price Buy $35 Direct Materials $14 $210,000 Direct Labor $10 $150,000 Variable manufacturing overhead $3 $45,000 Fixed manufacturing overhead, traceable $6 $30,000 Fixed manufacturing overhead, allocated $9 - $42 $435,000 Total Cost The company should make the carburetors. The outside supplier s offer should not be accepted. 1. b. Make Total relevant costs (15,000 units) $585,000 Buy Cost of making $435,000 - Cost of buying - Opportunity cost - new product line segment margin $150,000 - Total costs $585,000 Yes, Troy Engines Ltd., should accept to buy the carburetors.

5 2. a. Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. ROI Division A ROI Division B N et operating Income Sales x Average operating Sales assets $600,000 $12,000,000 $12,000,000 x $3,000, % margin x turnover ROI Division C margin x turnover $560,000 $14,000,000 $14,000,000 x $7,000, % margin x turnover $800,000 $25,000,000 $25,000,000 x $5,000, % 2. b. Compute the residual income for each division. Residual Income NOI - (Average operating assets x minimum required rate of return) Division A $600,000 - ($3,000,000 x 14%) $180,000 Division B $560,000 - ($7,000,000 x 10%) ($140,000) Division C $800,000 - ($5,000,000 x 16%) $0

6 2. c. Assume that each division is presented with an investment opportunity that would yield a 15% rate of return. iii. If performance is being measured by ROI, which division or divisions will probably accept the opportunity? Reject? Why? iv. If performance is being measured by residual income, which division or divisions will probably accept the opportunity? Reject? Why? Division A Return on Investment (ROI) Therefore, if the division is presented with an investment opportunity yielding 15%, it probably would Minimum required return for computing residual income Therefore, if the division is presented with an investment opportunity yielding 15%, it probably would Division B Division C 20% 8% 16% Reject Accept Reject 14% 10% 16% Accept Accept Reject

7 3. a. Did Maria make more money selling the cones for $1.89 or for $1.49? First Price Second Price Selling price (a) $1.89 $1.49 Unit sales (b) 1,500 2,340 Sales (a) x (b) $2,835 $3,486.6 $645 $1,006.2 $2,190 $2,480.4 $675 $675 $1,515 $1,805.4 Less: Variable cost ($0.43 per unit) Contribution Margin Less: Fixed expense Net Operating Income Maria made more money by selling the cones at $1.49 each. b. Estimate the price elasticity of demand for the ice cream cones. ln(1 + % change in quantity sold) εd ln(1 + % change in price) ln( ) ln(1 0.21) c. Estimate the profit-maximizing price for ice cream cones. 1 Profit-maximizing markup on variable cost 1 + εd Profit-maximizing price (1 + Profit-maximizing markup on variable cost) x VC per unit ( ) x $0.43 $0.92

8 4. a. Division A Division B Company Sales $2,500,000 $1,200,000 $3,200,000 Expenses: Added by the division $1,800,000 $400,000 $2,200,000 Transfer price paid $500,000 Total expenses $1,800,000 $900,000 $2,200,000 Net Operating Income $700,000 $300,000 $1,000,000 b. - If Division A sells the additional 1,000 units to Division B: - ($300 - $125 - $100) $75 - If Division A sells the additional 1,000 units to outside customers: - ($125 - $90) $35 - The transfer of 1,000 additional units from Division A to Division B should take place.