Managerial Accounting 15th Edition By Garrison – Test Bank

Exercise 11-8 (15 minutes)
1. ROI computations:

Queensland Division:

New South Wales Division:

2. The manager of the New South Wales Division seems to be doing the better job. Although her margin is three percentage points lower than the margin of the Queensland Division, her turnover is higher (a turnover of 3.5, as compared to a turnover of two for the Queensland Division). The greater turnover more than offsets the lower margin, resulting in a 21% ROI, as compared to an 18% ROI for the Queensland Division.

Notice that if you look at margin alone, then the Queensland Division appears to be the stronger division. This fact underscores the importance of looking at turnover as well as at margin in evaluating performance in an investment center.

Exercise 11-9 (15 minutes)

Company A Company B Company C
Sales $9,000,000 * $7,000,000 * $4,500,000 *
Net operating income $540,000 $280,000 * $360,000
Average operating assets $3,000,000 * $2,000,000 $1,800,000 *
Return on investment (ROI) 18%* 14%* 20%
Minimum required rate of return:
Percentage 16%* 16% 15%*
Dollar amount $480,000 $320,000 * $270,000
Residual income $60,000 $(40,000) $90,000 *

*Given.

Exercise 11-10 (20 minutes)
1. (b) (c)
Net Average
(a) Operating Operating ROI
Sales Income* Assets (b) ÷ (c)
$2,500,000 $475,000 $1,000,000 47.5%
$2,600,000 $500,000 $1,000,000 50.0%
$2,700,000 $525,000 $1,000,000 52.5%
$2,800,000 $550,000 $1,000,000 55.0%
$2,900,000 $575,000 $1,000,000 57.5%
$3,000,000 $600,000 $1,000,000 60.0%

*Sales × Contribution Margin Ratio – Fixed Expenses

2. The ROI increases by 2.5% for each $100,000 increase in sales. This happens because each $100,000 increase in sales brings in an additional profit of $25,000. When this additional profit is divided by the average operating assets of $1,000,000, the result is an increase in the company’s ROI of 2.5%.

Increase in sales $100,000 (a)
Contribution margin ratio 25% (b)
Increase in contribution margin and net operating income (a) × (b) $25,000 (c)
Average operating assets $1,000,000 (d)
Increase in return on investment (c) ÷ (d) 2.5%

Exercise 11-11 (continued)
3.

Exercise 11-12 (30 minutes)
1. ROI computations:

Division A:

Division B:

Division C:

2. Division A Division B Division C
Average operating assets $3,000,000 $7,000,000 $5,000,000
Required rate of return ×  14% ×   10% ×   16%
Required operating income $  420,000 $ 700,000 $ 800,000

Actual operating income $  600,000 $  560,000 $ 800,000
Required operating income (above) 420,000 700,000 800,000
Residual income $ 180,000 $(140,000) $ 0

Exercise 11-12 (continued)
3. a. and b.
Division A Division B Division C
Return on investment (ROI) 20% 8% 16%
Therefore, if the division is presented with an investment opportunity yielding 15%, it probably would Reject Accept Reject
Minimum required return for computing residual income 14% 10% 16%
Therefore, if the division is presented with an investment opportunity yielding 15%, it probably would Accept Accept Reject

If performance is being measured by ROI, both Division A and Division C probably would reject the 15% investment opportunity. These divisions’ ROIs currently exceed 15%; accepting a new investment with a 15% rate of return would reduce their overall ROIs. Division B probably would accept the 15% investment opportunity because accepting it would increase the division’s overall rate of return.

If performance is measured by residual income, both Division A and Division B probably would accept the 15% investment opportunity. The 15% rate of return promised by the new investment is greater than their required rates of return of 14% and 10%, respectively, and would therefore add to the total amount of their residual income. Division C would reject the opportunity because the 15% return on the new investment is less than its 16% required rate of return.

1Exercise 11-13 (continued)
Problem 11-14 (30 minutes)
1. a., b., and c.
Month
1 2 3 4
Throughput time—days:
Process time (x) 2.1 2.0 1.9 1.8
Inspection time 0.6 0.7 0.7 0.6
Move time 0.4 0.3 0.4 0.4
Queue time 4.3 5.0 5.8 6.7
Total throughput time (y) 7.4 8.0 8.8 9.5

Manufacturing cycle efficiency (MCE):
Process time (x) ÷
Throughput time (y) 28.4% 25.0% 21.6% 18.9%

Delivery cycle time—days:
Wait time from order to start of
production 16.0 17.5 19.0 20.5
Throughput time 7.4 8.0 8.8 9.5
Total delivery cycle time 23.4 25.5 27.8 30.0

2. All of the performance measures display unfavorable trends. Throughput time per unit is increasing—largely because of an increase in queue time. Manufacturing cycle efficiency is declining and delivery cycle time is increasing. In addition, the percentage of on-time deliveries has dropped.

Problem 11-14 (continued)
3. a. and b.
Month
5 6
Throughput time—days:
Process time (x) 1.8 1.8
Inspection time 0.6 0.0
Move time 0.4 0.4
Queue time 0.0 0.0
Total throughput time (y) 2.8 2.2

Manufacturing cycle efficiency (MCE):
Process time (x) ÷ Throughput time (y) 64.3% 81.8%

As a company reduces non-value-added activities, the manufacturing cycle efficiency increases rapidly. The goal, of course, is to have an efficiency of 100%. This will be achieved when all non-value-added activities have been eliminated and process time is equal to throughput time.

Problem 11-15 (20 minutes)
1. Operating assets do not include investments in other companies or in undeveloped land.

Beginning
Balances Ending
Balances
Cash $ 140,000 $ 120,000
Accounts receivable 450,000 530,000
Inventory 320,000 380,000
Plant and equipment (net) 680,000 620,000
Total operating assets $1,590,000 $1,650,000

2. Net operating income $405,000
Minimum required return (15% × $1,620,000) 243,000
Residual income $162,000

Problem 11-16 (45 minutes)
1. MPC’s previous manufacturing strategy was focused on high-volume production of a limited range of paper grades. The goal of this strategy was to keep the machines running constantly to maximize the number of tons produced. Changeovers were avoided because they lowered equipment utilization. Maximizing tons produced and minimizing changeovers helped spread the high fixed costs of paper manufacturing across more units of output. The new manufacturing strategy is focused on low-volume production of a wide range of products. The goals of this strategy are to increase the number of paper grades manufactured, decrease changeover times, and increase yields across non-standard grades. While MPC realizes that its new strategy will decrease its equipment utilization, it will still strive to optimize the utilization of its high fixed cost resources within the confines of flexible production. In an economist’s terms, the old strategy focused on economies of scale while the new strategy focuses on economies of scope.

2. Employees focus on improving those measures that are used to evaluate their performance. Therefore, strategically-aligned performance measures will channel employee effort towards improving those aspects of performance that are most important to obtaining strategic objectives. If a company changes its strategy but continues to evaluate employee performance using measures that do not support the new strategy, it will be motivating its employees to make decisions that promote the old strategy, not the new strategy. And if employees make decisions that promote the new strategy, their performance measures will suffer.

Some performance measures that would be appropriate for MPC’s old strategy include: equipment utilization percentage, number of tons of paper produced, and cost per ton produced. These performance measures would not support MPC’s new strategy because they would discourage increasing the range of paper grades produced, increasing the number of changeovers performed, and decreasing the batch size produced per run.