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MANAGEMENT ADVISORY SERVICES

Responsibility Accounting & Transfer Pricing

RETURN ON INVESTMENT Return on Investment Computation Based on Operating Income 1. The following selected data pertain to the belt division of Allen Corp. for last year: Sales $500,000 Average operating assets $200,000 Net operating income $80,000 Turnover 2.5 Minimum required return 20% How much is the return on investment? (M) a. 40% c. 20% b. 16% d. 15% AICPA, Adapted 2. Harstin Corporation has provided the following data: Sales Gross margin Net operating income Stockholders' equity Average operating assets Residual income The return on investment for the past year was: (M) a. 28%. c. 36%. b. 20%. d. 8%.

$625,000 70,000 50,000 90,000 250,000 20,000 G & N 9e

Investment 3. Apple Division of the American Fruit Co. had the following statistics for 2002: Assets available for use $1,000,000 Residual income 100,000 Return on investment 15% If the manager of Apple Division is evaluated based on return on investment, how much would she be willing to pay for an investment that promises to increase net segment income by $50,000? (M) a. $50,000 c. $1,000,000 b. $333,333 d. $500,000 Barfield CHIANG KAI SHEK COLLEGE

Required Peso Sales 4. The manager of the Strong Division of Powers Company expects the following results in 2003 (pesos in millions); Sales P49.60 Variable costs 29.76 (60%) Contribution margin P19.84 Fixed costs 12.00 Profit P 7.84 Investment Plant equipment P19.51 Working capital 14.88 P34.39 ROI (P7.84/P34.39) 22.80% The division has a target ROI of 30%, and the manager has asked you to determine how much sales volume the division would need to reach. He states that the sales mix is relatively constant so variable costs should be close to 60% of sales, fixed cost and plant and equipment should remain constant, and working capital (cash, receivables and inventories) should vary closely with sales in the percentage reflected above. The peso sales that the division needs in order to reach the 30% ROI target is (D) A. P19,829,032. C. P44,373,871 B. P57,590,322 D. P59,510,000 Pol Bobadilla Dupont Model Sensitivity Analysis 5. If the operating income margin of 0.3 stayed the same and the operating asset turnover of 5.0 increased by 10 percent, the ROI (M) a. increase by 10 percent d. remain the same b. decrease by 10 percent e. increase to 1.5. c. increase by 15 percent H&M 6. If the investment turnover increased by 20% and ROS decreased by 30%, the ROI would (M) a. Increase by 20%. c. Increase by 4%. Page 1 of 31

MANAGEMENT ADVISORY SERVICES b. Decrease by 16%.

Responsibility Accounting & Transfer Pricing d. None of the above. D, L & H 9e

7. If the investment turnover decreased by 20% and ROS decreased by 30%, the ROI would (M) a. Increase by 30%. c. Decrease by 44%. b. Decrease by 20%. d. None of the above. D, L & H 9e 8. Company L had its operating asset turnover increased by 50% and the operating income margin increased by 50%. Company U had its operating asset turnover increased by 30% and the operating income margin decreased by 30%. What changes are expected for ROI of Company L and Company U, respectively? (M) Pol A. B. C. D. Bobadilla Company L 50% 125% 225% 125% increase increase increase increase Company U 9% 9% No change No change decrease decrease

income method. Webb is reviewing the following forecasted information

for the division for next year. Category

Amount (thousands) Working capital $ 1,800 Revenue 30,000 Plant and equipment 17,200 To establish a standard of performance for the division’s manager using the residual income approach, four scenarios are being considered. Scenario 1 assumes an imputed interest charge of 15% and a target residual income of $2,000,000. Scenario 2 assumes an imputed interest charge of 12% and a target residual income of $1,500,000. Scenario 3 assumes an imputed interest charge of 18% and a target residual income of $1,250,000. Scenario 4 assumes an imputed interest charge of 10% and a target residual income of $2,500,000.

RESIDUAL INCOME Residual Income Computation 9. REB Service Co. is a computer service center. For the month of May 1995, REB had the following statistics: Sales $450,000 Operating income 25,000 Net profit after taxes 8,000 Total assets 500,000 Shareholders’ equity 200,000 Cost of capital 6% Based on the above information, which one of the following statements is correct? REB has a (M) a. ROI of 4% c. ROI of 1.6% CMA 0695 3-20 b. Residual income of $(5,000) d. Residual income of $(22,000) Target Cost 10. James Webb is the general manager of the Industrial Park Division, and his performance is measured using the residual CHIANG KAI SHEK COLLEGE

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MANAGEMENT ADVISORY SERVICES

Responsibility Accounting & Transfer Pricing

Which of the scenarios assumes the lowest maximum cost? (M) a. Scenario 1. c. Scenario 3. b. Scenario 2. d. Scenario 4. Gleim RETURN ON INVESMENT, MINIMUM REQUIRED RATE OF RETURN & RESIDUAL INCOME Minimum Required Rate of Return & Residual Income Return on Investment 11.Fortree products have a residual net income of P1.8 million. If the imputed interest rate is 16%, compute the ROI (M) a. 5% c. 15% b. 10% d. not listed RPCPA 1091 12.Z Division of XYZ Corp. has the following information for 2002: Assets available for $1,800,000 Target rate of return 10% Residual income $270,000 What was Z Division's return on investment for 2002? (M) a. 15% c. 25% b. 10% d. 20% Barfield 13.Pasta Division of We Make Italian, is evaluated based on residual income generated. For 2002, the Division generated a residual income of $2,000,000 and net income of $5,000,000. The target rate of return for all divisions of We Make Italian is 20 percent. For 2002, what was the return on investment for Pasta Division? (M) a. 40% c. 20% b. 13% d. 33% Barfield Return on Investment, Minimum Required Rate of Return & Residual Income Investment Cost 14.In the X Division of S Co., 2002 segment income exceeded 2002 residual income by $15,000. Also for 2002, return on investment exceeded the target rate of return by 10 percent. What was the level of investment in the X Division for 2002? (M) a. $15,000 b. $100,000 CHIANG KAI SHEK COLLEGE

c. $150,000 d. An answer can't be determined from this information.

Barfield

Return on Investment & Residual Income & Units Sold Questions 15 thru 17 are based on the following information. G & N 9e The Axle Division of LaBate Company makes and sells only one product. Annual data on the Axle Division's single product follow: Unit selling price $50 Unit variable cost $30 Total fixed costs $200,000 Average operating assets $750,000 Minimum required rate of return 12% 15.

If Axle sells 16,000 units per year, the return on investment should be: (M) a. 12%. c. 16%. b. 15%. d. 18%.

16.

If Axle sells 15,000 units per year, the residual income should be: (M) a. $30,000. c. $50,000. b. $100,000. d. $10,000. G & N 9e

17.

Suppose the manager of Axle desires an annual residual income of $45,000. In order to achieve this, Axle should sell how many units per year? (M) a. 14,500. c. 18,250. b. 16,750. d. 19,500. G & N 9e

ECONOMIC VALUE-ADDED EVA Based on Operating Income 18. Division A had the following information: Asset base in Division A Net income in Division A Operating income margin for Division A Target ROI Weighted-average cost of capital What is EVA for Division A?

$800,000 $100,000 20% 15% 12% Page 3 of 31

MANAGEMENT ADVISORY SERVICES a. $120,000 b. $96,000 c. $15,000

Responsibility Accounting & Transfer Pricing d. $4,000 e. $(20,000)

19. H&M

Watne Company has two divisions, M and N. Information for each division is as follows: Net earnings for division $65,000 Asset base for division $300,000 Target rate of return 18% Operating income margin 20% Weighted average cost of capital 12% What is EVA for N? a. $36,000 c. $54,000 b. $29,000 d. $11,000 H&M

20.Family Company has two divisions, Ma and Pa. Information for each division is as follows: Ma Pa Net earnings for division P20,000 P65,000 Asset base for division P50,000 P300,000 Target rate of return 15% 18% Operating income 10% 20% margin Weighted-average cost 12% 12% of capital What is the Economic Value Added for Ma and Pa, respectively? A. P20,000, P36,000 C. P12,500; P11,000 B. P14,000; P29,000 D. P20,000; P29,000 Pol Bobadilla EVA Based on Operating Income after Tax EVA - Given Operating Income Before Tax 21.McKenzie Oil had $440,000 in operating income before interest and taxes in the last year. McKenzie is in the 40% tax bracket. If capital employed by McKenzie was equal to $300,000, and the company's weighted-average after-tax cost of capital is 15%, what is McKenzie's Economic Value Added? A. $131,000 C. $198,000 B. $140,000 D. $219,000 Gleim

22. Valecon Co. reported the following information for the year just ended: Segment A CHIANG KAI SHEK COLLEGE

Segment B

Segment C Page 4 of 31

MANAGEMENT ADVISORY SERVICES

Responsibility Accounting & Transfer Pricing

Pre-tax operating $ 4,000,000 $ 2,000,000 $3,000,00 income 0 Current assets 4,000,000 3,000,000 4,000,000 Long-term assets 16,000,000 13,000,000 8,000,000 Current liabilities 2,000,000 1,000,000 1,500,000 If the applicable income tax rate and after-tax weighted-average cost of capital for each segment are 30% and 10%, respectively, the segment with the highest economic value added (EVA) is (M) A. Segment A. C. Segment C. Gleim B. Segment B. D. Not determinable from this information. 23.Assume Avionics Industries reported at year-end that operating income before taxes for the year equaled $2,400,000. Long-term debt issued by Avionics has a coupon rate equal to 6%, and its cost of equity is 8%. The book value of the debt currently equals its fair value, and the book value of the equity capital for Avionics is $900,000 less than its fair value. Current assets are listed at $2,000,000 and long-term assets equal $9,600,000. The claims against those assets are in the form of $1,500,000 in current liabilities and $2,200,000 in long-term liabilities. The income tax rate for Avionics is 30%. What is the economic value added (EVA)? (D) a. $731,240 c. $1,668,760 b. $948,760 d. $1,680,000 Gleim Questions 24 thru 26 are based on the following information. Horngren Waldorf Company has two sources of funds: long-term debt with a market and book value of $10 million issued at an interest rate of 12%, and equity capital that has a market value of $8 million (book value of $4 million). Waldorf Company has profit centers in the following locations with the following operating incomes, total assets, and total liabilities. The cost of equity capital is 12%, while the

tax rate is 25%. St. Louis

Operating Income $ 960,000

CHIANG KAI SHEK COLLEGE

Assets $ 4,000,000

Current Liabilities $ 200,000

Cedar Rapids $1,200,000 Wichita $2,040,000 24.What is the EVA for St. Louis? (M) a. $255,740 b. $327,460

$ 8,000,000 $12,000,000

$ 600,000 $1,200,000

c. $392,540 d. $720,000

25.What is the EVA for Cedar Rapids? (M) a. $135,580 c. $234,000 b. $220,000 d. $305,000 26.What is the EVA for Wichita? (M) a. $450,000 b. $1,530,000

c. $414,360 d. $1,115,640

EVA Computation – Given Operating Income after Tax 27.Samovar Company has operating income after taxes of $50,000. It has $200,000 of equity capital, which has an after-tax weightedaverage cost of 12%. Samovar also has $10,000 of current liabilities (noninterest-bearing) and no long-term liabilities. What is the company's economic value added (EVA) for the period? A. $(24,000) C. $24,000 B. $(26,000) D. $26,000 Gleim 28.Ralph, an investor, is interested in loaning money to a secure corporation. He always bases his decision on the company with the largest economic value added (EVA). Ralph has narrowed his choices down to four, and has collected the following information: Operating Income after Equity WACC Current Tax Capital Liabilities Company $50,000 $200,000 12% $10,000 A Company 60,000 150,000 20% 18,000 B Company 45,000 220,000 10% 30,000 C Page 5 of 31

MANAGEMENT ADVISORY SERVICES

Responsibility Accounting & Transfer Pricing

Company 55,000 250,000 15% 5,000 D Based on largest EVA and assuming that none of the companies have any long-term liabilities, which company should Ralph invest in? A. Company A. C. Company C. B. Company B. D. Company D. Gleim Equity Value Creation, Market Value Added & Total Shareholder Return Questions 29 thru 31 are based on the following information. Gleim Semibar Co. reports net income of $630,000. The information below or the year just ended is also available: January 1 December 31 Shareholders’ $4,200,000 $4,480,000 equity Share price $25 $30 400,000 400,000 Shares outstanding Cost of equity 10% 10% Dividends per $1.00 share 29.Equity value creation is a. $630,000 b. $448,000

CHIANG KAI SHEK COLLEGE

c. $420,000 d. $210,000

30.The market value added (MVA) is a. $2,000,000 c. $400,000 b. $1,720,000 d. $280,000 31.The total shareholder return is a. 24% b. 20%

c. 16.67% d. 4%

SENSITIVITY ANALYSIS 32. Apple Division of the American Fruit Co. had the following statistics for 2002: Assets available for use $1,000,000 Residual income 100,000 Return on investment 15% If expenses increased by $20,000 in Apple Division, (E) a. return on investment would decrease. c. the target rate of return would decrease. b. residual income would increase. d. asset turnover would decrease. Barfield 33.

Division A had the following information: Asset base in Division A $800,000 Net income in Division A $100,000 Operating income margin for Division A 20% Target ROI 15% Weighted-average cost of capital 12% If the asset base is decreased by $200,000, with no other changes, the return on investment of Division A will be a. 100.0% d. 62.5% b. 16.7% e. 20.0% c. 600.0% H&M

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MANAGEMENT ADVISORY SERVICES

Responsibility Accounting & Transfer Pricing

Comprehensive Questions 34 through 38 are based on the following information. AICPA 1186 II-22 to 26

Oslo Co.’s industrial photo-finishing division, Rho, incurred the following costs and expenses in 1992: Direct materials Direct labor Factory overhead General, selling and administrative Totals

Variable $200,000 150,000 70,000 30,000 $450,000

Fixed

b. $180,000

d. $60,000

38.Assume the variable cost per unit was $1.50. Based on Rho’s 1992 financial data, and an estimated 1993 production of 350,000 units of industrial photo-prints, Rho’s estimated 1993 total costs and expenses will be a. $525,000 c. $615,000 b. $540,000 d. $630,000

$42,000 48,000 $90,000

During 1992, Rho produced 300,000 units of industrial photo-prints, which were sold for $2.00 each. Oslo’s investment in Rho was $500,000 and $700,000 at January 1, 1992 and December 31, 1992, respectively. Oslo normally imputes interest on investments at 15% of average invested capital. 34.For the year-ended December 31, 1992, Rho’s return on average investment was a. 15.0% c. 8.6% b. 10.0% d. (5.0%) 35.Assume that net operating income was $60,000 and that average invested capital was $600,000. For the year ended December 31, 1992, Rho’s residual income (loss) was a. $150,000 c. $(45,000) b. $60,000 d. $(30,000) 36.How many industrial photo-print units did Rho have to sell in 1992 to break-even? a. 180,000 c. 90,000 b. 120,000 d. 60,000 37.For the year ended December 31, 1992, Rho’s contribution margin was a. $250,000 c. $150,000 CHIANG KAI SHEK COLLEGE

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MANAGEMENT ADVISORY SERVICES

Responsibility Accounting & Transfer Pricing

Questions 39 through 51 are based on the following information. Gleim Segment Segment Segment Segment A B C D Net income $ 5,000 $ 90,000 Sales 60,000 $750,00 $135,00 1,800,00 0 0 0 Investment 24,000 500,000 45,000 Net income as % of sales Turnover of investment ROI 20% 7.5% Minimum ROI$120,00 dollars 0 Minimum ROI - % 20% 6% Residual income -0$2,250 -

44.For segment B, ROI is a. 6% b. 20.8%

c. 20% d. 7.5%

39.For Segment B, net income as a percentage of sales is a. 8% c. 4% b. 6.67% d. 10% 40.For Segment C, net income as a percentage of sales is a. 5% c. 4% b. 6.67% d. 20% 41.For Segment C, the turnover of investment is a. 3 c. 2.5 b. 1.5 d. 4 42.For Segment D, the turnover of investment is a. 3 c. 2.5 b. 1.5 d. 4 43.For segment A, ROI is a. 6% b. 20% CHIANG KAI SHEK COLLEGE

c. 20.8% d. 7.5% Page 8 of 31

MANAGEMENT ADVISORY SERVICES 45.For segment A, the minimum dollar ROI is a. $30,000 c. $4,800 b. $6,750 d. $120,000 46.For Segment B, the minimum dollar ROI is a. $30,000 c. $4,800 b. $6,750 d. $120,000 47.For Segment C, the minimum dollar ROI is a. $30,000 c. $4,800 b. $6,750 d. $120,000 48.Assume that the minimum dollar ROI is $6,750 for Segment C. The minimum percentage of ROI is a. 20% c. 15% b. 6% d. 10% 49.In Segment D, the minimum percentage of ROI is a. 20% c. 15% b. 6% d. 10% 50.In Segment A, the residual income is a. $200 c. $(30,000) b. $12,000 d. $4,800 51.In Segment D, the residual income is a. $12,000 c. $(60,000) b. $(30,000) d. $9,000 SEGMENTED INCOME STATEMENT Sales 52. During April, Division D of Carney Company had a segment margin ratio of 15%, a variable expense ratio of 60% of sales, and traceable fixed expenses of $15,000. Division D's sales were closest to: (M) a. $100,000. c. $33,333. b. $60,000. d. $22,500. G & N 9e CHIANG KAI SHEK COLLEGE

Responsibility Accounting & Transfer Pricing Segment Margin 53.Assume the following information for a product line: Sales revenue Variable manufacturing costs Direct fixed manufacturing costs Variable selling/administrative costs Direct fixed selling/admin. costs What is the segment margin of the product line? (E) a. $400,000 d. $275,000 b. $325,000 e. $215,000 c. $350,000

$500,000 100,000 75,000 50,000 60,000

H&M

54.The data available for the current year are given below: Whole Division Division Co. 1 2 $ $ $ Variable mfg. cost of goods sold 400,000 220,000 80,000 100,000 Unallocated costs (e.g., president’s salary) Fixed costs controllable by Div. 90,000 50,000 40,000 Managers (e.g., advertising, eng’g supervision costs) Net revenue 1,000,0 600,000 400,000 00 130,000 70,000 60,000 Variable selling and administrative costs Fixed costs controllable by 120,000 70,000 50,000 others (e.g., depreciation, insurance) Using the information presented above, the contribution by Division 1 was (M) a. $190,000 c. $310,000 b. $260,000 d. $380,000 CIA 1186 IV-17 55.A and B are autonomous divisions of a corporation. They have no beginning or ending inventories, and the number of units produced Page 9 of 31

MANAGEMENT ADVISORY SERVICES is equal to the number of units sold. information relating to the two divisions.

Responsibility Accounting & Transfer Pricing Following is financial

A B Sales $150,000 $400,000 Other revenue 10,000 15,000 Direct materials 30,000 65,000 Direct labor 20,000 40,000 Variable factory overhead 5,000 15,000 Fixed factory overhead 25,000 55,000 Variance S&A expense 15,000 30,000 Fixed S&A expense 35,000 60,000 Central corporate expenses 12,000 20,000 (allocated) What is the total contribution to corporate profits generated by Division A before allocation of central corporate expenses? (M) a. $18,000 c. $30,000 b. $20,000 d. $80,000 CIA 1193 IV-20 Common Fixed Costs 56. Lyons Company consists of two divisions, A and B. Lyons Company reported a contribution margin of $50,000 for Division A, and had a contribution margin ratio of 30% in Division B, when sales in Division B were $200,000. Net income for the co...