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Exam 14: Strategy and Control

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Question 31

Multiple Choice

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A company is analysing the performance of responsibility centers. Controllable revenue would be included in the performance reports of which of the following types of responsibility centers. $\begin{array}{cc}&\text { Investrent centers}& \text {Profit centers }\\\end{array}$ A. $\begin{array}{ll}&&\text { No } &&&&&& \text { No } \\\end{array}$ B. $\begin{array}{ll}&&\text { No } &&&&&& \text { Yes } \\\end{array}$ C. $\begin{array}{ll}&&\text { Yes } &&&&&& \text { Yes } \\\end{array}$ D. $\begin{array}{ll}&&\text { Yes } & &&&&&\text { No }\end{array}$

A) Option A
B) Option B
C) Option C
D) Option D

E) A) and B)
F) A) and C)

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Question 32

Multiple Choice

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The managers of Herwhno want to introduce a new product line. The financial performance of the company for the most recent year is given below: $\begin{array} { | l | l | } \hline \text { Sales } & £ 63,300,000 \\\hline \text { Less variable costs } & £ 36,720,000 \\\hline \text { Contribution } & £ 26,580,000 \\\hline \text { Less fued expenses } & £ 22,720,000 \\\hline \text { Net profit } & £ 3,860,000 \\\hline \text { Divisional capital employed } & \$ 23,200,000 \\\hline\end{array}$ The company estimates that the required return on investment should be a minimum of 12%. Details of new product line The sales manager estimates that sales for the new product will be 420,000 units per annum if the selling price is £5.20 per unit. Variable costs are estimated to be £2.86 per unit. Fixed costs will increase by £900,000. A budget of £2,000,000 has been agreed for investment in new machinery. - Calculate the Return on Investment before the new investment is accepted

A) 16.64%.
B) 12.9%.
C) 22.8%.
D) 14.5%.

E) A) and B)
F) A) and C)

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Question 33

Multiple Choice

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Fenway Market has two stores, F and G. During February, Store F had a segment margin of £10,000, traceable fixed expenses of £26,000, and variable expenses equal to 55% of sales. Fenway Market as a whole had a combined segment margin of 15%, a contribution margin ratio of 40%, and total sales of £180,000. Based on this information, the traceable fixed expenses in Store G were

Common fixed costs are defined as those fixed costs that can be identified with a particular segment

In setting a transfer price, which of the following should not be considered

Consider the following statements:I. Rol may not be fully controllable by the division manager due to the presence of committed costs. II. ROl tends to emphasize short-run profitability rather than long-run performance. Which of these statements represents a disadvantage of ROI

Chang Company has two divisions, T and W. The company's overall contribution margin ratio is 40% when combined sales in the two divisions total £900,000. If variable expenses are £200,000 in Division T and if Division W's contribution margin ratio is 20%, the sales in Division W must be

The contribution margin for Product R was

Which of the following would be considered an operating asset in return on investment computations

The Gasson Company sells three products, Product A, Product B and Product C, and had sales of £1,000,000 during the month of June. The company's overall contribution margin ratio was 37% and fixed expenses totaled £350,000. Sales were: Product A, £500,000; Product B, £300,000; and Product C, £200,000. Traceable fixed costs were: Product A, £120,000; Product B, £100,000; and Product C, £60,000. The variable expenses of Product A were £300,000 and the variable expenses of Product B were £180,000. - The product line segment margin for Product A for June was

The Gasson Company sells three products, Product A, Product B and Product C, and had sales of £1,000,000 during the month of June. The company's overall contribution margin ratio was 37% and fixed expenses totaled £350,000. Sales were: Product A, £500,000; Product B, £300,000; and Product C, £200,000. Traceable fixed costs were: Product A, £120,000; Product B, £100,000; and Product C, £60,000. The variable expenses of Product A were £300,000 and the variable expenses of Product B were £180,000. - The net operating income for the company as a whole for June was

All other things equal, the return on investment is affected by a change in $\begin{array}{cc}\text { operating}& \text { assets Margin }\\\end{array}$ A. $\begin{array}{l}&\text { Yes } &&&& \text { Yes } \\\end{array}$ B. $\begin{array}{l}&\text { No } &&&& \text { Yes } \\\end{array}$ C. $\begin{array}{l}&\text { No } &&&& \text { No } \\\end{array}$ D. $\begin{array}{l}&\text { Yes } &&&& \text { No }\end{array}$

The divisional managers of West plc have requested that the method for calculating bonuses at the year be reviewed. Senior managers at the head office have proposed that a bonus of £40,000 will be paid to the divisional manager who has the best return on investment (ROI) of the 3 divisions and this policy is consistent with previous years. Divisional managers want the senior managers to take into account controllable costs and profits and residual income (RI) when deciding bonuses and also to include non-financial measures of performance. The main reason given by the head office for using ROI is that it is understood by all managers and that it is used by external analysts. Summary of Management Accounts to 31 December 1997 $\begin{array}{|l|l|l|l|}\hline & \text { Southern }(£) & \text { Eastern }(£) & \text { Western }(£) \\\hline \text { Sales } & 5,400,000 & 5,000,000 & 5,590,000 \\\hline \text { Controllable costs } & 3,700,000 & 3,502,000 & 3,660,000 \\\hline \text { Head Office Charges } & 998,000 & 1,282,000 & 1,170,000 \\\hline \text { Net Profit } & 702,000 & 716,000 & 760,000 \\\hline\end{array}$ Capital Employed $\begin{array}{|l|l|l|l|}\hline & \text { Southern }(£) & \text { Eastern }(£) & \text { Western }(£) \\\hline \text { Total Investment } & 4,700,000 & 5,100,000 & 5,200,000 \\\hline \text { Controllable Investment } & 4,000,000 & 4,100,000 & 4,274,000 \\\hline\end{array}$ Cost of Capital The head office has estimated that the group cost of capital is 10% Financial and non-financial measures of performance The divisional managers normally report on a wide range of financial measures each month to the head office but only use non-financial measures internally and each divisional manager is allowed to use their discretion when deciding on the range and number of measures to use. -Calculate the Net Residual Income for the Eastern Division

The Gasson Company sells three products, Product A, Product B and Product C, and had sales of £1,000,000 during the month of June. The company's overall contribution margin ratio was 37% and fixed expenses totaled £350,000. Sales were: Product A, £500,000; Product B, £300,000; and Product C, £200,000. Traceable fixed costs were: Product A, £120,000; Product B, £100,000; and Product C, £60,000. The variable expenses of Product A were £300,000 and the variable expenses of Product B were £180,000. - The contribution margin in pounds for Product B for June was

Division A is considering a project that will earn a rate of return that is greater than the required return on operating assets, but less than the division's ROI. Division B is considering a project that will earn a rate of return that is greater than the division's ROI, but less than the required return on operating assets. If the objective is to maximise residual income, would these divisions accept or reject their projects. $\begin{array}{cc} \text { Division A}& \text {Division } B\\\end{array}$ A. $\begin{array}{cc} \text {Accept}& \text { Accept}\end{array}$ B. $\begin{array}{cc} \text {Reject}& \text { Accept}\end{array}$ C. $\begin{array}{cc} \text {Reject }& \text {Reject}\end{array}$ D. $\begin{array}{cc} \text {Accept}& \text { Reject}\end{array}$

The Gasson Company sells three products, Product A, Product B and Product C, and had sales of £1,000,000 during the month of June. The company's overall contribution margin ratio was 37% and fixed expenses totaled £350,000. Sales were: Product A, £500,000; Product B, £300,000; and Product C, £200,000. Traceable fixed costs were: Product A, £120,000; Product B, £100,000; and Product C, £60,000. The variable expenses of Product A were £300,000 and the variable expenses of Product B were £180,000. -The contribution margin ratio for Product C is

A segment margin is defined as sales less traceable fixed costs

Ring Incorporated's income statement for the most recent month is given below. $\begin{array} { l l l l } & \text { Total } & \text { Store } P & \text { Store } Q \\\text { Sales } & £ 600,000 & £ 200,000 & £ 400,000 \\\text { Variable expenses } & \underline { 384,000 } & \underline { 144,000 } & \underline { 240,000 } \\\text { Contribution margin } & 216,000 & 56,000 & 160,000 \\\text { Traceable fixed expenses } & \underline { 152,000 } & \underline { 42,000 } & \underline { 110,000 } \\\text { Segment margin } & \underline { 64,000 } & \underline { £ 14,000 } & \underline { £ 50,000 } \\\text { Common fixed expenses } & \underline { 34,000 } & & \\\text { Net operating income } & \underline { £ 30,000 } & &\end{array}$ - For each of the following questions, refer back to the original data. A proposal has been made that will lower variable costs in Store P to 65% of sales. However, this reduction can only be accomplished by a £16,000 increase in Store P's traceable fixed costs. If this proposal is implemented and sales remain constant, overall company net operating income should

The managers of Herwhno want to introduce a new product line. The financial performance of the company for the most recent year is given below: $\begin{array} { | l | l | } \hline \text { Sales } & £ 63,300,000 \\\hline \text { Less variable costs } & £ 36,720,000 \\\hline \text { Contribution } & £ 26,580,000 \\\hline \text { Less fued expenses } & £ 22,720,000 \\\hline \text { Net profit } & £ 3,860,000 \\\hline \text { Divisional capital employed } & \$ 23,200,000 \\\hline\end{array}$ The company estimates that the required return on investment should be a minimum of 12%. Details of new product line The sales manager estimates that sales for the new product will be 420,000 units per annum if the selling price is £5.20 per unit. Variable costs are estimated to be £2.86 per unit. Fixed costs will increase by £900,000. A budget of £2,000,000 has been agreed for investment in new machinery. - Calculate the Residual Income before the new investment is accepted

The managers of Herwhno want to introduce a new product line. The financial performance of the company for the most recent year is given below: $\begin{array} { | l | l | } \hline \text { Sales } & £ 63,300,000 \\\hline \text { Less variable costs } & £ 36,720,000 \\\hline \text { Contribution } & £ 26,580,000 \\\hline \text { Less fued expenses } & £ 22,720,000 \\\hline \text { Net profit } & £ 3,860,000 \\\hline \text { Divisional capital employed } & \$ 23,200,000 \\\hline\end{array}$ The company estimates that the required return on investment should be a minimum of 12%. Details of new product line The sales manager estimates that sales for the new product will be 420,000 units per annum if the selling price is £5.20 per unit. Variable costs are estimated to be £2.86 per unit. Fixed costs will increase by £900,000. A budget of £2,000,000 has been agreed for investment in new machinery. -Calculate the Return on Investment for the new investment of £2,000,000