Chapter 24: Q19RQ (page 1355)
What does ROI measure?
ROI measures percentage return earned on the average total assets of the business entity.
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Consider the following data, and determine which of the corporate divisions is more profitable. Explain your reasoning.
Domestic International
Operating income \( 10,000,000 \) 11,000,000
Average total assets 24,000,000 32,000,000
Henderson Company manufactures electronics. The Calculator Division (an investment center) manufactures handheld calculators. The division can purchase the batteries used in the calculators from the Battery Division (another investment center) or from an outside vendor. The cost to purchase batteries from the outside vendor is \(5. The transfer price to purchase from the Battery Division is \)6. The Battery Division also sells to outside customers. The sales price is \(6, and the variable cost is \)3. The Battery Division has excess capacity.
Requirements
1. Should the Calculator Division purchase from the Battery Division or the outside vendor?
2. If Henderson Company allows division managers to negotiate transfer prices, what is the maximum transfer price the manager of the Calculator Division should consider?
3. What is the minimum transfer price the manager of the Battery Division should consider?
4. Does your answer to Requirement 3 change if the Battery Division is operating at capacity?
One subunit of Racer Sports Company had the following financial results last month:
Subunit X Actual Results Flexible Budget Flexible Budget % Variance
Variance (F or U) (F or U)
Net Sales
Revenue \( 476,000 \) 451,000
Variable
Expenses 261,000 251,000
Contribution
Margin 215,000 200,000
Traceable
Fixed Expenses 40,000 26,000
Divisional
Segment Margin \( 175,000 \) 174,000
Requirements
1. Complete the performance evaluation report for this subunit (round to two decimal places).
2. Based on the data presented and your knowledge of the company, what type of responsibility center is this subunit?
3. Which items should be investigated if part of management’s decision criteria is to investigate all variances equal to or exceeding \(8,000 andexceeding 10% (both criteria must be met)?
4. Should only unfavorable variances be investigated? Explain.
5. Is it possible that the variances are due to a higher-than-expected sales volume? Explain.
6. Will management place equal weight on each of the variances exceeding \)8,000? Explain.
7. Which balanced scorecard perspective is being addressed through this performance report? In your opinion, is this performance report a lead or a lag indicator? Explain.
8. List one key performance indicator for the three other balanced scorecard perspectives. Make sure to indicate which perspective is being addressed by the indicators you list.
List the advantages of decentralization.
Refer to the information in Short Exercise S24-7.
Requirements
1. Compute each division’s asset turnover ratio (round to two decimal places). Interpret your results.
2. Use your answers to Requirement 1, along with the profit margin ratio, to recalculate ROI using the expanded formula. Do your answers agree with the basic ROI in Short Exercise S24-7?
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