Chapter 24: Q9RQ (page 1355)
What is a performance evaluation system?
A performance evaluation system is systematic performance evaluation of an employees’ job.
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Question: Determining transfer pricing
The Hernandez Company is decentralized, and divisions are considered investment centers. Hernandez has one division that manufactures oak dining room chairs with upholstered seat cushions. The Chair Division cuts, assembles, and finishes the oak chairs and then purchases and attaches the seat cushions. The Chair Division currently purchases the cushions for \(32 from an outside vendor. The Cushion Division manufactures upholstered seat cushions that are sold to customers outside the company. The Chair Division currently sells 1,800 chairs per quarter, and the Cushion Division is operating at capacity, which is 1,800 cushions per quarter. The two divisions report the following information:
Chair Division Cushion Division
Sales Price per Chair \) 95 Sales Price per Cushion \( 34
Variable Cost (other than cushion) 56 Variable Cost per Cushion 12
Variable Cost (cushion) 32
Contribution Margin per Chair \) 7 Contribution Margin per Cushion $ 22
Requirements
1. Determine the total contribution margin for Hernandez Company for the quarter.
2. Assume the Chair Division purchases the 1,800 cushions needed from the Cushion Division at its current sales price. What is the total contribution margin for each division and the company?
3. Assume the Chair Division purchases the 1,800 cushions needed from the Cushion Division at its current variable cost. What is the total contribution margin for each division and the company?
4. Review your answers for Requirements 1, 2, and 3. What is the best option for Hernandez Company?
5. Assume the Cushion Division has capacity of 1,800 cushions per quarter and can continue to supply its outside customers with 1,800 cushions per quarter and also supply the Chair Division with 1,800 cushions per quarter. What transfer price should Hernandez Company set? Explain your reasoning. Using the transfer price you determined, calculate the total contribution margin for the quarter.
What are two key performance indicators used to evaluate investment centers?
Fill in the blanks with the phrase that best completes the sentence.Some phrases may be used more than once and some not at all.
Phrases:
1. The maintenance department at the local zoo is a(n)___________
2. The gift shop at the local zoo is a(n)____________
3. The menswear department of a department store, which is responsible forbuying and selling merchandise, is a(n)_______________
4. The production line at a manufacturing plant is a(n)
5. A( n)________________is any segment of the business whose manager isaccountable for specific activities.
6. A division of a beverage manufacturing company responsible for aparticular brand of soft drink is a(n)_______________
7. The sales manager in charge of a shoe company’s northwest sales territoryoversees a(n)
8. Managers of cost and revenue centers are at_____________ levels of theorganization than are managers of profit and investment centers.______
Preparing a financial budget—budgeted income statement and balance sheet
Bradley Company has the following post-closing trial balance on December 31, 2018:
The company’s accounting department has gathered the following budgeting information for the first quarter of 2019:
Budgeted total sales, all on account $ 305,000 Budgeted direct materials to be purchased and used 32,000 Budgeted direct labor cost 12,500 Budgeted manufacturing overhead costs:
Variable manufacturing overhead 2,100 Depreciation 1,300 Insurance and property taxes 1,350 Budgeted cost of goods sold 72,000 Budgeted selling and administrative expenses:
Salaries expense 7,000 Rent expense 2,000 Insurance expense 1,100 Depreciation expense 550 Supplies expense 15,250 Budgeted cash receipts from customers 263,500 Budgeted income tax expense 41,000 Budgeted purchase and payment for capital expenditures (additional equipment) 43,000
Additional information:
a. Direct materials purchases are paid 70% in the quarter purchased and 30% in the next quarter.
b. Direct labor, manufacturing overhead, selling and administrative costs, and income tax expense are paid in the quarter incurred.
c. Accounts payable at December 31, 2018 are paid in the first quarter of 2019. Requirements
1. Prepare Bradley Company’s budgeted income statement for the first quarter of 2019.
2. Prepare Bradley Company’s budgeted balance sheet as of March 31, 2019
Consider the following condensed financial statements of Forever Free, Inc. The company’s target rate of return is 40%.
Forever Free, Inc | |
Income Statement | |
For the year ended December 31, 2018 | |
Net Sales revenue | \( 3,500,000 |
Cost of Goods Sold | 2,200,000 |
Gross Profit | 1,300,000 |
Operating Expenses | 950,000 |
Operating Income | 350,000 |
Other income and (expenses) | |
Interest Expense | (27,000) |
Income before income tax expense | 323,000 |
Income tax expense | 113,050 |
Net Income | \) 209,950 |
Forever Free, Inc | ||
Income Statement | ||
For the year ended December 31, 2018 | ||
2018 | 2017 | |
Assets | ||
Cash | \( 64,000 | \) 52,000 |
Accounts Receivable | 49,200 | 17,800 |
Supplies | 1,000 | 400 |
Property, Plant, and Equipment, net | 331,800 | 229,800 |
Patents, net | 135,000 | 119,000 |
Total Assets | \( 581,000 | \) 419,000 |
Liabilities and Stockholders’ Equity | ||
Accounts Payable | \( 17,000 | \) 19,000 |
Short-term Notes Payable | 136,000 | 42,000 |
Long-term Notes Payable | 184,000 | 114,500 |
Common Stock, no Par | 232,000 | 242,000 |
Retained Earnings | 12,000 | 1,500 |
Total Liabilities and Stockholders’ Equity | \( 581,000 | \) 419,000 |
Requirements
1. Calculate the company’s ROI. Round all of your answers to four decimal places.
2. Calculate the company’s profit margin ratio. Interpret your results.
3. Calculate the company’s asset turnover ratio. Interpret your results.
4. Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results.
5. Calculate the company’s RI. Interpret your results.
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