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The document contains 5 problems related to calculating residual income and analyzing divisional performance. Problem 1 calculates residual income for a division. Problem 2 calculates the unit sales needed for a division to achieve a target residual income. Problem 3 calculates residual income for a plastics division. Problem 4 calculates residual income for a household products division. Problem 5 analyzes the contribution margin and identifies the unprofitable division for a retail company.

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Lealyn Cuesta
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2K views4 pages

Sample Problem

The document contains 5 problems related to calculating residual income and analyzing divisional performance. Problem 1 calculates residual income for a division. Problem 2 calculates the unit sales needed for a division to achieve a target residual income. Problem 3 calculates residual income for a plastics division. Problem 4 calculates residual income for a household products division. Problem 5 analyzes the contribution margin and identifies the unprofitable division for a retail company.

Uploaded by

Lealyn Cuesta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Problem 1

Meycauayan Company’s Electronics Division provided the following annual date for
2021:
Sales P8,000,000
Net operating income 1,000,000
Average operating assets 4,000,000
Minimum required rate of return 15%
Compute the division’s residual income
RI = 1,000,000 – (4,000,000 x 15%)
= 1,000,000 – 600,000
RI = 400,000
Problem 2
The following data are available for the Centra Division of LaSalle, Inc. and the
single product it makes.
Average operating assets P3,000,000
Annual fixed costs 560, 000
Unit selling price 40
Variable cost per unit 24
If the company’s minimum required rate of return is 10%, how many units must the
division sell each year to have a residual income of P100,000?
Unit selling price 40 RI = Operating Income – (3,000,000 x 10%)
Variable cost per unit 24 100,000 = OI – 300,000
Unit CM 16 Operating Income = 400,000
Sales = 560,000 + 400,000
= 960,000/16
= 60,000 units must the division sell
Problem 3
Five years ago, Arlington Industries expanded vertically by acquiring one of its
suppliers., Raddix Plastics. Arlington monitors its divisions based on both product
contribution and return on investment (ROI), with investment defined as average
operating assets employed. All investments in operating assets are expected to earn
a minimum return of 11% before income taxes. Management bonuses are also
determined based on ROI. The cost of goods sold at Raddix is fully variable while
administrative expenses are not dependent on sales volume. Selling expenses are a
mixed cost with 40% attributed to sales volume. Since Arlington acquired Raddix, the
ROI at Raddix has ranged from 11.8% to 14.7%. During the fiscal year just ended,
Raddix considered a capital acquisition with an estimated ROI of 11.5%; however,
division management decided against the capital acquisition because it believed that
the capital acquisition would decrease the division’s ROI. The abbreviated most
recent income statement for Raddix is presented below. The division’s operating
assets employed were P15,750,000 at year end, a 5% increase over the previous
year-end balance.
Raddix Plastics Division Income Statement
For the year ended December 31
Sales 25,000
Cost of goods sold 16,500
Gross profit 8,500
Administrative expenses 3,955
Selling expenses 2,700
Income from operations 1,845

Required:
1. Based on the average operating assets employed, calculate the residual
income for the Raddix Plastics Division.
Average assets = [15,750,000 + (15,750,000/1.05)] / 2
= 15,375,000

Residual Income = Operating Income – min. required return on average


assets
= 1,845,000 – (15,375,000 x 11%)
= 153,750
Problem 4
Household Products is a division of Delaware Electronics. The division had the
following performance targets for 2020:
Asset turnover 3.1
Profit margin 6%
Target rate of return on investment for RI 15%
Cost of capital 9%
Income tax rate 35%
At the end of 2020, the following actual information concerning the company’s
performance is available:
Total assets at beginning of year 24,800,000
Total assets at end of year 29,600,000
Sales 68,000,000
Variable operating costs 34,800,000
Direct fixed costs 27,440,000
Allocated fixed costs 2,700,000
Required:
1. Compute the segment margin and average assets for Household Products.
Sales 68,000,000
Variable operating costs (34,800,000)
Direct fixed costs (27,440,000)
Segment margin 5,760,000

Average assets = (24,800,000 + 29,600,000) / 2


= 27,200,000
2. Compute the residual income
RI = 5,760,000 – (0.15 x 27,200,000)
= 5,760,000 – 4,080,000
= 1,680,000
Problem 5
Blue Mountain operates retail stores throughout the United States. Blue Mountain
has three division, where each operates their own independent retail stores: Apparel,
Shoes, and Sports Equipment. The manager of each division is responsible for the
revenues and costs of the division. All investment decisions are made by the
corporate headquarters. Blue Mountain had a history of financial success until last
year when it incurred a net loss of 250,000. President Bob Johnson does not
understand why the company incurred a loss and has assigned accountant Hillary
Ryan with the job of analyzing the results.
Last Year’s Operating Results
Sale 7,500,000
Variable expenses 4,000,000
Fixed expenses 3,750,000
Net loss (250,000)
A breakout of operating data by division is shown below.
Apparel Shoes Sport Equipment
Revenues 3,750,000 1,500,000 2,250,000
Variable expenses 1,500,000 500,000 2,000,000

Ryan analyzed fixed expenses and found that 1,000,000 is traceable to Apparel,
750,000 is traceable to Shoes, and 1,500,000 is traceable to Sports Equipment. The
remaining fixed expenses relate to the corporate headquarters.
Required:
1. Calculate the contribution margin for each division.
Apparel Shoes Sport Equipment Total
Revenues 3,750,000 1,500,000 2,250,000
7,500,000
Variable expenses 1,500,000 500,000 2,000,000 4,000,000
Contribution margin 2,250,000 1,000,000 250,000 3,500,000
2. Which division of Blue Mountain is the most unprofitable one and how can
Blue Mountain improve this division’s profitability?
Sports Equipment is the unprofitable division. This division’s contribution margin is
not high enough to cover its traceable fixed expenses.
Apparel Shoes Sport Equipment Total
Revenues 3,750,000 1,500,000 2,250,000
7,500,000
Variable expenses 1,500,000 500,000 2,000,000 4,000,000
Contribution margin 2,250,000 1,000,000 250,000 3,500,000
Traceable exp. 1,000,000 750,000 1,500,000 3,250,000
Segment margin 1,250,000 250,000 (1,250,000) 250,000
Common fixed exp. 500,000
Net loss (250,000)

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