Question1 - Responsibility accounting, Profit Centers, and Contribution Approach
Bloomington Honda had the following data for the year's operations:
Sales of vehicles $2,400,000
Sales of parts and service 600,000
Cost of vehicle sales 1,920,000
Parts and service materials 180,000
Parts and service labor 240,000
Parts and service overhead 60,000
General dealership overhead 200,000
Advertising of vehicles 120,000
Sales commissions, vehicles 48,000
Sales salaries, vehicles 60,000
The president of the dealership has long regarded the markup on material and labor for the parts and service activity as the amount that is supposed to cover all parts and service overhead plus some general overhead of the dealership. In other words, the parts and service department is viewed as a cost recovery operation, while the sales of vehicles is viewed as the income-producing activity.
1. Prepare a departmentalized operating statement that harmonizes with the views of the president.
2. Prepare an alternative operating statement that would reflect a different view of the dealership operations. Assume that $24,000 and $120,000 of the $200,000 general overhead can be allocated with confidence to the parts and service department and to sales of vehicles, respectively. The remaining $56,000 cannot be allocated except in some highly arbitrary manner.
3. Comment on the relative merits of number 1 and 2.
Horngren, C.T., Sundem, G.L., Sratton, W.O., Burghstaler, D. & Schatzberg, J. (2011). Introduction to management accounting. (15th ed.). Upper Saddle River, NJ: Prentice Hall.
Question 2 - Bern Equipment, SA , a Swiss transportation equipment manufacturer, is heavily decentralized. Each division head has full authority on all decisions regarding sales to internal or external customers. The Graubunden division has always acquired a certain equipment component from the Ticino division. The Ticino division recently acquired specialized equipment that is used primarily to make this component. Because of the new depreciation charges on the equipment, the Ticino division has informed the Graubunden division that the unit price will be increased to CHF 325. However, the Graubunden division's management has now decided to purchase the component from outside suppliers at a price of CHF 300.
The Ticino division has supplied the following production cost data for this component:
Annual production of component (all for sale to Graubunden division) 3,000 units
Ticino's variable costs per unit CHF 280
Ticino's fixed costs per unit CHF 30
1. Suppose there are no alternative uses of the Ticino facilities and that fixed costs will continue if Ticino no longer produces the component for Graubunden. Will the company as a whole benefit if the Graubunden division buys from the outside suppliers for CHF 300 per unit? Show computations to support your answer.
2. Suppose there is an alternative use for the Ticino facilities. If the Ticino facilities are used to produce the component for the Graubunden division, the Ticino division will give up a contribution of CHF 75,000 from this alternative use. Should the Graubunden division purchase from outsiders at CHF 300 per unit?
3. Suppose that there are no alternative uses for Ticino's internal facilities and that the outsiders' selling price drops by CHF 30 to CHF 270. Should the Graubunden division purchase from outsiders?
4. As the president, how would you respond if the Ticino division manager's requests that you require the Graubunden division to purchase the component from Ticino? Would your response differ depending on the specific situations described in numbers 1-3 above? Why?
Question 3 - Accountants often express ROI as the product of two components- capital turnover and return on sales. You are considering investing in one of the three companies, all in the same industry, and are given the following information:
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Company
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Abel
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Baker
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Charlie
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Sales
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$6,000,000
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$2,500,000
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$37,500,000
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Income
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$600,000
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$375,000
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$375,000
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Capital
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$3,000,000
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$12,500,000
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$12,500,000
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1. Why would you desire the breakdown of return on investment into return on sales and turnover on capital?
2. Compute the return on sales, turnover on capital, and ROI for the three companies, and comment on the relative performance of the companies as thoroughly as the data permit
3. Notice that Baker and Charlie have the same income and capital but vastly different levels of sales. Discuss the types of industries that Baker and Charlie might be in.