Question 1. Goetz Company has operating assets of $20,000,000. The company's operating income for the most recent accounting period was $2,640,000. The East Division of Goetz controls $7,500,000 of the company's assets and earned $1,170,000 of its operating income. Goetz's desired ROI is 10 percent. Goetz has $900,000 of additional funds to invest. The manager of the East division believes that his division could earn $126,000 on the additional funds. The highest investment opportunity to any of the company's other divisions is 11 percent.
Required
a. If ROI is used as the sole performance measure, would the manager of the East Division be likely to accept or reject the additional funding? Why or why not?
b. Would Goetz Company benefit if the manager of the East Division accepted the additional funds. Why or why not?
c. If residual income is used as the sole performance measure would the manager of the East Division be likely to accept or reject the additional funding? Why or why not?
Question 2. IDT, has three divisions. IDT has a desired rate of return of 13 percent. The operating assets and income for each division are as follows:
Divisions Operating Assets Operating Income
Printer $ 475,000 $ 85,000
Copier 785,000 87,000
Fax 310,000 45,000
Total $ 1,570,000 $ 217,000
IDT headquarters has $115,000 of additional cash to invest in one of its divisions. The division managers have identified investment opportunities that are expected to yield the following ROIs:
Divisions Expected ROIs for Additional Investments
Printer 15.5%
Copier 13.5%
Fax 12.0%
Required
a. Which division manager is currently producing the highest ROI?
b. Based on ROI, which division manager would be most eager to accept the $115,000 of investment funds?
c. Based on ROI, which division manager would be least likely to accept the $115,000 of investment funds?
d. Which division offers the best investment opportunity for IDT?
e. Explain how the residual income performance measure could be used to motivate the managers to act in the best interest of the company.
f. Calculate the residual income:
(1) at the corporate (headquarters) level before the additional investment.
(2) at the division level before the additional investment.
(3) at the investment level.
(4) at the division level after the additional investment.
g. Based on residual income, which division manager would be most eager to accept the $115,000 investment opportunity?
Question 3. Grandma Company makes blankets that it markets through a variety of department stores. It makes the blankets in batches of 1,000 units. Grandma made 20,000 blankets during the prior accounting period. The cost of producing the blankets is summarized here.
Materials cost ($21 per unit x 20,000) $ 420,000
Labor cost ($22 per unit x 20,000) 440,000
Manufacturing supplies ($2 x 20,000) 40,000
Batch-level costs (20 batches at $4,000 per batch) 80,000
Product-level costs 160,000
Facility-level costs 290,000
Total costs $ 1,430,000
Cost per unit = $1,430,000 / 20,000 = $71.50
Required:
a. Super Motels has offered to buy a batch of 500 blankets for $51 each. Grandma's normal selling price is $90 per unit. Based on the preceding quantitative data, should Grandma accept the special order? Support your answer with appropriate computations.
b. Would your answer to Requirement a change if Sunny offered to buy a batch of 1,000 blankets for $51 per unit? Support your answer with appropriate computations.
c. Describe the qualitative factors that Grandma Company should consider before accepting a special order to sell blankets to Super Motels.
Question 4. Footware Co. sells men's, women's, and children's boots. For each type of boot sold, it operates a separate department that has its own manager. The manager of the men's department has a sales staff of nine employees, the manager of the women's department has six employees, and the manager of the children's department has three employees. All departments are housed in a single store. In recent years, the children's department has operated at a net loss and is expected to continue to do so. Last year's income statements follow.
Men's Department Women's Department Children's Department
Sales $ 590,000 $ 420,000 $ 155,000
Cost of goods sold (265,500) (176,400) (96,875)
Gross margin 324,500 243,600 58,125
Department manager's salary (52,000) (41,000) (21,000)
Sales commissions (106,200) (75,600) (27,900)
Rent on store lease (21,000) (21,000) (21,000)
Store utilities (4,000) (4,000) (4,000)
Net income (loss) $ 141,300 $ 102,000 $ (15,775)
Required
a. Determine whether to eliminate the children's department.
b. Confirm the conclusion you reached in Requirement a by preparing income statements for the company as a whole with and without the children's department.
c. Eliminating the children's department would increase space available to display men's and women's boots. Suppose management estimates that a wider selection of adult boots would increase the store's net earnings by $32,000. Would this information affect the decision that you made in Requirement a? Explain your answer.