TEST BANK managerial accounting 13e by garrison chapter 12

Net operating income is earnings before interest and taxes.Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: 2 Level: Easy 6.. A its g

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5 Net operating income is earnings before interest and taxes.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement LO: 2 Level: Easy

6 Land held for possible plant expansion would be included as an operating asset in the ROI calculation

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium

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8 The use of return on investment (ROI) as a performance measure may lead managers

to reject a project that would be favorable for the company as a whole

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium

9 Residual income is equal to the difference between total revenues and operating expenses

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium

10 When using residual income as a measure of performance, it is not meaningful to compare the residual incomes of divisions of different sizes

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy

11 The transfer price used for internal transfers between divisions of the same company can increase or decrease each division's reported profits

Ans: True AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting Appendix: 12A LO: 4 Level: Medium

12 For performance evaluation purposes, the lump-sum amount of fixed service

department costs charged to an operating department should usually be based on eitherthe operating department's peak-period or long-run average needs

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 12B LO: 5 Level: Easy

13 In service department cost allocations, sales dollars should be used as an allocation base whenever possible

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 12B LO: 5 Level: Easy

14 A cost center is also a responsibility center

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15 The basic objective of responsibility accounting is to charge each manager with those costs and/or revenues over which he has control.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy

Multiple Choice Questions

16 The impact on net operating income of short-run changes in sales for a segment can bemost clearly predicted by analyzing:

A) the contribution margin ratio

B) the segment margin

C) the ratio of the segment margin to sales

D) net sales less segment fixed costs

Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Medium

17 In a segmented contribution format income statement, what is the best measure of the long-run profitability of a segment?

A) its gross margin

B) its contribution margin

C) its segment margin

D) its segment margin minus an allocated portion of common fixed expenses

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting; Measurement LO: 1 Level: Medium

18 In order to properly report segment margin as a guide to long-run segment profitabilityand performance, fixed costs must be separated into two broad categories One

category is common fixed costs What is the other category?

A) discretionary fixed costs

B) committed fixed costs

C) traceable fixed costs

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19 Which of the following segment performance measures will decrease if there is an increase in the interest expense for that segment?

Return on Investment Residual Income

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2; 3 Level: Hard

20 Which of the following segment performance measures will increase if there is a decrease in the selling expenses for that segment?

Return on Investment Residual Income

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2; 3 Level: Medium

21 Some investment opportunities that should be accepted from the viewpoint of the entire company may be rejected by a manager who is evaluated on the basis of:A) return on investment

B) residual income

C) contribution margin

D) segment margin

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22 Consider the following three conditions:

I An increase in sales

II An increase in operating assets

III A reduction in expenses

Which of the above conditions provide a way in which a manager can improve return

on investment?

A) Only I

B) Only I and II

C) Only I and III

D) Only II and III

23 When calculating a segment's return on investment (ROI), which of the following assets of that segment would be considered a part of average operating assets?

A) cash

B) accounts receivable

C) plant and equipment

D) all of the above

24 Which of the following measures of performance encourages continued expansion by

an investment center so long as it is able to earn a return in excess of the minimum required return on average operating assets?

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25 Residual income is:

A) Net operating income plus the minimum required return on average operating assets

B) Net operating income less the minimum required return on average operating assets

C) Contribution margin plus the minimum required return on average operating assets

D) Contribution margin less the minimum required return on average operating assets

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Easy

26 Which of the following is NOT a common approach used to set transfer prices?A) market price

B) variable cost

C) negotiation

D) suboptimization

Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting Appendix: 12A LO: 4 Level: Easy

27 For performance evaluation purposes, the variable costs of a service department should be charged to operating departments using:

A) the actual variable rate and the budgeted level of activity for the period

B) the budgeted variable rate and the actual level of activity for the period

C) the budgeted variable rate and the budgeted level of activity for the period.D) the actual variable rate and the peak-period or long-run average servicing capacity

AICPA FN: Reporting Appendix: 12B LO: 5 Level: Medium

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28 Which of the following companies is following a policy with respect to the costs of service departments that is not recommended?

A) To charge operating departments with the depreciation of forklifts used at its central warehouse, Shalimar Electronics charges predetermined lump-sum amounts calculated on the basis of the long-term average use of the services provided by the warehouse to the various segments

B) Manhattan Electronics uses the sales revenue of its various divisions to allocate costs connected with the upkeep of its headquarters building

C) Rainier Industrial does not allow its service departments to pass on the costs of their inefficiencies to the operating departments

D) Golkonda Refinery separately allocates fixed and variable costs incurred by its service departments to its operating departments

Source: CMA; adapted

29 A segment of a business responsible for both revenues and expenses would be called:A) a cost center

B) an investment center

C) a profit center

D) residual income

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30 Devlin Company has two divisions, C and D The overall company contribution margin ratio is 30%, with sales in the two divisions totaling $500,000 If variable expenses are $300,000 in Division C, and if Division C's contribution margin ratio is 25%, then sales in Division D must be:

A) $50,000

B) $100,000

C) $150,000

D) $200,000

AICPA FN: Reporting LO: 1 Level: Hard

Solution:

Total company contribution margin = $500,000 × 30% = $150,000

Total company variable expenses = $500,000 − $150,000 = $350,000

Division C contribution margin ratio = (Sales − $300,000) ÷ Sales = 0.25

Company Division C Division DSales $500,000 $400,000 $100,000

Less variable expenses 350,000 300,000 50,000

Contribution margin $150,000 $100,000 $ 50,000

Contribution margin ratio 0.30 0.25 0.50

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31 Toxemia Salsa Company manufactures five flavors of salsa Last year, Toxemia generated net operating income of $40,000 The following information was taken fromlast year's income statement segmented by flavor (brackets indicate a negative

amount):

Wimpy Mild Medium Hot AtomicContribution margin $(2,000) $45,000 $35,000 $50,000 $162,000Segment margin $(16,000) $(5,000) $7,000 $10,000 $94,000Segment margin less

allocated common

fixed expenses $(26,000) $(15,000) $(3,000) $0 $84,000Toxemia expects similar operating results for the upcoming year If Toxemia wants to maximize its profitability in the upcoming year, which flavor or flavors should

Toxemia discontinue?

A) no flavors should be discontinued

B) Wimpy

C) Wimpy and Mild

D) Wimpy, Mild, and Medium

AICPA FN: Decision Making; LO: 1 Level: Medium

Solution:

The segment margin is a better indication of profitability of individual products than the segment margin less allocated common fixed expenses The products with negativesegment margins should be discontinued to maximize profit: Wimpy and Mild

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32 Uchimura Corporation has two divisions: the AFE Division and the GBI Division Thecorporation's net operating income is $42,000 The AFE Division's divisional segment margin is $15,700 and the GBI Division's divisional segment margin is $175,400 What is the amount of the common fixed expense not traceable to the individual divisions?

A) $149,100

B) $57,700

C) $217,400

D) $191,100

Solution:

TotalCompanyDivisional segment margin $191,100 ($15,700 + $175,400)Less common fixed costs not

traceable to the individual divisions X

Net operating income $ 42,000

Common fixed costs not traceable to the individual divisions

= $191,100 − $42,000 = $149,100

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33 Younie Corporation has two divisions: the South Division and the West Division The corporation's net operating income is $26,900 The South Division's divisional

segment margin is $42,800 and the West Division's divisional segment margin is

$29,900 What is the amount of the common fixed expense not traceable to the

Solution:

TotalCompanyDivisional segment margin $72,700 ($42,800 + $29,900)Less common fixed costs not

traceable to the individual divisions X

Net operating income $26,900

Common fixed costs not traceable to the individual divisions

= $72,700 − $26,900 = $45,800

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34 Dukelow Corporation has two divisions: the Governmental Products Division and the Export Products Division The Governmental Products Division's divisional segment margin is $255,000 and the Export Products Division's divisional segment margin is

$59,800 The total amount of common fixed expenses not traceable to the individual divisions is $163,700 What is the company's net operating income?

A) $314,800

B) ($314,800)

C) $151,100

D) $478,500

AICPA FN: Reporting; Measurement LO: 1 Level: Easy

Solution:

TotalCompanyDivisional segment margin $314,800 *

Less common fixed costs not

traceable to the individual divisions 163,700

*$255,000 + $59,800 = $314,800

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35 Miscavage Corporation has two divisions: the Beta Division and the Alpha Division The Beta Division has sales of $580,000, variable expenses of $301,600, and traceablefixed expenses of $186,500 The Alpha Division has sales of $510,000, variable expenses of $178,500, and traceable fixed expenses of $222,100 The total amount of common fixed expenses not traceable to the individual divisions is $235,500 What is the company's net operating income?

A) $374,400

B) $201,300

C) $609,900

D) ($34,200)

Solution:

DivisionsTotal

Company

AlphaDivision

BetaDivisionSales $1,090,000 $510,000 $580,000

Less: variable expenses 480,100 178,500 301,600

Contribution margin 609,900 331,500 278,400

Less: traceable fixed expenses 408,600 222,100 186,500

Divisional segment margin 201,300 $109,400 $91,900

Less common fixed expenses 235,500

Net operating income ($34,200)

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36 J Corporation has two divisions Division A has a contribution margin of $79,300 and Division B has a contribution margin of $126,200 If total traceable fixed costs are

$72,400 and total common fixed costs are $34,900, what is J Corporation's net

Solution:

Total CompanyContribution margin $205,500 *

Less: traceable fixed expenses 72,400

Divisional segment margin 133,100

Less common fixed expenses 34,900

*$79,300 + $126,200 = $205,500

37 Kop Corporation has provided the following data:

Return on investment (ROI) 15%

Sales $120,000

Average operating assets $60,000

Minimum required rate of return 12%

AICPA FN: Reporting LO: 2; 3 Level: Medium

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Net operating income = Sales × Margin on sales = $120,000 × 7.5% = $9,000

Residual income = Net operating income − (Average operating assets × Minimum required rate of return) = $9,000 − ($60,000 × 12%) = $9,000 − $7,200 = $1,800

38 Spar Company has calculated the following ratios for one of its investment centers:

AICPA FN: Reporting LO: 2 Level: Easy Source: CPA; adapted

Solution:

Return on investment = Margin × Turnover = 25% × 0.5 times = 12.5%

39 Mike Corporation uses residual income to evaluate the performance of its divisions The company's minimum required rate of return is 14% In January, the Commercial Products Division had average operating assets of $970,000 and net operating income

of $143,700 What was the Commercial Products Division's residual income in

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40 In November, the Universal Solutions Division of Keaffaber Corporation had average operating assets of $480,000 and net operating income of $46,200 The company uses residual income, with a minimum required rate of return of 11%, to evaluate the performance of its divisions What was the Universal Solutions Division's residual income in November?

A) -$6,600

B) $5,082

C) $6,600

D) -$5,082

Solution:

Residual income = Net operating income − (Average operating assets × Minimum required rate of return) = $46,200 − ($480,000 × 11%) = $46,200 − $52,800 = -$6,600

41 If operating income is $60,000, average operating assets are $240,000, and the

minimum required rate of return is 20%, what is the residual income?

A) 40%

B) 25%

C) $12,000

D) $48,000

Solution:

Residual income = Net operating income − (Average operating assets × Minimum required rate of return) = $60,000 − ($240,000 × 20%) = $60,000 − $48,000 = $12,000

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42 Division A makes a part that it sells to customers outside of the company Data

concerning this part appear below:

Selling price to outside customers $40

Variable cost per unit $30

Total fixed costs $10,000

Capacity in units 20,000

Division B of the same company would like to use the part manufactured by Division

A in one of its products Division B currently purchases a similar part made by an outside company for $38 per unit and would substitute the part made by Division A Division B requires 5,000 units of the part each period Division A is already selling all of the units it can produce to outside customers If Division A sells to Division B rather than to outside customers, the variable cost per unit would be $1 lower What is the lowest acceptable transfer price from the standpoint of the selling division?

A) $40

B) $39

C) $38

D) $37

AICPA FN: Decision Making; Reporting Appendix: 12A LO: 4 Level: HardSolution:

Transfer price ≥ Variable cost per unit + (Total contribution margin on lost sales ÷ Number of units transferred) = ($30 − $1) + [($40 − $30) × 5,000] ÷ 5,000 = $29 +

$10 = $39

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43 Product A, which is produced by the Parts Division of BYP Corporation, sells for

$14.25 on the outside market The costs to make Product A as recorded by the

company's cost accounting system are:

Direct materials $7.25

Direct labor $2.25

Variable manufacturing overhead $1.50

Fixed manufacturing overhead $2.50

The Assembly Division of BYP Corporation requires a part much like Product A to make one of its products The Assembly Division can buy this part from an outside supplier for $14.15 However, the Assembly Division could use Product A instead of this part purchased from an outside supplier What is the most the Assembly Division would be willing to pay the Parts Division for Product A?

A) $13.50

B) $14.25

C) $14.15

D) $14.00

AICPA FN: Decision Making; Reporting Appendix: 12A LO: 4 Level: EasySolution:

Transfer price ≤ Cost of buying from outside supplier = $14.15

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44 Macumber Corporation has two operating divisions-an Atlantic Division and a Pacific Division The company's Logistics Department services both divisions The variable costs of the Logistics Department are budgeted at $36 per shipment The Logistics Department's fixed costs are budgeted at $234,000 for the year The fixed costs of the Logistics Department are determined based on peak-period demand.

Percentage of PeakPeriod Capacity Required

ActualShipmentsAtlantic Division 30% 1,100

AICPA FN: Reporting Appendix: 12B LO: 5 Level: Easy

Solution:

Labor department cost charged to Atlantic Division

= (1,100 shipments × $36 per shipment) + ($234,000 × 30%)

= $39,600 + $70,200 = $109,800

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45 Erholm Corporation has two operating divisions-an Atlantic Division and a Pacific Division The company's Logistics Department services both divisions The variable costs of the Logistics Department are budgeted at $31 per shipment The Logistics Department's fixed costs are budgeted at $411,800 for the year The fixed costs of the Logistics Department are determined based on peak-period demand.

Percentage of Peak PeriodCapacity Required

BudgetedShipmentsAtlantic Division 35% 1,900

Pacific Division 65% 5,200

At the end of the year, actual Logistics Department variable costs totaled $290,700 and fixed costs totaled $431,950 The Atlantic Division had a total of 3,900 shipments and the Pacific Division had a total of 5,100 shipments for the year How much

Logistics Department cost should be charged to the Pacific Division at the END of the year for performance evaluation purposes?

A) $391,453

B) $425,770

C) $445,498

D) $409,502

Solution:

Logistics department cost charged to Pacific Division

= (5,100 shipments × $31 per shipment) + ($411,800 × 65%)

= $158,100 + $267,670 = $425,770

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46 Gretter Corporation has two operating divisions-an Atlantic Division and a Pacific Division The company's Logistics Department services both divisions The variable costs of the Logistics Department are budgeted at $36 per shipment The Logistics Department's fixed costs are budgeted at $399,600 for the year The fixed costs of the Logistics Department are determined based on peak-period demand.

Percentage of Peak PeriodCapacity Required

BudgetedShipmentsAtlantic Division 25% 1,600

Pacific Division 75% 5,800

At the end of the year, actual Logistics Department variable costs totaled $305,040 and fixed costs totaled $418,680 The Atlantic Division had a total of 2,600 shipments and the Pacific Division had a total of 5,600 shipments for the year For performance evaluation purposes, how much actual Logistics Department cost should NOT be charged to the operating divisions at the END of the year?

A) $28,920

B) $9,840

C) $19,080

D) $0

Solution:

Actual Logistics Department cost incurred = $305,040 + $418,680 = $723,720

Logistics Department charged to operating divisions

= [$36 per shipment × (2,600 shipments + 5,600 shipments)] + $399,600

= [$36 per shipment × 8,200 shipments] + $399,600

= $295,200 + $399,600 = $694,800

Actual Logistics Department cost not charged to operating divisions

= $723,720 − $694,800 = $28,920

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47 Bockoven Corporation has two operating divisions-a Consumer Division and a

Commercial Division The company's Customer Service Department provides services

to both divisions The variable costs of the Customer Service Department are budgeted

at $46 per order The Customer Service Department's fixed costs are budgeted at

$181,500 for the year The fixed costs of the Customer Service Department are

determined based on the peak period orders

Percentage of Peak PeriodCapacity Required ActualOrdersConsumer Division 40% 1,100

Solution:

Customer Service Department cost charged to Consumer Division

= ($46 per order × 1,100 orders) + ($181,500 × 40%)

= $50,600 + $72,600 = $123,200

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48 Levar Corporation has two operating divisions-a Consumer Division and a

Commercial Division The company's Order Fulfillment Department provides services

to both divisions The variable costs of the Order Fulfillment Department are budgeted

at $73 per order The Order Fulfillment Department's fixed costs are budgeted at

$470,400 for the year The fixed costs of the Order Fulfillment Department are

Percentage of Peak PeriodCapacity Required BudgetedOrdersConsumer Division 25% 1,800

Commercial Division 75% 6,600

At the end of the year, actual Order Fulfillment Department variable costs totaled

$621,600 and fixed costs totaled $473,970 The Consumer Division had a total of 1,840 orders and the Commercial Division had a total of 6,560 orders for the year For purposes of evaluation performance, how much Order Fulfillment Department cost should be charged to the Commercial Division at the END of the year?

A) $831,680

B) $855,588

C) $840,918

D) $846,240

Solution:

Order Fulfillment Department cost charged to Commercial Division

= ($73 per order × 6,560 orders) + ($470,400 × 75%)

= $478,880 + $352,800 = $831,680

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49 Schabel Corporation has two operating divisions-a Consumer Division and a

Commercial Division The company's Customer Service Department provides services

to both divisions The variable costs of the Customer Service Department are budgeted

at $72 per order The Customer Service Department's fixed costs are budgeted at

$695,400 for the year The fixed costs of the Customer Service Department are

Percentage of Peak PeriodCapacity Required BudgetedOrdersConsumer Division 25% 2,600

Commercial Division 75% 9,600

At the end of the year, actual Customer Service Department variable costs totaled

$891,089 and fixed costs totaled $709,820 The Consumer Division had a total of 2,610 orders and the Commercial Division had a total of 9,580 orders for the year For performance evaluation purposes, how much actual Customer Service Department cost should NOT be charged to the operating divisions at the END of the year?

A) $13,409

B) $0

C) $14,420

D) $27,829

Solution:

Actual Customer Service Department cost incurred

= $891,089 + $709,820 = $1,600,909

Customer Service Department cost charged to operating divisions

= [$72 per order × (2,610 orders + 9,580 orders)] + $695,400

= [$72 per order × 12,190 orders] + $695,400

= $877,680 + $695,400 = $1,573,080

Actual Customer Service Department cost not charged to operating divisions

= $1,600,909 − $1,573,080 = $27,829

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50 Mangiamele Corporation's Maintenance Department provides services to the

company's two operating divisions-the Paints Division and the Stains Division The variable costs of the Maintenance Department are budgeted based on the number of cases produced by the operating departments The fixed costs of the Maintenance Department are budgeted based on the number of cases produced by the operating departments during the peak period Data appear below:

Maintenance Department

Budgeted variable cost $4 per case

Budgeted total fixed cost $693,000

For performance evaluation purposes, how much Maintenance Department cost should

be charged to the Paints Division at the end of the year?

A) $234,000

B) $500,500

C) $279,900

D) $300,300

Solution:

Maintenance Department cost charged to Paints Division

= ($4 per case × 18,000 cases) + ($693,000 × 30%)

= $72,000 + $207,900 = $279,900

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51 Tabarez Corporation's Maintenance Department provides services to the company's two operating divisions-the Paints Division and the Stains Division The variable costs

of the Maintenance Department are budgeted based on the number of cases produced

by the operating departments The fixed costs of the Maintenance Department are budgeted based on the number of cases produced by the operating departments during the peak period Data appear below:

Maintenance Department

Budgeted variable cost $2 per case

Budgeted total fixed cost $1,140,000

Actual total variable cost $239,400

Actual total fixed cost $1,157,980

For performance evaluation purposes, how much Maintenance Department cost should

be charged to the Stains Division at the END of the year?

A) $989,002

B) $1,041,416

C) $967,920

D) $1,019,520

Solution:

Maintenance Department cost charged to Stains Division

= ($2 per case × 84,960 cases) + ($1,140,000 × 70%)

= $169,920 + $798,000 = $967,920

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Use the following to answer questions 52-56:

O'Neill, Incorporated's income statement for the most recent month is given below

Total Store A Store BSales $300,000 $100,000 $200,000

Variable expenses 192,000 72,000 120,000

Traceable fixed expenses 76,000 21,000 55,000

Segment margin 32,000 $ 7,000 $ 25,000

Common fixed expenses 27,000

For each of the following questions, refer back to the original data

52 If Store B sales increase by $20,000 with no change in traceable fixed expenses, the overall company net operating income should:

A) increase by $2,500

B) increase by $5,000

C) increase by $8,000

D) increase by $12,000

Solution:

Store B contribution margin ratio = $80,000 ÷ $200,000 = 40%

Additional net operating income = $20,000 × 40% = $8,000

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53 The marketing department believes that a promotional campaign at Store A costing

$5,000 will increase sales by $15,000 If its plan is adopted, overall company net operating income should:

A) decrease by $800

B) decrease by $5,800

C) increase by $5,800

D) increase by $10,000

Solution:

Store A contribution margin ratio = $28,000 ÷ $100,000 = 28%

Change in net operating income = ($15,000 × 28%) − $5,000

Solution:

New amount for Store A variable expenses = $100,000 × 62% = $62,000

Change in net operating income = ($72,000 − $62,000) − $8,000

= $10,000 − $8,000 = $2,000 increase

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55 If sales in Store B increase by $30,000 as a result of a $7,000 expenditure in fixed expenses:

A) the contribution margin should increase by $18,000

B) the segment margin should increase by $12,000

C) the contribution margin should increase by $11,000

D) the segment margin should increase by $5,000

Solution:

Store B contribution margin ratio = $80,000 ÷ $200,000 = 40%

Change in segment margin = ($30,000 × 40%) − $7,000

= $12,000 − $7,000 = $5,000 increase

56 Currently the sales clerks receive a salary of $7,000 per month in Store B A proposal has been made to change from a fixed salary to a sales commission of 5% Assume that this proposal is adopted, and that as a result sales increase by $20,000 The new segment margin for Store B should be:

A) $29,000

B) $32,000

C) $39,000

D) $45,000

AICPA FN: Reporting; Measurement LO: 1 Level: Hard

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Higgins Company sells three products, Product A, Product B, and Product C Sales during June totaled $1,500,000 in the company The company's overall contribution margin ratio was 38%, and its fixed expenses totaled $525,000 for the year Sales by product were: Product A,

$750,000; Product B, $450,000; and Product C, $300,000 Traceable fixed expenses were: Product A, $180,000; Product B, $150,000; and Product C, $90,000 The variable expenses were: Product A, $450,000; Product B, $270,000; and Product C, $ _? _

57 The net operating income for the company as a whole for June was:

A) $45,000

B) $105,000

C) $150,000

D) $570,000

58 The contribution margin ratio for Product C for June was:

A) 0%

B) 30%

C) 38%

D) 70%

Solution:

Company variable expenses = $1,500,000 × (100% − 38%)

= $1,500,000 × 62% = $930,000

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59 Common fixed expenses for Higgins Company for June were:

A) $45,000

B) $420,000

C) $150,000

D) $105,000

Solution:

Common fixed expenses = Total fixed expenses – Traceable fixed expenses

= $525,000 – ($180,000 + $150,000 + $90,000)

= $525,000 – $420,000 = $105,000

Azuki Corporation operates in two sales territories, urban and rural Shown below is last year's income statement segmented by territory:

Urban RuralSales $320,000 $80,000

Variable expenses 208,000 56,000

Contribution margin 112,000 24,000

Traceable fixed expenses 48,000 30,000

Segment margin $64,000 $(6,000)

Azuki's common fixed expenses were $25,000 last year

60 What was Azuki Corporation's overall net operating income for last year?

A) $33,000

B) $45,000

C) $58,000

D) $83,000

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61 If urban sales were 10% higher last year, by approximately how much would Azuki's net operating income have increased? (Assume no change in the revenue or cost structure.)

A) $4,400

B) $6,400

C) $11,200

D) $32,000

Solution:

Urban contribution margin ratio = $112,000 ÷ $320,000 = 35%

Increase in net operating income = $320,000 × 10% × 35% = $11,200

62 If operations in rural areas would have been discontinued at the beginning of last year, how would this have changed the net operating income of Azuki Company as a

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Tubaugh Corporation has two major business segments—East and West In December, the East business segment had sales revenues of $690,000, variable expenses of $352,000, and traceable fixed expenses of $104,000 During the same month, the West business segment hadsales revenues of $140,000, variable expenses of $56,000, and traceable fixed expenses of

$24,000 The common fixed expenses totaled $162,000 and were allocated as follows:

$89,000 to the East business segment and $73,000 to the West business segment

63 The contribution margin of the West business segment is:

A) $84,000

B) $234,000

C) $422,000

D) $145,000

Solution:

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65 A properly constructed segmented income statement in a contribution format would show that the net operating income of the company as a whole is:

A) $294,000

B) $422,000

C) $132,000

D) -$30,000

Solution:

TotalCompany East WestSales $830,000 $690,000 $140,000

Segment margin 294,000 $234,000 $60,000

Data for January for Bondi Corporation and its two major business segments, North and South, appear below:

Sales revenues, North $660,000

Variable expenses, North $383,000

Traceable fixed expenses, North $79,000

Sales revenues, South $510,000

Variable expenses, South $291,000

Traceable fixed expenses, South $66,000

In addition, common fixed expenses totaled $179,000 and were allocated as follows: $93,000

to the North business segment and $86,000 to the South business segment

Trang 35

66 The contribution margin of the South business segment is:

A) $198,000

B) $496,000

C) $219,000

D) $105,000

Solution:

NorthSales $660,000

Variable expenses 383,000

Contribution margin 277,000

Traceable fixed expenses 79,000

Segment margin $198,000

Trang 36

A) -$7,000

B) $172,000

C) $351,000

D) $496,000

Solution:

TotalCompany North SouthSales $1,170,000 $660,000 $510,000

Segment margin 351,000 $198,000 $153,000

Ferrar Corporation has two major business segments-Consumer and Commercial Data for thesegment and for the company for March appear below:

Sales revenues, Consumer $680,000

Sales revenues, Commercial $280,000

Variable expenses, Consumer $394,000

Variable expenses, Commercial $143,000

Traceable fixed expenses, Consumer $102,000

Traceable fixed expenses, Commercial $45,000

In addition, common fixed expenses totaled $210,000 and were allocated as follows:

$122,000 to the Consumer business segment and $88,000 to the Commercial business

segment

Trang 37

69 The contribution margin of the Commercial business segment is:

A) $137,000

B) $184,000

C) $62,000

D) $423,000

Solution:

ConsumerSales $680,000

Variable expenses 394,000

Contribution margin 286,000

Traceable fixed expenses 102,000

Segment margin $184,000

Trang 38

A) $66,000

B) -$144,000

C) $423,000

D) $276,000

Solution:

SegmentsTotal

Company Consumer CommercialSales $960,000 $680,000 $280,000

Segment margin 276,000 $184,000 $92,000

The Tipton Division of Dudley Company reported the following data last year:

Return on investment 20%

Minimum required rate of return 12%

Residual income $50,000

Trang 39

72 Tipton Division's average operating assets last year were:

A) $625,000

B) $250,000

C) $416,677

D) $333,333

Solution:

ROI = Net operating income ÷ Average operating assets

Net operating income = ROI × Average operating assets

= 20% × $625,000 = $125,000

Trang 40

The following data pertain to Turk Company's operations last year:

Plant, property, & equipment $120,000

74 Turk's return on investment for the year was:

A) 4%

B) 15%

C) 36%

D) 20%

Solution:

Residual income = Net operating income − (Average operating assets × Minimum required rate of return)

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