Module 23 Exercises
1. M23-21. ROI and Residual Income: Impact of a New Investment (LO3)
The Mustang Division of Detroit Motors had an operating income of $900,000 and net assets of
$4,000,000. Detroit Motors has a target rate of return of 16 percent. Required
a. Compute the return on investment.
b. Compute the residual income.
c. The Mustang Division has an opportunity to increase operating income by $200,000 with an
$850,000 investment in assets.
1. Compute the Mustang Division's return on investment if the project is undertaken. (Round
your answer to three decimal places.)
2. Compute the Mustang Division's residual income if the project is undertaken.
2. Nelson Company is a two-division firm and has the following information available for this year:
Common fixed costs
$ 800,000
Direct fixed costs of Division A
200,000
Direct fixed costs of Division B
400,000
Sales revenue of Division A
800,000
Sales revenue of Division B
1,200,000
Variable costs of Division A
240,000
Variable costs of Division B
360,000
What is Division A's contribution margin?
What is Division B’s segment margin?
3. The following information pertains to the Pink Division, which operates as an investment center:
Sales
Division income
Return on
Investment
$16,000,000
$2,880,000
12%
What was Pink Division assets?
4. Information for Pipe division is as follows:
Net earnings for division
Asset base for division
Target rate of return
Operating income margin
Weighted average cost of
capital
What is Pipe’s residual income?
5. Ruby Division had the following information:
Current Liabilities
Assets
Net operating income before
taxes
Tax rate
Cost of capital
Calculate Ruby Division's economic value added.
$40,000
$100,000
14%
12%
8%
$ 4,000,000
30,000,000
6,000,000
30%
10%
6. Provide the missing data for the following divisions.
Asset base
Income
Investment turnover
Return on sales ratio
Return on investment
Sales
CD Division
$ (a)
$96,000
(c)
(b)
12%
$1,200,000
MP3 Division
$ (e)
$480,000
(f)
0.12
15%
$ (d)
7. M23-19. Transfer Prices at Full Cost with Excess Capacity: Divisional Viewpoint (LO2) Koji
Cameras, Inc., has a Disposables Division that produces a camera that sells for $10 per unit in the
open market. The cost of the product is $6 (variable manufacturing of $4, plus fixed manufacturing of
$2). Total fixed manufacturing costs are $140,000 at the normal annual production volume of 70,000
units. The Overseas Division has offered to buy 15,000 units at the full cost of $6. The Disposables
Division has excess capacity, and the 15,000 units can be produced without interfering with the
current outside sales of 70,000 units. The total fixed cost of the Disposables Division will not change.
Required
Explain whether the Disposables Division should accept or reject the offer. Show calculations.
8. Transfer Pricing with Excess Capacity: Divisional and Corporate Viewpoints (LO2) Eclectic Art
Company has a Print Division that is currently producing 100,000 prints per year but has a capacity
of 150,000 prints. The variable costs of each print are $30, and the annual fixed costs are $1,350,000.
The prints sell for $45 in the internet market. The company's Retail Division wants to buy 50,000
prints at $29 each. The Print Division manager refuses the order because the price is below variable
cost by $1 and goes on to insists that the price should be $45 per print.
The Retail Division manager argues that the order should be accepted because it will lower the fixed
cost per print from $9 to $6. The retail division manager plans to frame the picture at a cost of $10
per unit and sell for $53.
Required
a. What is the validity of the Retail Division Manager’s argument about lowering fixed costs per
unit?
b. From the viewpoint of the Print Division, should they sell at $29 per unit to the Retail Division?
Show your calculations.
c. From the viewpoint of the Retail Division, should they purchase at a $45 per unit market price?
Show your calculations.
d. From the viewpoints of the Electric Art Company, should the order be accepted and the prints
transferred? Show your calculations
e. What action should the company President take, assuming she believes in divisional autonomy?