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Chapter 7 Responsibility Accounting and Segment Performance Analysis

Exercise 1
MATCHING
1.
2.
3.
4.
5.
6.

C
J
L
I
K
H

7.
8.
9.
10.
11.
12.

Exercise 2
(C / D / Both)
(C / D / Both)
(C / D / Both)
(C / D / Both)
(C / D / Both)
(C / D / Both)
(C / D / Both)
(C / D / Both)
(C / D / Both)
(C / D / Both)

a.
b.
c.
d.
e.
f.
g.
h.
i.
j.

Freedom for managers at lower organizational levels to make decisions


Best suited to organizations within stable environments
Greater responsiveness to user needs
Use the most efficient technologies
Maximum constraints and minimum freedom for managers at lowest levels
Maximization of benefits over costs
Minimization of duplicate functions
Standard operating procedures
Requires trust in employees at all levels
Primarily task control rather than results control

Exercise 3
(M / C / N / A / All)
(M / C / N / A / All)
(M / C / N / A / All)
(M / C / N / A / All)

a.
b.
c.
d.

(M / C / N / A / All)
(M / C / N / A / All)
(M / C / N / A / All)

e.
f.
g.

(M / C / N / A / All)

h.

(M / C / N / A / All)
(M / C / N / A / All)

i.
j.

Exercise 3
a.

F
D
G
B
E
A

Bargaining between selling and buying units


Objective and provides the proper economic incentives
145% of full costs
Avoids confrontation and generally used when a transaction occurs
frequently
Internal product transfers are required
Prices listed in a trade journal
Prices do not reflect pure economic considerations nor
accountability considerations
Goal is to motivate decision makers to act in the organizations
best interest
Provides no incentive to the supplying division
Reflects support of the controllability principle

No, I would not recommend dropping the Candy product line because the P7,000 segment
margin indicates that this product line contributes P7,000 toward corporate costs and profits.

b.

If the Choco product line were discontinued, corporate profits would immediately decrease by
P12,000, the amount reported for the segment margin.

c.

If the Fudge product line were discontinued and long-term capacity has had time to adjust,
corporate profits would decrease by P12,000, the amount reported for the segment income.

d.

To maximize corporate profits, the Fudge product line should receive the advertising dollars
because it has a contribution margin of approximately 46%, the highest contribution margin
of the three product lines.

e.

The current segment margin statement could be made more understandable if the allocated
corporate costs were only listed under the company total column, and they were not part of
the computation for each product line segment. It is obvious that the corporate costs are
arbitrarily allocated equally to each product line and arbitrary allocations do not aid in
decision making.

Exercise 4
a.
Revenue
Cost of services:
Incurred
Transferred-in
Total
Operating income

Cutting
P660,000*

Assembly
P2,500,000

P 660,000
0
P 660,000

P 360,000
660,000
P1,020,000

P1,480,000

Cutting
P540,000*

Assembly
P2,500,000

P 660,000
0
P 660,000

P 360,000
540,000
P 900,000

P120,000)

P1,600,000

* 60,000 cords x P11 = $660,000


b.
Revenue
Cost of service
Incurred
Transferred-in
Total
Operating income

c.

* 60,000 cords x P9 = P540,000


The manager of Cutting cares about the transfer price if the division is a profit center but not if it is a
cost center. Under the circumstances, the division probably should be a cost center and it should not
worry about the profit it pretends to make by selling to another division.

Exercise 5
a.
ROI is 10% (P10,000 department income / P100,000 investment in the department).
b.

Economic value added is P2,000 [P10,000 income - P8,000 (P100,000 x 8%)].

c.

By accepting the proposed project, the departments ROI will be reduced by 0.1% to 9.9%. The
department manager being evaluated on ROI will probably reject the P10,000 investment proposal
even though the investment exceeds the companys 8% cost of capital. New ROI of 9.9% = P10,900
segment income / P110,000 investment in the segment.
By accepting the proposed project, the economic value added will be increased to P2,100, an
increase of P100. The department manager being evaluated on economic value added will probably
choose to accept the investment since it increases economic value added for the department. New
economic value added is P2,100 [P10,900 actual income - P8,800 (P110,000 x 8%) cost of capital].

Exercise 6
a.
X Division is operating and selling outside at full capacity so minimum price is equal to the variable cost to
make and sell plus the lost contribution margin from outside sales:
VC: Production
P7
SGA
2
P 9
Contribution margin
16
Selling price
P25
b. What will be the effect on overall corporate profits if the two divisions agree to an internal transfer of
5,000 units?
Corporate profits will decrease by forcing the transfer.
CM per units earned by X is from external sales P25 [P7 + P2]
P16
Times units to be sold
5,000
Decrease in CM to X and XY Corp.
P80,000
Net savings to buy internally rather than externally [P22 P9]
Times units to be purchased
Savings by buying internally
Net effect on XY Corp. profits

P13
5,000
P 65,000
P (15,000 )

Exercise 7
6,000 Units
Variable costs:
Direct labor
Direct materials
Total variable costs
Fixed costs
Total costs

P42,000
6,000
48,000
24,000
P72,000

Unit Variable Cost


P7.00
1.00

Exercise 8
a. P90,000 .12 = P750,000
b. P400,000 .08 = P32,000
c. P32,000 (P400,000 P100,000) = 10.7%
d. (P90,000 + P20,000) P750,000] = 14.7%

Exercise 9
a.
Controllable margin
P280,000
Return on investment = =
= 7%
Average operating assets
P4,000,000
b.
1.
New controllable margin = P800,000 (P100,000 x 50%) P420,000 = P330,000
P330,000
P4,000,000

8.25%

9,000 Units
P63,000
9,000
72,000
24,000
P96,000

2.

New operating assets = P4,000,000 70% = P2,800,000


P280,000
P2,800,000

3.

10%

New controllable margin


= P800,000 + (P200,000 x *47.5%) P100,000 P420,000 = P375,000
P375,000
P4,000,000

9.38%

*P380,000 / P800,000 = 47.5% contribution margin

Test I MULTIPLE CHOICE

1
2
3
4
5
6
7
8
9
10
11
12

B
A
B
B
B
A
A
B
A
A
A
A

13
14
15
16
17
18
19
20
21
22
23
24

B
B
A
C
A
D
B
C
A
D
C
A

25
26
27
28
29
30
31
32
33
34
35
36

B
D
A
B
C
D
C
D
A
C
C
B

13
14
15
16
17
18
19
20
21
22
23
24

B
B
B
A
A
C
D
A
B
C
D
B

25
26
27
28
29
30
31
32
33
34

B
C
C
B
A
B
B
A
C
C

Test II MULTIPLE CHOICE

1
2
3
4
5
6
7
8
9
10
11
12

C
B
C
A
C
D
A
B
B
C
B
A

37
38
39
40
41
42
43
44
45
46
47
48

D
B
B
A
B
D
A
A
D
C
D
B