Homework SourseAs manager in charge of California Division Investment Cente
As manager in charge of California Division Investment Center, Lisa will be responsible for acquiring and managing division assets required to manufacture and market the center’s products, as well as for managing the revenues and costs related to those products. President has decided to use the most popular method for evaluating the performance of Investment Centers - Return on Investment (ROI).
One of the problems with ROI is that, a division whose ROI is larger than the ROI for the entire company, may reject an investment opportunity that would lower its own ROI even though the project would increase the ROI for the entire company. As a result, the President has also decided to use Residual Income (RI) as supplement to ROI for measuring the performance of Lisa. Kaplan Company has set a minimum required return of 25% for ROI.
David and Georgia Production Unit Info:
Assets assigned to California Division for 2017 were as follows:
Assets Beg Balance End Balance
Cash $250,000 $260,000
Accounts receivable 120,000 135,000
Inventory 230,000 205,000
Plant and equipment (net) 420,000 380,000
Land (undeveloped)* 430,000 430,000
Total assets $1,450,000 $1,410,000
*The undeveloped land is purchased by the President of company in California for construction of future headquarter of the company, that is, Lisa is not accountable for it.
Income Statement
Sales $1,750,000
Cost of goods sold 1,170,000
Operating expenses 300,000
Operating income 280,000
Less interest and taxes:
Interest expense $96,000
Tax expense 70,000 166,000
Net income $114,000
1) Prepare a Static Budget for Georgia Production Unit as of Jan. 1, 2017.
2) Assess and report the performance of David for year 2017 by computing appropriate cost variances for DM, DL, and factory overhead costs.
3) Assess and report the performance of Lisa for year 2018 by computing appropriate measures of performance.
4) Explain the difference between ROI and Profit Margin Ratio by computing Profit Margin ratio and ROI for California division. What does each ratio is trying to measure?
Solution
1) Prepare a Static Budget for Georgia Production Unit as of Jan. 1, 2017.
Answer: On the basis of below assumption
1. Sales price per unit $50.
2. Fixed Cost is $1,00,000
2) Assess and report the performance of David for year 2017 by computing appropriate cost variances for DM, DL, and factory overhead costs.
I.Direct Material Cost variance
Formula to calculate Direct Material Cost Variance
MCV = Standard Cost-Actual Cost
=$194040 - $195000
=960(Unfavorable)
II.Direct Labour Cost variance
=Standard Cost- Actual Cost
=$95760-102000
=$6240(Unfavorable)
III.Factory overhead Cost variance.
=Standard Cost- Actual Cost
=$117140-$121100
=$3960(Unfavorable)
3) Assess and report the performance of Lisa for year 2018 by computing appropriate measures of performance.
Answer: Measure the performance of Lisa on the basis of Return on investment and profit margin ratio.
I.Return on investment
=Net Income / Total Asset *100
=$114,000 / $980,000 *100
=11.63%
Note: Total asset decresed by $430,000 because The undeveloped land is purchased by the President of company in California for construction of future headquarter of the company, that is, Lisa is not accountable for it.
II.Profit Margin Ratio.
=Net income / Revenue *100
=$114,000 / $1,750,000 *100
=6.51%
4) Explain the difference between ROI and Profit Margin Ratio by computing Profit Margin ratio and ROI for California division. What does each ratio is trying to measure?
Answer: margin ratio is a profitability ratios calculated as net income divided by revenue, or net profits divided by sales it express net profit margin in total sales whereas Return on Investment (ROI) is a performance measure, used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments.
| Purticulers | price p.u | Total |
|---|---|---|
| Unit Sold | 12600 | |
| A.Revenue | $50 | $630000.00 |
| B.Less:Variable Cost | ||
| Direct Material | $15.48 | $195000 |
| Direct Labour | $8.10 | $102000 |
| Factory overhead cost | $9.61 | $121100 |
| Total(B) | $33.18 | $418100 |
| C.Contribution (A-B) | $16.82 | $211900 |
| D.Fixed Cost (Assumption) | $100000 | |
| E.Operating Income (C-D) | $111900 |
