Accounting Quiz
rude-1
practice_problem_solutions.docxACCT505 Solutions to Weekly Problems—Week 6
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Exercise 11-12 (30 minutes)
1. ROI computations:
Division A:
Division B:
Division C:
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2. |
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Division A |
Division B |
Division C |
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Average operating assets |
$3,000,000 |
$7,000,000 |
$5,000,000 |
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Required rate of return |
× 14% |
× 10% |
× 16% |
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Required operating income |
$ 420,000 |
$ 700,000 |
$ 800,000 |
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Actual operating income |
$ 600,000 |
$ 560,000 |
$ 800,000 |
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Required operating income (above) |
420,000 |
700,000 |
800,000 |
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Residual income |
$ 180,000 |
$(140,000) |
$ 0 |
Exercise 12-2 (30 minutes)
1. No, production and sale of the racing bikes should not be discontinued. If the racing bikes were discontinued, then the net operating income for the company as a whole would decrease by $11,000 each quarter:
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Lost contribution margin |
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$(27,000) |
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Fixed costs that can be avoided: |
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Advertising, traceable |
$ 6,000 |
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Salary of the product line manager |
10,000 |
16,000 |
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Decrease in net operating income for the company as a whole |
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$(11,000) |
The depreciation of the special equipment is a sunk cost and is not relevant to the decision. The common costs are allocated and will continue regardless of whether or not the racing bikes are discontinued; thus they are not relevant to the decision.
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Solutions Manual
$560,000$14,000,000
ROI = × = 4% × 2 = 8%
$14,000,000$7,000,000
$800,000$25,000,000
ROI = × = 3.2% × 5 = 16%
$25,000,000$5,000,000
Net operating incomeSales
ROI = ×
SalesAverage operating assets
$600,000$12,000,000
ROI = × = 5% × 4 = 20%
$12,000,000$3,000,000
