Managerial Accounts

Chapter 13 lnvestment Centers and Transfer Pricing

rva,vs Dakota Division's manager could irnprove the division's ROI to

l-1 24. Assunre that thc companr''s mininlunr desired latc of rcturn on

Required: (ior.nputc Dakola l)ivisiorr's rcsiiitlal itlcerrtre 1or thc )ear

Required: I)enlotlstratet*o )5 perccttt.

Ilefer to tirc data lirr I:rercise investcd capital is I I Pcrceltt.

Beal esiate......

!i0l-rsi|JCtr0n..

Saieg ie,lelue ........

577

Exercise 13-26 iles dual lncome

Exercise 13_27

Calculate \{/eighted-Average

Cost of CaL.itai fot EVA

Exercise 13-28

Economrc Vaiue Added {EVAI;

Coni nuation of Preceding

Exercrse

C.lcicn (jatc Construction Associates. a reai estat.c cieveloper and iruiiding colltraclor in San Irrancisco'

h,s trv6 s6ur.ces ol'long-term capital: deht and er4uit-r. Ihr' cost to Goldcrt Cate of issuing debi is lhe

alter-tax c0s1 ot"rhe interijst pa.\nter11s ou the dsht. taliing into accotttlt the thctth0t the irrterest pallrents

are tax cleciuctibic. I lre cost ofCiolcieil (jate's equil) capital is the inr.'estment opportulitl rate ot'(jolden

(ia1c's inlestgrs. that is. 1he rate thcy r:ouiri carn iu1 invesinlents ol sinlilar risk to ihat ol-investirig irl

Golclcn Gate Construction A-ssociates. lhe interest rate trtt (jolden Clate's $60 nrillirln ol iong-ternt 6eht is i g pcrcent" ancl llrc compan)

's la\ rate is .10 percent. 'l lte cost of (-ioiden (iatc's equitl capital is

l,{ pcrcent. i\'lorcover. the ntarket |aluc (ancl book vahic) o1'Collen Gate "s equitf is $90 nlillion'

Required: CalcLrlate Goklcn CaLe Cor1stluction ,\ssociates' $e ighted-arcragu cost r:lcapital.

Reicr t. the rlata in tlrc preceding cxercise lirl Coldcn Gate ("ottstruction Associatcs. 'l'ire con4ratl,r has

t*,r.r dilisions: the rcal estate clir ision ancl the construction rlivision. "l-hc divisiorls' total asscts" ctlrrel.Il

iiabilities. and bcfbre-lar: operatirtg income lirr the lnosl reccnl )ear ar0 as lbilo\\'s:

Hequired: calcllate i11c ecollgmic l'altre added (E\A) llr erch oiLruldcrt (,atc LonsLrllction Assot'i- atcs' ,.iivisions. (\ou *ill neecl to use thc rveiglrte<1-averagc cost ol capital. ri'hich lvas conlpuled in the precrdine erercisc.)

\L'yalLrsing l,tkrsiries has i,a,utacturgd prclibricatc'cl hotues iirr .r'er 20 r.orr' fiJ'"ffi;;; ,r};fiff|I:lt strllcted in sections to be assentblecl or1 custoruers" lots. \.\,ralusing crpandecl ittto the precul lrotlsirtg

tltar-

l<.st ri hen it accpircd frainuont Contpany. one ol' its suppliors. ln lhis rrarket. variotts t1'pcs 01']r:nlber arc

pre.:ul int6 t6e appropriate lc,ngths. bauiic'rl into packages. ancl shipped to ctlstolllers" Iots fil'assernbil'

i\,ralusing desigltrteti the lrainnont Dirision as an investmetlt centcr. \\ilalusin-e Llse\ re1unl ('lr ill\e\t-

ntcnt (ROt) m a perlilrntapce ulcasure *,i1h irn'eslnrent dcfineci as average producti\e ilssets. Nlattagernent

bOnuscs arc based in parl ,.rn ROt. All investlrleuts irre erpected to earn a nliuitrlun.} rettll'l] of l-5 percent

belirrc inconte tarcs. Irainlont's itOl has rangcd lionr 19.3 to 22.1 percent sincc it r'ras acquir"ed. i':airntont

had an investrnent oppoflun ii)' iil 20x I that hacl an cstiniatcd RO I o1' I 8 perccnt. Iiainnotlt's lnanagonlelrt

tlecidcd against the investntent lrecause it believed the iuvesttrtetrt *'or:lt] decrease thc dirision"s oreral!

R(jl"'l'hc 20x1 inconte stiitelnent fiir Ftrirnroilt I)irisioil tbllo$s. l-he division's productile iissets \\elc

Sl2.(100"000 at the end oi.20rl. a 5 percent iilcrease orer the baiance at tht beginning of'the 1ear.

$l f ir C!i-' 0ii1r

60 000 0u0

s8 atc0.r.lill $2i rlilll ll0! r 0it0 t)00 18 C00 CC.j

$24,00u

r5.800 00si ol glods sold

0nerat ng expersesr

3 60C 5.74{)Selling. .............. lnr rme I nrr 0r.erat rlns beio'e ncom'c tares