Accounting

Chapter 6 Homework – Conceptual Questions

Explain the goals of the quality/improvement movement, how the movement began, and identify at least three(3) quality methods or approaches.

Describe the characteristics and functions of key performance indicators (KPIs).

Describe the nature of core strategies and identify at least three (3) examples of core strategies that you have observed within the last 12 months.

Compare and contrast leading and lagging indicators.

Explain and contrast the characteristics of traceable/avoidable fixed costs and common/unavoidable fixed costs.

What are the four basic components of the first generation balanced scorecard? Describe the characteristics of each component.

Homerun Inc. has made base bags and home plates for professional and amateur 

baseball leagues for decades.  The firm's owners want to determine the costs they

incur because of poor quality products.  The following information has been collected

to assist in determining the current cost of quality for Homerun Inc.

Prevention costs Employee training $125,000

Improved materials

Preventative maintenance

Appraisal costs Inspection throughout production

Inspection of final product

Product testing $375,000

Intermnal failure costs Production loss caused by downtime

Product rework in production process $300,000

Rejected product units $50,000

External failure costs Lost profits from lost customers $1,000,000

Warranty costs $135,000

Service costs at customer sites

Sales returns due to quality problems $65,000

Required:

Prepare a Cost of Quality Statement for Homerun Inc.

Chapter 6 ‐‐ Homework

Cost of Quality

Manufacturing Firms

Homerun Inc. competes with Bases‐R‐Us to sell base bags and home plates.  Homerun has always

benchmarked itself against Bases‐R‐Us to evaluate their own performance and to provide information

for their own planning purposes.

Item Homerun Inc. Bases‐R‐Us

Net sales $46,795 $52,855

Cost of goods sold $27,850 $28,110

Gross margin $18,945 $24,745

Selling & Administrative expenses $13,158 $22,814

Other operating expenses $819 $117

Operating income $4,968 $1,814

Interest expense $733 $903

Other income (expenses; net) $6,477 $785

Income before taxes $10,712 $1,696

Income tax expense $3,749 $593

Net income $6,963 $1,103

Required:

Prepare an external benchmarking analysis for Homerun Inc. against Bases‐R‐Us.

Chapter 6 ‐‐ Homework

External Benchmarking

For the Year Ended December 31, 2xxx

Homerun Inc. actively benchmarks their own performance on a daily, monthly, quarterly, and annual basis.

The following information has been collected for the annual financial results of the firm.

Item Year 1 Year 2 Year 3

Net sales $46,795 $42,150 $44,562

Cost of goods sold $27,850 $25,990 $26,871

Gross margin $18,945 $16,160 $17,691

Selling & Administrative expenses $13,158 $13,250 $12,789

Other operating expenses $819 $720 $910

Operating income $4,968 $2,190 $3,992

Interest expense $733 $664 $822

Other income (expenses; net) $6,477 $5,546 $5,968

Income before taxes $10,712 $7,072 $9,138

Income tax expense $3,749 $2,475 $3,198 Net income $6,963 $4,597 $5,940

Required:

Prepare an internal benchmarking analysis for Homerun Inc. for years 1, 2, and 3.

Chapter 6 ‐‐ Homework

Internal Benchmarking

Amount

Homerun Inc. operates two segments, Base Bags and Home Plates.  The following information has been prepared to support the annual segment

analysis.

Revenue FC Traceable FC Common Revenue % VC Ratio CM Ratio

Parent company Homerun Inc. $1,890 100.0%

Segment 1 Base Bags $25,737 $3,645 $1,440 100.0% 60.0% 40.0%

Segment 2 Home   Plates $21,058 $6,207 $795 100.0% 55.0% 45.0%

Division 2‐1 Moveable $15,793 $2,832 100.0% 55.0% 45.0%

Division 2‐2 Fixed $5,264 $2,580 100.0% 55.0% 45.0%

Required:

Prepared segmented income statements for Homerun Inc and it's two subsidiaries, Base Bags and Home Plates.  

Prepare a segmented income statement for Home Plates and its two divisions, Moveable and Fixed.

Chapter 6 ‐‐ Homework

Segment Information

Homerun Inc. would like to perform an analysis of their return on investment for the Base Bags segment.

The following information has been provided to assist with the analysis.

2xxx

Results

Revenues $25,737.25

Operating expenses $15,379.90

Operating assets, beginning $146,570.00

Operating assets, ending $159,235.00

Required:

1) Calculate the return on investment, including margin and turnover for the 2xxx actual results for Base Bags.

2) Calculate the return on investment for the following independent scenarios:

2a) Net operating assets are reduced by 20%

2b) Operating expenses are reduced 15%

2c) Revenues are increased by 5% and operating expenses are reduced by 10%

2d) Net operating income is reduced by 8% and average operating assets are reduced by 15%

Chapter 6 ‐‐ Homework

Return on Investment

Base Bags Segment

Homerun Inc. would like to evaluate the Base Bags segment using residual income as a

measure of performance.

The following information has been provided to assist in the analysis.

2xxx

Results

Revenues $25,737.25

Operating expenses $15,379.90

Operating assets, beginning $146,570.00

Operating assets, ending $159,235.00

Minimum required rate of return 22%

Required:

1) Calculate the residual income using the information above.

2a) Given the information above, what would be the required minimum

rate of return to show zero (0) residual income?

2b) What would the requireed minimum rate of return need to be to

generate $100 of residual income given the information above?

Base Bags Segment

Chapter 6 ‐‐ Homework

Residual Income