Expert Answers

1. (TCO D) Delmar Corporation is considering the use of residual income as a measure of the performance of its divisions. Which major disadvantage of this method should the company consider before deciding to institute it? (Points : 5)
This method does not take into account differences in the size of divisions.
Investments may be adopted that will decrease the overall return on investment.
The minimum required rate of return may eliminate desirable investments.
Residual income does not measure how effectively the division manager controls costs.
2. (TCO D) Which of the following performance measures will decrease if there is an increase in the accounts receivable?
Return on Investment Residual Income
(A) Yes Yes
(B) No Yes
(C) Yes No
(D) No No
(Points : 5)
Choice A
Choice B
Choice C
Choice D

3. (TCO D) For which of the following decisions are sunk costs relevant? (Points : 5)
The decision to keep an old machine or buy a new one
The decision to sell a product at the split-off point or after further processing
The decision to accept or reject a special order offer
All of the above
None of the above

4. (TCO D) Eber Wares is a division of a major corporation. The following data are for the latest year of operations.

Sales $30,000,000
Net Operating income $1,170,000
Average operating assets $8,000,000
The company’s minimum required rate of return 18%

Required:
i. What is the division’s margin?
ii. What is the division’s turnover?
iii. What is the division’s ROI?
iv. What is the division’s residual income? (Points : 15)
5. (TCO D) Data for December concerning Dinnocenzo Corporation’s two major business segments-Fibers and Feedstocks-appear below:

Sales revenues, Fibers $870,000
Sales revenues, Feedstocks $820,000
Variable expenses, Fibers $426,000
Variable expenses, Feedstocks $344,000
Traceable fixed expenses, Fibers $148,000
Traceable fixed expenses, Feedstocks S156,000

Common fixed expenses totaled $314,000 and were allocated as follows: $129,000 to the Fibers business segment and $185,000 to the Feedstocks business segment.

Required:

Prepare a segmented income statement in the contribution format for the company. Omit percentages; show only dollar amounts. (Points : 15)