Segmented Reporting, Investment Center Evaluation, and Transfer Pricing

Chapter 10
Segmented Reporting, Investment Center Evaluation, and Transfer Pricing
MULTIPLE CHOICE
1. In a company with a centralized approach to responsibility accounting, upper-level managers do

which of the following?
a. Make decisions.
b. Implement decisions.
c. Make and implement decisions.
d. Review the outcomes of decisions only.
ANS: A DIF: 1 REF: p. 418
OBJ: 2 NAT: AICPA Reflective thinking | IMA Performance measures
2. Decentralization occurs when

a. the firm's operations are located over a large geographic area to reduce risk
b. authority for important decisions is delegated to lower segments of the organization
c. important decisions are made at the upper levels and the lower levels of the organization
are responsible for implementing the decisions
d. None of the above are correct.
ANS: B DIF: 1 REF: p. 418
OBJ: 2 NAT: AICPA Reflective thinking | IMA Cost management
3. In a company with a decentralized approach to responsibility accounting, lower-level managers

typically do which of the following?
a. Make key decisions only.
b. Implement key decisions only.
c. Both make and implement key decisions.
d. Review the outcomes of key decisions only.
ANS: C DIF: 1 REF: p. 418
4. Why would a company decide to decentralize?

a. To ensure all decisions are made by one or two key individuals within the company.
b. To enhance competition, exposing segments to market forces.
c. To keep decision making within the top levels of the organization.
d. To discourage competition from other companies in the same field.
ANS: B DIF: 1 REF: p. 418-419
5. Advantages of decentralization include all of the following EXCEPT

a. divisional management is able to react to changing market conditions more rapidly than top
management
b. divisional management is a source of personnel for promotion to top management positions
c. decentralization can free top managers day to day operations
d. decentralization permits divisional management to concentrate on firmwide problems and
long-range planning
1
2  Managerial Accounting
ANS: D DIF: 2 REF: p. 419

6. Responsibility accounting includes all of the following EXCEPT

a. responsibility
b. culpability
c. accountability
d. performance evaluation
7. The Marketing Department is most likely considered to be a(n)

a. profit center
b. revenue center
c. investment center
d. cost center
8. Types of responsibility centers include all of the following EXCEPT

a. profit centers
b. contribution centers
c. investment centers
d. cost centers
9. The Human Resource office at a major banking establishment is most likely considered to be a(n)
a. profit center
b. revenue center
d. cost center
10. The Production Department is most likely considered to be a(n)

a. profit center
b. revenue center
d. cost center
11. An Accounting Department within a large corporation is most likely considered to be a(n)
a. profit center
b. revenue center
Chapter 10/Segmented Reporting, Investment Center Evaluation, and Transfer Pricing  3
d. cost center
12. When variable costing is used, all of the following are considered product costs EXCEPT
a. direct labor
b. fixed overhead
c. variable overhead
d. direct materials
OBJ: 2 NAT: AICPA Analytic | IMA Cost management
13. When absorption costing is used, all of the following costs are considered product costs EXCEPT
a. direct labor
b. variable selling and administrative costs
c. variable overhead
d. fixed overhead
14. In a variable costing system, product cost includes

a. direct materials, direct labor, variable overhead
b. direct materials, direct labor, fixed overhead
c. direct labor, variable overhead, fixed overhead
d. direct materials, variable overhead, fixed overhead
15. When variable costing is used, fixed manufacturing overhead is recognized as an expense when
a. the cost is incurred
b. the product is sold
c. the product is completed
d. none of the above are correct
16. If a company uses absorption costing, product cost would be calculated by adding together
a. direct materials, direct labor, variable overhead and fixed overhead only
b. direct materials, direct labor, and fixed overhead only
c. direct labor, variable overhead, and fixed overhead only
d. direct materials, variable overhead, and fixed overhead only
17. Which costing method is NOT acceptable to the FASB for external reporting?
a. absorption costing
b. full costing
c. variable costing
d. all of the above methods are acceptable
18. Variable costing can be used for

a. external reporting purposes
b. internal reporting purposes
c. either external reporting or internal reporting
d. neither external reporting nor internal reporting
19. When variable costing is used, which costs would appear as ending inventory on the balances sheet?
a. direct materials, direct labor, fixed overhead and variable overhead only
b. direct materials, direct labor, and fixed overhead only
c. direct materials, direct labor, and variable overhead only
d. direct materials, direct labor only
20. When variable costing is used, the income statement is usually prepared using
a. a contribution margin format
b. a functional format
c. an operational format
d. all of the above
21. The level of production affects income under which of the following methods?
b. variable costing
c. both absorption and variable costing
d. neither absorption nor variable costing
22. During this past year, Bouncy Company experienced no change in inventory. Sales were 40,000
units at a selling price of $3 per unit. Variable manufacturing costs were $1.25 per unit, and total
manufacturing costs were $55,000. Under absorption costing, net income was calculated at $53,000.
What was net income under variable costing?
a. $65,000
b. $55,000
c. $53,000
d. $2,000
ANS: C
SUPPORTING CALCULATIONS:
Net income under absorption and variable costing is the same when there is no change in inventory.
PTS: 1 DIF: 2 REF: p. 424 OBJ: 2

NAT: AICPA Analytic | IMA Cost management
23. Which of the following would appear on an absorption costing income statement but NOT on a
variable costing income statement?
a. cost of goods sold
b. selling and administrative expenses
c. contribution margin
d. gross margin
Figure 10-1
Fairfield Corporation uses an actual cost system and produces a single product. Information about
the product for the past year is as follows:
Product X
Production (units) 100,000
Sales (units) 80,000
Selling price $20.00
Machine hours 50,000
Manufacturing costs:
Direct materials $ 80,000
Direct labor 240,000
Variable overhead 40,000
Fixed overhead 200,000
Nonmanufacturing costs:
Variable selling $48,000
Fixed selling 20,000
There were no beginning inventories. (Round amounts to two decimal places.)
24. Refer to Figure 10-1. Fairfield's unit product cost for Product X using variable costing would be
a. $4.00
b. $3.60
c. $3.20
d. $2.80
ANS: B
Direct materials ($80,000/100,000) $0.80

Direct labor ($240,000/100,000) 2.40

Variable overhead ($40,000/100,000) 0.40
Cost per unit $3.60

25. Refer to Figure 10-1. Fairfield's unit product cost for Product X using absorption costing would be
a. $5.60
b. $7.60
c. $5.00
d. $4.00
ANS: A

Direct labor ($240,000/100,000) 2.40
Fixed overhead ($200,000/100,000) 2.00
Cost per unit $5.60

26. Refer to Figure 10-1. Fairfield's variable cost of goods sold would be
a. $312,000
b. $296,000
c. $288,000
d. $256,000
ANS: C

Direct labor ($240,000/100,000) 2.40
Total variable cost of goods sold per unit $3.60
80,000  $3.60 = $288,000

27. Refer to Figure 10-1. Fairfield's variable cost per unit would be
a. $3.20
b. $3.60
c. $4.08
d. $4.20
ANS: D

Direct labor ($240,000/100,000) 2.40
Variable selling costs ($48,000/80,000) 0.60
Total cost per unit $4.20

28. Refer to Figure 10-1. If Fairfield uses absorption costing, cost of goods sold would be
a. $860,000
b. $728,000
c. $704,000
d. $448,000
ANS: D

Direct labor ($240,000/100,000) 2.40
Fixed overhead ($200,000/100,000) 2.00
Cost per unit $5.60
80,000  $5.60 = $448,000

29. Refer to Figure 10-1. If Fairfield uses absorption costing, net income would be
a. $1,152,000
b. $1,044,000
c. $1,264,000
d. $1,084,000
ANS: D
Sales Revenue $1,600,000

Less: Cost of Goods Sold 448,000
Gross Margin 1,152,000
Less: variable selling expense 48,000
Less: fixed selling expense 20,000
Net Income $1,084,000
Cost of goods sold calculation:

Direct labor ($240,000/100,000) 2.40

Fixed overhead ($200,000/100,000) 2.00
Cost per unit $5.60
80,000  $5.60 = $448,000

30. Refer to Figure 10-1. If Fairfield uses variable costing, net income would be
a. $1,264,000
b. $1,064,000
c. $1,044,000
d. $1,084,000
ANS: C
Sales Revenue $1,600,000

Less: Cost of Goods Sold 288,000
Less: variable selling expense 48,000
Contribution margin 1,264,000
Less: fixed overhead 200,000
Less: fixed selling expense 20,000
Net Income $1,044,000
Variable cost of goods sold calculation:

Direct labor ($240,000/100,000) 2.40
Total variable cost of goods sold per unit $3.60
80,000  $3.60 = $288,000

Figure 10-2
Lee Company began the year with no inventories of work in process or finished goods. Budgeted
and actual costs for the year were as follows:
Variable costs:
Direct materials $15 per unit
Direct labor $10 per unit
Manufacturing overhead $7 per unit
Selling expenses $5 per unit
Fixed costs:
Manufacturing overhead $180,000 per month
Selling and administrative $50,000 per month
During the first three months of the year, production and sales in units were as follows:
Production Sales
January 20,000 20,000
February 20,000 18,000
March 20,000 22,000
Total 60,000 60,000
31. Refer to Figure 10-2. Lee's unit cost of production for February under variable costing would be
a. $46
b. $37
c. $32
d. $41
ANS: C
Direct materials $15

Direct labor 10
Variable overhead 7
Cost per unit $32

32. Refer to Figure 10-2. Lee Company sells its product for $100 per unit. There were no work-in-
process inventories at the end of any month and costs have remained stable all year long.
Lee's unit cost of production for March using absorption costing would be
a. $46
b. $41
c. $37
d. $32
ANS: B

Direct labor 10
Variable overhead 7
Fixed overhead ($180,000/20,000) 9
Cost per unit $41

Figure 10-3
Jennings Industries began operations on January 1. The company sells a single product for $7 per
unit. During the year, 80,000 units were produced and 75,000 units were sold. There was no work-
in-process inventory at December 31.
The company uses an actual cost system, and actual costs for the year were as follows:
Fixed Costs Variable Costs

Direct materials -0- $1.50 per unit produced
Direct labor -0- $1.80 per unit produced
Manufacturing overhead $60,000 $0.40 per unit produced
Selling and administrative
expenses $35,000 $0.50 per unit sold
33. Refer to Figure 10-3. Jennings' variable costing income would be

a. $210,000
b. $115,000
c. $118,750
d. $187,500
ANS: B
Sales ($7  75,000) $525,000

Variable cost of goods sold ($3.70*  75,000) (277,500)
Variable selling and administrative expenses
($0.50  75,000) (37,500)
Contribution margin $210,000
Fixed overhead (60,000)
Fixed selling and administrative expenses (35,000)
Net income $115,000
*$1.50 + $1.80 + $0.40 = $3.70

34. Refer to Figure 10-3. Jennings' product cost per unit under variable costing would be
a. $4.45
b. $4.20
c. $3.70
d. $3.30
ANS: C
Direct materials $1.50

Direct labor 1.80
Variable overhead 0.40
Total variable product cost $3.70

35. Refer to Figure 10-3. Jennings' product cost per unit under absorption costing would be
a. $4.45
b. $4.20
c. $3.70
d. $3.30
ANS: A

Direct labor 1.80
Fixed overhead ($60,000/80,000) 0.75
Total variable product cost $4.45

36. Refer to Figure 10-3. Jennings' absorption costing income would be

a. $210,000
b. $115,000
c. $118,750
d. $187,500
ANS: C
Sales ($7  75,000) $525,000

Less: Cost of goods sold ($4.45*  75,000) 333,750
Gross margin $191,250
Less: Selling and administrative expenses
[$35,000 + ($0.50  75,000)] 72,500
Net income $118,750
*$1.50 + $1.80 + $0.40 + ($60,000/80,000) = $4.45

37. The difference in net income using variable and absorption costing can be explained by
a. the difference in product costs under each method multiplied by the number of units sold
b. the difference in the number of units sold and produced multiplied by the fixed overhead
rate per unit
c. the change in fixed overhead in inventory
d. both b and c
ANS: D DIF: 3 REF: p. 424-425

38. When will absorption costing income generally exceed variable costing income?
a. sales exceed production
b. production exceeds sales
c. production and sales are equal
39. Variable costing income will usually exceed absorption costing income when
a. sales exceed production
b. production exceeds sales
c. production and sales are equal
40. Variable costing net income is

a. higher than absorption net income when more units are sold than produced
b. lower than absorption net income when more units are produced than sold
c. the same as absorption net income when all units produced are sold
d. all of the above are correct
Figure 10-4
Belanna Industries began operations on January 1. The company sells a single product for $7 per
unit. During the year, 50,000 units were produced and 45,000 units were sold. There was no work-
in-process inventory at December 31.
Budgeted and actual costs for the year were as follows:

41. Refer to Figure 10-4. Belanna's product cost per unit under variable costing would be
a. $5.30
b. $4.70
c. $4.20
d. $3.70
ANS: D

Direct labor 1.70
Cost per unit $3.70

42. Refer to Figure 10-4. Under variable costing, Belanna's variable cost per unit would be
a. $5.30
b. $4.70
c. $4.20
d. $3.70
ANS: C

Direct labor 1.70
Variable selling 0.50
Cost per unit $4.20

43. Refer to Figure 10-4. Belanna's product cost per unit under absorption costing would be
a. $5.30
b. $4.70
c. $4.20
d. $3.70
ANS: A

Direct labor 1.70
Fixed overhead ($80,000/50,000) 1.60
Cost per unit $5.30

44. Refer to Figure 10-4. Belanna's cost of ending finished goods inventory under variable costing
would be
a. $18,500
b. $23,500
c. $26,500
d. $21,000
ANS: A

Direct labor 1.70
Cost per unit $3.70
(50,000 - 45,000)  $3.70 = $18,500

45. Refer to Figure 10-4. Belanna's cost of ending finished goods inventory under absorption costing
would be
a. $18,500
b. $23,500
c. $26,500
d. $21,000
ANS: C

Direct labor 1.70
Fixed overhead ($80,000/50,000) 1.60
Cost per unit $5.30
(50,000 - 45,000)  $5.30 = $26,500

46. Refer to Figure 10-4. Belanna's net income under variable costing would be
a. $19,000
b. $22,500
c. $11,000
d. ($7,500)
ANS: C
Sales Revenue ($7.00  45,000) $315,000

Less: variable cost of goods sold* 166,500
Less: variable selling & admin. expense 22,500
($.50  45,000 units sold)
Less: fixed manufacturing overhead 80,000

Less: fixed selling & admin. expense 35,000
Net Income $ 11,000
*variable cost of goods sold calculation

Direct labor 1.70
Cost per unit $3.70
$3.70  45,000 units $166,500

47. Refer to Figure 10-4. Belanna's net income under absorption costing would be
a. $19,000
b. $22,500
c. $11,000
d. ($7,500)
ANS: A
Sales Revenue ($7.00  45,000) $315,000

Less: cost of goods sold* 238,500
Gross margin $ 76,500
Less: variable selling & admin. expense 22,500
($.50  45,000 units sold)
Less: fixed selling & admin. expense 35,000
Net Income $ 19,000
*cost of goods sold calculation

Direct labor 1.70
Fixed overhead ($80,000/50,000) 1.60
Cost per unit $5.30
$5.30  45,000 = $238,500

Figure 10-5
Oscar Company began the year with no inventories of work in process or finished goods. The
company uses an actual cost system with actual costs for the year as follows:
Variable costs:

Fixed costs:
During the third quarter, production and sales in units were as follows:
Production Sales
July 20,000 20,000
August 20,000 18,000
September 20,000 22,000
Total 60,000 60,000
The company sells its product for $80 per unit. There were no work-in-process inventories at the end
of any month and costs have remained stable and unchanged throughout the year.
48. Refer to Figure 10-5. Oscar's income for August under absorption costing would be
a. $346,000
b. $706,000
c. $490,000
d. $546,000
ANS: C
Sales (18,000  $80) $1,440,000

Less cost of goods sold:
Beginning inventory $ -0-
Cost of goods manufactured (20,000  $46*) 920,000
Goods available for sale $ 920,000
Ending inventory (2,000  $46*) 92,000
Cost of goods sold $ 828,000
Gross profit $ 612,000
[(18,000  $4) + $50,000] 122,000
Net income $ 490,000
*$12 + $20 + $6 + ($160,000/20,000) = $46

49. Refer to Figure 10-5. Oscar's income for September under variable costing would be
a. $920,000
b. $836,000
c. $714,000
d. $626,000
ANS: D
Sales (22,000  $80) $1,760,000

Less variable expenses:
Beginning inventory (2,000  $38*) $ 76,000
Cost of goods manufactured (20,000  $38*) 760,000
Goods available for sale $836,000
Less: Ending inventory -0-
Variable cost of goods sold $ 836,000
Selling expenses (22,000  $4) 88,000
Total variable expenses $ 924,000
Contribution margin $ 836,000
Less fixed expenses:
Fixed expenses (manufacturing) $160,000
Fixed selling and administrative 50,000 210,000
*$12 + $20 + $6 = $38

50. Refer to Figure 10-5. Oscar's income for the quarter ended September 30 under absorption and
variable costing, respectively, was
a. $1,650,000; $1,650,000
b. $1,650,000; $2,310,000
c. $2,130,000; $1,650,000
d. $2,130,000; $2,130,000
ANS: A
Absorption costing:
Sales (60,000 units  $80) $4,800,000
Less: COGS (60,000 units  $46*) 2,760,000
Gross margin $2,040,000
Less selling and administrative expenses:
Variable (60,000 units  $4) $240,000
Fixed ($50,000 per month  3) 150,000 390,000
Net income $1,650,000
*$12 + $20 + $6 + ($160,000/20,000) = $46
Variable costing:
Sales (60,000 units  $80) $4,800,000
Variable COGS (60,000 units  $38*) $2,280,000
Variable selling (60,000 units  $4) 240,000 2,520,000
Contribution margin $2,280,000

Fixed overhead ($160,000  $3) $ 480,000
Fixed selling and administrative
($50,000  $3) 150,000 630,000
Net income $1,650,000
*$12 + $20 + $6 = $38
PTS: 1 DIF: 3 REF: p. 424-425 OBJ: 2

Figure 10-6
Hammer Corporation uses an actual cost system and produces a single product. Information about
the product for the past year is as follows:
Product X
Production (units) 200,000
Sales (units) 160,000
Selling price $18.00
Machine hours 82,000
Manufacturing costs:
Direct materials $200,000
Direct labor 560,000
Variable overhead 100,000
Fixed overhead 492,000
Nonmanufacturing costs:
Variable selling $120,000
Fixed selling 60,000
There were no beginning inventories of Product X. (Round amounts to two decimal places.)
51. Refer to Figure 10-6. Hammer's unit product cost for Product X using variable costing would be
a. $4.30
b. $4.20
c. $4.00
d. $6.76
ANS: A

Direct labor ($560,000/200,000) 2.80
Cost per unit $4.30

52. Refer to Figure 10-6. Hammer's unit product cost for Product X using absorption costing would be
a. $7.06
b. $10.30
c. $6.76
d. $4.30
ANS: C

Direct labor ($560,000/200,000) 2.80
Fixed overhead ($492,000/200,000) 2.46
Cost per unit $6.76

53. Refer to Figure 10-6. Hammer's variable cost of goods sold would be
a. $704,000
b. $688,000
c. $680,000
d. $672,000
ANS: B

Direct labor ($560,000/200,000) 2.80
Cost per unit $4.30
160,000  $4.30 = $688,000

54. Refer to Figure 10-6. If Hammer uses absorption costing, cost of goods sold would be
a. $1,129,600
b. $2,060,000
c. $1,081,600
d. $1,600,000
ANS: C

Direct labor ($560,000/200,000) 2.80

Fixed overhead ($492,000/200,000) 2.46
Cost per unit $6.76
160,000  $6.76 = $1,081,600

Figure 10-7
Barry Industries began operations on January 1. The company sells a single product for $20 per unit.
During the year, 40,000 units were produced and 30,000 units were sold. There was no work-in-
process inventory at December 31.
The company uses an actual cost system, and actual costs for the year were as follows:

55. Refer to Figure 10-7. Barry Industries’ product cost per unit under variable costing would be
a. $7.80
b. $6.70
c. $6.60
d. $6.00
ANS: D

Direct labor 2.00
Cost per unit $6.00

56. Refer to Figure 10-7. Barry Industries’ product cost per unit under absorption costing would be
a. $7.80
b. $6.60
c. $6.10
d. $6.00
ANS: B

Direct labor 2.00
Fixed overhead ($24,000/40,000) 0.60
Cost per unit $6.60

57. Refer to Figure 10-7. Barry Industries’ cost of ending finished goods inventory under variable
costing would be
a. $50,000
b. $60,000
c. $66,000
d. $67,000
ANS: B

Direct labor 2.00
Cost per unit $6.00
(40,000 - 30,000)  $6.00 = $60,000

58. Refer to Figure 10-7. Barry Industries’ cost of ending finished goods inventory under absorption
costing would be
a. $50,000
b. $60,000
c. $66,000
d. $67,000
ANS: C

Direct labor 2.00
Fixed overhead ($24,000/40,000 0.60
Cost per unit $6.60
(40,000 - 30,000)  $6.60 = $66,000

NAT: IMA Cost management
59. Refer to Figure 10-7. Barry Industries’ net income under variable costing would be
a. $355,000
b. $361,000
c. $379,000
d. $382,000
ANS: A
Sales (30,000  $20) $600,000

Variable cost of goods sold (30,000  $6*) (180,000)
(30,000  $0.70) (21,000)
Net income $355,000
*$3 + $2 + $1 = $6

60. Refer to Figure 10-7. Barry Industries’ net income under absorption costing would be
a. $355,000
b. $361,000
c. $379,000
d. $382,000
ANS: B
Sales (30,000  $20) $600,000

Less: Cost of goods sold (30,000  $6.60*) 198,000
[$20,000 + (30,000  $0.70)] 41,000
Net income $361,000
*$3 + $2 + $1 + ($24,000/40,000) = $6.60

Figure 10-8
Burke Company began the year with no inventories of work in process or finished goods. The
company uses an actual cost system, and actual costs for the year were as follows:
Variable costs:
Fixed costs:
Production Sales
January 30,000 30,000
February 30,000 26,000
March 30,000 34,000
Total 90,000 90,000
The company sells its product for $120 per unit. There were no work-in-process inventories at the
end of any month and costs remained stable throughout the year.
61. Refer to Figure 10-8. Burke Company’s unit cost of production for February under variable costing
would be
a. $60
b. $76
c. $82
d. $84
ANS: B

Direct labor 24
Variable overhead 16
Cost per unit $76

62. Refer to Figure 10-8. Burke Company’s unit cost of production for March under absorption costing
would be
a. $60
b. $76
c. $82
d. $84
ANS: C

Direct labor 24
Fixed overhead ($180,000/30,000) 6
Cost per unit $82

63. Refer to Figure 10-8. Burke Company’s income for February under absorption costing would be
a. $780,000
b. $700,000
c. $660,000
d. $372,000
ANS: B
Sales (26,000  $120) $3,120,000

Less cost of goods sold:
Cost of goods manufactured (30,000  $82*) 2,460,000
Goods available for sale $2,460,000
Less: Ending inventory (4,000  $82*) 328,000
Cost of goods sold $2,132,000
Gross profit $ 988,000
[$80,000 + (26,000  $8)] 288,000
*$36 + $24 + $16 + ($180,000/30,000) = $82

64. Refer to Figure 10-8. Burke Company’s income for February under variable costing would be
a. $936,000
b. $756,000
c. $676,000
d. $580,000
ANS: C
Sales (26,000  $120) $3,120,000

Variable cost of goods sold (26,000  $76*) (1,976,000)
(26,000  $8) (208,000)

*$36 + $24 + $16 = $76

65. In the month just ended, Aldebraun Industries produced 40,000 units and sold 37,000 units. There
were 2,000 units in finished goods inventory at the start of the month. Manufacturing costs are
stable from month to month. The fixed overhead rate was $8 per unit. Aldebraun uses absorption
costing. If Aldebraun used variable costing, the difference in net income would have been
a. $24,000
b. $16,000
c. $40,000
d. $8,000
ANS: A
Beginning Inventory 2,000

Ending Inventory 5,000
Change 3,000  $8 = $24,000

66. Laguna Company had a net income of $25,000 using variable costing and a net income of $34,600
using absorption costing. The product cost using variable costing was $10.20 and using absorption
costing was $15. If 10,000 units were sold, how many units were produced during?
a. 2,000
b. 8,000
c. 12,000
d. 4,800
ANS: C
Difference in net income: $34,600 - $25,000 = $9,600

Absorption costing net income exceeds variable costing net income. Therefore, production exceeds
sales
Fixed overhead rate: $15 - $10.20 = $4.80
Increase in inventory: $9,600/$4.80 = 2,000
Number of units produced: 10,000 + 2,000 = 12,000

67. Focus Picture Company sold 5,600 units and produced 6,000 units this past year. Unit variable costs
were $15 (including variable selling costs of $3), and total fixed manufacturing costs totaled
$16,500. Which costing system (variable or absorption) will show a higher net income and by how
much?
a. absorption costing, $1,100
b. variable costing, $1,100
c. absorption costing $17,600
d. cannot be determined from the information given
ANS: A
Production exceeds sales. Therefore, absorption costing has higher income than variable costing.
Fixed overhead rate: $16,500/6,000 = $2.75
Difference in net income: (6,000 - 5,600)  $2.75 = $1,100

68. Stannel Company had 5,200 units in its ending inventory last year. The fixed manufacturing
overhead was $1.75 per unit in beginning inventory, and variable manufacturing cost is $5 per unit.
Stannel's net income was $4,725 higher than variable costing. How many units did the company
have in beginning inventory?
a. 2,500
b. 7,900
c. 5,200
d. 5,000
ANS: A
Change in inventory: $4,725/$1.75 = 2,700

Beginning inventory: 5,200 - 2,700 = 2,500 units

69. Profit center managers would be evaluated based on

a. operating income of the profit center
b. return on investment
c. economic value added
d. all of the above
70. Under variable costing, how can a manager increase net income?
a. increase sales
b. increase sales and decrease costs
c. increase sales and increase production
d. increase sales, decrease costs, and increase production

71. Which of the following could be considered a segment?

a. division
b. product line
c. sales territory
d. all of the above
72. Reporting the profit contributions of activities or other units within an organization is generally
known as
b. segment reporting
c. consolidated financial statements
d. fixed cost analysis
73. Consider the following costs:
1. Variable manufacturing costs

2. Direct fixed costs
3. Common fixed costs
4. Variable selling costs
5. Direct fixed selling costs
6. Common fixed selling costs
Which of the costs would be avoided if a segment were eliminated?

a. 2, 3, 5, 6
b. 1, 2, 4, 5
c. 2, 3, 4, 5
d. 1, 4, 5, 6
OBJ: 2 NAT: AICPA Analytic | IMA Performance measures
74. Which of the following costs would continue to be incurred even if a segment is eliminated?
a. direct fixed expenses
b. variable cost of goods sold
c. common fixed costs
d. variable selling and administrative expenses
75. Merlin Corporation is considering discontinuing its Pellinore Division due to decreasing demand for
Pellinore's main product. Costs associated with the Pellinore Division are as follows:
Variable manufacturing expenses $100,000

Variable selling expenses 20,000
Direct fixed expenses 60,000
Allocated common fixed expenses 72,000
How much fixed cost can be avoided if the Pellinore Division is discontinued?
a. $12,000
b. $60,000
c. $72,000
d. $132,000
ANS: B
Merlin can avoid only the direct fixed cost of $60,000.

NAT: AICPA Analytic | IMA Performance measures
76. Sales less variable costs and direct fixed costs equals
a. contribution margin
b. income before taxes
c. segment margin
d. income after taxes
77. Segment margin is equal to

a. sales less variable costs
b. sales less variable costs and direct fixed costs
c. sales less variable costs and indirect fixed costs
d. sales less cost of goods sold
78. GW Shoe Company has two retail stores, one in Albany and the other in Buffalo. The Albany store
had sales of $100,000, a contribution margin of 35 percent, and a segment margin of $14,000. The
company's two stores have total sales of $250,000, contribution margin of 32 percent, and a total
segment margin of $31,000. The contribution margin for the Buffalo store must have been
a. $65,000
b. $170,000
c. $105,000
d. $45,000
ANS: D
Contribution margin for two stores ($250,000  32%) $80,000

Contribution margin for Albany ($100,000  30%) 35,000
Contribution margin for Buffalo $45,000

Figure 10-9
Stevens Industries has two divisions: the Northwest Division and the Southeast Division.
Information relating to the divisions for the year just ended is as follows:
Northwest Southeast
Units produced and sold 30,000 40,000
Selling price per unit $8 $15
Variable expenses per unit $3 $5
Direct fixed expenses $48,000 $110,000
Common fixed expenses $40,000 $40,000
Common fixed expenses have been allocated equally to each of the two divisions.
79. Refer to Figure 10-9. Stevens' contribution margin for the Northwest Division is
a. $240,000
b. $150,000
c. $102,000
d. $ 90,000
ANS: B
Sales (30,000  $8) $240,000

Less variable expenses (30,000  $3) 90,000
$150,000

80. Refer to Figure 10-9. Stevens' contribution margin for the Southeast Division is
a. $400,000
b. $290,000
c. $250,000
d. $30,000
ANS: A
Sales (40,000  $15) $600,000



81. Refer to Figure 10-9. Stevens' segment margin for the Northwest Division is
a. $150,000
b. $102,000
c. $30,000
d. $110,000
ANS: B
Sales (30,000  $8) $240,000

Less direct fixed expenses 48,000
Segment margin $102,000

82. Refer to Figure 10-9. Stevens' segment margin for the Southeast Division is
a. $250,000
b. $110,000
c. $400,000
d. $290,000
ANS: D
Sales (40,000  $15) $600,000

Segment margin $290,000

83. Beeline Industries produces two products. Information about the products is as follows:
Item 38B Item 40F

The company's fixed costs totaled $40,000, of which $8,000 can be avoided if Item 38B is dropped
and $25,000 can be avoided if Item 40F is dropped.
The segment margin for Item 40F is

a. $3,200
b. $7,000
c. ($2,000)
d. $10,000
ANS: B
Sales (4,000  $20) $80,000

Avoidable fixed costs 25,000
Segment margin $ 7,000

84. Expert Industries produces two products. Information about the products is as follows:
Product E Product Z
The company's fixed costs totaled $60,000, of which $10,000 can be directly traced to Product E and
$35,000 can be directly traced to Product Z.
The effect on the firm's profits if Product Z is dropped would be a

a. $10,000 increase
b. $35,000 increase
c. $35,000 decrease
d. $10,000 decrease
ANS: D
Sales (5,000  $25) $125,000

Less direct fixed costs 35,000
Product margin $ 10,000

Figure 10-10
Tori Industries has two divisions: the Cabinet Division and the Furniture Division. Information
relating to the divisions for the year is as follows:
Cabinet Furniture
Variable expenses per unit 3 5
Fixed expenses that cannot be identified directly with either division but which are necessary for the
operation of the company amounted to $80,000.
85. Refer to Figure 10-10. Tori's contribution margin for the Furniture Division is
a. ($10,000)
b. $10,000
c. $30,000
d. $100,000
ANS: D
Sales (10,000  $15) $150,000


86. Refer to Figure 10-10. Tori's contribution margin for the Cabinet Division is
a. $75,000
b. $5,000
c. $125,000
d. $80,000
ANS: C
Sales (25,000  $8) $200,000


87. Refer to Figure 10-10. Tori's segment margin for the Furniture Division is
a. ($10,000)
b. $10,000
c. $30,000
d. $100,000
ANS: C
Sales (10,000  $15) $150,000


88. Refer to Figure 10-10. Tori's segment margin for the Cabinet Division is
a. $-0-
b. $5,000
c. $85,000
d. $125,000
ANS: C
Sales (25,000  $8) $200,000


89. Refer to Figure 10-10. Calculate Tori’s net income (loss) from both divisions.
a. $225,000
b. $115,000
c. $35,000
d. none of the above
ANS: C
Sales (25,000  $8) + (10,000  $15) $350,000

Less variable expenses (25,000  $3) + (10,000  $5) 125,000
Less fixed expenses ($40,000 + $70,000 + $80,000) 190,000
Net Income $ 35,000

Figure 10-11
Gee Industries produces two products. Information about the products is as follows:
Product X Product Y
Units produced and sold 100 500
The company's fixed costs totaled $80,000, of which $29,000 can be avoided if Product X is
dropped and $45,000 can be avoided if Product Y is dropped.
90. Refer to Figure 10-11. Gee's segment margin for Product Y is

a. $65,000
b. ($20,000)
c. $25,000
d. $20,000
ANS: D
Sales (500  $200) $100,000

Less variable expenses (500  $70) 35,000

91. Refer to Figure 10-11. Gee's segment margin for Product X is

a. $14,000
b. $29,000
c. ($15,000)
d. ($66,000)
ANS: C
Sales (100  $400) $40,000

Segment margin ($15,000)

92. Refer to Figure 10-11. The effect on Gee's profits if Product X is dropped would be a
a. $15,000 increase
b. $15,000 decrease
c. $14,000 decrease
d. $29,000 increase
ANS: A
Sales (100  $400) $ 40,000

Segment margin $(15,000)

93. Refer to Figure 10-11. Calculate Gee Industries’ net income (loss) from the two divisions.
a. $79,000
b. $80,000
c. ($1,000)
d. cannot tell by information provided
ANS: C
Sales (100  $400) + (500  $200) $140,000

Less variable expenses (100  $260) + (500  $70) 61,000
Less fixed costs 80,000
Segment margin $(1,000)

94. Investment center managers would be evaluated based on

a. operating income of the profit center
b. return on investment
c. economic value added
d. all of the above
95. Operating income is defined as

a. income after interest and taxes
b. income after other revenues and expenses
c. income before interest and taxes
d. income before other revenues and expenses

96. Average operating assets are calculated as

a. (Beginning net book value + Ending net book value)/2
b. (Beginning net book value - Ending net book value)/2
c. (Beginning fair market value + Ending fair market value)/2
d. (Beginning fair market value - Ending fair market value)/2
97. Assuming all other things are equal, a company's ROI would decrease when
a. operating expenses increase
b. operating income increases
c. average operating assets decrease
d. operating expenses decrease
98. The Morris Agency reports the following information from its income statement for the current year:
Current Year
Sales revenue $1,000,000
Cost of goods sold 500,000
Depreciation expense 30,000
Salary expense 50,000
Other operating expenses 150,000
Interest expense 4,000
Tax expense 81,000
Calculate Morris Agency’s operating income.

a. $185,000
b. $266,000
c. $270,000
d. $300,000
ANS: C
Operating income is earnings before interest and taxes.

Sales revenue $1,000,000 - Cost of goods sold $500,000 - Depreciation expense $30,000 - Salary
Expense $50,000 - Other operating expenses $150,000 = $270,000

Figure 10-12
The following information has been extracted from the accounting records of Trinity Corporation:
Prior Year Current Year

Operating assets $1,800,000 $2,000,000
Operating liabilities 1,200,000 1,300,000
Operating income after taxes 40,000 52,000
Taxes 27,000 35,000
99. Refer to Figure 10-12. Trinity's average operating assets are

a. $1,900,000
b. $1,250,000
c. $650,000
d. $3,227,000
ANS: A
($1,800,000 + $2,000,000)/2 = $1,900,000

100. Refer to Figure 10-12. Trinity's operating income for the current year is
a. $57,000
b. $87,000
c. $17,000
d. $46,000
ANS: B
$52,000 + $35,000 = $87,000

101. Return on investment (ROI) is calculated as

a. Operating income/Average operating assets
b. (Operating income/Sales)  (Sales/Average operating assets)
c. Operating income margin  Operating asset turnover
d. all of the above
ANS: D DIF: 2 REF: p. 431-432
102. Assuming that sales and operating assets remain the same, a company's ROI will
a. decrease if operating income increases
b. decrease if operating expenses decrease
c. increase if margin decreases
d. increase if margin increases

ANS: D DIF: 3 REF: p. 431-432
103. Return on investment can be broken into two components:

a. profit margin and asset turnover
b. contribution margin and asset turnover
c. segment margin and asset turnover
d. profit margin and inventory turnover
104. One possible formula to calculate ROI is

a. Margin/Turnover
b. Margin  Turnover
c. Turnover/Margin
d. None of the formulas above show how to calculate ROI.
105. Margin is calculated in an ROI analysis. Which of the following is used?

a. net income after taxes in the numerator
b. investment in the denominator
c. sales in the denominator
d. average assets in the denominator
106. Which of the following statements is true concerning turnover?

a. Turnover is the ratio of sales to average operating assets.
b. Turnover measures how well a company is controlling expenses.
c. Turnover is calculated by dividing sales by operating income.
d. Turnover is calculated by dividing operating income by sales.
107. A company has provided the following information concerning its assets.
Asset Account 2005 2006

Cash $4,000 $6,000
Accounts receivable 20,000 40,000
Undeveloped land 80,000 80,000
Buildings, net of depreciation 140,000 180,000
Calculate the company’s average operating assets for 2006.

a. $226,000
b. $244,000
c. $195,000
d. $275,000
ANS: C
Include all assets except undeveloped land.

Cash: $5,000 +
Accounts Receivable $30,000 +
Buildings, net of depreciation $160,000.

108. Halperin Company's ROI for the current year is greater than it was in the prior year. Information
related to the computation of ROI is as follows:

Margin 6.0 5.0
Turnover 2.5 3.2
The increase in Halperin's ROI can be attributed to the

a. improved turnover
b. improved margin
c. decline in turnover
d. decline in margin
Figure 10-13
The following results for the year are for the Clark Division of First Enterprises:
Sales $150,000
Variable costs 50,000
Fixed expenses 40,000
Segment income $ 60,000
Clark's average operating assets are $300,000. Clark's minimum required rate of return is 15 percent.
109. Refer to Figure 10-13. Profit margin for the Clark Division is
a. 26.7%
b. 33.3%
c. 40.0%
d. 60.0%
ANS: C
$60,000/$150,000 = 40.0%

110. Refer to Figure 10-13. Asset turnover for the Clark Division is
a. 66.7%
b. 50.0%
c. 40.0%
d. 20.0%
ANS: B
$150,000/$300,000 = 50.0%

111. Refer to Figure 10-13. Return on investment for the Clark Division is
a. 50.0%
b. 40.0%
c. 33.3%
d. 20.0%
ANS: D
$60,000/$300,000 = 20.0%

Figure 10-14
The following information was reported on two projects of Dartmouth, Inc.:

Sales $30,000,000 $30,000,000
Operating income 2,160,000 2,100,000
Average operating assets 12,000,000 12,000,000
112. Refer to Figure 10-14. Dartmouth, Inc.'s margin for the prior year was
a. 18.0%
b. 7.2%
c. 4.0%
d. 2.5%
ANS: B
Margin = Operating income/Sales

= $2,160,000/$30,000,000
= 7.2%

113. Refer to Figure 10-14. Dartmouth, Inc.'s turnover for the prior year was
a. 5.6
b. 13.9
c. 4
d. 2.5
ANS: D
Turnover = Sales/Average operating assets

= $30,000,000/$12,000,000
= 2.5

114. Refer to Figure 10-14. Dartmouth, Inc.'s margin for the current year is
a. 7.0%
b. 7.2%
c. 4.0%
d. 2.5%
ANS: A
Margin = Operating income/Sales

= $2,100,000/$30,000,000
= 7.0%

115. Refer to Figure 10-14. Dartmouth, Inc.'s turnover for the current year is
a. 5.6
b. 13.9
c. 4
d. 2.5
ANS: D
Turnover = Sales/Average operating assets

= $30,000,000/$12,000,000
= 2.5

Figure 10-15
Chess Company provided the following information from its 2006 income statement.
Sales revenue $800,000
Selling expenses 100,000
Administrative expenses 50,000
Other operating expenses 50,000
Interest expense 20,000
Tax expense 63,000
In addition, the company reported the following asset balances for fiscal years ended December 31,
2005 and 2006:
Assets 2005 2006

Cash $50,000 $55,000
Accounts receivable 170,000 185,000
Inventory 100,000 120,000
Investment in Checkers Company 80,000 85,000
Undeveloped land 170,000 170,000
Buildings, net of depreciation 400,000 450,000
116. Refer to Figure 10-15. Calculate Chess Company’s operating income.

a. $117,000
b. $180,000
c. $200,000
d. $400,000
ANS: C
Sales revenue $800,000 - Cost of goods sold $400,000 - Selling expenses $100,000 - Administrative
expense $50,000 - Other operating expenses $50,000 = $200,000. Operating income is equal to
income before interest and taxes.

117. Refer to Figure 10-15. Calculate Chess Company’s margin.

a. 15%
b. 17%
c. 22.5%
d. 25%
ANS: D
Operating income/Sales revenue

$200,000/$800,000 = 25%

118. Refer to Figure 10-15. Calculate Chess Company’s average operating assets.
a. $765,000
b. $847,500
c. $970,000
d. $1,065,000
ANS: A
Average operating assets include assets held for productive use. Omit undeveloped land and
investment in Checkers Company.
Cash $52,500 + Accounts receivable $177,500 + Inventory $110,000 + Buildings, net $425,000 =
$765,000.

119. Refer to Figure 10-15. Calculate Chess Company’s turnover ratio.

a. .75
b. .80
c. .90
d. 1.05
ANS: D
Sales/Average operating assets

$800,000/$765,000 = 1.05

120. Refer to Figure 10-15. Calculate Chess Company’s return on investment.

a. 18.75%
b. 20%
c. 22.5%
d. 26%
ANS: D
$200,000/$765,000 = .2614 or 26%

121. The operating margin for the Randall Company last year was 8 percent. If total sales are $1,250,000
and average operating assets are $400,000, ROI was
a. 25%
b. 20%
c. 16%
d. 10%
ANS: A
ROI = .08  ($1,250,000/$400,000) = 25%

122. If Dixie Company has sales of $1,200,000 and operating assets of $600,000, what operating margin
will it have to earn to generate an ROI of 20 percent?
a. 5%
b. 7.5%
c. 10%
d. 20%
ANS: C
Turnover = $1,200,000/$600,000 = 2
Operating margin = 20%/2 = 10%

123. The sales in the Components Division last year totaled $600,000, and its ROI was 15 percent. If the
company's operating margin was 5 percent, then its average operating assets must have been
a. $4,000,000
b. $200,000
c. $$60,000
d. It cannot be determined from the information given.
ANS: B
ROI = Margin  Turnover

.15 = .05  Turnover
Turnover = 3
Operating assets = $600,000/3 = $200,000

124. GreenWorld Company wants to increase its ROI from 20 percent to 25 percent in the current year.
The company cannot increase operating income and sales from the previous year's levels of $50,000
and $1,200,000, respectively. To increase ROI, GreenWorld should
a. make additional investments of $25,000
b. sell obsolete inventory for $10,000 and use the proceeds to pay off debts
c. sell obsolete inventory for $50,000 and use the proceeds to pay off debts
d. GreenWorld can't increase ROI.
ANS: C
ROI of 20%: $50,000/.20 = $200,000 in operating assets

ROI of 25%: $50,000/.25 = $250,000 in operating assets
Decrease in operating assets needed: $250,000 - $200,000 = $50,000

125. The following information was extracted from the accounting records of Florissant Valley Motors:

Margin 6.0 5.0
Turnover 2.5 3.2
Florissant Valley's ROI for the current year is

a. greater than the prior year due to the change in turnover
b. greater than the prior year due to the change in margin
c. less than the prior year due to the change in turnover
d. less than the prior year due to the change in margin
ANS: A
Prior ROI = 6.0  2.5 = 15

Current ROI = 5.0  3.2 = 16

126. The following information is provided:
Operating Average Operating

Project Income Assets
A $44,000 $400,000
B 70,000 800,000
C 30,000 600,000
Assume the division's current ROI is 10 percent and the firm's minimum required rate of return is 8
percent.
If you were the division manager and you were evaluated based on ROI, which projects would you
accept?
a. Projects A, B, and C
b. Projects A and C
c. Projects A and B
d. Project A only
ANS: D
Project A: ROI = $44,000/$400,000 = 11.0%

Project B: ROI = $70,000/$800,000 = 8.75%
Project C: ROI = $30,000/$600,000 = 5.0%
The division manager would want to accept only the projects with a ROI that exceeds the division's
current ROI of 10 percent; therefore, only Project A would be accepted.
PTS: 1 DIF: 2 REF: p. 433-435 OBJ: 3

Figure 10-16
The following information is provided by the Janis Division of the Joplin Company.
Project Income Investment

A $40,000 $800,000
B 44,000 400,000
C 46,875 625,000
Assume the division's current ROI is 10 percent and the firm's minimum required rate of return is 6
percent.
127. Refer to Figure 10-16. If you were the division manager and you were evaluated based on ROI,
which projects would you accept?
b. Projects A and B
c. Projects B and C
d. Project B only
ANS: D
Project A: ROI = $40,000/$800,000 = 5.0%

Project B: ROI = $44,000/$400,000 = 11.0%
Project C: ROI = $46,875/$625,000 = 7.5%
The division manager would want to accept only the projects with a ROI that exceeds the division's
current ROI of 10 percent; therefore, only Project B would be accepted.
PTS: 1 DIF: 2 REF: p. 433-435 OBJ: 3

128. Refer to Figure 10-16. If you were the president of the firm, which projects would you want the
division manager to accept?
b. Projects B and C
c. Project A only
d. Project B only
ANS: B
Project A: ROI = $40,000/$800,000 = 5.0%

Project B: ROI = $44,000/$400,000 = 11.0%
Project C: ROI = $46,875/$625,000 = 7.5%
Accept Projects B and C.
PTS: 1 DIF: 2 REF: p. 433-435 OBJ: 3

129. A disadvantage of ROI is

a. it leads to goal incongruence
b. its short-run focus
c. its focus on divisional profit rather than overall profit of the firm
d. all of the above
ANS: D DIF: 3 REF: p. 435-436
130. The difference between the operating income and the minimum return on the company’s operating
assets is known as
a. segment margin
b. contribution margin
c. return on investment
d. residual income
131. The Battery Division of an ato parts store had net income of $560,000, a net asset base of
$4,000,000, and a required rate of return of 12 percent. Sales for the period totaled $3,000,000. The
residual income for the period is
a. $480,000
b. 360,000
c. 120,000
d. 80,000
ANS: D
$ 560,000 - ($4,000,000 x .12) = $80,000

132. The Bara Division had the follwoing information
operating assets $400,00

operating income $50,000
minimum return 15%
margin 20%
What is the residual income for the Bara Division?

a. $60,000
b. 48,000
c. 7,500
d. (10,000)
ANS: D
$50,000 - ($400,000  0.15) = $ (10,000)

133. Economic value added (EVA) is

a. before-tax operating income minus the total annual cost of capital
b. after-tax operating income minus the total annual cost of capital
c. after-tax operating income minus the before-tax cost of debt
134. Economic value added (EVA) is

a. a dollar amount
b. a percentage rate of return
c. negative if the company is creating capital
135. A negative EVA means

a. the company is destroying capital
b. the company is increasing capital
c. ROI is negative
d. both a and c
136. Assuming that the weighted average cost of capital remains the same, EVA will increase by
a. investing in a project wherein after-tax operating income is greater than the cost of capital
b. investing in a project wherein after-tax operating income is less than the cost of capital
c. increasing operating expenses
d. decreasing after-tax operating income
137. Dizzy Company's Asian Division employed capital of $250,000 last year. If the weighted average
cost of capital is 15 percent and if last year's after-tax income was $50,000, then EVA for the Asian
Division last year was
a. $2,500
b. $37,500
c. $12,500
d. $7,500
ANS: C
EVA = $50,000 - ($250,000  .15) = $12,500

Figure 10-17
The following results for the year pertain to the Maddox Division of Ryan Corporation:
Sales $640,000
Variable expenses 160,000
The weighted average cost of capital is 12 percent. The firm's minimum required rate of return is 14
percent. Taxes for the firm are 40 percent.
138. Refer to Figure 10-17. If average operating assets are $1,000,000, return on investment for the
Maddox Division is
a. 48%
b. 34%
c. 18%
d. 16%
ANS: C
($640,000 - $160,000 - $300,000)/$1,000,000 = 18%

139. Refer to Figure 10-17. If the total capital employed by the Maddox Division is $800,000, what is the
economic value added (EVA)?
a. $12,000
b. $96,000
c. $108,000
d. $180,000
ANS: A
[($640,000 - $160,000 - $300,000)  (1 - .4)] - [(.12)  ($800,000)] = $12,000

Figure 10-18
The following results for the year pertain to the Northern Division of Garvey Corporation:
Sales $400,000
Taxes 60,000
Operating income after taxes 160,000
140. Refer to Figure 10-18. Northern's total capital employed is $1,200,000, and its weighted average
cost of capital is 12 percent. Economic value added for the Northern Division is
a. $240,000
b. $144,000
c. ($104,000)
d. $16,000
ANS: D
$160,000 - ($1,200,000  12%) = $16,000

141. Refer to Figure 10-18. If Northern's average operating assets are $1,200,000 and its minimum
required rate of return is 12 percent, what is the Northern Division's return on investment?
a. 33.3%
b. 18.3%
c. 13.3%
d. 12.0%
ANS: B
($160,000 + $60,000)/$1,200,000 = 18.3%

142. The EVA of Credit Financial's African Division was ($15,000) last year. If after-tax income is
$60,000 and the capital employed totaled $500,000, what is the weighted average cost of capital?
a. 15%
b. 3%
c. 12%
d. 9%
ANS: A
EVA = After-tax operating income - (WACC  Total capital employed)

($15,000) = $60,000 - (WACC  $500,000)
WACC  $500,000 = $60,000 + $15,000
WACC = $75,000/$500,000 = 15%

143. The output of one division that can be used as input in another division is called a
a. work-in-process product
b. transferred (good) product
c. final product
d. finished goods product
144. The actual transfer price that a company sets

a. nets out for the company as a whole
b. can affect divisional behavior
c. can affect income taxes
d. All of the above are correct.
ANS: D DIF: 2 REF: p. 440-441
145. The opportunity cost approach to setting a transfer price would set the minimum transfer price as
a. the opportunity cost of the firm as a whole
b. the opportunity cost of the selling division
c. the opportunity cost of the buying division

146. The opportunity cost approach to setting a transfer price would set the maximum transfer price as
a. the opportunity cost of the firm as a whole
b. the opportunity cost of the selling division
c. the opportunity cost of the buying division
147. Which of the following statements is true regarding the opportunity cost approach?
a. The opportunity cost approach identifies the maximum price a selling division would be
willing to accept.
b. The opportunity cost approach identifies the minimum price that the buying division would
be willing to pay.
c. The opportunity cost approach identifies the minimum price a selling division would be
willing to accept.
d. The opportunity cost approach identifies both the minimum and maximum price a selling
division would be willing to accept.
Figure 10-19
The Adam Division produces a component that is used by the West Division. The cost of
manufacturing the component is as follows:

Direct labor 8
Fixed overheada 12
Total cost $60
a
Based on a practical volume of 250,000 components
Other costs incurred by the Adam Division are as follows:
Fixed selling and administrative $1,200,000

Variable selling $4 per unit
The component usually sells for $90 in the external market. The Adam Division is capable of
producing 250,000 components per year; however, only 200,000 components are expected to be sold
next year. The variable selling expenses are avoidable if the component is sold internally.
The West Division has been buying the same component from an external supplier for $80 each. The
West Division expects to use 40,000 units of the component next year. The manager of the West
Division has offered to buy 40,000 units from the Adam Division for $56 each.
148. Refer to Figure 10-19. The minimum transfer price that the Adam Division would accept is
a. $60
b. $50
c. $48
d. $30
ANS: C
$30 + $8 + $10 = $48

149. Refer to Figure 10-19. The maximum transfer price that the West Division would be willing to pay is
a. $80
b. $60
c. $48
d. $38
ANS: A
The market price of $80

150. Refer to Figure 10-19. The effect on firmwide income if 40,000 components are transferred
internally at $56 each instead of purchased from an external supplier at $80 per unit would be a
a. $1,920,000 decrease
b. $1,280,000 increase
c. $960,000 decrease
d. $960,000 increase
ANS: B
($80  40,000) - ($48  40,000) = $1,280,000 increase

Figure 10-20
The Simonds Division produces a component that is used by the Allen Division. The cost of
manufacturing the component is as follows:

Direct labor 6
Variable overhead 4
Fixed overheada 5
Total cost $25

a
Based on a practical volume of 400,000 components
Other costs incurred by the Simonds Division are as follows:
Fixed selling and administrative $400,000

Variable selling $1.50 per unit
The component usually sells for $35 in the external market. The Simonds Division is capable of
producing 500,000 components per year; however, only 400,000 components are expected to be sold
next year. The variable selling expenses are avoidable if the component is sold internally.
The Allen Division has been buying the same component from an external supplier for $34 each.
The Allen Division expects to use 50,000 units of the component next year. The manager of the
Allen Division has offered to buy 50,000 units from the Simonds Division for $22.50 each.
151. Refer to Figure 10-20. The minimum transfer price that the Simonds Division would accept is
a. $25
b. $21
c. $20
d. $16
ANS: C
$10 + $6 + $4 = $20

152. Refer to Figure 10-20. The maximum transfer price that the Allen Division would be willing to pay
is
a. $20.00
b. $25.00
c. $26.50
d. $34.00
ANS: D
The market price of $34.00

153. Refer to Figure 10-20. The effect on firmwide income if 50,000 components are transferred
internally at $22.50 each instead of purchased from an external supplier at $34 per unit would be a
a. $700,000 increase
b. $700,000 decrease
c. $575,000 increase
d. $575,000 decrease
ANS: A
[$34 - ($10 + $6 + $4)]  50,000 = $700,000 increase

Figure 10-21
Allied Industries has two divisions: the Bradley Division and the Rommel Division. Information
about the component that the Bradley Division produces is as follows:
Sales $180 per unit

Variable manufacturing costs $80 per unit
Fixed manufacturing overhead $50 per unit
Expected sales in units 10,000 units
The Bradley Division can produce up to 12,000 components per year. The Rommel Division needs
800 units of the component for a product it manufactures.
154. Refer to Figure 10-21. The minimum transfer price that the Bradley Division would be willing to
accept is
a. $50
b. $80
c. $130
d. $180
ANS: B
The Bradley Division's variable manufacturing cost of $80

155. Refer to Figure 10-21. The maximum transfer price that the Rommel Division would be willing to
pay is
a. $50
b. $80
c. $130
d. $180
ANS: D

156. Refer to Figure 10-21. If the selling division did NOT have excess capacity, the minimum transfer
price the selling division would be willing to accept would be
a. $50
b. $80
c. $130
d. $180
ANS: D

Figure 10-22
Universe Industries has two divisions: the Haley Division and the Comet Division. Information
about a component that the Haley Division produces is as follows:
Sales $120 per unit

The Haley Division can produce up to 5,000 components per year. The Comet Division needs 200
units of the component for a product it manufactures.
157. Refer to Figure 10-22. The minimum transfer price that the Haley Division would be willing to
accept is
a. $120
b. $70
c. $50
d. $30
ANS: D
Haley's variable manufacturing costs of $30

158. Refer to Figure 10-22. The maximum transfer price that the Comet Division would be willing to pay
is
a. $120
b. $70
c. $50
d. $30
ANS: A

159. Transfer prices are set using which of the following?

a. market prices
b. negotiated price
c. cost plus
d. all of the above are correct
160. If it is available, the correct transfer price is

a. the market price from a perfectly competitive market
b. the negotiated transfer price
c. the variable production costs of the firm
PROBLEM
1. Griffiths Industries began operations on January 1. The company sells a single product for $75 per
unit. During the year, 9,000 units were produced and 8,600 units were sold. There was no work-in-
The company uses an actual cost system for product costing, and actual costs for the year were as
follows:
Required:
a. Determine the cost per unit using absorption costing.

b. Determine the cost per unit using variable costing.
c. Determine the finished goods inventory cost at December 31 using absorption costing.
d. Determine the finished goods inventory cost at December 31 using variable costing.
e. Determine absorption costing income.
f. Determine variable costing income.
ANS:
a. $53
Cost per unit using absorption costing:

Direct labor 16.00
Variable manufacturing overhead 5.00
Fixed manufacturing overhead
($90,000/9,000 units) 10.00
Cost per unit $53.00
b. $43
Cost per unit using variable costing:

Direct labor 16.00
c. $21,200 (9,000 - 8,600)  $53

d. $17,200 (9,000 - 8,600)  $43
e. $113,400
Absorption Costing
Sales ($75  8,600) $645,000
Cost of goods sold:
Cost of goods manufactured
($53  9,000) 477,000
Less: Ending inventory
($53  400) 21,200 455,800
Fixed $ 50,000
Variable ($3  8,600) 25,800
Total selling and administrative expenses 75,800
Net income $113,400
f. $109,400
Variable Costing
Sales ($75  8,600) $645,000
Cost of goods sold:
($43  9,000) 387,000
($43  400) 17,200 $369,800
Variable selling expenses
($3  8,600) 25,800
Total variable expenses 395,600
Manufacturing overhead $ 90,000
Selling and administrative 50,000
Total fixed expenses 140,000
Net income $109,400
PTS: 1 DIF: 3 REF: p. 423-427 OBJ: 2

2. Hopkins, Inc., began operations on January 1. The company sells a single product for $100 per unit.
During the year, 12,000 units were produced and 9,000 units were sold. There was no work-in-
The company uses an actual cost system for product costing, and actual costs for the year were as
follows:

Required:
a. Determine the cost per unit using absorption costing.
b. Determine the cost per unit using variable costing.
c. Determine the finished goods inventory cost on December 31 using absorption costing.
d. Determine the finished goods inventory cost on December 31 using variable costing.
e. Determine absorption costing income.

f. Determine variable costing income.
ANS:
a. $76
Cost per unit using absorption costing:

Direct labor 30.00
($192,000/12,000 units) 16.00
b. $60
Cost per unit using variable costing:

Direct labor 30.00
c. $228,000 (12,000 - 9,000)  $76

d. $180,000 (12,000 - 9,000)  $60
e. $140,000
Absorption Costing
Sales ($100  9,000) $900,000

Cost of goods sold:
($76  12,000) 912,000
($76  3,000) 228,000 684,000
Fixed $ 40,000
Variable ($4  9,000) 36,000
Total selling and administrative expenses 76,000
Net income $140,000
f. $92,000
Variable Costing
Sales ($100  9,000) $900,000

Cost of goods sold:

($60  12,000) 720,000
($60  3,000) 180,000 $540,000
($4  9,000) 36,000
Manufacturing overhead $192,000
Selling and administrative 40,000
Net income $ 92,000
PTS: 1 DIF: 3 REF: p. 423-427 OBJ: 1

3. Flick Manufacturing uses an absorption costing system. The company's income statement for the
current year is as follows:
FLICK MANUFACTURING COMPANY
INCOME STATEMENT
FOR THE CURRENT YEAR ENDING DECEMBER 31
Sales (19,000 units at $33) $627,000

Cost of goods sold:
Finished goods inventory, January 1 $ -0-
(20,000 units at $15) 300,000
Finished goods inventory, December 31
(1,000 units at $15) 15,000
Less operating expenses:

Selling $ 96,000
Administrative 37,500
Total selling and administrative 133,500
Net income $208,500
The following additional information is available:
Variable costs per unit:

Direct labor 6.00
Manufacturing overhead 2.25
Selling expense 1.50
Fixed costs for the period:

Selling 67,500
Required:
a. When absorption costing was used, how much fixed manufacturing overhead was
deferred in finished goods inventory?
b. Recast the income statement using variable costing.
c. Reconcile the net income in the variable costing income statement with the net income
shown in the absorption costing income statement.
ANS:
a. $3,000
Fixed overhead rate per unit = $60,000/20,000 units

= $3 per unit
FOH deferred in finished goods inventory = 1,000 units  $3 per unit
= $3,000
b.
Variable Costing
Sales ($33  19,000) $627,000

Cost of goods sold:
($12  20,000) 240,000
($12  1,000) 12,000 $228,000
($1.50  19,000) 28,500
Manufacturing overhead $ 60,000
Selling 67,500
Total fixed expense 165,000
Net income $205,500
c. Difference in absorption costing variable costing

Income = Income - Income
= $208,500 - $205,500
= $3,000
Difference in Change in Inventory Fixed Manufacturing

Income = in Units  Cost per Unit
= 1,000  $3
= $3,000
PTS: 1 DIF: 3 REF: p. 423-427 OBJ: 1

4. Ivy, Inc., produces a single product that sells for $60 per unit. There were no inventories of work in
process or finished goods. Costs for the year were as follows:
Variable costs:
Fixed costs:
Production Sales
January 4,000 4,000
February 4,000 3,500
March 4,000 4,500
Total 12,000 12,000
The company uses an actual cost system. There were no work-in-process inventories at the end of
any month, and the company uses FIFO costing.
Required:
a. Determine the unit cost of production under variable costing for each of the three months.
b. Determine the unit cost of production under absorption costing for each of the three
months.
c. Determine income under variable costing for each of the three months.
d. Determine income under absorption costing for each of the three months.
ANS:
a. January February March
Direct materials $8 $8 $8
Direct labor 12 12 12
Variable manufacturing overhead 5 5 5
Total manufacturing cost per unit $25 $25 $25
b. January February March

Direct materials $8 $8 $8
Direct labor 12 12 12
Variable manufacturing overhead 5 5 5
($36,000/4,000) 9 9 9
Total manufacturing cost per unit $34 $34 $34
c. January, $77,000; February, $61,000; March, $93,000
variable costing Income Statements
January February March Total

Sales $240,000 $210,000 $270,000 $720,000
Beginning inventory $ -0- $ -0- $ 12,500 $ -0-
($25  4,000) 100,000 100,000 100,000 300,000
Goods available for sale $100,000 $100,000 $112,500 $300,000
Less: Ending inventory -0- 12,500 -0- -0-
Cost of goods sold $100,000 $ 87,500 $112,500 $300,000
Selling expenses ($3 per unit) 12,000 10,500 13,500 36,000
Total variable expenses $112,000 $ 98,000 $126,000 $336,000
Contribution margin $128,000 $112,000 $144,000 $384,000
Manufacturing $ 36,000 $ 36,000 $ 36,000 $108,000
Selling and administrative 15,000 15,000 15,000 45,000
Total fixed expenses $ 51,000 $ 51,000 $ 51,000 $153,000
Net income $ 77,000 $ 61,000 $ 93,000 $231,000
d. January, $77,000; February, $65,500; March, $88,500
absorption costing Income Statements
January February March Total

Sales $240,000 $210,000 $270,000 $720,000
Less: Cost of goods sold
Beginning inventory $ -0- $ -0- $ 17,000 $ -0-
($34  4,000) 136,000 136,000 136,000 408,000
Goods available for sale $136,000 $136,000 $153,000 $408,000
Less: Ending inventory -0- 17,000 -0- -0-
Cost of goods sold $136,000 $119,000 $153,000 $408,000
Gross margin $104,000 $ 91,000 $117,000 $312,000
Less: Selling and admin.
expenses 27,000 25,500 28,500 81,000
Net income $ 77,000 $ 65,500 $ 88,500 $231,000
PTS: 1 DIF: 3 REF: p. 423-427 OBJ: 2

5. Actual costs for Nesbit, Inc., for the past year were as follows:
Direct materials (2 pounds at $2.50) $5 per unit

Direct labor (1 hours at $10) $10 per unit
Variable selling and administrative $3 per unit
Fixed selling and administrative $80,000
During the year, 42,000 units were produced and 37,000 units were sold. The product sells for $50
per unit. There were no beginning inventories. During the year, 42,000 direct labor hours were
worked. Actual overhead for the year totaled $386,000, of which $312,000 was fixed.
Budgeted fixed overhead was $315,000, and the expected activity level was 45,000 direct labor
hours. Variable overhead was budgeted at 1 direct labor hour per unit and $2 per direct labor hour.
The company uses a normal cost system, and overhead variances are closed to cost of goods sold.
Required:
a. Determine the unit cost using variable costing.
b. Determine the unit cost using absorption costing.
c. Using variable costing, determine the following:
Contribution margin
variable costing income
d. Using absorption costing, determine the following:
Gross margin
absorption costing income
Reconcile any difference between variable costing income and absorption costing income.
ANS:
a. Direct materials $5
Direct labor 10
Variable overhead 2
Cost per unit $17
b. Direct materials $5
Direct labor 10
Variable overhead 2
Fixed overhead (1  $7*) 7
Cost per unit $24
*$315,000/45,000 = $7 per direct labor hour
c. Contribution margin = $1,110,000

variable costing income = $718,000
Sales (37,000  $50) $1,850,000

Variable cost of goods sold (37,000  $17) (629,000)
Variable selling expenses (37,000  $3) (111,000)
Contribution margin $1,110,000
Fixed factory overhead $315,000
Less: Budget variance* 3,000
$312,000
Selling and administrative expenses 80,000 392,000
*Budgeted fixed overhead $315,000

Actual fixed overhead 312,000
Fixed budget variance $ 3,000
d. Gross margin = $944,000

absorption costing income = $753,000
Sales (37,000  $50) $1,850,000

Cost of goods sold (37,000  $24) $888,000
Add: Underapplied overhead* 18,000 906,000
Gross margin $ 944,000
Selling and administrative expenses
($80,000 + ($3  37,000)) 191,000
*Applied fixed overhead

(42,000 hours worked  $7 per DLH) $294,000
Actual fixed overhead 312,000
Underapplied fixed overhead $ 18,000
Reconciliation: $753,000 - $718,000= $7  (42,000 - 37,000)

$35,000= $35,000
PTS: 1 DIF: 3 REF: p. 423-427 OBJ: 2

6. Fagan Manufacturing uses an absorption costing system. The company's income statement for the
current year is as follows:
FAGAN MANUFACTURING COMPANY
INCOME STATEMENT
FOR THE CURRENT YEAR ENDING DECEMBER 31
Sales (20,000 units at $45) $900,000

Cost of goods sold:
Finished goods inventory, January 1 $ -0-

(25,000 units at $32.50) 812,500
Finished goods inventory, December 31
(5,000 units at $32.50) 162,500
Less operating expenses:

Selling [(20,000  $5.50) + $25,000] $135,000
Total selling and administrative 165,000
Net income $ 85,000
The following additional information is available:
Variable costs per unit:

Direct materials $ 9.50
Direct labor 12.00
Manufacturing overhead 4.00
Selling expenses 5.50
Fixed costs for the period:

Selling 25,000
Required:
a. When absorption costing was used, how much fixed manufacturing overhead was
deferred in finished goods inventory?
b. Recast the income statement using variable costing.
c. Reconcile the net income on the variable costing income statement with the net income
shown on the absorption costing income statement.
ANS:
a. $35,000
Fixed overhead rate per unit = $175,000/25,000 units

= $7 per unit
FOH deferred in finished goods inventory = 5,000 units  $7 per unit
= $35,000
b. Variable Costing
Sales ($45  20,000) $900,000

Less variable expenses
Cost of goods sold:

($25.50  25,000) 637,500
($25.50  5,000) 127,500 $510,000
($5.50  20,000) 110,000
Selling 25,000
Net income $ 50,000
c. Difference in absorption costing variable costing

Income = Income - Income
= $85,000 - $50,000
= $35,000
Difference in Change in Inventory Fixed Manufacturing

Income = in Units  Cost per Unit
= 5,000  $7
= $35,000
PTS: 1 DIF: 3 REF: p. 423-427 OBJ: 2

7. Russett Industries produces three products: Product A, Product N, and Product G. Information for
the products for the year is as follows:
Product A Product N Product G
Units produced and sold 10,000 8,000 3,000
Selling price per unit $16 $20 $25
Variable expenses per unit $10 $15 $23
The company's fixed costs totaled $75,000, of which $30,000 can be avoided if Product A is
dropped, $25,000 can be avoided if Product N is dropped, and $8,000 can be avoided if Product G is
dropped.
Required:
a. Determine the segment margin for each product.
b. What would be the effect on the firm's profit if Product A were dropped? Indicate
whether this is an increase or decrease.
c. What would be the effect on the firm's profit if Product N were dropped? Indicate
d. What would be the effect on the firm's profit if Product G were dropped? Indicate
e. Which, if any, of the products should the firm drop in order to increase profits?
ANS:
a. Product A Product N Product G Total
Sales $160,000 $160,000 $75,000 $395,000
Less: Variable expenses 100,000 120,000 69,000 289,000
Contribution margin $ 60,000 $ 40,000 $ 6,000 $106,000
Less: Direct fixed expenses 30,000 25,000 8,000 63,000
Segment margin $ 30,000 $ 15,000 $(2,000) $ 43,000
Less: Common fixed expenses 12,000
Net income $ 31,000
b. $30,000 decrease
c. $15,000 decrease
d. $2,000 increase
e. Based on quantitative factors, Product G should be dropped in order to increase profits by
$2,000.
PTS: 1 DIF: 3 REF: p. 429-431 OBJ: 2

8. Austin Industries has two divisions: Dallas Division and Houston Division. Information relating to
the divisions for the current year is as follows:
Dallas Houston
Fixed expenses that cannot be identified directly with either division but which are necessary for the
operation of the company amounted to $40,000.
Required:
Prepare income statements segmented by division.
ANS:
AUSTIN INDUSTRIES
SEGMENTED INCOME STATEMENTS
FOR THE CURRENT YEAR ENDED DECEMBER 31
Dallas Houston Total for

Division Division Company
Sales $400,000 $375,000 $775,000
Less: Variable expenses 240,000 225,000 465,000
Contribution margin $160,000 $150,000 $310,000
Less: Direct fixed expenses 100,000 140,000 240,000

Segment margin $ 60,000 $ 10,000 $ 70,000
Net income $ 30,000
PTS: 1 DIF: 3 REF: p. 429-431 OBJ: 2

9. Coral Industries produces three products: Product X, Product Y, and Product Z. Information for the
products for the year is as follows:
Product X Product Y Product Z
Units produced and sold 5,000 9,000 12,000
Selling price per unit $22 $14 $25
Variable expenses per unit $16 $10 $19
The company's fixed costs totaled $106,000, of which $20,000 can be avoided if Product X is
dropped, $40,000 can be avoided if Product Y is dropped, and $22,000 can be avoided if Product Z
is dropped.
Required:
Prepare a memorandum with your recommendation as to whether any of the products should be
dropped. In your supporting calculations, include a segmented income statement using variable
costing.
ANS:
The memorandum should contain a recommendation to drop Product Y if the decision is based on
quantitative factors. Coral Industries can increase profits by $4,000 if it drops Product Y.
Supporting calculations should include the following segmented income statement:
Product X Product Y Product Z Total

Sales $110,000 $126,000 $300,000 $536,000
Less: Variable expenses 80,000 90,000 228,000 398,000
Contribution margin $ 30,000 $ 36,000 $ 72,000 $138,000
Less: Direct fixed expenses 20,000 40,000 22,000 82,000
Product margin $ 10,000 $ (4,000) $ 50,000 $ 56,000
Net income $ 32,000
PTS: 1 DIF: 3 REF: p. 429-431 OBJ: 2

10. TotToys Corporation recently made $2,000,000 of capital available to its Toddler Division. The
manager of the Toddler Division is evaluating the possibility of investing the additional funds in two
new toys. Information about the two new toys is as follows:
Toy #1 Toy #2
Projected investment $900,000 $750,000
Expected operating income 144,000 90,000
Any funds not invested in a project will be invested to earn the company's required minimum return
of 10 percent. Without the additional investment, the Toddler Division's average operating assets
would have been $10,000,000, and its operating income would have been $1,400,000.
Required:
a. Compute the Toddler Division's operating income and ROI, assuming that the division
manager rejects both projects.
b. Compute the Toddler Division's operating income and ROI, assuming that the division
manager accepts only the Toy #1 project.
c. Compute the Toddler Division's operating income and ROI, assuming that the division
manager accepts only the Toy #2 project.
d. Compute the Toddler Division's operating income and ROI, assuming that the division
manager accepts both projects.
(Round all computations to the nearest two decimal places.)
ANS:
a. $1,600,000 $1,400,000 + ($2,000,000  10%)
13.33% $1,600,000/($10,000,000 + $2,000,000)
b. $1,654,000 $1,400,000 + $144,000 + [($2,000,000 - $900,000)  10%]

13.78% $1,654,000/($10,000,000 + $2,000,000)
c. $1,615,000 $1,400,000 + $90,000 + [($2,000,000 - $750,000)  10%]

13.46% $1,615,000/($10,000,000 + $2,000,000)
d. $1,669,000 $1,400,000 + $144,000 + $90,000 + [($2,000,000 - $900,000 - $750,000) 

10%]
13.91% $1,669,000/($10,000,000 + $2,000,000)

11. The following results for the current year are for the Grundy Division of Salmon Enterprises:
Sales $700,000
Divisional income $140,000
Average operating assets are $1,400,000. The firm's minimum required rate of return is 8 percent.
The weighted average cost of capital is 6 percent. The division's tax rate is 30 percent.
Required:
a. Calculate profit margin for the division.
b. Calculate asset turnover for the division.
c. Calculate return on investment (ROI) for the division.
d. Calculate economic value added (EVA) for the division.
ANS:
a. 20% $140,000/$700,000
b. 50% $700,000/$1,400,000
c. 10% $140,000/$1,400,000
d. $14,000 [$140,000  (1 - .3)] - ($1,400,000  6%)
PTS: 1 DIF: 3 REF: p. 431-432 | p. 436 | p. 439

OBJ: 3 | 4 NAT: AICPA Analytic | IMA Performance measures
12. The manager of the recently formed Oak Division of Parkes, Incorporated, is evaluating the
following four investment opportunities available to the division. Parkes, Incorporated, requires a
minimum return of 10 percent.
Investment
Opportunity Income Investment
1 $ 91,000 $650,000
2 63,000 700,000
3 59,400 540,000
4 117,600 980,000
Required:
a. Calculate the return on investment (ROI) for each investment opportunity.
b. If only one investment opportunity can be funded and the division is evaluated based on ROI, which
investment opportunity would be accepted?
c. If Parkes, Incorporated, can fund all of the projects and wishes to achieve the best possible
performance, which investments would be accepted?
ANS:
a. Project 1: 14% $91,000/$650,000
Project 2: 9% $63,000/$700,000
Project 3: 11% $59,400/$540,000
Project 4: 12% $117,600/$980,000
b. Project 1, because it has the highest ROI
c. Projects 1, 3, and 4; their ROIs exceed the minimum return of 10 percent.
PTS: 1 DIF: 2 REF: p. 431-435 OBJ: 3

13. The following results for the current year are for the Calvin Division of Stinson Enterprises:
Sales $400,000
Divisional income $ 60,000
Average operating assets are $500,000. The firm's minimum required rate of return is 10 percent,
the weighted average cost of capital is 8 percent, and the tax rate is 30 percent.
Required:
a. Calculate profit margin for the division.
b. Calculate asset turnover for the division.
c. Calculate return on investment (ROI) for the division.
d. Calculate economic value added (EVA) for the division.
ANS:
a. 15% $60,000/$400,000
b. 80% $400,000/$500,000
c. 12% $60,000/$500,000
d. $2,000 [$60,000  (1 - .3)] - ($500,000  8%)
PTS: 1 DIF: 2 REF: p. 431-432 | p. 436 | p. 439

14. Brothers, Incorporated, has just formed a new division, and the following four investment
opportunities are available to the division. The firm requires a minimum return of 8 percent.
Investment
Opportunity Income Investment
1 $57,600 $ 640,000
2 75,000 600,000
3 60,000 1,000,000
4 59,500 850,000
Required:
a. Calculate the return on investment (ROI) for each investment opportunity.
b. If you were the division manager and you were evaluated based on ROI, which
investment opportunity would you accept?
c. If you were president of Brothers, Incorporated, which projects would you want the
division to accept?
ANS:
a. Project 1: 9% $57,600/$640,000
Project 2: 12.5% $75,000/$600,000
Project 3: 6% $60,000/$1,000,000
Project 4: 7% $59,500/$850,000
b. Project 2, because it has the highest ROI
c. Projects 1 and 2
PTS: 1 DIF: 2 REF: p. 431-438 OBJ: 3

15. Ritter Company reported the following information during 2006.
Sales revenue $400,000

Operating income $16,000
Average operating assets ?
Return on investment ?
Margin 4%
Turnover 2
Required:
1) Determine average operating assets

2) Determine return on investment
ANS:
1) $400,000/x = 2,  = $200,000
2) Margin  turnover = 8%

16. Reses Company reported the following information during 2006.
Sales revenue ?
Operating income $20,000
Average operating assets $200,000
Return on investment 10%
Margin 4%
Turnover ?
Required:
1) Determine sales revenue.

2) Determine turnover.
ANS:
1) $20,000/x = .04, x = $500,000
2) ROI = Margin  Turnover, 10% = 4%  ?, ? = 2.5

17. Brown Industries has two divisions: the Hank Division and the Murray Division. Information about
a component that the Hank Division produces is as follows:
Sales $150 per unit

The Hank Division can produce up to 22,000 components per year. The Murray Division needs
1,000 units of the component for a product it manufactures.
Required:
a. Determine the minimum transfer price that the selling division would be willing to
accept.
b. Determine the maximum transfer price that the buying division would be willing to pay.
c. If the Hank Division did not have excess capacity, what would be the correct transfer
price?
ANS:
a. $60 The variable manufacturing costs per unit
b. $150 The market price
c. $150 The market price

18. Garland Industries is a decentralized company that evaluates its divisions based on ROI. The Shelly
Division has the capacity to make 4,000 units of a component. The Shelly Division's variable costs
are $160 per unit.
The Blake Division can use the Shelly component in the manufacturing of one of its own products.
The Blake Division would incur $170 of variable costs to convert the component into its own
product, which sells for $600.
Required:
The following requirements are independent of each other:
a. Assume the Shelly Division can sell all of the components that it produces for $400 each.
The Blake Division needs 200 units. What is the correct transfer price?
b. Assume the Shelly Division can sell 3,500 units at $440. Any excess capacity will be
unused unless the units are purchased by the Blake Division, which could use up to 200
units.
Determine the minimum transfer price that the Shelly Division would be willing to accept.
Determine the maximum transfer price that the Blake Division would be willing to pay.
ANS:
a. $400 The market price
b. Minimum: $160 Variable manufacturing costs
Maximum: $430 ($600 - $170)

19. Chantilly Industries has two divisions: the Triangle Division and the Square Division. The Triangle
Division produces a component that is used by the Square Division. Information about that
component is as follows:
Sales $200 per unit

The Triangle Division can produce up to 15,000 components per year. The Square Division needs
1,500 units of the component for a product it manufactures.
Required:
a. Determine the minimum transfer price that the Triangle Division would accept.
b. Determine the maximum transfer price that the Square Division would pay.
c. If the Triangle Division produces and sells 15,000 units in a highly competitive market,
what would be the correct transfer price?
ANS:
a. $80 The variable manufacturing costs
b. $200 The market price
c. $200 The market price
PTS: 1 DIF: 2 REF: p. 441-442 OBJ: 5

20. Halber Industries is a decentralized company that evaluates its divisions based on ROI. The Brock
Division has the capacity to make 2,000 units of a component. The Brock Division's variable costs
are $80 per unit.
The Cliff Division can use the Brock component in the manufacturing of one of its own products.
The Cliff Division would incur $60 of variable costs to convert the component into its own product,
which sells for $300.
Required:
The following requirements are independent of each other:
a. Assume the Brock Division can sell all of the components that it produces for $180 each.
The Cliff Division needs 100 units. What is the correct transfer price?
b. Assume the Brock Division can sell 1,800 units at $260. Any excess capacity will be
unused unless the units are purchased by the Cliff Division, which could use up to 100
units.
Determine the minimum transfer price that the Brock Division would be willing to
accept.
Determine the maximum transfer price that the Cliff Division would be willing to pay.
ANS:
a. $180 The market price
b. Minimum: $80 Variable manufacturing costs
Maximum: $240 The transfer price that results in a zero contribution
margin on the goods for the buying division ($300 - $60)
PTS: 1 DIF: 2 REF: p. 441-442 OBJ: 5

21. Darfor Company had the following data for the year:
Division A Division B
Sales $400,000 $300,000
Contribution margin 160,000 125,000
Operating income 80,000 30,000
Average operating assets 320,000 200,000
weighted average cost of capital 15% 15%
minimum rate of return 20% 20%
Calculate the following amounts for each division:

a. margin
b. turnover
c. ROI
d. residual income
e. EVA
ANS:
a. A = $80,000/$400,000 = 20% | B = $30,000/$300,000 = 10%
b. A = $400,000/320,000 = 1.25 | B = $300,000 /$200,000 = 1.5
c. A = .2 x 1.25 = 25% | B = .1 x 1.5 = 15%
d. A = $80,000 - ($320,000 x .2) = $16,000 |
B = $30,000 - ($200,000 x .2) = $(10,000)
e. A = $80,000 - ($320,000 x .15) = $32,000 |
B = $ 30,000 - ($200,000 x .15) = $0
PTS: 1 DIF: 2 REF: p. 432 | p. 437 | p. 439

OBJ: 3 | 4 NAT: AACSB Analytic | IMA Performance measures
ESSAY
1. Why do firms decentralize?
ANS:
Many companies choose to decentralize to increase overall efficiency. The following are advantages
of decentralization:
 Ease of gathering and using local information

 Focusing of central management on strategy
 Training and motivating segment managers
 Enhanced competition, exposing segments to market forces
PTS: 1 DIF: 2 REF: p. 418-419 OBJ: 1

NAT: AICPA Reflective thinking | IMA Performance measures
2. Define responsibility accounting and describe four types of responsibility centers.
ANS:
Responsibility accounting is a system that measured the results of responsibility centers and
compares those results with expected outcomes.
Type Manager is responsible for these items:

Cost center Costs
Revenue center Revenues
Profit center Revenues and costs
Investment center Revenues, costs, and investment
PTS: 1 DIF: 2 REF: p. 419-420 OBJ: 1

3. Explain the differences between variable and absorption costing.
ANS:
Variable and absorption costing differ in their treatment of fixed factory overhead. Variable costing
treats fixed factory overhead as a period expense. Thus, unit production cost under variable costing
consists of direct materials, direct labor, and variable factory overhead. Absorption costing treats
fixed factory overhead as a product cost. Thus, unit production cost under absorption costing
consists of direct materials, direct labor, variable factory overhead, and a share of fixed factory
overhead.
PTS: 1 DIF: 2 REF: p. 424-428 OBJ: 2

NAT: AICPA Reflective thinking | IMA Cost management
4. What are the advantages and disadvantages of using ROI as a performance measure?
ANS:
ROI has the following advantages:
1. It encourages managers to focus on the relationship between sales, expenses, and
investment.
2. It encourages managers to focus on cost efficiency.
3. It encourages managers to focus on operating asset efficiency.
ROI has the following disadvantages:
1. It can encourage managers to focus on divisional profitability at the expense of the
profitability of the whole firm.
2. It encourages managers to focus on the short run at the expense of the long run.
3. Managers may make dysfunctional recommendations on equipment replacement
decisions, not basing them on cash flow NPV criterions.
PTS: 1 DIF: 2 REF: p. 431-436 OBJ: 3

5. Compare and contrast return on investment (ROI) and economic value added (EVA).
ANS:
ROI is the ratio of operating income to average operating assets. This ratio can be broken down into
two components: margin (the ratio of operating income to sales) and turnover (the ratio of sales to
average operating assets). EVA is the difference between after-tax operating income and the total
annual cost of capital employed. Both are used as measures of performance for managers of
decentralized units. ROI can lead managers to focus on the short term.
PTS: 1 DIF: 2 REF: p. 431-436 | p. 439

6. What is the role of transfer pricing in a decentralized firm?
ANS:
A transfer price is an internal price that one division of a firm charges another division of the same
firm. The transfer price is revenue to the selling division and cost to the buying division. The
transfer pricing problem involves finding a mutually satisfactory transfer price that is compatible
with the company's goals of accurate performance evaluation, divisional autonomy, and goal
congruence.
PTS: 1 DIF: 2 REF: p. 439-443 OBJ: 5

MATCHING
Maria’s Mexican Food Corporation has a number of divisions. Indicate whether the manager in
each division referenced would likely be evaluated as a cost center, a revenue center, a profit center,
or an investment center.
a. Cost Center
b. Revenue Center
c. Profit Center
d. Investment Center
1. The manager of department that produces made-to-order frozen dinners.
2. The VP of the marketing division.
3. The Chief Financial Officer in Maria’s corporate headquarters office.
4. The manager of the beverage product line.
5. The manager of the frozen dinner line.
6. The manager of the department that produces tortillas.
1. ANS: A DIF: 2 REF: p. 420

2. ANS: B DIF: 2 REF: p. 420
3. ANS: D DIF: 2 REF: p. 420
4. ANS: C DIF: 2 REF: p. 420
5. ANS: C DIF: 2 REF: p. 420
6. ANS: A DIF: 2 REF: p. 420

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Chapter 10

Segmented Reporting, Investment Center Evaluation, and Transfer Pricing

1. In a company with a centralized approach to responsibility accounting, upper-level managers do

2. Decentralization occurs when

3. In a company with a decentralized approach to responsibility accounting, lower-level managers

4. Why would a company decide to decentralize?

5. Advantages of decentralization include all of the following EXCEPT

ANS: D DIF: 2 REF: p. 419

6. Responsibility accounting includes all of the following EXCEPT

7. The Marketing Department is most likely considered to be a(n)

8. Types of responsibility centers include all of the following EXCEPT

10. The Production Department is most likely considered to be a(n)

14. In a variable costing system, product cost includes

18. Variable costing can be used for

PTS: 1 DIF: 2 REF: p. 424 OBJ: 2

There were no beginning inventories. (Round amounts to two decimal places.)

Direct materials ($80,000/100,000) $0.80

Direct labor ($240,000/100,000) 2.40

PTS: 1 DIF: 2 REF: p. 423 OBJ: 2

Direct materials ($80,000/100,000) $0.80

PTS: 1 DIF: 2 REF: p. 423 OBJ: 2

Direct materials ($80,000/100,000) $0.80

80,000  $3.60 = $288,000

PTS: 1 DIF: 2 REF: p. 424 OBJ: 2

Direct materials ($80,000/100,000) $0.80

PTS: 1 DIF: 2 REF: p. 424 OBJ: 2

Direct materials ($80,000/100,000) $0.80

80,000  $5.60 = $448,000

PTS: 1 DIF: 2 REF: p. 424 OBJ: 2

Sales Revenue $1,600,000

Cost of goods sold calculation:

Variable overhead ($40,000/100,000) 0.40

80,000  $5.60 = $448,000

PTS: 1 DIF: 3 REF: p. 424 OBJ: 2

Sales Revenue $1,600,000

Variable cost of goods sold calculation:

80,000  $3.60 = $288,000

PTS: 1 DIF: 3 REF: p. 424 OBJ: 2

Direct materials $15

PTS: 1 DIF: 2 REF: p. 423 OBJ: 2

Direct materials $15

PTS: 1 DIF: 2 REF: p. 423 OBJ: 2

Fixed Costs Variable Costs

33. Refer to Figure 10-3. Jennings' variable costing income would be

Sales ($7  75,000) $525,000

*$1.50 + $1.80 + $0.40 = $3.70

PTS: 1 DIF: 3 REF: p. 424 OBJ: 2

Direct materials $1.50

PTS: 1 DIF: 2 REF: p. 423 OBJ: 2

Direct materials $1.50

PTS: 1 DIF: 2 REF: p. 423 OBJ: 2

36. Refer to Figure 10-3. Jennings' absorption costing income would be

Sales ($7  75,000) $525,000

*$1.50 + $1.80 + $0.40 + ($60,000/80,000) = $4.45

PTS: 1 DIF: 3 REF: p. 424 OBJ: 2

ANS: D DIF: 3 REF: p. 424-425

40. Variable costing net income is