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Introduction To Managerial Accounting 6th Edition Brewer Solutions Manual
Introduction To Managerial Accounting 6th Edition Brewer Solutions Manual
Solutions to Questions
9-3 The manager of a cost center has 9-8 An MCE of less than 1 means that the
control over cost, but not revenue or the use of production process includes non-value-added
investment funds. A profit center manager has time. An MCE of 0.40, for example, means that
control over both cost and revenue. An 40% of throughput time consists of actual
investment center manager has control over processing, and that the other 60% consists of
cost and revenue and the use of investment moving, inspection, and other non-value-added
funds. activities.
9-4 Margin is the ratio of net operating 9-9 A company’s balanced scorecard should
income to total sales. Turnover is the ratio of be derived from and support its strategy.
total sales to average operating assets. The Because different companies have different
product of the two numbers is the ROI. strategies, their balanced scorecards should be
different.
9-5 Residual income is the net operating
income an investment center earns above the 9-10 The balanced scorecard is constructed
to support the company’s strategy, which is a
© The McGraw-Hill Companies, Inc., 2013. All rights reserved.
Solutions Manual, Chapter 9 1
theory about what actions will further the If the internal business processes improve, but
company’s goals. Assuming that the company the financial outcomes do not improve, the
has financial goals, measures of financial theory may be flawed and the strategy should
performance must be included in the balanced be changed.
scorecard as a check on the reality of the theory.
$1,000,000
= = 1.6
$625,000
$200,000
= = 1.67 (rounded)
$120,000
7, 8, and 9.
If the company pursues the investment opportunity, this year’s margin,
turnover, and ROI would be:
Net operating income
Margin =
Sales
$200,000 + $30,000
=
$1,000,000 + $200,000
$230,000
= = 19.2% (rounded)
$1,200,000
Sales
Turnover =
Average operating assets
$1,000,000 + $200,000
=
$625,000 + $120,000
$1,200,000
= = 1.61 (rounded)
$745,000
ROI = Margin × Turnover
10. The CEO would not pursue the investment opportunity because it
lowers her ROI from 32% to 30.9%. The owners of the company
would want the CEO to pursue the investment opportunity because its
ROI of 25% exceeds the company’s minimum required rate of return
of 15%.
12. The residual income for this year’s investment opportunity is:
Average operating assets ...................... $120,000
Net operating income ........................... $30,000
Minimum required return:
15% × $120,000 ............................... 18,000
Residual income ................................... $12,000
14. The CEO would pursue the investment opportunity because it would
raise her residual income by $12,000.
15. The CEO and the company would not want to pursue this investment
opportunity because it does not exceed the minimum required return:
Average operating assets ...................... $120,000
Net operating income ........................... $10,000
Minimum required return:
15% × $120,000 ............................... 18,000
Residual income ................................... $ (8,000)
2. Sales
Turnover =
Average operating assets
$18,000,000
= = 0.5
$36,000,000
3. If the MCE is 35%, then 35% of throughput time was spent in value-
added activities, the other 65% was spent in non-value-added activities.
5. If all queue time is eliminated, then the throughput time drops to only 4
days (0.5 + 2.8 + 0.7). The MCE becomes:
Value-added time 2.8 days
MCE= = =0.70
Throughput time 4.0 days
Thus, the MCE increases to 70%. This exercise shows quite dramatically
how a lean production approach can improve operations and reduce
throughput time.
Financial
Sales Contribution
+ +
margin per ton
Customer
Number of new
+
customers acquired
Internal
Business
Processes Number of different +
paper grades produced
Learning
and Growth Number of employees
trained to support the +
flexibility strategy
1. (b) (c)
Net Average
(a) Operating Operating ROI
Sales Income* Assets (b) ÷ (c)
$4,500,000 $290,000 $800,000 36.25%
$4,600,000 $300,000 $800,000 37.50%
$4,700,000 $310,000 $800,000 38.75%
$4,800,000 $320,000 $800,000 40.00%
$4,900,000 $330,000 $800,000 41.25%
$5,000,000 $340,000 $800,000 42.50%
*Sales × Contribution Margin Ratio – Fixed Expenses
2. The ROI increases by 1.25% for each $100,000 increase in sales. This
happens because each $100,000 increase in sales brings in an additional
profit of $10,000. When this additional profit is divided by the average
operating assets of $800,000, the result is an increase in the company’s
ROI of 1.25%.
Increase in sales ................................................... $100,000 (a)
Contribution margin ratio ....................................... 10% (b)
Increase in contribution margin and net operating
income (a) × (b) ................................................ $10,000 (c)
Average operating assets ....................................... $800,000 (d)
Increase in return on investment (c) ÷ (d) ............. 1.25%
$8,000,000
= = 2.5
$3,200,000
ROI = Margin × Turnover
$4,000,000
= = 20%
$20,000,000
Sales
Turnover =
Average operating assets
$8,000,000 + $2,000,000
=
$3,200,000 + $800,000
$10,000,000
= = 2.5
$4,000,000
ROI = Margin × Turnover
2. Perth Darwin
Average operating assets .................... $3,000,000 $10,000,000
Net operating income ......................... $630,000 $1,800,000
Minimum required return on average
operating assets—16% × Average
operating assets .............................. 480,000 1,600,000
Residual income ................................. $150,000 $ 200,000
3. No, the Darwin Division is simply larger than the Perth Division and for
this reason one would expect that it would have a greater amount of
residual income. Residual income can’t be used to compare the
performance of divisions of different sizes. Larger divisions will almost
always look better. In fact, in the case above, Darwin does not appear to
be as well managed as Perth. Note from Part (1) that Darwin has only
an 18% ROI as compared to 21% for Perth.
2. The manager of the Western Division seems to be doing the better job.
Although her margin is three percentage points lower than the margin
of the Eastern Division, her turnover is higher (a turnover of 3.5, as
compared to a turnover of two for the Eastern Division). The greater
turnover more than offsets the lower margin, resulting in a 21% ROI, as
compared to an 18% ROI for the other division.
Notice that if you look at margin alone, then the Eastern Division
appears to be the strongest division. This fact underscores the
importance of looking at turnover as well as at margin in evaluating
performance in an investment center.
Financial
Profit margin +
Customer
Number of new
+
customers acquired
Internal Business
Average number of
Processes –
errors per tax return
Learning
And Growth
$800,000
= =8
$100,000
ROI = Margin × Turnover
= 2% × 8 = 16%
$800,000 + $80,000
=
$100,000
$880,000
= = 8.8
$100,000
ROI = Margin × Turnover
$800,000
= =8
$100,000
ROI = Margin × Turnover
= 2.4% × 8 = 19.2%
$800,000
=
$100,000 - $20,000
$800,000
= = 10
$80,000
ROI = Margin × Turnover
= 2% × 10 = 20%
Division
Fab Consulting IT
Sales ....................................... $800,000 * $650,000 $500,000
Net operating income ............... $72,000 * $26,000 $40,000 *
Average operating assets ......... $400,000 $130,000 * $200,000
Margin .................................... 9% 4% * 8% *
Turnover ................................. 2.0 5.0 * 2.5
Return on investment (ROI) ..... 18% * 20% 20% *
*Given.
Note that the Consulting and IT Divisions apparently have different
strategies to obtain the same 20% return. The Consulting Division has a
low margin and a high turnover, whereas the IT Division has just the
opposite.
2. Fred Halloway will be inclined to reject the new product line because
accepting it would reduce his division’s overall rate of return.
3. The new product line promises an ROI of 21%, whereas the company’s
overall ROI last year was only 18%. Thus, adding the new line would
increase the company’s overall ROI.
Financial
Total profit +
Sales +
Customer
Customer Customer
satisfaction with + satisfaction with +
service menu choices
Internal
Business Average time
Dining area
Processes cleanliness + to prepare an –
order
Learning
and Percentage Percentage
Growth of dining of kitchen
room staff staff +
+
completing completing
hospitality cooking
course course
$1,880,000 + $1,920,000
Average operating assets = = $1,900,000
2
Net operating income
Margin =
Sales
$627,000
= = 15%
$4,180,000
Sales
Turnover =
Average operating assets
$4,180,000
= = 2.2
$1,900,000
ROI = Margin × Turnover
3. In real life, the production manager simply added several weeks to the
delivery cycle time. In other words, instead of promising to deliver an
order in four weeks, the manager promised to deliver in six weeks. This
increase in delivery cycle time did not, of course, please customers and
drove some business away, but it dramatically improved the percentage
of orders delivered on time.
$80,000 $1,000,000
= ×
$1,000,000 $500,000
= 8% × 2 = 16%
2. $90,000 $1,000,000
ROI = ×
$1,000,000 $500,000
= 9% × 2 = 18%
3. $80,000 $1,000,000
ROI = ×
$1,000,000 $400,000
= 8% × 2.5 = 20%
4. The company has a contribution margin ratio of 40% ($20 CM per unit
divided by $50 selling price per unit). Therefore, a $100,000 increase in
sales would result in a new net operating income of:
Sales .................................... $1,100,000 100%
Variable expenses .................. 660,000 60%
Contribution margin ............... 440,000 40%
Fixed expenses ...................... 320,000
Net operating income ............ $ 120,000
$120,000 $1,100,000
ROI = ×
$1,100,000 $500,000
= 10.91% × 2.2 = 24%
6. $80,000 $1,000,000
ROI = ×
$1,000,000 $320,000
= 8% × 3.125 = 25%
7. $60,000 $1,000,000
ROI = ×
$1,000,000 $480,000
= 6% × 2.08 = 12.5%
Applied Pharmaceuticals
Financial
Return on
+
Stockholders’ Equity
Customer
Customer perception of Customer perception of
+ +
first-to-market capability product quality
Internal
Business R&D Yield + Defect rates –
Processes
Learning
Percentage of job
and +
offers accepted
Growth
Financial
Sales +
Customer
+
Number of repeat customers
Internal
Business Room cleanliness +
Processes
Learning
and Employee Employee morale
Growth – +
turnover as shown in
survey
Number of employees
+
receiving database
training
3. a. and b.
Month
5 6
Throughput time in days:
Process time .......................................... 0.6 0.6
Inspection time ...................................... 0.8 0.0
Move time ............................................. 1.4 1.4
Queue time ........................................... 0.0 0.0
Total throughput time............................. 2.8 2.0
Manufacturing cycle efficiency (MCE):
Process time ÷ Throughput time ............. 21.4% 30.0%
Financial
Total profit +
Customer Customer
satisfaction with
accuracy of charge
+
account bills
Percentage of
suppliers making
just-in-time
+
deliveries
Learning
Percentage of sales
and
clerks trained to
Growth
correctly enter data +
on charge account
slips
© The McGraw-Hill Companies, Inc., 2013. All rights reserved.
Solutions Manual, Chapter 9 47
Case (continued)
A number of the performance measures suggested by managers have
not been included in the above balanced scorecard. The excluded
performance measures may have an impact on total profit, but they are
not linked in any obvious way with the two key problems that have been
identified by management—accounts receivables and unsold inventory.
If every performance measure that potentially impacts profit is included
in a company’s balanced scorecard, it would become unwieldy and focus
would be lost.
2. Sales
Turnover =
Average operating assets
$21,600,000
= = 0.6
$36,000,000
3. If the MCE is 48%, then 48% of throughput time was spent in value-
added activities, the other 52% was spent in non-value-added activities.
5. If all queue time is eliminated, then the throughput time drops to only 6
days (0.5 + 4.8 + 0.7). The MCE becomes:
Value-added time 4.8 days
MCE= = =0.80
Throughput time 6.0 days
1. (b) (c)
Net Average
(a) Operating Operating ROI
Sales Income* Assets (b) ÷ (c)
$4,500,000 $380,000 $800,000 47.50%
$4,600,000 $392,000 $800,000 49.00%
$4,700,000 $404,000 $800,000 50.50%
$4,800,000 $416,000 $800,000 52.00%
$4,900,000 $428,000 $800,000 53.50%
$5,000,000 $440,000 $800,000 55.00%
*Sales × Contribution Margin Ratio – Fixed Expenses
2. The ROI increases by 1.50% for each $100,000 increase in sales. This
happens because each $100,000 increase in sales brings in an additional
profit of $12,000. When this additional profit is divided by the average
operating assets of $800,000, the result is an increase in the company’s
ROI of 1.50%.
Increase in sales ................................................... $100,000 (a)
Contribution margin ratio ....................................... 12% (b)
Increase in contribution margin and net operating
income (a) × (b) ................................................ $12,000 (c)
Average operating assets ....................................... $800,000 (d)
Increase in return on investment (c) ÷ (d) ............. 1.50%
$8,000,000
= = 2.5
$3,200,000
ROI = Margin × Turnover
$4,800,000
= = 24%
$20,000,000
Sales
Turnover =
Average operating assets
$8,000,000 + $2,000,000
=
$3,200,000 + $800,000
$10,000,000
= = 2.5
$4,000,000
ROI = Margin × Turnover
2. Perth Darwin
Average operating assets .................... $3,000,000 $10,000,000
Net operating income ......................... $660,000 $1,800,000
Minimum required return on average
operating assets—16% × Average
operating assets .............................. 480,000 1,600,000
Residual income ................................. $180,000 $ 200,000
3. No, the Darwin Division is simply larger than the Perth Division and for
this reason one would expect that it would have a greater amount of
residual income. Residual income can’t be used to compare the
performance of divisions of different sizes. Larger divisions will almost
always look better. In fact, in the case above, Darwin does not appear to
be as well managed as Perth. Note from Part (1) that Darwin has only
an 18% ROI as compared to 22% for Perth.
2. The manager of the Western Division seems to be doing the better job.
Although her margin is one percentage point lower than the margin of
the Eastern Division, her turnover is higher (a turnover of 3.5, as
compared to a turnover of 2.0 for the Eastern Division). The greater
turnover more than offsets the lower margin, resulting in a 28% ROI, as
compared to an 18% ROI for the other division.
Notice that the Western Division’s 2% increase in margin (from 6% to
8%) resulted in a 7% increase in ROI (from 21% to 28%) due to its
turnover of 3.5.
$800,000
= =4
$200,000
ROI = Margin × Turnover
= 2% × 4 = 8%
$800,000 + $80,000
=
$200,000
$880,000
= = 4.4
$200,000
ROI = Margin × Turnover
$800,000
= =4
$200,000
ROI = Margin × Turnover
= 2.4% × 4 = 9.6%
$800,000
=
$200,000 - $20,000
$800,000
= = 4.44 (rounded)
$180,000
ROI = Margin × Turnover