Garrison (Asian Edition) Practice Exam Chapter 13

Print these pages. Answer each of the following questions, explaining your answers or showing your work, as appropriate, and then compare your solutions to those provided at the end of the practice exam. 1. North Star Company has recorded the following information about the results of its operations for the fourth quarter: Total Company "#$$%$$$ " ($%$$$ "1$$%$$$ " ,$%$$$ Western Di ision " &$%$$$ )$%$$$ #,%$$$ #$%$$$ !astern Di ision "1#$%$$$ )$%$$$ -,%$$$ )$%$$$

Sales re enues 'ariable cost of sales *i+ed costs: Common Traceable

.ased on this information% prepare a segmented income statement for the quarter and comment on the results.

#. The Southern Di ision of /earle Company recorded the following operating data for the past year: 0 erage operating assets Stoc1holders2 equity Sales Net operating income 4esidual income "#$$%$$ $ 1($%$$$ 3$$%$$$ ,$%$$$ #(%$$$

/art 5a6 What was the di ision2s return on in estment7

/art 5b6 What was the di ision2s margin7

/art 5c6 What was the di ision2s turno er7

). The following data are a ailable for the Central Di ision of 8aSalle% 9nc. and the single product it ma1es. 0 erage operating assets 0nnual fi+ed costs :nit selling price 'ariable cost per unit ")%$$$%$$ $ ,($%$$$ 3$ #3

;ow many units must the di ision sell each year to ha e an 4<9 of 1(=7

3. 0 di isional manager recei es a bonus based on 1$= of the residual income from the di ision. The results of the di ision included re enues of "1%$$$%$$$ and e+penses of ",$$%$$$. The di ision had "#%$$$%$$$ in a erage operating assets. The minimum required rate of return for the di ision was 1,=. What will be the amount of the manager>s bonus7

GNBCY Practice Exam Solutions Chapter 13

1 Solution (!earnin" #$%ecti&e 1)' Total Company "#$$%$$$ ($%$$$ 13$%$$$ ,$%$$$ ?$%$$$ 1$$%$$$ 5"1$%$$$6 Western Di ision " &$%$$$ )$%$$$ ,$%$$$ #$%$$$ " )$%$$$ !astern Di ision "1#$%$$$ )$%$$$ ?$%$$$ )$%$$$ " ($%$$$

Sales re enues 'ariable cost of sales Contribution margin 8ess traceable fi+ed costs Segment margin 8ess common fi+ed costs Net operating loss

Since common fi+ed costs are not traceable to the di isions% they should not be included in segment margins. 0s can be seen from the data% the company2s di isions ha e performed with positi e segment margins% but as a whole the company has a net operating loss for the quarter due to the significant amount of common fi+ed costs. 9f possible% the company needs to increase its re enues and@or decrease its costs 5particularly fi+ed costs6 to generate operating income instead of loss. ( Part (a) Solution (!earnin" #$%ecti&e ()' The return on in estment for the past year is determined as follows: 4<9 A Net operating income B 0 erage operating assets 4<9 A ",$%$$$ B "#$$%$$$ A #,= Part ($) Solution (!earnin" #$%ecti&e ()' The margin for the past year is determined as follows: Cargin A Net operating income B Sales Cargin A ",$%$$$ B "3$$%$$$ A 1#.,= Part (c) Solution (!earnin" #$%ecti&e ()' The turno er for the past year is determined as follows: Turno er A Sales B 0 erage operating assets Turno er A "3$$%$$$ B "#$$%$$$ A #

Solution (!earnin" #$%ecti&e ()' *irst% calculate% the di ision2s required operating income as follows. Net operating income A 0 erage operating assets + 4<9 Net operating income A ")%$$$%$$$ + .1( A "3&$%$$$ Then% calculate the number of units that must be sold to generate that operating income as follows. Net operating income A Sales D 'ariable e+penses D *i+ed e+pensesE let F represent the number of units Net operating income A "3&$%$$$ A "3$F D "#3F D ",($%$$$ Net operating income A "1%$3$%$$$ A "1(FE F A (,%$$$ units Solution (!earnin" #$%ecti&e 3)' *irst% determine the minimum required return as follows. Cinimum required return A 0 erage operating assets + Cinimum required rate of return Cinimum required return A "#%$$$%$$$ + .1, A ")$$%$$$ Then% determine the residual income as follows. 4esidual income A Net operating income D Cinimum required return 4esidual income A 5"1%$$$%$$$ D ",$$%$$$6 D ")$$%$$$ A "#$$%$$$ *inally% determine the bonus as follows: .onus A 4esidual income + 1$= A "#$$%$$$ + .1$ A "#$%$$$