DECENTRALIZATION:

RESPONSIBILITY ACCOUNTING, SEGMENT

REPORTING, AND PERFORMANCE EVALUATION
TYPES OF RESPONSIBILITY CENTERS/SEGMENTS
1. Enumerate and Differentiate the 4 types of responsibility centers.

REPORTING FOR SEGMENTS

2. THE CONJURING Company, a wholesale distributor of horror DVDs, has been experiencing losses for
some time, as shown by its most recent monthly contribution format income statement, which
follows:
Sales P 1,000,000
Less: Variable expenses 390,00
Contribution margin 610,000
Less: Fixed expenses 625,000
Net operating income (loss) P (15,000)
In an effort to isolate the problem, the president has asked for an income statement segmented by
division. Accordingly, the Accounting Department has developed the following information:
Luzon Visayas Mindanao
Sales 250,000 400,000 350,000
Variable expenses as a
percentage of sales 52% 30% 40%
Traceable fixed expenses 160,000 200,000 175,000

Prepare a contribution format income statement segmented by divisions, as desired by the president.

PERFORMANCE EVALUATION OF SEGMENTS

3. Bing Company has an investment center in Hongkong. The Board of Directors wishes to evaluate the
performance of this investment center. The following are the relevant data:
Sales P 1,600,000
Net Operating Income 150,000
Average Operating Assets 1,200,000
Minimum required rate of 10%
return
A. Return on investment
B. Residual income

4. Durand Division has the following results for the year:

Revenues $470,000
Net income 130,000
Total divisional assets are $625,000. The company's minimum required rate of return is 12 percent.
A. Residual income for Durand is?
B. Return on investment for Durand is?
C. Return on sales for Durand is?

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5. Rosatoroa Company has two divisions with headquarters in Manila and Cebu. Selected data on the
two divisions follow:

MANILA CEBU
Sales P 3,600,000 P 10,800,000
Net Operating Income 252,000 864,000
Average Operating Assets 1,200,000 4,800,000
A. For each division, compute the return on investment (ROI) in terms of margin and turnover.
B. Assume that the company evaluates performance by use of residual income and that the
minimum required return for any division is 16%. Compute the residual income for each
division.
C. Is Cebu's greater amount of residual income an indication that it is better managed? Explain.

6. An investment center has return on sales of .1 and a total asset turnover of 1.2. How much is the
return on investment?

7. The following year-end data pertain to Adan Corporation:

Earnings before interest and taxes P 800,000

Current assets 800,000

Non-current assets 3,200,000
Current Liabilities 400,000
Non-current Liabilities 1,000,000
Stockholders’ equity 2,600,000
Adan Corporation pays an income tax rate of 30%. Its weighted-average cost of capital is 10%. What
is Adan Corporation's Economic Value Added (EVA)?

(800,000*[1-.3]) = 560,000 – (3,600,000 *.10%)

= 200,000.00

8. Carolina Corporation has a before-tax operating income of $3,200,000 and a 9% weighted-average

cost of capital. The tax rate is 30%. Assets total $7,000,000 and current liabilities total $1,800,000.
On the basis of this information, Carolina's economic value added is?

3,200,000 *(.7) = 2,240,000 – (5,200,000 *.09) = 2,240,000 – 468,000 = 1,772,000

The following data pertain to Dana Industries:

Interest rate on debt capital: 9%
Cost of equity capital: 12%
Before-tax operating income: $35 million
Market value of debt capital: $60 million
Market value of equity capital: $120 million
Total assets: $150 million
Income tax rate: 30%
Total current liabilities: $15 million
Compute Dana’s weighted-average cost of capital. WACC = 10.1%EVA = $10,865,000
Compute Dana’s economic value added.

WACC = .09 *(.7)*(60/180)+(12%*120/180) = 10.1%

EVA = 35,000 *.7 – (135000*.101) = 10,865,000

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TRANSFER PRICING BETWEEN SEGMENTS
9. The Wood Division of Fir Products, Inc. manufactures rubber moldings and sells them externally for
P110. Its variable cost is P50 per unit, and its fixed cost per unit is P14. Fir's president wants the
Wood Division to transfer 5,000 units to another company division at a price of P64.
A. Assuming the Wood Division has available capacity of 5,000 units, the minimum transfer price
it should accept is? 64 = 50+14
B. Assuming the Wood Division does not have any available capacity, the minimum transfer price
it should accept is? 110
C. Assuming the Wood Division has only 3,000 units of available capacity, the minimum transfer
price it should accept is? 64 + loss margin =

(110-64*2000/5000) = 64+18.4 = 82.4

10. The Can Division of Fruit Products Inc. manufactures and sells tin cans externally for P0.50 per can. Its
unit variable costs and unit fixed costs are P0.20 and P0.07, respectively. The Packaging Division
wants to purchase 50,000 cans at P0.27 a can. Selling internally will save P0.02 a can.
A. Assuming the Can Division has sufficient capacity, what is the minimum transfer price it should
accept? .25
B. Assuming the Can Division is already operating at full capacity, what is the minimum transfer
price it should accept? .50-.02 = .48
C. Assuming the Can Division only has 10,000 remaining available capacity, what is the minimum
transfer price it should accept? .25 +(.5-.27 *40,000/50000) = .434

11. Management of the Catering Company would like the Food Division to transfer 10,000 cans of its final
product to the Restaurant Division for P80. The Food Division sells the product to customers for P140
per unit. The Food Division’s variable cost per unit is P70 and its fixed cost per unit is P20.
A. If the Food Division is currently operating at full capacity, what is the minimum transfer price
the Food Division should accept? 140
B. If the Food Division has 6,000 units available capacity, what is the minimum transfer price the
Food Division should accept? 90 + (4,000 * 140-90)/10000 = 110

12. The Lumber Division of Paul Bunyon Homes Inc. produces and sells lumber that can be sold to outside
customers or within the company to the Construction Division. The following data have been
gathered for the coming period:
Lumber Division:
Capacity 200,000 board feet
Price per board foot P2.00
Variable production cost per bd. ft. P1.00
Variable selling cost per bd. ft. P0.40
Construction Division:
Board feet needed 60,000
Outside price paid per bd. ft. P1.60
If the Lumber Division sells to the Construction Division, P0.30 per board foot can be saved in
shipping costs.
A. If current outside sales are 130,000 board feet, what is the minimum transfer price that the
Lumber Division could accept? .70
B. If current outside sales are 150,000 board feet, what is the minimum transfer price that the
Lumber Division could accept? .70 + (10,000*.6)/60000 = .80
C. If the Lumber Division has sufficient excess capacity to fulfil the Construction Division’s needs,
what will be the effect on the company’s profit? Increase by .30 per board

Lumber profit = .60 lost

Construction division = decrease in cost = .90
Net effect = .30 * 60,000 = 18,000 increase in profit

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13. Tuttle Motorcycles Inc. manufactures and sells high-priced motorcycles. The Engine Division produces
and sells engines to other motorcycle companies and internally to the Production Division. It has
been decided that the Engine Division will sell 20,000 units to the Production Division at P700 a unit.
The Engine Division, currently operating at capacity, has a unit sales price of P1,700 and unit variable
costs and fixed costs of P700 and P500, respectively. The Production Division is currently paying
P1,600 per unit to an outside supplier. P60 per unit can be saved on internal sales from reduced
selling expenses.
A. What is the minimum transfer price that the Engine Division should accept?
B. What is the maximum transfer price that the Production division should accept?
C. What is the increase/decrease in overall company profits if this transfer takes place?

14. Computer Solutions Corporation manufactures and sells various high-tech office automation
products. Two divisions of Office Products Inc. are the Computer Chip Division and the Computer
Division. The Computer Chip Division manufactures one product, a "super chip," that can be used by
both the Computer Division and other external customers. The following information is available on
this month's operations in the Computer Chip Division:
Selling price per chip P50
Variable costs per chip P20
Fixed production costs P60,000
Fixed SG&A costs P90,000
Monthly capacity 10,000 chips
External sales 6,000 chips
Internal sales 0 chips
Presently, the Computer Division purchases no chips from the Computer Chips Division, but instead
pays P45 to an external supplier for the 4,000 chips it needs each month.
A. Minimum transfer price
B. Maximum transfer price

15. Pepsi Co has subsidiaries in USA, the Philippines and the Cayman Islands. The tax rate for the
different territories are as follows:
USA 40%
Philippines 30%
Cayman Islands 0%
The company wishes to transfer product A, which is manufactured in the Philippines, to the USA with
the intention to be sold. The cost to manufacture ingredient A in the Philippines is P20. It will be
transferred to the USA and sold for P50.

Devise an illegal transfer pricing scheme that will result in no taxes for Pepsi Co as a whole.

Cay man will buy the product from Philippines a 20 then sell it at 50 to usa

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