What does suboptimization mean?

Division A manufactures electronic circuit boards. The boards can be sold either to Division B of the same company or to outside customers. Last year, the following activity occurred in Division A:

$$\begin{array}{lr} \text{Selling price per circuit board}&&& \hspace{5pt}\$125\\ \text{Variable cost per circuit board}&&& \hspace{10pt}\$90 \\ \text{Number of circuit boards:} \\ \quad \text{Produced during the year}&&& \hspace{5pt}\text{20,000} \\ \quad \text{Sold to outside customers}&&& \hspace{5pt}\text{16,000} \\ \quad \text{Sold to Division B}&&& \hspace{10pt}\text{4,000} \\ \end{array}$$

Sales to Division B were at the same price as sales to outside customers. The circuit boards purchased by Division B were used in an electronic instrument manufactured by that division (one board per instrument). Division B incurred $100 in additional variable cost per instrument and then sold the instruments for$300 each.

Required:

1. Calculate the net operating incomes earned by Division A, Division B, and the company as a whole.

2. Assume Division A's manufacturing capacity is 20,000 circuit boards. Next year, Division B wants to purchase 5,000 circuit boards from Division A rather than 4,000. (Circuit boards of this type are not available from outside sources.) From the standpoint of the company as a whole, should Division A sell the 1,000 additional circuit boards to Division B or continue to sell them to outside customers? Explain.

Westerville Company reported the following results from last year's operations:

$$\begin{array}{lr} \text{Sales} & \$1,000,000\\ \text{Variable expenses} & \underline{\hspace{10pt} 300,000}\\ \text{Contribution margin} & 700,000\\ \text{Fixed expenses} & \underline{\hspace{10pt} 500,000}\\ \text{Net operating income} & \underline{\underline{\$\hspace{10pt} 200,000}}\\ \text{Average operating assets} & \underline{\underline{\$\hspace{10pt} 200,000}}\\ \end{array}$$

At the beginning of this year, the company has a $\$ 120,000$ investment opportunity with the following cost and revenue characteristics:

$$\begin{array}{lr} \text{Sales} & \$200,000\\ \text{Contribution margin ratio} & 60\% \text{ of sales}\\ \text{Fixed expenses} & \$90,000\\ \end{array}$$

The company's minimum required rate of return is 15%.

If the company pursues the investment opportunity and otherwise performs the same as last year, what margin will it earn this year?

In what way can the use of ROI as a performance measure for investment centers lead to bad decisions? How does residual income approach overcome this problem?

Westerville Company reported the following results from last year's operations:

$$\begin{array}{lr} \text{Sales} & \$1,000,000\\ \text{Variable expenses} & \underline{\hspace{10pt} 300,000}\\ \text{Contribution margin} & 700,000\\ \text{Fixed expenses} & \underline{\hspace{10pt} 500,000}\\ \text{Net operating income} & \underline{\underline{\$\hspace{10pt} 200,000}}\\ \text{Average operating assets} & \underline{\underline{\$\hspace{10pt} 200,000}}\\ \end{array}$$

At the beginning of this year, the company has a $\$ 120,000$ investment opportunity with the following cost and revenue characteristics:

$$\begin{array}{lr} \text{Sales} & \$200,000\\ \text{Contribution margin ratio} & 60\% \text{ of sales}\\ \text{Fixed expenses} & \$90,000\\ \end{array}$$

The company's minimum required rate of return is 15%.

What is the ROI related to this year's investment opportunity?

Tan Corporation of Japan has two regional divisions with headquarters in Osaka and Yokohama. Selected data on the two divisions follow:

$$\begin{array}{c} \hspace{110pt} \text{Division}\\ \begin{array}{l r r} \hline & \text{Osaka} & \text{Yokohama} \\ \text{Sales} &\$3,000,000& \$9,000,000 \\ \text{Net operating income} & \$210,000& \$ 720,000\\ \text{Average operating assets} & \$ 1,000,000& \$4,000,000 \\ \end{array} \end{array}$$

Required:

1. For each division, compute the margin, turnover, and return on investment (ROI). Where necessary, carry computations to two decimal places.

2. Assume that the company evaluates performance using residual income and that the minimum required rate of return for any division is $15. Compute the residual income for each division.

Westerville Company reported the following results from last year's operations:

$$\begin{array}{lr} \text{Sales} & \$1,000,000\\ \text{Variable expenses} & \underline{\hspace{10pt} 300,000}\\ \text{Contribution margin} & 700,000\\ \text{Fixed expenses} & \underline{\hspace{10pt} 500,000}\\ \text{Net operating income} & \underline{\underline{\$\hspace{10pt} 200,000}}\\ \text{Average operating assets} & \underline{\underline{\$\hspace{10pt} 200,000}}\\ \end{array}$$

At the beginning of this year, the company has a $\$ 120,000$ investment opportunity with the following cost and revenue characteristics:

$$\begin{array}{lr} \text{Sales} & \$200,000\\ \text{Contribution margin ratio} & 60\% \text{ of sales}\\ \text{Fixed expenses} & \$90,000\\ \end{array}$$

The company's minimum required rate of return is 15%.

What is the turnover related to this year's investment opportunity?

What is meant by the term residual income?

Provide the missing data in the following table for a distributor of martial arts products:

$$\begin{array}{l c c c} & & \text{Division} & \\ \hline & \text{Alpha} & \text{Bravo} & \text{Charlie}\\ \text{Sales} &\$\hspace{20pt} ? \hspace{25pt} & \$11,500,000 & \$\hspace{20pt} ? \hspace{25pt}\\ \text{Net operating income} & \$\hspace{20pt} ? \hspace{25pt} & \$ \hspace{15pt} 920,000 & \$ \hspace{15pt} 210,000\\ \text{Average operating assets} & \$ \hspace{15pt}800,000 & \$\hspace{20pt} ? \hspace{25pt} &\$\hspace{20pt} ? \hspace{25pt}\\ \text{Margin} & 4\% & ? & 7\%\\ \text{Turnover} & 5 & ? &?\\ \text{Return on investment (ROI)} & ? & 20\% &14\%\\ \end{array}$$

Hannibal Steel Company has a Transport Services Department that provides trucks to haul ore from the company's mine to its two steel mills-the Northern Plant and the Southern Plant. Budgeted costs for the Transport Services Department total $350,000 per year, consisting of$0.25 per ton variable cost and $300,000 fixed cost. The level of fixed cost is determined by peak period requirements. During the peak period, the Northern Plant requires$70 of the Transport Services Department's capacity and the Southern Plant requires 30%.

During the year, the Transport Services Department actually hauled 130,000 tons of ore to the Northern Plant and 50,000 tons to the Southern Plant. The Transport Services Department incurred $364,000 in cost during the year, of which$54,000 was variable cost and $310,000 was fixed cost.

Required:

1. How much of the Transport Services Department's variable costs should be charged to each plant.

2. How much of the Transport Services Department's fixed costs should be charged to each plant.

3. Should any of the Transport Services Department's actual total cost of$364,000 be treated as a spending variance and not charged to the plants? Explain.

What is meant by the terms "margin" and "turnover" in ROI calculations?

Westerville Company reported the following results from last year's operations:

$$\begin{array}{lr} \text{Sales} & \$1,000,000\\ \text{Variable expenses} & \underline{\hspace{10pt} 300,000}\\ \text{Contribution margin} & 700,000\\ \text{Fixed expenses} & \underline{\hspace{10pt} 500,000}\\ \text{Net operating income} & \underline{\underline{\$\hspace{10pt} 200,000}}\\ \text{Average operating assets} & \underline{\underline{\$\hspace{10pt} 200,000}}\\ \end{array}$$

At the beginning of this year, the company has a $\$ 120,000$ investment opportunity with the following cost and revenue characteristics:

$$\begin{array}{lr} \text{Sales} & \$200,000\\ \text{Contribution margin ratio} & 60\% \text{ of sales}\\ \text{Fixed expenses} & \$90,000\\ \end{array}$$

The company's minimum required rate of return is 15%.

What is the margin related to this year's investment opportunity?

Westerville Company reported the following results from last year's operations:

$$\begin{array}{lr} \text{Sales} & \$1,000,000\\ \text{Variable expenses} & \underline{\hspace{10pt} 300,000}\\ \text{Contribution margin} & 700,000\\ \text{Fixed expenses} & \underline{\hspace{10pt} 500,000}\\ \text{Net operating income} & \underline{\underline{\$\hspace{10pt} 200,000}}\\ \text{Average operating assets} & \underline{\underline{\$\hspace{10pt} 200,000}}\\ \end{array}$$

At the beginning of this year, the company has a $\$ 120,000$ investment opportunity with the following cost and revenue characteristics:

$$\begin{array}{lr} \text{Sales} & \$200,000\\ \text{Contribution margin ratio} & 60\% \text{ of sales}\\ \text{Fixed expenses} & \$90,000\\ \end{array}$$

The company's minimum required rate of return is 15%.

What is last year's return on investment (ROI)?

Distinguish between a cost center, a profit center, and an investment center.