Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN: 9781337115773
Author: Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher: Cengage Learning
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Textbook Question
Chapter 11, Problem 32E
Use the following information for Exercises 11-31 and 11-32:
Washington Company has two divisions: the Adams Division and the Jefferson Division. The following information pertains to last year’s results:
Washington’s actual cost of capital was 12%.
Exercise 11-32 Residual Income
Refer to the information for Washington Company above. In addition, Washington Company’s top management has set a minimum acceptable
Required:
- 1. Calculate the residual income for the Adams Division.
- 2. Calculate the residual income for the Jefferson Division.
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Coolbrook company has the following information available for the past year:(Chart in photo below)
Required:1. calculate return on Investment (ROI) and residual income for each divison for the last year2. Recalculate ROI and residual income for the division for each independent situration that follows:a.) operating income increases by 9 percentb.) operating Income decreases by 9 percentc.) The company invests 255,000 in each division, an amount that generates 106,000 additional income per division.d.) Coolbrook changes its hurdle rate to 5.26 percent
The Western Division of Claremont Company had net operating income of $154,000 and average invested assets of $557,000.
Claremont has a required rate of return of 14.75 percent. Western has an opportunity to increase operating income by $48,000 with a
$84,000 investment in assets.
Compute Western Division's return on investment and residual income currently and if it undertakes the project.
Note: Enter your ROI answers as a percentage rounded to two decimal places, (i.e., 0.1234 should be entered as 12.34%). Round
your Residual Income (Loss) answers to the nearest whole dollar.
Return on Investment (ROI)
Residual Income (Loss)
Current
%
Proposed Project
GGX is the general manager of the Jung Division, and his performance is measured using the residual income method. GGX is reviewing the following forecasted information for the division for next year.
Category
Amount (thousands)
Working capital
P 1,800
Revenue
30,000
Plant and equipment
17,200
To establish a standard of performance for the division’s manager using the residual income approach, four scenarios are being considered. Scenario 1 assumes an imputed interest charge of 12% and a target residual income of P1,500,000. Scenario 2 assumes an imputed interest charge of 15% and a target residual income of P2,000,000. Scenario 3 assumes an imputed interest charge of 18% and a target residual income of P1,250,000. Scenario 4 assumes an imputed interest charge of 10% and a target residual income of P2,500,000. What is the residual income for scenario 2?
Chapter 11 Solutions
Managerial Accounting: The Cornerstone of Business Decision-Making
Ch. 11 - Discuss the differences between centralized and...Ch. 11 - Prob. 2DQCh. 11 - Explain why firms choose to decentralize.Ch. 11 - What are margin and turnover? Explain how these...Ch. 11 - What are the three benefits of ROI? Explain how...Ch. 11 - What is residual income? What is EVA? How does EVA...Ch. 11 - Can residual income or EVA ever be negative? What...Ch. 11 - What is transfer price?Ch. 11 - Prob. 9DQCh. 11 - (Appendix 11A) What is the Balanced Scorecard?
Ch. 11 - (Appendix 11A) Describe the four perspectives of...Ch. 11 - The practice of delegating authority to...Ch. 11 - Which of the following is not a reason for...Ch. 11 - A responsibility center in which a manager is...Ch. 11 - A responsibility center in which a manager is...Ch. 11 - If sales and average operating assets for Year 2...Ch. 11 - If sales and average operating assets for Year 2...Ch. 11 - The key difference between residual income and EVA...Ch. 11 - It ROI for a division is 15% and the company's...Ch. 11 - Prob. 9MCQCh. 11 - Prob. 10MCQCh. 11 - (Appendix 11A) Which of the following is a...Ch. 11 - (Appendix 11A) The length of time it takes to...Ch. 11 - Use the following information for Brief Exercises...Ch. 11 - Use the following information for Brief Exercises...Ch. 11 - Use the following information for Brief Exercises...Ch. 11 - Prob. 16BEACh. 11 - Use the following information for Brief Exercises...Ch. 11 - Use the following information for Brief Exercises...Ch. 11 - Use the following information for Brief Exercises...Ch. 11 - Use the following information for Brief Exercises...Ch. 11 - Prob. 21BEBCh. 11 - Calculating Transfer Price Teslum Inc. has a...Ch. 11 - Use the following information for Brief Exercises...Ch. 11 - Use the following information for Brief Exercises...Ch. 11 - Types of Responsibility Centers Consider each of...Ch. 11 - Margin, Turnover, Return on Investment Pelak...Ch. 11 - Margin, Turnover, Return on Investment, Average...Ch. 11 - Return on Investment, Margin, Turnover Data follow...Ch. 11 - Residual Income The Avila Division of Maldonado...Ch. 11 - Economic Value Added Falconer Company had net...Ch. 11 - Use the following information for Exercises 11-31...Ch. 11 - Use the following information for Exercises 11-31...Ch. 11 - Prob. 33ECh. 11 - Use the following information for Exercises 11-33...Ch. 11 - Prob. 35ECh. 11 - (Appendix 11A) Cycle Time and Velocity Prakesh...Ch. 11 - (Appendix 11A) Cycle Time and Velocity Lasker...Ch. 11 - (Appendix 11A) Manufacturing Cycle Efficiency...Ch. 11 - (Appendix 11A) Manufacturing Cycle Efficiency...Ch. 11 - Return on Investment and Investment Decisions...Ch. 11 - Return on Investment, Margin, Turnover Ready...Ch. 11 - Return on Investment for Multiple Investments,...Ch. 11 - Return on Investment and Economic Value Added...Ch. 11 - Transfer Pricing GreenWorld Inc. is a nursery...Ch. 11 - Prob. 45PCh. 11 - Prob. 46PCh. 11 - (Appendix 11A) Cycle Time, Velocity, Conversion...Ch. 11 - (Appendix 11A) Balanced Scorecard The following...Ch. 11 - (Appendix 11A) Cycle Time and Velocity,...Ch. 11 - Prob. 50C
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