agamata

CHAPTER 8
RESPONSIBILITY ACCOUNTING, SEGMENT EVALUATION AND TRANSFER PRICING

[Problem 1] 1. ROI of Div A (past year) = = 30%

2. ROI of Div A (with new product) = = 27.6%

*(P960,000 = P8,000 x 40% - P2,240,000)

3. No; because the new product line would decrease the overall ROI of Division A.

4. Yes; because the new product line’s ROI is 24% (i.e., P960,000 + P4,000,000) and is not lower than the overall ROI of the company.

5. a. Last year With new product .
Operating income (P1,800,000 + P960,000) P1,800,000 P2,760,000
Less: Minimum income (P6M x 20%) 1,200,000 (P10M x 20%) 2,000,000 Residual income P 600,000 P 760,000

b. Yes; the new product is acceptable because the residual income is increased by P160,000 that is derived from the operations of the new product.

[Problem 2] Values of the unknown data:

Red

Blue

White

Company

Company

Company

Sales (P8,000,000 x 3)

P
24,000,000

Net operating income

(P24,000,000 x 8%)

1,920,000

Average operating assets

(P720,000 / 12%)

P
6,000,000

Return on sales

P1,200,000

20%

P6,000,000

P220,000

15%

P4,800,000

P1,920,000

8% P24,000,000

Asset turnover

P6,000,000

2

P3,000,000

P4,800,000

0.8

P6,000,000

Return on investment

P1,200,000

40%

P3,000.000

P1,920,000

24% P8,000,000

[Problem 3]