1. In divisional income statements prepared for Franklin Electrical Company, the

Question

1.
In divisional income statements prepared for Franklin Electrical Company, the Payroll Department costs are charged back to user divisions on the basis of the number of payroll checks, and the Purchasing Department costs are charged back on the basis of the number of purchase requisitions. The Payroll Department had expenses of 44,000 and the Purchasing Department had expenses of 18,720 for the year. The following annual data for Residential, Commercial, and Government Contract Divisions were obtained from corporate records:
                                                       Residential Commercial Goverment
Sales                                                    420,000     500,000    1,800,000
Number of employees
Weekley payroll(52 wks per yr)                      144             72            108
Monthly payroll                                               25             20             18
Number of purchase requisition per yr          1,800        1,530       1,350

A. Determine the total amount of payroll checks and purchase requisitions processed per year by each division.
B. Using the activity base information in a, determine the annual amount of payroll and purchasing costs charged back to the residential, commercial, and Government contract divisions from payroll and purchasing services.
C. Why does the residential division have a larger service department charge than the other two divisions, even though its sales are lower?

2.
Outdoor Athletic Equipment Co. operates two divisions the Winter Sports Division and the Summer Sports Division. The following income and expense accounts were provided from the trial balance as of June 30, 2008, the end of the current fiscal year, after all adjustments, including those for inventories, were records and posted:

Sales Winter Sports Div             950,000
Sales Summers Sports Div       1,437,500
Cost of Goods Winter Sports Div 512,500
Cost of Goods Summer Sports Div 687,500
Sales Expense Winter Sports Div 150,000
Sales Expense Summer Sports Div 205,000
Admin Expense Winter Sports Div 97,000
Admin Expense Summer Sports Div 128,000
Advertising Expense 64,500
Transportation Expense 100,700
Accounts Receivable Collection Expense 58,100
Warehouse Expense 120,000

A. Advertising expense incurred at headquarters, charged back to divisions of the basis of usage: Winter sports divisions, 28,000, Summer sports divisions 36,500.

B. Transportation expense charged back to divisions at a transfer price of 7.60 per bill of lading: Winter sports division 6,000 bills of lading, Summer sports division 7,250 bills of lading.

C. Accounts receivable collection expense incurred at headquarters, charged back to divisions at a transfer price of 5.60 per invoice: Winter sports division 4,500 sales invoices, Summer Sports division, 5,875 sales invoices.

D. Warehouse expense charged back to divisions of the basis of floor space used in storing division products: Winter sports division, 25,000 sq ft, Summer sports division 12,500 sq ft.

Prepare a divisional income statement with two column headings: Winter sports division and Summer sports division. Provide supporting schedules for determining service department charges.

3.

The Vice president of operations of 14 Computer Inc. is evaluating the performance of two divisions organized as investment centers. Invested assets and condensed income statement data for the past year for each division are as follows:

                                 Personal Computing Div                 Business Computing Div
Sales                                        800,000                                1,200,000
Cost of goods sold                     460,000                                   780,000
Operating expenses                   180,000                                   156,000
invested assets                          500,000                               2,000,000

1. Prepare condensed divisional income statements for the year ended December 31, 2008, assuming that there were no service department charges.
2. Using the Dupont formula for rate of return on investment, determine the profit margin, investment turnover, and rate of return on investment for each division.
3. If management's minimum acceptable rate of return is 15%, determine the residual income for each division.
4. Discuss the evaluation of the two divisions, using the performance measures determined in parts 1, 2, and 3.

Explanation / Answer

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