Exercise 10-19 The Pletcher Transportation Company uses a responsibility reporti
ID: 2445065 • Letter: E
Question
Exercise 10-19
The Pletcher Transportation Company uses a responsibility reporting system to measure the performance of its three investment centers: Planes, Taxis, and Limos. Segment performance is measured using a system of responsibility reports and return on investment calculations. The allocation of resources within the company and the segment managers’ bonuses are based in part on the results shown in these reports.
Recently, the company was the victim of a computer virus that deleted portions of the company’s accounting records. This was discovered when the current period’s responsibility reports were being prepared. The printout of the actual operating results appeared as follows.
Determine the missing pieces of information below. (Round intermediate calculations and final answer to 0 decimal places, e.g. 1,255.)
Planes
Taxis
Limos
$502,400
5,503,200
299,400
247,900
487,408
1,497,900
84,800
248,608
25,037,700
1,462,400
14
8
Problem 10-7A
Delby Industries has manufactured prefabricated houses for over 20 years. The houses are constructed in sections to be assembled on customers’ lots. Delby expanded into the precut housing market when it acquired Jensen Company, one of its suppliers. In this market, various types of lumber are precut into the appropriate lengths, banded into packages, and shipped to customers’ lots for assembly. Delby designated the Jensen Division as an investment center.
Delby uses return on investment (ROI) as a performance measure with investment defined as average operating assets. Management bonuses are based in part on ROI. All investments are expected to earn a minimum rate of return of 18.2%. Jensen’s ROI has ranged from 20.4% to 23.2% since it was acquired. Jensen had an investment opportunity in 2014 that had an estimated ROI of 19.4%. Jensen management decided against the investment because it believed the investment would decrease the division’s overall ROI.
Selected financial information for Jensen are presented below. The division’s average operating assets were $12,776,000 for the year 2014.
JENSEN DIVISION
Selected Financial Information
For the Year Ended December 31, 2014
Calculate the following performance measures for 2014 for the Jensen Division. (Round ROI to 1 decimal place, e.g. 1.5.)
Planes
Taxis
Limos
Service revenue$
$502,400
$
Variable costs5,503,200
299,400
Contribution margin247,900
487,408
Controllable fixed costs1,497,900
Controllable margin84,800
248,608
Average operating assets25,037,700
1,462,400
Return on investment14
%8
% %Explanation / Answer
1) Return on investment = Net income / total operating assets
= 2541,000/ 12776,000
= 19.89%
2) Residual income = A- (B*C)
A = Department's net operating income
B = Minimum required return on assets ; and
C = Average operating assets of the department
= 2,541,000 - ( 12,776,000 @ 18.2%)
= $2,541,000 - $2,325,232
= $215,768
3) Missing piecies
Service revenue - variable cost = contribution margin
Contribution margin - fixed cost = controllable margin( net income)
Planes Taxis Limos Sevice revenue $10,506,378 $502,400 $786,808 Variable cost 5,503,200 254,500 299,400 Contributon margin 5,003,178 247,900 487,408 Controllable fixed cost 1,497,900 163,100 238,800 Controllable margin 3,505,278 84,800 248,608 Average operating asset 25,037,700 10,60,000 1,462,400 Return on investment 14% 8% 17%Related Questions
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