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# DO IT!

REVIEW 11-16
(a) Controllable margin: \$500,000 (\$300,000 + \$75,000) = \$125,000
ROI: \$125,000 \$450,000 = 27.78%
(b) (1) (i) Controllable margin\$125,000, same as in (a).
(ii) ROI: \$125,000 (\$450,000 \$50,000) = 31.25%
(2) CM: (\$500,000 \$300,000) \$500,000 = 40%
Therefore increase of \$100,000 in sales = \$40,000 in CM
(i) Controllable margin:
\$600,000 (\$300,000 + \$60,000 + \$75,000) = \$165,000
(ii) ROI: (\$125,000 + \$40,000) \$450,000 = 36.67%

EXERCISE 11-20
(a)

RANEY COMPANY
For the Month Ended July 31, 2012

## Direct labour hours

Variable costs
Indirect labour (\$0.70)
Indirect materials (\$0.50)
Utilities (\$0.40)
Total variable costs
Fixed costs:
Supervision
Depreciation
Property taxes
Total fixed costs
Total costs
(b)

Budget
9,000

Actual
9,000

Favourable F
Unfavourable U

Difference

\$6,300
4,500
3,600
14,400

\$6,100
4,300
3,200
13,600

\$200
200
400
800

4,000
1,500
800
6,300
\$20,700

4,000
3,000
800
7,800
\$21,400

1,500

1,500
\$700

F
F
F
F
U
U
U

RANEY COMPANY
For the Month Ended July 31, 2012

## Direct labour hours

Variable costs
Indirect labour (\$0.70)
Indirect materials (\$0.50)
Utilities (\$0.40)
Total variable costs
Fixed costs:
Supervision
Depreciation
Property taxes

Budget
8,500

Actual
8,500

Favourable F
Unfavourable U

Difference

\$5,950
4,250
3,400
13,600

\$6,100
4,300
3,200
13,600

\$150
50
200

4,000
1,500
800

4,000
3,000
800

1,500

U
U
F

## Total fixed costs

Total costs

6,300
\$19,900

7,800
\$21,400

1,500
\$1,500

(c) In case (a) the performance for the month was satisfactory,
although management might want to find out the reason why
depreciation has doubled, as this may be an error Usually large
capital purchases are planned well in advance. In case (b)
management may need to determine the causes of the
unfavourable differences for indirect labour and indirect materials, or
since the differences are small, 2.5% of budgeted cost for indirect
labour and 1.2% for indirect materials, they might be considered
immaterial.

U
U

EXERCISE 11-31
(a) Controllable margin = (\$3,000,000 \$2,400,000 \$400,000) =
\$200,000
ROI = \$200,000 \$5,000,000 = 4%
(b) 1.

## Contribution margin is \$3,000,000 \$2,400,000 = \$600,000

Contribution margin percentage is 20%, or (\$600,000
\$3,000,000)
Increase in controllable margin = \$300,000 20% = \$60,000
ROI = (\$200,000 + \$60,000) \$5,000,000 = 5.2%

2.

3.

## \$200,000 (\$5,000,000 \$200,000) = 4.2%

EXERCISE 11-33
Planes:
ROI = Controllable margin Average operating assets
15%= Controllable margin \$25,000,000
Controllable margin = \$25,000,000 15% = \$3,750,000 (g)
Contribution margin = Controllable margin + Controllable fixed costs
Contribution margin = \$3,750,000 + \$2,000,000 = \$5,750,000 (d)
Service revenue = Contribution margin + Variable costs
Service revenue = \$5,750,000 + \$5,500,000 = \$11,250,000 (a)
Taxis:
ROI = Controllable margin Average operating assets
10% = \$95,000 Average operating assets
Average operating assets = \$95,000 0.10 = \$950,000 (h)
Controllable fixed costs = Contribution margin Controllable margin
Controllable fixed costs = \$200,000 \$95,000 = \$105,000 (e)
Variable costs = Service revenue Contribution margin
Variable costs = \$600,000 \$200,000 = \$400,000 (c)
Limos:
ROI = Controllable margin Average operating assets
ROI = \$255,000 \$1,500,000 = 17% (i)
Controllable fixed costs = Contribution margin Controllable margin
Controllable fixed costs = \$500,000 \$255,000 = \$245,000 (f)
Service revenue = Contribution margin + Variable costs
Service revenue = \$500,000 + \$320,000 = \$820,000 (b)

*EXERCISE 11-34
(a)

## North Division: ROI = \$50,000 \$100,000 = 50%

or (\$50,000 \$400,000) (\$400,000 \$100,000)
West Division: ROI = \$75,000 \$200,000 = 37.5%
or (\$75,000 \$450,000) (\$450,000 \$200,000)

(b)

(c)

North Division:
Residual Income = \$50,000 (0.15 \$100,000) = \$35,000
West Division:
Residual Income = \$75,000 (0.15 \$200,000) = \$45,000
If ROI is used to measure performance, neither division would
make the additional investment as they are currently experiencing
a higher rate of return and adding this investment would reduce
this rate.

(d) If residual income is used to measure performance, both divisions would probably make the additional investment because
each would realize an increase in residual income (20% return on
investment vs. 15% required rate of return).
*EXERCISE 11-35
(a) Investment turnover = sales average operating assets
Average operating assets = \$500,000 2.5 = \$200,000
(b) Operating income (Average operating assets
Minimum rate of return) = residual
income
Operating income = \$5,000 + (\$200,000 0.15) = \$35,000
(c) ROI = operating income average operating assets
ROI = \$35,000 \$200,000 = 17.5%
(d) Profit margin = Operating income Sales
Profit margin = \$35,000 \$500,000 = 7.0%

*PROBLEM 11-48A
(a)

## The Electronics Division would probably reject the investment

because it would reduce their ROI, negatively affecting their
bonuses.
ROI without investment: 20% (\$60,000 \$300,000)
ROI with investment: \$72,000 \$375,000 = 19.2%
If the Electronics Division built the new plant, their return on the
investment would be 19.2%, which is less than what they are
earning right now. This results from the ROI of the investment
(16%) being less than their current ROI.

(b) Yes, they would be more willing to build the plant, because any
investment that earns more than the required rate of return (16%
vs. 14%) will increase their residual income which will increase
their bonuses.
(c)

## Without product line: \$60,000 (10% \$300,000) = \$30,000

With new product line: \$72,000 (10% \$375,000) = \$34,500
Introducing the new product line would increase residual income
by \$4,500, so the managers would be encouraged to introduce
the new product line.