PRACTICE DRILL 1

Given: Division A- Sales

Division A- Variable Costs
Division A- Contribution Margin
Division A- Fixed Costs
Division A- Net Operating Income

Investment Division A

New Product Line Sales

New Product Line Variable Cost Ratio
New Product Line Variable Cost
New Product Line Contribution Margin
New Product Line Fixed Costs
New Product Line Net Operating Income

Investment New Product Line

1 Compute Division A's ROI for last year

ROI= Net Operating Income/ Investment

ROI=1,800,000/6,000,000
ROI= 30%

Answer Return on Investment is 30%.

For an investment of 6,000,000 Division A was able to make 30% profit.

2 Compute Division A's ROI if new product is added

ROI=(Net Operating Income Division A+ Net Operating Income New Product Line)/(Investment Division A+ Inves
ROI=(1,800,000+960,000)/(6,000,000+4,000,000)
ROI=2,760,000/10,000,000
ROI=27.60 %

Answer Return on Investment is 27.6% .

There is a decrease of 2.4% on Division A's ROI if the new product line is added.

3 If you were Division A's manager, would you accept the product line?
Based on the computation, Division A's ROI will decrease if I added the new product line.
It is still near the 30% ROI of Division A.
As a division manager, I will not accept the new product line despite exceeding the minimum required rate of
 Based on the following justifications:
Justifications:
1. ROI w/ the new product line is lesser than the current Division A's ROI
2.If Return of Investment is a performance measure as a division manager ,this would make my performance
3. Efforts in creating the new product line such as hiring of additional employees and buying of new equipme
4. Possibilities of not meeting the said projections

4 If you were the CEO of Jamaica Company, would you advise Division A manager to add the new product line? Ju

Despite of the projections, As a CEO I would like to take chances on adding a new product line.
Based on the following justifications:
1. Division A's ROI when a new product is added is near the original ROI.
2. Possibilities of making higher sales.
3. New Product Line's Variable Cost is comprised of 60% and I can ask the division manager to investigate on
4. Division A's product expansion

5 Suppose that the Company set a minimum return of 20% of its invested assets,
and that the divisional performance is evaluated by the residual income approache:

a. Determine the residual income of Division A last year and its new residual income if the new product line is a
Percent Cost of Capital is equivalent to the Minimum Required Rate of Return
Residual Income= Operating Income -(Minimum Required Rate of Return * Average Operating Assets)

Residual Income Last Year= Operating Income -(Minimum Required Rate of Return * Average Operating Asset
Residual Income Last Year= 1,800,000 -(20% * 6,000,000)
Residual Income Last Year= Php 600,000

Residual Income w/ new product line= (Operating Income Div. A + Operating Income New Product Line) -(Min
Line))
Residual Income w/ new product line=(1,800,000+960,000)-((20%*(6,000,000+4,000,000))
Residual Income w/ new product line=2,760,000-(20%*10,000,000)
Residual Income w/ new product line=2,760,000-(20%*10,000,000)
Residual Income w/ new product line=2,760,000-2,000,000
Residual Income w/ new product line=Php 760,000

b. Under these circumstances, if you are Divison A's manager , would you accept the new product line?
As Division A's manager projected residual income with the new product line is higher than the residual incom
I would accept the new product line.
Aside that the projection shown an additional residual income of Php 160,000 (from 760,000-600,000)
as a division manager, the main focus is actually increasing the residual income.
PRACTICE DRILL 2

Given:
Sales
Cost of goods sold
Gross Profit
Fixed Costs
Net Income:

Traceable Fixed Costs:

Big
Small

Computed Variable Costs

Queen City Variable Cost = [(Variable Cost Big)+(Variable Cost Small)]
Queen City Variable Cost-Big = 300,000*40%
Queen City Variable-Small= 400,000*45%
Queen City Variable Cost = [(300,000*40%)+(400,000*45%)]

City of Smiles Contribution Margin= City of Smiles Net Income + Traceable Fixed Income + Allocated Income
City of Smiles Contribution Margin=170,000+120,000+30,000
City of Smiles Contribution Margin
City of Smiles Total Variable Costs= City of Smiles Sales -City of Smiles Contribution Margin
City of Smiles Total Variable Costs= 500,000 -320,000

City of Smiles Variable Cost-Big= (Sales*60%)*40%

City of Smiles Variable Cost-Big= (500,000*60%)*40%
City of Smiles Variable Cost-Big= (500,000*60%)*40%

City of Smiles Variable Costs -Small= City of Smiles Total Variable Cost- City of Smiles Variable Cost-Big
City of Smiles Variable Costs -Small= 180,000- 120,000
City of Smiles Variable Costs -Small

Computed Allocated Fixed Costs

Total Fixed Cost= Traceable Fixed Cost + Allocated Fixed Costs
Queen City Total Fixed Cost= Traceable Fixed Cost + Allocated Fixed Costs
Allocated Fixed Cost= Queen City Total Fixed Cost- Traceable Fixed Cost
 Queen City Allocated Fixed Cost= 250,000-200,000
Queen City Allocated Fixed Cost

Total Allocated Fixed Cost= Queen City Allocated Fixed Cost/ Rate of Allocation Queen City
Total Allocated Fixed Cost= 50,000/62.50%

City of Smiles Allocated Fixed Cost= Total Allocated Fixed Cost * Rate of Allocation City of Smiles
City of Smiles Allocated Fixed Cost= 80,000*37.50%

Creating a Segmented Income Statement

Sales
Variable Costs:
Big
Small
Less: Total Variable Costs
Contribution Margin
Traceable Fixed Costs:
Big
Small
Less: Total Traceable Fixed Costs:
Less: Allocated Fixed Costs from Corporate Headquarters (Php 80,000)
Queen City - 62.5% of 80,000 and City of Smiles -37.5% of 80,000
Net Income:

Analysis
 24,500,000
14,700,000
9,800,000
8,000,000
1,800,000

6,000,000

8,000,000
60%
4,800,000
3,200,000
2,240,000
960,000

4,000,000

Line)/(Investment Division A+ Investment New Product Line)

w product line.

ding the minimum required rate of return

,this would make my performance look bad
oyees and buying of new equipments

ger to add the new product line? Justify your answer.

a new product line.

division manager to investigate on how to control these costs

ncome if the new product line is accepted.

Average Operating Assets)

Return * Average Operating Assets)

ng Income New Product Line) -(Minimum Required Rate of Return *(Avg. Operating Assets Div.A + Operating Assets New Product

00+4,000,000))

ept the new product line?

ne is higher than the residual income last year.

000 (from 760,000-600,000)

 Queen City City of Smiles Total
₱ 700,000 ₱ 500,000 ₱ 1,200,000
300,000 180,000 480,000
400,000 320,000 720,000
250,000 150,000 400,000
₱ 150,000 ₱ 170,000 ₱ 320,000

Queen City City of Smiles Total

₱ 120,000 ₱ 90,000 ₱ 210,000
80,000 30,000 110,000
₱ 200,000 ₱ 120,000 ₱ 320,000

120,000
180,000
300,000

Fixed Income + Allocated Income

320,000
ribution Margin
180,000

120,000

of Smiles Variable Cost-Big

60,000
 50,000

tion Queen City

80,000

ocation City of Smiles

30,000

Queen City City of Smiles Total

₱ 700,000 ₱ 500,000 ₱ 1,200,000

120,000 120,000 240,000

180,000 60,000 240,000
(300,000) (180,000) (480,000)
400,000 320,000 720,000

120,000 90,000 210,000

80,000 30,000 110,000
(200,000) (120,000) (320,000)

(50,000) (30,000) (80,000)

₱ 150,000.00 ₱ 170,000.00 ₱ 320,000.00
Assets New Product