RESPONSIBILITY ACCOUNTING

Problem 4

Tamiya Company’s most recent income statement is shown below. The company’s
president is disappointed with the company’s performance and is strategizing on what to
do to improve profit.

Tamiya Corporation
Income Statement
For the month ended, June 30, 2020
Total NCR Southern Luzon
Sales 1,200,000 700,000 500,000
Less: Cost of goods sold 480,000 300,000 180,000
Gross profit 720,000 400,000 320,000
Less: Fixed costs 400,000 250,000 150,000
Net income 320,000 150,000 170,000

The sales and cost records of the company disclose the following:
1. The company is divided into two sales territories, NCR and Southern Luzon. The
NCR Region recorded P700,000 in sales and P300,000 in variable costs during July;
the remaining sales and variable costs were recorded in the Southern Luzon Region.
Fixed costs of P200,000 and P120,000are traceable to the NCR and Southern Luzon
Regions, respectively. The balance of the fixed costs are common to the two regions.
2. The company sells two products, Big and Small. Sales of products Big and Small
totaled P300,000 and P400,000, respectively, in the NCR Region during June.
Variable costs are 40% of the selling price of Big and 45% for Small. Costs records
show that P120,000of the NCR Region’s fixed costs are traceable to Big and P80,000
to Small, and that P90,000 of Southern Luzon’s fixed costs are traceable to Big and
P30,000 to Small.
3. Sixty percent of total Southern Luzon’s sales are in product Big with a variable cost
rate of 40%.
Required: Prepare a segmented income statement for the regional territories broken down
into products.

Tamiya Corporation

Segmented Income Statement

For the Month Ended, June 30, 2020

(in Php)

CNR Southern Luzon Grand

Big Small Total Big Small Total Total

Sales 700,000 500,000 1,200,000

Less: Variable Cost 300,000 180,000 480,000

Contribution Margin 400,000 320,000 720,000

Less: Direct Fixed 80,00

Costs 120,000 0 200,000 90,000 30,000 120,000 320,000

Segment Margin

Less: Allocated Fixed

Costs

Net Income

Problem 5
Megatronics Corporation, a massive retailer of electronic products, is organized in four separate
divisions. The four divisional managers are evaluated at year-end, and bonuses are awarded based
on ROI. Last year, the company as a whole produced a 13 percent return on its investment.

During the past week, management of the company’s Middle Eastern Division was approached
about the possibility of buying a competitor that had decided to redirect its retail activities. (If the
competitor is acquired, it will be acquired at its book value.) The data that follow relate to recent
performance of the Middle Eastern Division and the competitor:

Middle Eastern Division Competitor

Sales P 8,400,000 P 5,200,000
Variable costs 70% of sales 65% of sales
Fixed costs P 2,131,500 P 1,670,000
Invested capital P 1,850,000 P 625,000

Management has determined that in order to upgrade the competitor to Megatronics’ standards, an
additional P 375,000 of invested capital would be needed.

1. Compute the current ROI of the Middle Eastern Division and the division’s ROI if the
competitor is acquired.
2. What is the likely reaction of divisional management toward the acquisition? Why?
3. What is the likely reaction of Megatronics’ corporate management toward the acquisition?
Why?
4. Would the division be better off if it acquired the competitor but didn’t upgrade it to
Megatronics’ standards? Show computations to support your answer.
5. Assume that Megatronics uses residual income to evaluate performance and desires a 12
percent minimum return on invested capital. Compute the current residual income of the
Middle Eastern Division and the division’s residual income if the competitor is acquired.
Will divisional management be likely to change its attitude toward the acquisition? Why?

Problem 6

Li Ling – Fung, head of the Sporting Goods Division of Reliable Products, has just completed a
miserable nine months. “If it could have gone wrong, it did. Sales are down, income is down,
inventories are too high, and quite frankly, I’m beginning to worry that I will lose my job,” he
explained. Li is evaluated on the basis of ROI. Selected figures for the past nine months follow:

Sales P 4,800,000
Operating income 348,000
Invested capital 6,000,000

In an effort to salvage the current year’s performance, Li was contemplating implementation of

some or all of the following four strategies:

a. Write off and discard P 60,000 of obsolete inventory. The company will take a loss on the
disposal.
b. Accelerate the collection of P 80,000 of overdue customer accounts receivable.
c. Stop advertising through year-end and drastically reduce outlays for repairs and
maintenance. These actions are expected to save the division P 150,000 of expenses and will
conserve cash resources.
d. Acquire two competitors that are expected to have the following financial characteristics:

Projected Sales Projected Operating Projected Invested

Expenses Capital

Kowloon Manufacturing P 3,000,000 P 2,400,000 P 5,000,000

Pearl River Enterprises 4,500,000 4,120,000 4,750,000

Required:
 1. Briefly define sales margin, capital turnover, and return on investment and then compute
these amounts for Reliable’s Sporting Goods Division over the past nine months.
2. Evaluate each of the first two strategies listed, with respect to its effect on the Reliable’s last
nine months’ performance, and make a recommendation to Li regarding which, if any, to
adopt.
3. Are there possible long-term problems associated with strategy (c)? Briefly explain.
4. Determine the ROI of the investment in Kowloon Manufacturing and do the same for the
investment in Pearl River Enterprises. Should Li reject both acquisitions, acquire one
company, or acquire both companies? Assume that sufficient capital is available to fund
investments in both organizations.

Problem 7. Divisional ROI and Residual Income.

Hidden Light Corporation operates two (2) autonomous divisions, Black and White
Company. The divisions reported the following data with respect to their 2018 operations:
Black White
Net sales 40M 400M
Segment (Operating income) 5M 30M
Average assets 25M 160M
Average assets life in years 5 5
Cost of capital 12% 12%
Required:
1. Return on investments
2. Residual income

Problem 8
Costa Brava Seafood, Ltd. (CBSL) is a seafood restaurant chain operating throughout Europe. The
company has two sources of long-term capital: debt and equity. The cost to CBSL of issuing debt is
the after-tax cost of the interest payments on the debt, taking into account the fact that the interest
payments are tax deductible. The cost of CBSL’s equity capital is the investment opportunity rate of
CBSL’s investors, that is, the rate they could earn on investments of similar risk to that of investing
in Costa Brava Seafood, Ltd. The interest rate on CBSL’s P 80 million of long-term debt is 9 percent,
and the company’s tax rate is 40 percent. The cost of CBSL’s equity capital is 14 percent. Moreover,
the market value (and book value) of CBSL’s equity is P 120 million.

Costa Brava Seafood, Ltd. consists of two divisions, the properties division and the food service
division. The divisions’ total assets, current liabilities, and before-tax operating income for the most
recent year are as follows:
Division Total Assets Current Liabilities Before-Tax Operating
Income
Properties P 145,000,000 P 3,000,000 P 29,000,000
Food Service 64,000,000 6,000,000 15,000,000

Required:
1. Calculate the weighted-average cost of capital for Costa Brava Seafood, Ltd..
2. Calculate the economic value added (EVA) for each of CBSL’s divisions.

Problem 9
All – Canadian Ltd. is a multiproduct company with three divisions. Pacific Division, Plains
Division, and Atlantic Division. The company has two sources of long-term debt and equity.
The interest rate on All-Canadian’s P 400 million debt is 9 percent, and the company’s tax
rate is 30 percent. The cost of All-Canadian’s equity capital is 12 percent. Moreover, the
market value of the company’s equity is P 600 million. (The book value of All-Canadian’s
equity is P 430 million, but that amount does not reflect the current value of the company’s
assets or the value of intangible assets.)

The following data (in millions) pertain to All – Canadian’s three divisions.
Division Operating Income Current Liabilities Total Assets

Pacific P 14 P6 P 70

Plains 45 5 300

Atlantic 48 9 480

Required:

1. Compute All-Canadian’s weighted average cost of capital (WACC).

2. Compute the economic value added 9or EVA) for each of the company’s three
divisions.
3. What conclusion can you draw from the EVA analysis?