RESPONSIBILITY ACCOUNTING

Problem 1

Alyssa Company is a decentralized company with five autonomous divisions. Operating

results for the company’s Division A are given below:
Sales P24,500,000
Less: Variable costs 14,700,000
Contribution margin 9,800,000
Less: Fixed costs 8,000,000
Net operating income P 1,800,000

The company had an overall ROI of 24% last year. Division A used an investment of
P6,000,000 at the start of the year. Division A has an opportunity to add a new product line
that would require an investment of P4,000,000. The cost and revenue characteristics of
the new product line per year would be:

Sales P 8,000,000
Variable costs 60% of sales
Fixed costs P 2,240,000

Required:
1. Compute Division A’s ROI for last year.
2. Compute Division A’s ROI if the new product is added.
3. If you were Division A’s manager, would you accept the new product line?
4. If you were the Chief Executive Officer (CEO) of Alyssa Company, would you
advise Division A manager to add the new product line?
5. Suppose that the company sets a minimum return of 20% on its invested
assets, and that the divisional performance is evaluated using the residual income
approach:
a. Determine the residual income of Division A last year and its new
residual income if the new product line is accepted.
b. Under these circumstances, if you are the Division A manager, would
you accept the new product line?

Problem 2

The following excerpted data were taken from a report published by retailing industry:

RED COMPANY BLUE COMPANY WHITE

COMPANY
Sales P6,000,000 P4,800,000 P ?
Net operating income 1,200,000 720,000 ?
Average operating assets 3,000,000 ? 8,000,000
Return on sales ? ? 8%
Assets turnover ? ? 3
Return on investment ? 12% ?

Required: Compute for the missing information.

Problem 3
Return on investment is often expressed as follows:
Income = Revenue x Income
Investment Investment Revenue

Required:
1. What advantages are there in the breakdown of the computation into two separate
components?
 2. Fill in the blanks.
Companies in the same industry:
A B C
Revenue 1,000,000 500,000 ?
Income 100,000 50,000 ?
Investment 500,000 ? 5,000,000
Income as a % of revenue ? ? 0.5%
Investment turnover ? ? 2X
Return on Investment ? 1% ?

After filling in the blanks, comment on the relative performance of these companies as
thoroughly as the data permit.