The Central Railroad allocates all central corporate overhead costs to its divisions

12-A3 Allocation of Central Costs

The Central Railroad allocates all central corporate overhead costs to its divisions. Some costs, such as specified internal auditing and legal costs are identified on the basis of time spent. However, other costs are harder to allocate so the revenue achieved by each division is used as an allocation base. Examples of such costs are executive salaries, travel, secretarial, utilities, rent, depreciation, donations, corporate planning, and general marketing costs.

Allocations on the basis of revenue for 20X7 were (in millions):
Division Revenue Allocated Costs
Northern $120 $ 6
Midwest 240 12
Texas-Oklahoma 240 12
Total $600 $30

In 20X8, Northern’s revenue remained unchanged. However, Texas-Oklahoma’s revenue soared to $280 million because of unusually large imports from Mexico. The latter are troublesome to forecast because of variations in world markets. Midwest had expected a sharp rise in revenue, but severe competitive conditions resulted in a decline to $200 million. The total cost allocated on the basis of revenue was again $30 million, despite rises in other costs. The president was pleased that central costs did not rise for the year.

1. Compute the allocations of costs to each division for 20X8.
2. How would each division manager probably feel about the cost allocation in 20X8 as compared with 20X7? What are the weaknesses of using revenue as a basis for cost allocation?
3. Suppose the budgeted revenues for 2002 were $120 million, $240, and $280, respectively, and the budgeted revenues were used as a cost driver for allocation. Compute the allocations of costs to each division for 20X8. Do you prefer this method to the one used in requirement 1? Why?
4. Many accountants and managers oppose allocating any central costs. Why?

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Selected sales and operating data for three divisions of three different companies are given below

Selected sales and operating data for three divisions of three different companies are given below:

Division X Division Y Division Z
Sales $900,000 $750,000 $600,000
Average operating assets $600,000 $150,000 $200,000
Net operating income $54,000 $30,000 $10,000
Minimum required rate of return 10% 16% 8%

a. Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. Show computations
b. Compute the residual income for each division. Show computations
c. Under which of these methods would they accept an opportunity with a 15% return. Show computations and details

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Lewis Manufacturing Company has four operating divisions

ACC 560 Week 5 Assignment

P7-5A Lewis Manufacturing Company has four operating divisions. During the first quarter of 2008, the company reported aggregate income from operations of $176,000 and the following divisional results.

Division I II III IV
Sales $250,000 $200,000 $500,000 $400,000
Cost of goods sold 200,000 189,000 300,000 250,000
Selling and administrative expenses 65,000 60,000 60,000 50,000
Income (loss) from operations - $15,000 - $49,000 $140,000 $100,000

Analysis reveals the following percentages of variable costs in each division.

I II III IV
Cost of goods sold 70 % 90 % 80 % 75 %
Selling and administrative expenses 40 70 50 60

Discontinuance of any division would save 50% of the fixed costs and expenses for that division.
Top management is very concerned about the unprofitable divisions (I and II). Consensus is that one or both of the divisions should be discontinued.

Instructions
(a) Compute the contribution margin for Divisions I and II.
(b) Prepare an incremental analysis concerning the possible discontinuance of (1) Division I and (2) Division II. What course of action do you recommend for each division?
(c) Prepare a columnar condensed income statement for Lewis Manufacturing, assuming Division II is eliminated. Use the CVP format. Division II’s unavoidable fixed costs are allocated equally to the continuing divisions.
(d) Reconcile the total income from operations ($176,000) with the total income from operations without Division II.


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The vice president of operations of Six Layer Computers Inc. is evaluating the performance of two divisions organized as investment centers

PR 24-5B The vice president of operations of Six Layer Computers Inc. is evaluating the performance of two divisions organized as investment centers. Invested assets and condensed income statement data for the past year for each division are as follows:

Network Equipment Division Personal Computing Division
Sales $1,400,000 $1,120,000
Cost of goods sold 845,000 690,000
Operating expenses 345,000 206,000
Invested assets 1,000,000 1,400,000

1. Prepare condensed divisional income statements for the year ended December 31, 2010, assuming that there were no service department charges. Enter all amounts as positive numbers.

2. Using the DuPont formula for rate of return on investment, determine the profit margin, investment turnover, and rate of return on investment for each division. Round investment turnover to one decimal place. Do not enter in the percent sign.

3. If management's minimum acceptable rate of return is 14%, determine the residual income for each division. If required, use the minus sign to indicate a negative.

4. Discuss the evaluation of the two divisions, using the performance measures determined in parts (1), (2), and (3). The input in the box below will not be graded, but may be reviewed and considered by your instructor.

Check: 2. Network Equipment Division ROI, 21%

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Maggie Sharrer, a recent graduate of Rolling's accounting program, evaluated the operating performance of Poway Company's six divisions

Exercise 6-10 (E6-10) Make incremental analysis concerning elimination of division.
Maggie Sharrer, a recent graduate of Rolling's accounting program, evaluated the operating performance of Poway Company's six divisions. Maggie made the following presentation to Poway's Board of Directors and suggested the Erie Division be eliminated. “If the Erie Division is eliminated,” she said, “our total profits would increase by $24,500.”
The Other Five Divisions Erie Division Total
Sales $1,664,200 $100,000 $1,764,200
Cost of goods sold 978,520 76,500 1,055,020
Gross profit 685,680 23,500 709,180
Operating expenses 527,940 48,000 575,940
Net income $ 157,740 $(24,500) $ 133,240

In the Erie Division, cost of goods sold is $60,000 variable and $16,500 fixed, and operating expenses are $25,000 variable and $23,000 fixed. None of the Erie Division' fixed costs will be eliminated if the division is discontinued.

Instructions
Is Maggie right about eliminating the Erie Division? Prepare a schedule to support your answer.


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Edward Baird Company is a diversified investment company with three operating divisions organized as investment centers

Edward Baird Company is a diversified investment company with three operating divisions organized as investment centers. Condensed data taken from the records of the three divisions for the year ended June 30, 2012, are as follows:

Mutual Fund Division Electronic Brokerage Division Investment Banking Division
Fee revenue $3,450,000 $2,800,000 $3,800,000
Operating expenses 2,415,000 2,632,000 2,850,000
Invested Assets 5,750,000 800,000 4,750,000

The management of Edward Baird Company is evaluating each division as a basis for planning a future expansion of operations.

Required:
1. Prepare condensed divisional income statements for the three divisions, assuming that there were no service department charges.
2. Using the DuPont formula for rate of return on investment, compute the profit margin, investment turnover, and rate of return on investment for each division. If required, round your final answer to one decimal place
3. If available funds permit the expansion of operations of only one division, which of the divisions would you recommend for expansion, based on parts (1) and (2)? Explain.

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