Exercise Solution Ch13
Week 12 Class Exercises Solutions:
Exercise 13-29
1.
Average investment in productive assets:
Balance on 12/31/x1
$12,600,000
Balance on 1/1/x1 ($12,600,000 1.05) 12,000,000
Beginning balance plus ending balance
$24,600,000
Average balance ($24,600,000 2)
$12,300,000
a.
ROI
=
=
=
20%
b.
Income from operations before income taxes
$ 2,460,000
Less: imputed interest charge:
Average productive assets
$12,300,000
Imputed interest rate
.15
Imputed interest charge 1,845,000
Residual income
$ 615,000
2.
Yes, Fairmont’s management probably would have accepted the investment if residual income were used. The investment opportunity would have lowered Fairmont’s 20x1 ROI because the project's expected return (18 percent) was lower than the division's historical returns (19.3 percent to 22.1 percent) as well as its actual 20x1 ROI (20 percent). Management may have rejected the investment because bonuses are based in part on the ROI performance measure. If residual income were used as a performance measure (and as a basis for bonuses), management would accept any and all investments that would increase residual income (i.e., a dollar amount rather than a percentage) including the investment opportunity it had in 20x1.
3.
For the electronic version of the solutions manual, please refer to file: Build a Spreadsheet 13-29.xls
Exercise 13-34
1.
Transfer price
=
outlay cost + opportunity cost
=
$320* + $100† = $420
*Outlay cost = unit variable production cost
†Opportunity cost
=
forgone contribution margin
=
$420 – $320 = $100
2.
If the Fabrication Division has excess capacity, there is no opportunity cost associated with a transfer. Therefore:
Transfer price
=
outlay cost + opportunity cost
=
$320 + 0 = $320
Exercise 13-35
1.
The Assembly Division's manager is likely to reject the special offer because the Assembly Division's
Exercise 13-29
1.
Average investment in productive assets:
Balance on 12/31/x1
$12,600,000
Balance on 1/1/x1 ($12,600,000 1.05) 12,000,000
Beginning balance plus ending balance
$24,600,000
Average balance ($24,600,000 2)
$12,300,000
a.
ROI
=
=
=
20%
b.
Income from operations before income taxes
$ 2,460,000
Less: imputed interest charge:
Average productive assets
$12,300,000
Imputed interest rate
.15
Imputed interest charge 1,845,000
Residual income
$ 615,000
2.
Yes, Fairmont’s management probably would have accepted the investment if residual income were used. The investment opportunity would have lowered Fairmont’s 20x1 ROI because the project's expected return (18 percent) was lower than the division's historical returns (19.3 percent to 22.1 percent) as well as its actual 20x1 ROI (20 percent). Management may have rejected the investment because bonuses are based in part on the ROI performance measure. If residual income were used as a performance measure (and as a basis for bonuses), management would accept any and all investments that would increase residual income (i.e., a dollar amount rather than a percentage) including the investment opportunity it had in 20x1.
3.
For the electronic version of the solutions manual, please refer to file: Build a Spreadsheet 13-29.xls
Exercise 13-34
1.
Transfer price
=
outlay cost + opportunity cost
=
$320* + $100† = $420
*Outlay cost = unit variable production cost
†Opportunity cost
=
forgone contribution margin
=
$420 – $320 = $100
2.
If the Fabrication Division has excess capacity, there is no opportunity cost associated with a transfer. Therefore:
Transfer price
=
outlay cost + opportunity cost
=
$320 + 0 = $320
Exercise 13-35
1.
The Assembly Division's manager is likely to reject the special offer because the Assembly Division's