ACCT 202 Principles of Managerial Accounting
Practice Exam - Chapter 12
Segment Reporting and Decentralization
Dr. Fred Barbee

Select your answer by clicking on the button next to each alternative. You will receive immediate feedback.
1. All other things equal, if a division's traceable fixed expenses decrease:
a.  The division's segment margin will increase.
b.  The overall company net operating income will increase.
c.  The division's contribution margin will increase.
d.  The division's sales volume will increase.
2. Residual income is the:
a.  Contribution margin of an investment center, less the required return on the average operating assets.
b.  Contribution margin of an investment center, plus the required return on the average operating assets.
c.  Net operating income of an investment center less the required return on the average operating assets.
d.  Net operating income of an investment center, plus the required return on the average opearting assets.
3. Contribution income statements are used to measure the performance of:
a.  Cost centers.
b.  Both cost centers and profit centers.
c.  Both cost centers and investment centers.
d.  Both profit centers and investment centers.
4. A company that is seeking to increase ROI should attempt to decrease:
a.  Sales.
b.  Turnover.
c.  Margin.
d.  Average Operating Assets.
Use the following information to answer question 5: Following is the information relating to Kew Co.'s Vale Division last year:

Sales
$500,000
Variable expenses
300,000
Traceable fixed expenses
50,000
Average operating assets
100,000
Minimum required rate of return
6%

5. Vale's residual income was:

a.  $144,000.
b.  $150,000.
c.  $156,000.
d.  $200,000.
Use the following information to answer questions 6 and 7:

The North Division of the Lyman Company reported the following data for last year:

Sales
$900,000
Operating expenses
700,000
Interest expense
50,000
Tax expense
60,000
Stockholders' equity
250,000
Average operating assets
500,000
Minimum required rate of return
14%

6. The residual income for the North Division last year was:

a.  $130,000
b.  $126,000
c.  $90,000
d.  $70,000

7. The return on investment last year for the North Division was:

a.  18%
b.  40%
c.  36%
d.  80%

8. Chabot Company had the following results last year: net operating income, $2,160; turnover, 5; and ROI 18%. Chabot Company's average operating assets were:

a.  $300,000.
b.  $60,000.
c.  $10,800.
d.  $12,000.
9. Residual income is a better measure for performance evaluation of an investment center manager than return on investment because:
a.  The problems associated with measuring the asset base are eliminated.
b.  Desirable investment decisions will not be rejected by divisions that already have a high ROI.
c.  Only the gross book value of assetsw need to be calculated.
d.  Returns do not increase as assets are depreciated.
10. Segmented income statements are most meaningful to managers when they are prepared:
a.  On an absorption cost basis.
b.  On a cost behavior (contribution) basis.
c.  On a cash basis.
d.  In a single-step format.


Part II: Problems   (To see the answer, click on the solution button.)
Problem 1 - Segmented Income Statements

The Los Angeles Division of Awercamp Manufacturing produces and markets two product lines: Racquets and Gloves. The following data were gathered on activities last month:

 
Racquets
Gloves
Sales in units
1,000
5,000
Selling price per unit
$100
$40
Variable production costs per unit
$20
$8
Traceable fixed production costs
$20,000
$37,000
Variable selling expenses per unit
$11
$2
Traceable fixed selling expenses
$10,000
$23,000
Allocated division administrative expenses
$6,000
$24,000

Required:

Prepare a segmented income statement for last month, showing both "amount" and "Percent" columns for the division as a whole and for each product line.


Problem 2 - Return on Investment and Residual Income

Financial data for Windsor, Inc., for last year appear below:

Windsor, Inc.
Statements of Financial Position

Assets
Beginning
Balance
Ending
Balance
Cash
$250,000
260,000
Accounts Receivable
120,000
135,000
Inventory
230,000
205,000
Plant and Equipment (net)
420,000
380,000
Investment in Pine Company
220,000
250,000
Land (Undeveloped)
430,000
430,000
Total Assets
$1,670,000
$1,660,000

Liabilities and Owners' Equity
 
 
Accounts Payable
$160,000
$140,000
Long-Term Debt
800,000
800,000
Owners' Equity
710,000
720,000
Total Liabilities & Owners' Equity
$1,670,000
$1,660,000

Windsor, Inc.
Income Statement
Sales
 
$1,750,000
Less Operating Expenses
 
1,470,000
Net Operating Income
 
$280,000
Less Interest and Taxes:
 
 
   Interest Expense
$96,000
 
   Tax Expense
70,000
166,000
Net Income
 
$114,000

The company paid dividends of $104,000 last year. The "Investment in Pine Company" on the statement of financial position represents an investment in the stock of another company.

Required:

  1. Compute the company's margin, turnover, and return on investment for last year.

  2. The Board of Directors of Windsor, Inc., has set a minimum required return of 25%. What was the company's residual income last year?



Last Modified October 29, 2004