Yard Products Company
Chapter 10 Below is an income statement for the most recently ended year for the Yard Products
Company and its two divisions:
Sales………………………………………
Variable Costs……………………………
Contribution Margin……………………..
Segment Fixed Costs…………………….
Corporate Fixed Costs……………………
Net Income………………………………. Shovel
$900,000
(500,000)
400,000
(250,000)
(120,000)
30,000 Hoe
$600,000
(350,000)
250,000
(100,000)
( 80,000)
70,000 Co. Total
$1,500,000
(850,000)
650,000
(350,000)
(200,000)
100,000 Segment average assets…………………..
Corporate average assets…………………
Total average assets……………… $500,000
300,000
800,000 $400,000
200,000
600,000 $900,000
500,000
1,400,000 The president of the company has severely criticized the manager of the Shovel Division
for its dismal 3.8% ROI, “which doesn’t come close to the firm’s 12% cost of capital.”
The manager of Hoe Division also was criticized for an 11.7% ROI, “which is slightly
less than the cost of capital.” Corporate fixed costs and assets are allocated to each
division on the basis of sales.
Required:
a. Show the calculations that the president used as the basis for the criticism.
b. For each division and for the company as a whole, using appropriate data,
calculate the following:
a. Return on Sales
b. Investment Turnover
c. ROI
c. Calculate residual income for each division.
d. In view of your answers to parts (b) and (c), is the president’s criticism justified?
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Posted 21 Apr 2017 03:04 AM
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