Types of Responsibility Centers
For each of the independent scenarios, indicate the type of responsibility center involved (cost, revenue, profit, or investment).
- Terrin Belson, plant manager for the laser printer factory of Compugear Inc., brushed his hair back and sighed. December had been a bad month; two machines had broken down, and some factory production workers (all on salary) were idled for part of the month. Materials prices increased, and insurance premiums on the factory increased. No way out of it; costs were going up. He hoped that the marketing vice president would be able to push through some price increases, but that really wasn’t his department.
- Joanna Pauly was delighted to see that her ROI figures had increased for the third straight year. She was sure that her campaign to lower costs and use machinery more efficiently (enabling her factories to sell several older machines) was the reason why. Joanna planned to take full credit for the improvements at her semiannual performance review.
- Gil Rodriguez, sales manager for ComputerWorks, was not pleased with a memo from headquarters detailing the recent cost increases for the laser printer line. Headquarters suggested raising prices. “Great,” thought Gil, “an increase in price will kill sales and revenue will go down. Why can’t the plant shape up and cut costs like every other company in America is doing? Why turn this into my problem?”
- Susan Whitehorse looked at the quarterly profit/loss statement with disgust. Revenue was down, and cost was up—what a combination! Then she had an idea. If she cut back on maintenance of equipment and let a product engineer go, expenses would decrease—perhaps enough to reverse the trend in income.
- Shonna Lowry had just been hired to improve the fortunes of the Southern Division of ABC Inc. She met with top staff and hammered out a three-year plan to improve the situation. A centerpiece of the plan is the retiring of obsolete equipment and the purchasing of state-of-the-art, computer-assisted machinery. The new machinery would take time for the workers to learn to use, but once that was done, waste would be virtually eliminated.
Cornerstone Exercise 12-13 (Algorithmic)
Calculating Average Operating Assets, Margin, Turnover, and Return on Investment
East Mullett Manufacturing earned operating income last year as shown in the following income statement:
Sales$531,250Cost of goods sold280,000Gross margin$251,250Selling and administrative expense181,700Operating income$69,550
At the beginning of the year, the value of operating assets was $390,000. At the end of the year, the value of operating assets was $460,000.
For East Mullett Manufacturing, calculate the following:
1. Average operating assets$ _________________ 2. Margin (round to the nearest whole percent) _________________ %3. Turnover (round to two decimal places) _________________ 4. Return on investment _________________ %
Margin, Turnover, Return on Investment
You may use the attached spreadsheet to help you complete this activity, but you are not required to do so. You will find the spreadsheet by clicking on the link in the drop-down menu above.
Pelak Company had sales of $30,000,000, expenses of $27,600,000, and average operating assets of $6,000,000.
1. Compute the operating income.
2. Compute the margin (as a percent) and turnover ratio.
Margin : _________________ %Turnover : _________________
3. Compute the ROI as a percent.
Exercise 12-21 (Algorithmic)
Park Company provided the following income statement for last year:
Sales$70,000Less: Variable expenses56,000Contribution margin$14,000Less: Fixed expenses19,200Operating income$-5,200
At the beginning of last year, Park had $38,650 in operating assets. At the end of the year, Park had $41,350 in operating assets.
Compute ROI. Do not round interim calculations, but do round your final answer to two decimal places. If required, use a minus sign to indicate a negative ROI.
ROI = _________________ %
Return on Investment, Margin, Turnover
Links to learning objectives referenced by this question can be accessed in the “Additional Resources” drop-down menu above.
Data follow for the Construction Division of D. Jack Inc.:
Round all answers to two decimal places.
1. Compute the margin (as a percent) and turnover ratios for each year.
Year 1 Year 2Margin: _________________ % _________________ %Turnover: _________________ _________________
2. Compute the ROI as a percent for the Construction Division for each year.
ROI year 1 _________________ %ROI year 2 _________________ %