Question

The Asphalt Division of Sierra Industries is operated as a profit center. Sales for the division were budgeted for 2014 at $1,200,000. The only variable costs budgeted for the division were cost of goods sold ($590,000) and selling and administrative ($80,000). Fixed costs were budgeted at $130,000 for cost of goods sold, $120,000 for selling and administrative. Actual results for these items were:

                                            Net Sales                                $1,185,000

                                            Cost of goods sold

                                                Variable                                    545,000

                                                Fixed                                        140,000

                                            Selling and administrative

                                                Variable                                      82,000

                                                Fixed                                          90,000

Instructions

Prepare a responsibility report for the Asphalt Division for 2014. (Hint: The table outline is provided here, but would not be provided on an examination)(Solution: Total of Difference column yields operating income at $48,000 Favorable)

Assume the division is an investment center, and average total assets were $1,200,000. Compute ROI for actual results. (Solution: 27.33%)

Compute profit margin ratio. (See page 1297 in text) (Solution: 27.68%)

Compute asset turnover. (See page 1297 in text)(Hint: PM ratio x Asset T.O. should equal ROI) (Solution: 98.75%)

If the target rate of return is 25%, compute residual income. (See page 1299 in text) (Solution: $28,000)

Answer 1