Question

Marian Corporation has two separate divisions that operate as profit centers. The following information is available for the most recent year:

	Black Division					Navy Division
Sales (net)		$	700,000			$	500,000
Salary expense			38,000				58,000
Cost of goods sold			200,000				169,000

The Black Division occupies 30,000 square feet in the plant. The Navy Division occupies 40,000 square feet. Rent is an indirect expense and is allocated based on square footage. Rent expense for the year was $60,000. Compute gross profit for the Black and Navy Divisions, respectively.

Multiple Choice

• $500,000; $331,000.

• $162,000; $233,000.

• $662,000; $442,000.

• $162,000; $273,000.

• $132,000; $233,000.
  
  

  Carter Company reported the following financial numbers for one of its divisions for the year; average total assets of $4,160,000; sales of $4,585,000; cost of goods sold of $2,610,000; and operating expenses of $1,432,000. Assume a target income of 11% of average invested assets. Compute residual income for the division:

  Multiple Choice

• $85,400.

• $217,250.

• $42,900.

• $95,400.

• $59,730.

Answer 1

1. Gross profit is calculated as Sales less cost of goods sold. The indirect expenses are not deducted while calculating the gross profit.
Accordingly, the gross profit for the Black Division and the Navy Division are calculated as follows:
Particulars	Black Division	Navy Division
Sales	$700,000	$500,000
Less: Cost of goods sold	$200,000	$169,000
Gross profit	$500,000	$331,000
Since rent is an indirect expense, it is not considered while calculating the gross profit.
Hence, the first option is the correct answer.
2. Residual income = Net income - Target income
=> Residual income = $543,000 - (11% of $4,160,000) = $85,400
Hence, the first option is the correct answer,
Working note: Net income = Sales - cost of goods sold - operating expenses
=> Net income = $4,585,000 - $2,610,000 - $1,432,000 = $543,000