Fundamentals Of Cost Accounting (6th Edition)
Fundamentals Of Cost Accounting (6th Edition)
6th Edition
ISBN: 9781259969478
Author: WILLIAM LANEN, Shannon Anderson, Michael Maher
Publisher: McGraw Hill Education
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Chapter 14, Problem 24E

Computing Divisional Income: Incomplete Information and Financial Ratios

As a part of an employment interview, you are given the partial income statement and selected financial ratios shown for Sneaky Pete’s, a chain of western stores. Sneaky Pete’s is organized into two divisions: Mountain and Valley. You are told that corporate overhead costs are allocated to divisions based on relative sales.

Chapter 14, Problem 24E, Computing Divisional Income: Incomplete Information and Financial Ratios As a part of an employment

Required

  1. a.      Complete the income statements for both divisions and the corporation as a whole.
  2. b.      What recommendation(s) would you make about computing divisional income for divisional performance measurement at Sneaky Pete’s?

a.

Expert Solution
Check Mark
To determine

Complete the income statements for both divisions along with the corporation as a whole.

Explanation of Solution

Divisional income statement:

The divisional income statement shows the income of various divisions of the business. It calculates the operating profit of the division by subtracting the expenses of the business from the sales of the division.

Calculate the divisional income statement for mountain division, valley division and corporate:

Company S

Divisional Income Statement

ParticularsMountain divisionValley divisionCorporate
Sales$120.00(6)$480.00(7)$600.00(1)
Cost of sales$60.00(10)$300.00(10)$360.00(4)
Gross margin$60.00(8)$180.00(8)$240.00(3)
SG&A$25.00(9)$52.00(5)$77.00(5)
Allocated corporate costs$8.00$32.00(11)$40.00
Operating income(a)$27.00(8)$96.00(8)$123.00(2)
Tax expenses b=(a × 20%)$5.40$19.20$24.60
After tax profit c = (a - b)$21.60$76.80$98.40

Table: (1)

Working note 1:

Calculate the overall corporate sales:

Fundamentals Of Cost Accounting (6th Edition), Chapter 14, Problem 24E , additional homework tip  1

Sales = After-tax incomeProfit margin= $98.40.164= $600

Working note 2:

Calculate the operating income:

Fundamentals Of Cost Accounting (6th Edition), Chapter 14, Problem 24E , additional homework tip  2Operating income =  Sales × Operating margin= $600 × 20.5%= $123

Working note 3:

Calculate the gross margin:

Gross margin =  Sales × gross margin ratio= $600 × 40%= $240

Working note 4:

Calculate the cost of sales:

Cost of sales = Sales - Gross margin= $600 - $240= $360

Working note 5:

Calculate the SG&A:

Operating income = Gross margin - (SG&A + Allocated corporate costs) $123 = $240 - (SG&A + $40)SG&A = $77

Working note 6:

Calculate the sales for mountain division:

The allocated corporate costs are allocated on the basis of sales. The sales level is $600 on the costs of $40, and it will be computed as follows for the costs of $8:

Allocated corporate costs = (Corporate salesTotal corporrate cost  × Mountain division costs)$600$40 × $8= $120

Working note 7:

Calculate the sales for valley division:

Valley division sales = Corporate sales (1) - Mountain division sales (2)= $600 - $120= $480

Working note 8:

Calculate the gross and operating income for both the divisions:

Particulars

Sales

(a)

Gross margin

(b)

Operating margin

(c)

Gross margin

d = (a × b)

Operating profit

e = (a × c)

Mountain division$12050%23%$60$27
Valley division$48038%20%$180$96

Table: (2)

Working note 9:

Calculate the SG&A:

Operating income = Gross margin - (SG&A + Allocated corporate costs) $27 = $60 - (SG&A + $8)SG&A = $25

Working note 10:

Calculate the cost of sales:

ParticularsSalesGross marginCost of sales
Mountain division12050%$60
Valley division48038%$298

Table: (3)

Working note 11:

Calculate the allocated corporate costs:

Allocated coprorate costs = Corporate cost - Mountain division costs= $40 - $8= $32

b.

Expert Solution
Check Mark
To determine

Provide recommendations to Company S.

Explanation of Solution

Recommendations to company S:

Company S should not allocate the corporate cost to the divisions. It is not a division specific cost so it should not be allocated on the basis of the revenue of the unit.

Thus, Company S should not allocate the corporate cost to the mountain division and valley division.

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Chapter 14 Solutions

Fundamentals Of Cost Accounting (6th Edition)

Ch. 14 - Prob. 11CADQCh. 14 - What problems might there be if the same methods...Ch. 14 - Prob. 13CADQCh. 14 - The chapter identified some problems with ROI-type...Ch. 14 - Failure to invest in projects is not a problem...Ch. 14 - How would you respond to the following comment?...Ch. 14 - Prob. 17CADQCh. 14 - Prob. 18CADQCh. 14 - Prob. 19CADQCh. 14 - Prob. 20CADQCh. 14 - Prob. 21CADQCh. 14 - Compute Divisional Income Arlington Clothing,...Ch. 14 - Compute Divisional Income Refer to Exercise 14-22....Ch. 14 - Computing Divisional Income: Incomplete...Ch. 14 - Compute RI and ROI The Campus Division of...Ch. 14 - Prob. 26ECh. 14 - Compare Alternative Measures of Division...Ch. 14 - Comparing Business Units Using ROI Back Mountain...Ch. 14 - Comparing Business Units Using Residual Income...Ch. 14 - Prob. 30ECh. 14 - Universal Electronics, Inc. (UEI), which started...Ch. 14 - Comparing Business Units Using Residual...Ch. 14 - Comparing Business Units Using Economic Value...Ch. 14 - Impact of New Asset on Performance Measures The...Ch. 14 - Refer to the data in Exercise 14–34. The division...Ch. 14 - Refer to the information in Exercises 14–34 and...Ch. 14 - Impact of an Asset Disposal on Performance...Ch. 14 - Impact of an Asset Disposal on Performance...Ch. 14 - Compare Historical Cost, Net Book Value to Gross...Ch. 14 - Prob. 40ECh. 14 - Prob. 41ECh. 14 - Effects of Current Cost on Performance...Ch. 14 - Comparing Business Units Using Divisional Income,...Ch. 14 - Comparing Business Units Using Economic Value...Ch. 14 - Prob. 45PCh. 14 - Equipment Replacement and Performance Measures...Ch. 14 - Prob. 47PCh. 14 - Prob. 48PCh. 14 - Prob. 49PCh. 14 - Prob. 50PCh. 14 - Prob. 51PCh. 14 - Evaluate Performance Evaluation System: Behavioral...Ch. 14 - ROI, EVA, and Different Asset Bases Hys is a...Ch. 14 - Economic Value Added Bisbee Health Products...Ch. 14 - Prob. 55PCh. 14 - Prob. 56PCh. 14 - Refer to the information in Exercise 14-39. Assume...Ch. 14 - Refer to the information in Exercise 14-42. Assume...
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