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    Cost Division

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    kris m
    The document provides information about three divisions - Division A, Division B, and Nash. It presents three scenarios regarding Division B's potential purchase of 5,000 units from an outside supplier or Division A. It then asks to calculate the effect on Nash's income for each scenario.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd

    Cost Division

    Uploaded by

    kris m
    50 views4 pages
    The document provides information about three divisions - Division A, Division B, and Nash. It presents three scenarios regarding Division B's potential purchase of 5,000 units from an outside supplier or Division A. It then asks to calculate the effect on Nash's income for each scenario.

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    cost division

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    The document provides information about three divisions - Division A, Division B, and Nash. It presents three scenarios regarding Division B's potential purchase of 5,000 units from an outside supplier or Division A. It then asks to calculate the effect on Nash's income for each scenario.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    50 views4 pages

    Cost Division

    Uploaded by

    kris m
    The document provides information about three divisions - Division A, Division B, and Nash. It presents three scenarios regarding Division B's potential purchase of 5,000 units from an outside supplier or Division A. It then asks to calculate the effect on Nash's income for each scenario.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 4

    Division B has the opportunity to buy its needs for 5,000 units from an outside supplier at $45 each.

    a. Division A refuses to meet the $45 price, sales to outsiders cannot be increased, and Division B buys
    from the outside supplier. Compute the effect on the income of Nash.

    b. Division A cannot increase its sales to outsiders, does meet the $45 price, and Division B continues
    to buy from A. Compute the effect on the income of Nash.

    c. Suppose that Division A could sell the 5,000 units now taken by Division B to outsiders at $57 each
    without disturbing sales at the regular $72 price. Division B buys outside at $45 and Division A increases
    its outside sales. Find the effect on the income of Nash.

    SOLUTION:

    a. Nash's income: Decreases $45,000 [5,000 units x ($45 outside price - $36 variable cost)]

    b. Nash's income: No change

    c. Nash's income: $60,000 increase ($285,000 added revenue from outsiders - $225,000 paid to the
    outsider by B)

    8. The following information relates to Bradley Division of Allen Company. Allen's minimum cost of
    capital for its segments is 15%.

    Sales $4,000,000 Variable costs 1,400,000

    Direct fixed costs 1,800,000 Investment 4,800,000

    a. Find Bradley's ROI.


    b. Find Bradley's economic value added.

    SOLUTION:

    a. ROI: 16.7% [($4,000,000 - $1,400,000 - $1,800,000)/$4,800,000]

    b. EVA: $80,000 [$800,000 - ($4,800,000 x 15%)]

    9. Rosalie Division of Lachene Inc. has a capacity of 100,000 units and expects the following results for.

    Sales (90,000 units at $30) $2,700,000

    Variable costs, at $20 (1,800,000)

    Fixed costs (700,000)

    ---------

    Income $ 200,000

    ==========

    Katarina Division of Lachene Inc. currently purchases 20,000 units of a part for one of its
    products from an outside supplier at $32 per unit. Katarina's manager believes he could use a minor
    variation of Rosalie's product instead, and offers to buy the units from Rosalie at $26. Making the
    variation desired by Katarina would cost Rosalie an additional $5 per unit and would increase Rosalie's
    annual cash fixed costs by $80,000. ROSALIE'S MANAGER AGREES TO THE DEAL OFFERED BY
    KATARINA'S MANAGER.

    a. Find the effect of the deal on Katarina's income and circle the correct direction. (increase decrease
    none)

    b. Find the effect of the deal on Rosalie's income and circle the correct direction. (increase decrease
    none)
    c. Find the effect of the deal on the income of Lachene Inc. and circle the correct direction. (increase
    decrease none)

    SOLUTION:

    a. Katarina's income, + $120,000 [20,000 x ($32 - $26)]

    b. Rosalie's income, - $160,000 {20,000 x ($26 - $20 - $5) - [lost contribution margin of 10,000 x ($30 -
    $20)] - $80,000 new fixed costs)}

    c. Lachene's income, - $40,000 ($120,000 - $160,000)

    10. Young Division has the following information for the most recent period:

    Divisional income $ 11,000,000

    Divisional investment $ 85,000,000

    Divisional sales $100,000,000

    Young has a minimum required return of 15%

    a. Compute Young's return on investment.

    b. Compute Young's investment turnover.

    c. Compute Young's residual income.


    d. Compute Young's return on sales.

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