Week 7 Homework 1. Burton Electronics produces radios, computers, and navigation systems. Although all high level decisions are made at company headquarters by top management, rapid expansion and increasingly specialized products have caused the company to consider decentralizing into three divisions. Each division manager would be responsible for costs, revenues, and investments in assets. a) How should the company classify the three divisions, as cost centers, profit centers, or investment centers? Explain. b) What are the potential advantages of decentralizing? c) What are the potential disadvantages of decentralizing? 2. Aviation Products, Inc., operates primarily in the United States and has several segments. For each of the following segments, identify if it is a cost center, profit center, or investment center. a) Accounting and finance: responsible for recording financial information and preparing financial reports. b) Human resources: responsible for hiring employees and maintaining personnel records. c) Retail stores: responsible for sales prices and all costs within each store. d) Advertising: responsible for promotional materials. e) Production: responsible for manufacturing company products. f) International operations: acts as an independent segment responsible for all facets of the business outside of the United States. 3. Pool Accessories, Inc., has two divisions—Furniture and Supplies. Assume for both divisions that the tax rate is 30 percent, and the cost of capital is 8%. The following segmented financial information is for the most recent fiscal year ended December 31. Sales Cost of goods sold Allocated overhead Selling and administrative expenses Average net operating assets Furniture Division $3,000,000 1,600,000 375,000 250,000 $8,500,000 Supplies Division $1,000,000 430,000 125,000 200,000 2,100,000 a) Prepare a segmented income statement using the format presented in Figure 11.3 "Segmented Income Statements (Game Products, Inc.)". Include the profit margin ratio for each division at the bottom of the segmented income statement. b) Using net income as the measure, which division is most profitable? Explain why this conclusion might be misleading. c) Using profit margin as the measure, which division is most profitable? d) Using ROI as the measure, which division is most profitable? e) Using RI as the measure, which division is most profitable? f) Using EVA as the measure, which division is most profitable? For the EVA calculation, the only adjustment to be made to net income is to deduct taxes. No adjustments are required for assets. 4. The CEO of Home Store was concerned about the company’s drop in cash from $130,000 at the beginning of the year to $32,000 at the end of the year. The $98,000 decrease in cash came primarily from the purchase of a forklift, which was paid in cash rather than being financed. a) Identify whether the cash payment for the purchase of equipment would appear in the operating, investing, or financing activities section of the statement of cash flows. b) Explain why a small increase in cash from operating activities might be more concerning to investors than a large decrease in cash from investing or financing activities. 5. Tech University has more than 10,000 students enrolling in courses each term. The management would like to develop a balanced scorecard to assess performance. Assume students are the customers. a) Provide two financial measures Tech University can use on its balanced scorecard. Assume students are the customers. b) Provide two internal business process measures Tech University can use on its balanced scorecard. Assume students are the customers. c) Provide two learning and growth measures Tech University can use on its balanced scorecard. Assume students are the customers. d) Provide two customer measures Tech University can use on its balanced scorecard. Assume students are the customers. 6. CarTrax, Inc. has the following operating incomes: 2017 2016 Net sales 897,000 747,000 COGS 767,000 637,000 Gross margin 130,000 110,000 SG&A 92,000 82,000 Operating Income 38,000 28,000 a) Prepare a trend analysis of the income statements (calculate the year-to-year amount and percent change for each of the line items). What does the trend analysis tell you about the company? b) Prepare a common-size analysis of the income statements (). What does the commonsize analysis tell you about the company?
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