Resolução - Garrison Contabilidade Gerencial- capítulo 12

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Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-5 
 
True/False Questions 
 
 1. Allocating common fixed costs to segments on segmented income statements reduces 
the usefulness of such statements. 
 
 Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking 
AICPA FN: Reporting; Measurement LO: 1 Level: Easy 
 
 2. A segment is any part or activity of an organization about which a manager seeks cost, 
revenue, or profit data. 
 
 Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking 
AICPA FN: Reporting; Measurement LO: 1 Level: Easy 
 
 3. A responsibility center is a business segment whose manager has control over costs, 
revenues, or investments in operating assets. 
 
 Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking 
AICPA FN: Reporting; Measurement LO: 1 Level: Easy 
 
 4. Residual income is used in the numerator to compute turnover in an ROI analysis. 
 
 Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 2 Level: Easy 
 
 5. Net operating income is earnings before interest and taxes. 
 
 Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking 
AICPA FN: Reporting; Measurement LO: 2 Level: Easy 
 
 6. Land held for possible plant expansion would be included as an operating asset in the 
ROI calculation. 
 
 Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 2 Level: Medium 
 
 7. Margin equals Stockholders' Equity divided by Sales. 
 
 Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 2 Level: Easy 
Chapter 12 Segment Reporting and Decentralization 
 
12-6 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 8. The use of return on investment (ROI) as a performance measure may lead managers 
to reject a project that would be favorable for the company as a whole. 
 
 Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 2 Level: Medium 
 
 9. Residual income is equal to the difference between total revenues and operating 
expenses. 
 
 Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 3 Level: Medium 
 
 10. When using residual income as a measure of performance, it is not meaningful to 
compare the residual incomes of divisions of different sizes. 
 
 Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 3 Level: Easy 
 
 11. The transfer price used for internal transfers between divisions of the same company 
can increase or decrease each division's reported profits. 
 
 Ans: True AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting Appendix: 12A LO: 4 Level: Medium 
 
 12. For performance evaluation purposes, the lump-sum amount of fixed service 
department costs charged to an operating department should usually be based on either 
the operating department's peak-period or long-run average needs. 
 
 Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking 
AICPA FN: Reporting Appendix: 12B LO: 5 Level: Easy 
 
 13. In service department cost allocations, sales dollars should be used as an allocation 
base whenever possible. 
 
 Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking 
AICPA FN: Reporting Appendix: 12B LO: 5 Level: Easy 
 
 14. A cost center is also a responsibility center. 
 
 Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 6 Level: Easy 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-7 
 
 15. The basic objective of responsibility accounting is to charge each manager with those 
costs and/or revenues over which he has control. 
 
 Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 6 Level: Easy 
 
 
Multiple Choice Questions 
 
 16. The impact on net operating income of short-run changes in sales for a segment can be 
most clearly predicted by analyzing: 
 A) the contribution margin ratio. 
 B) the segment margin. 
 C) the ratio of the segment margin to sales. 
 D) net sales less segment fixed costs. 
 
 Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 1 Level: Medium 
 
 17. In a segmented contribution format income statement, what is the best measure of the 
long-run profitability of a segment? 
 A) its gross margin 
 B) its contribution margin 
 C) its segment margin 
 D) its segment margin minus an allocated portion of common fixed expenses 
 
 Ans: C AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting; Measurement LO: 1 Level: Medium 
 
 18. In order to properly report segment margin as a guide to long-run segment profitability 
and performance, fixed costs must be separated into two broad categories. One 
category is common fixed costs. What is the other category? 
 A) discretionary fixed costs 
 B) committed fixed costs 
 C) traceable fixed costs 
 D) specialized fixed costs 
 
 Ans: C AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting; Measurement LO: 1 Level: Easy 
Chapter 12 Segment Reporting and Decentralization 
 
12-8 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 19. Which of the following segment performance measures will decrease if there is an 
increase in the interest expense for that segment? 
 
 Return on Investment Residual Income 
A) Yes Yes 
B) No Yes 
C) Yes No 
D) No No 
 
 Ans: D AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 2; 3 Level: Hard 
 
 20. Which of the following segment performance measures will increase if there is a 
decrease in the selling expenses for that segment? 
 
 Return on Investment Residual Income 
A) Yes Yes 
B) No Yes 
C) Yes No 
D) No No 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 2; 3 Level: Medium 
 
 21. Some investment opportunities that should be accepted from the viewpoint of the 
entire company may be rejected by a manager who is evaluated on the basis of: 
 A) return on investment. 
 B) residual income. 
 C) contribution margin. 
 D) segment margin. 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 2 Level: Medium 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-9 
 
 22. Consider the following three conditions: 
 
I. An increase in sales 
II. An increase in operating assets 
III. A reduction in expenses 
 
 Which of the above conditions provide a way in which a manager can improve return 
on investment? 
 A) Only I 
 B) Only I and II 
 C) Only I and III 
 D) Only II and III 
 
 Ans: C AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 2 Level: Medium 
 
 23. When calculating a segment's return on investment (ROI), which of the following 
assets of that segment would be considered a part of average operating assets? 
 A) cash 
 B) accounts receivable 
 C) plant and equipment 
 D) all of the above 
 
 Ans: D AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 2 Level: Medium 
 
 24. Which of the following measures of performance encourages continued expansionby 
an investment center so long as it is able to earn a return in excess of the minimum 
required return on average operating assets? 
 A) return on investment 
 B) transfer pricing 
 C) the contribution approach 
 D) residual income 
 
 Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 3 Level: Easy 
Chapter 12 Segment Reporting and Decentralization 
 
12-10 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 25. Residual income is: 
 A) Net operating income plus the minimum required return on average operating 
assets. 
 B) Net operating income less the minimum required return on average operating 
assets. 
 C) Contribution margin plus the minimum required return on average operating 
assets. 
 D) Contribution margin less the minimum required return on average operating 
assets. 
 
 Ans: B AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 3 Level: Easy 
 
 26. Which of the following is NOT a common approach used to set transfer prices? 
 A) market price 
 B) variable cost 
 C) negotiation 
 D) suboptimization 
 
 Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking 
AICPA FN: Reporting Appendix: 12A LO: 4 Level: Easy 
 
 27. For performance evaluation purposes, the variable costs of a service department 
should be charged to operating departments using: 
 A) the actual variable rate and the budgeted level of activity for the period. 
 B) the budgeted variable rate and the actual level of activity for the period. 
 C) the budgeted variable rate and the budgeted level of activity for the period. 
 D) the actual variable rate and the peak-period or long-run average servicing 
capacity. 
 
 Ans: B AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting Appendix: 12B LO: 5 Level: Medium 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-11 
 
 28. Which of the following companies is following a policy with respect to the costs of 
service departments that is not recommended? 
 A) To charge operating departments with the depreciation of forklifts used at its 
central warehouse, Shalimar Electronics charges predetermined lump-sum 
amounts calculated on the basis of the long-term average use of the services 
provided by the warehouse to the various segments. 
 B) Manhattan Electronics uses the sales revenue of its various divisions to allocate 
costs connected with the upkeep of its headquarters building. 
 C) Rainier Industrial does not allow its service departments to pass on the costs of 
their inefficiencies to the operating departments. 
 D) Golkonda Refinery separately allocates fixed and variable costs incurred by its 
service departments to its operating departments. 
 
 Ans: B AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting Appendix: 12B LO: 5 Level: Medium 
Source: CMA; adapted 
 
 29. A segment of a business responsible for both revenues and expenses would be called: 
 A) a cost center. 
 B) an investment center. 
 C) a profit center. 
 D) residual income. 
 
 Ans: C AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 6 Level: Easy 
Chapter 12 Segment Reporting and Decentralization 
 
12-12 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 30. Devlin Company has two divisions, C and D. The overall company contribution 
margin ratio is 30%, with sales in the two divisions totaling $500,000. If variable 
expenses are $300,000 in Division C, and if Division C's contribution margin ratio is 
25%, then sales in Division D must be: 
 A) $50,000 
 B) $100,000 
 C) $150,000 
 D) $200,000 
 
 Ans: B AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 1 Level: Hard 
 
 Solution: 
 
 Total company contribution margin = $500,000 × 30% = $150,000 
Total company variable expenses = $500,000 − $150,000 = $350,000 
 
Division C contribution margin ratio = (Sales − $300,000) ÷ Sales = 0.25 
Sales − $300,000 = 0.25 × Sales 
(0.75 × Sales) ÷ 0.75 = $300,000 ÷ 0.75 
Sales = $400,000 
 
Division D sales = Total company sales − Division C sales 
= $500,000 − $400,000 = $100,000 
 
 Divisions 
 
 
Total 
Company Division C Division D 
 Sales ................................... $500,000 $400,000 $100,000 
 Less variable expenses ....... 350,000 300,000 50,000 
 Contribution margin .......... $150,000 $100,000 $ 50,000 
 Contribution margin ratio .. 0.30 0.25 0.50 
 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-13 
 
 31. Toxemia Salsa Company manufactures five flavors of salsa. Last year, Toxemia 
generated net operating income of $40,000. The following information was taken from 
last year's income statement segmented by flavor (brackets indicate a negative 
amount): 
 
 Wimpy Mild Medium Hot Atomic 
 Contribution margin . $(2,000) $45,000 $35,000 $50,000 $162,000 
 Segment margin ........ $(16,000) $(5,000) $7,000 $10,000 $94,000 
 Segment margin less 
allocated common 
fixed expenses ....... $(26,000) $(15,000) $(3,000) $0 $84,000 
 
 Toxemia expects similar operating results for the upcoming year. If Toxemia wants to 
maximize its profitability in the upcoming year, which flavor or flavors should 
Toxemia discontinue? 
 A) no flavors should be discontinued 
 B) Wimpy 
 C) Wimpy and Mild 
 D) Wimpy, Mild, and Medium 
 
 Ans: C AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Decision Making; LO: 1 Level: Medium 
 
 Solution: 
 
 The segment margin is a better indication of profitability of individual products than 
the segment margin less allocated common fixed expenses. The products with 
negative segment margins should be discontinued to maximize profit: Wimpy and 
Mild. 
Chapter 12 Segment Reporting and Decentralization 
 
12-14 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 32. Uchimura Corporation has two divisions: the AFE Division and the GBI Division. The 
corporation's net operating income is $42,000. The AFE Division's divisional segment 
margin is $15,700 and the GBI Division's divisional segment margin is $175,400. 
What is the amount of the common fixed expense not traceable to the individual 
divisions? 
 A) $149,100 
 B) $57,700 
 C) $217,400 
 D) $191,100 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 1 Level: Medium 
 
 Solution: 
 
 
Total 
Company 
 
 Divisional segment margin ..............................$191,100 ($15,700 + $175,400) 
 Less common fixed costs not 
traceable to the individual divisions............. X 
 
 Net operating income ................................ $ 42,000 
 
Common fixed costs not traceable to the individual divisions 
= $191,100 − $42,000 = $149,100 
 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-15 
 
 33. Younie Corporation has two divisions: the South Division and the West Division. The 
corporation's net operating income is $26,900. The South Division's divisional 
segment margin is $42,800 and the West Division's divisional segment margin is 
$29,900. What is the amount of the common fixed expense not traceable to the 
individual divisions? 
 A) $56,800 
 B) $69,700 
 C) $72,700 
 D) $45,800 
 
 Ans: D AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 1 Level: Medium 
 
 Solution: 
 
 
Total 
Company 
 
 Divisional segment margin ..............................$72,700 ($42,800 + $29,900) 
 Less common fixed costs not 
traceable to the individual divisions............. XNet operating income ................................ $26,900 
 
Common fixed costs not traceable to the individual divisions 
= $72,700 − $26,900 = $45,800 
 
Chapter 12 Segment Reporting and Decentralization 
 
12-16 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 34. Dukelow Corporation has two divisions: the Governmental Products Division and the 
Export Products Division. The Governmental Products Division's divisional segment 
margin is $255,000 and the Export Products Division's divisional segment margin is 
$59,800. The total amount of common fixed expenses not traceable to the individual 
divisions is $163,700. What is the company's net operating income? 
 A) $314,800 
 B) ($314,800) 
 C) $151,100 
 D) $478,500 
 
 Ans: C AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting; Measurement LO: 1 Level: Easy 
 
 Solution: 
 
 
Total 
Company 
 
 Divisional segment margin ..............................$314,800 * 
 Less common fixed costs not 
traceable to the individual divisions ............ 163,700 
 
 Net operating income ................................ $151,100 
 
*$255,000 + $59,800 = $314,800 
 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-17 
 
 35. Miscavage Corporation has two divisions: the Beta Division and the Alpha Division. 
The Beta Division has sales of $580,000, variable expenses of $301,600, and traceable 
fixed expenses of $186,500. The Alpha Division has sales of $510,000, variable 
expenses of $178,500, and traceable fixed expenses of $222,100. The total amount of 
common fixed expenses not traceable to the individual divisions is $235,500. What is 
the company's net operating income? 
 A) $374,400 
 B) $201,300 
 C) $609,900 
 D) ($34,200) 
 
 Ans: D AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting; Measurement LO: 1 Level: Easy 
 
 Solution: 
 Divisions 
 
Total 
Company 
Alpha 
Division 
Beta 
Division 
Sales .............................................. $1,090,000 $510,000 $580,000 
Less: variable expenses ................. 480,100 178,500 301,600 
Contribution margin ...................... 609,900 331,500 278,400 
Less: traceable fixed expenses ...... 408,600 222,100 186,500 
Divisional segment margin ............ 201,300 $109,400 $91,900 
Less common fixed expenses ........ 235,500 
Net operating income .................... ($34,200) 
 
Chapter 12 Segment Reporting and Decentralization 
 
12-18 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 36. J Corporation has two divisions. Division A has a contribution margin of $79,300 and 
Division B has a contribution margin of $126,200. If total traceable fixed costs are 
$72,400 and total common fixed costs are $34,900, what is J Corporation's net 
operating income? 
 A) $168,000 
 B) $170,600 
 C) $133,100 
 D) $98,200 
 
 Ans: D AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting; Measurement LO: 1 Level: Easy 
 
 Solution: 
 
 Total Company 
Contribution margin ...................... $205,500 * 
Less: traceable fixed expenses ...... 72,400 
Divisional segment margin ............ 133,100 
Less common fixed expenses ........ 34,900 
Net operating income .................... $ 98,200 
 
*$79,300 + $126,200 = $205,500 
 
 37. Kop Corporation has provided the following data: 
 
 Return on investment (ROI) ................ 15% 
 Sales ..................................................... $120,000 
 Average operating assets ..................... $60,000 
 Minimum required rate of return ......... 12% 
 Margin on sales ................................... 7.5% 
 
 Kop Corporation's residual income is: 
 A) $1,800 
 B) $5,400 
 C) $2,700 
 D) $3,600 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 2; 3 Level: Medium 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-19 
 
 Solution: 
 
 Net operating income = Sales × Margin on sales = $120,000 × 7.5% = $9,000 
Residual income = Net operating income − (Average operating assets × Minimum 
required rate of return) = $9,000 − ($60,000 × 12%) = $9,000 − $7,200 = $1,800 
 
 38. Spar Company has calculated the following ratios for one of its investment centers: 
 
 Margin ................... 25% 
 Turnover ................ 0.5 times 
 
 What is Spar's return on investment for this investment center? 
 A) 50.0% 
 B) 12.5% 
 C) 15.0% 
 D) 25.0% 
 
 Ans: B AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 2 Level: Easy Source: CPA; adapted 
 
 Solution: 
 
 Return on investment = Margin × Turnover = 25% × 0.5 times = 12.5% 
 
 39. Mike Corporation uses residual income to evaluate the performance of its divisions. 
The company's minimum required rate of return is 14%. In January, the Commercial 
Products Division had average operating assets of $970,000 and net operating income 
of $143,700. What was the Commercial Products Division's residual income in 
January? 
 A) $7,900 
 B) -$20,118 
 C) $20,118 
 D) -$7,900 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 3 Level: Easy 
 
 Solution: 
 
Residual income = Net operating income − (Average operating assets × Minimum 
required rate of return) = $143,700 − ($970,000 × 14%) = $143,700 − $135,800 = 
$7,900 
 
Chapter 12 Segment Reporting and Decentralization 
 
12-20 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 40. In November, the Universal Solutions Division of Keaffaber Corporation had average 
operating assets of $480,000 and net operating income of $46,200. The company uses 
residual income, with a minimum required rate of return of 11%, to evaluate the 
performance of its divisions. What was the Universal Solutions Division's residual 
income in November? 
 A) -$6,600 
 B) $5,082 
 C) $6,600 
 D) -$5,082 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 3 Level: Easy 
 
 Solution: 
 
Residual income = Net operating income − (Average operating assets × Minimum 
required rate of return) = $46,200 − ($480,000 × 11%) = $46,200 − $52,800 = -$6,600 
 
 41. If operating income is $60,000, average operating assets are $240,000, and the 
minimum required rate of return is 20%, what is the residual income? 
 A) 40% 
 B) 25% 
 C) $12,000 
 D) $48,000 
 
 Ans: C AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 3 Level: Easy 
 
 Solution: 
 
Residual income = Net operating income − (Average operating assets × Minimum 
required rate of return) = $60,000 − ($240,000 × 20%) = $60,000 − $48,000 = $12,000 
 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-21 
 
 42. Division A makes a part that it sells to customers outside of the company. Data 
concerning this part appear below: 
 
 Selling price to outside customers ............. $40 
 Variable cost per unit ................................ $30 
 Total fixed costs ........................................ $10,000 
 Capacity in units ........................................ 20,000 
 
 Division B of the same company would like to use the part manufactured by Division 
A in one of its products. Division B currently purchases a similar part made by an 
outside company for $38 per unit and would substitute the part made by Division A. 
Division B requires 5,000 units of the part each period. Division A is already selling 
all of the units it can produce to outside customers. If Division A sells to Division B 
rather than to outside customers, the variable cost per unit wouldbe $1 lower. What is 
the lowest acceptable transfer price from the standpoint of the selling division? 
 A) $40 
 B) $39 
 C) $38 
 D) $37 
 
 Ans: B AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Decision Making; Reporting Appendix: 12A LO: 4 Level: Hard 
 
 Solution: 
 
Transfer price ≥ Variable cost per unit + (Total contribution margin on lost sales ÷ 
Number of units transferred) = ($30 − $1) + [($40 − $30) × 5,000] ÷ 5,000 = $29 + 
$10 = $39 
 
Chapter 12 Segment Reporting and Decentralization 
 
12-22 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 43. Product A, which is produced by the Parts Division of BYP Corporation, sells for 
$14.25 on the outside market. The costs to make Product A as recorded by the 
company's cost accounting system are: 
 
 Direct materials ......................................... $7.25 
 Direct labor ................................................ $2.25 
 Variable manufacturing overhead ............. $1.50 
 Fixed manufacturing overhead .................. $2.50 
 
 The Assembly Division of BYP Corporation requires a part much like Product A to 
make one of its products. The Assembly Division can buy this part from an outside 
supplier for $14.15. However, the Assembly Division could use Product A instead of 
this part purchased from an outside supplier. What is the most the Assembly Division 
would be willing to pay the Parts Division for Product A? 
 A) $13.50 
 B) $14.25 
 C) $14.15 
 D) $14.00 
 
 Ans: C AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Decision Making; Reporting Appendix: 12A LO: 4 Level: Easy 
 
 Solution: 
 
 Transfer price ≤ Cost of buying from outside supplier = $14.15 
 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-23 
 
 44. Macumber Corporation has two operating divisions-an Atlantic Division and a Pacific 
Division. The company's Logistics Department services both divisions. The variable 
costs of the Logistics Department are budgeted at $36 per shipment. The Logistics 
Department's fixed costs are budgeted at $234,000 for the year. The fixed costs of the 
Logistics Department are determined based on peak-period demand. 
 
 
 
Percentage of Peak 
Period Capacity Required 
Actual 
Shipments 
 Atlantic Division ......... 30% 1,100 
 Pacific Division ........... 70% 3,400 
 
 How much Logistics Department cost should be charged to the Altlantic Division at 
the end of the year for performance evaluation purposes? 
 A) $198,000 
 B) $109,800 
 C) $118,800 
 D) $96,800 
 
 Ans: B AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting Appendix: 12B LO: 5 Level: Easy 
 
 Solution: 
 
 Labor department cost charged to Atlantic Division 
= (1,100 shipments × $36 per shipment) + ($234,000 × 30%) 
= $39,600 + $70,200 = $109,800 
 
Chapter 12 Segment Reporting and Decentralization 
 
12-24 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 45. Erholm Corporation has two operating divisions-an Atlantic Division and a Pacific 
Division. The company's Logistics Department services both divisions. The variable 
costs of the Logistics Department are budgeted at $31 per shipment. The Logistics 
Department's fixed costs are budgeted at $411,800 for the year. The fixed costs of the 
Logistics Department are determined based on peak-period demand. 
 
 
 
Percentage of Peak Period 
Capacity Required 
Budgeted 
Shipments 
 Atlantic Division ............... 35% 1,900 
 Pacific Division ................. 65% 5,200 
 
 At the end of the year, actual Logistics Department variable costs totaled $290,700 
and fixed costs totaled $431,950. The Atlantic Division had a total of 3,900 shipments 
and the Pacific Division had a total of 5,100 shipments for the year. How much 
Logistics Department cost should be charged to the Pacific Division at the END of the 
year for performance evaluation purposes? 
 A) $391,453 
 B) $425,770 
 C) $445,498 
 D) $409,502 
 
 Ans: B AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting Appendix: 12B LO: 5 Level: Medium 
 
 Solution: 
 
 Logistics department cost charged to Pacific Division 
= (5,100 shipments × $31 per shipment) + ($411,800 × 65%) 
= $158,100 + $267,670 = $425,770 
 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-25 
 
 46. Gretter Corporation has two operating divisions-an Atlantic Division and a Pacific 
Division. The company's Logistics Department services both divisions. The variable 
costs of the Logistics Department are budgeted at $36 per shipment. The Logistics 
Department's fixed costs are budgeted at $399,600 for the year. The fixed costs of the 
Logistics Department are determined based on peak-period demand. 
 
 
 
Percentage of Peak Period 
Capacity Required 
Budgeted 
Shipments 
 Atlantic Division ......... 25% 1,600 
 Pacific Division ........... 75% 5,800 
 
 At the end of the year, actual Logistics Department variable costs totaled $305,040 
and fixed costs totaled $418,680. The Atlantic Division had a total of 2,600 shipments 
and the Pacific Division had a total of 5,600 shipments for the year. For performance 
evaluation purposes, how much actual Logistics Department cost should NOT be 
charged to the operating divisions at the END of the year? 
 A) $28,920 
 B) $9,840 
 C) $19,080 
 D) $0 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting Appendix: 12B LO: 5 Level: Medium 
 
 Solution: 
 
 Actual Logistics Department cost incurred = $305,040 + $418,680 = $723,720 
Logistics Department charged to operating divisions 
= [$36 per shipment × (2,600 shipments + 5,600 shipments)] + $399,600 
= [$36 per shipment × 8,200 shipments] + $399,600 
= $295,200 + $399,600 = $694,800 
Actual Logistics Department cost not charged to operating divisions 
= $723,720 − $694,800 = $28,920 
 
Chapter 12 Segment Reporting and Decentralization 
 
12-26 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 47. Bockoven Corporation has two operating divisions-a Consumer Division and a 
Commercial Division. The company's Customer Service Department provides services 
to both divisions. The variable costs of the Customer Service Department are budgeted 
at $46 per order. The Customer Service Department's fixed costs are budgeted at 
$181,500 for the year. The fixed costs of the Customer Service Department are 
determined based on the peak period orders. 
 
 
 
Percentage of Peak Period 
Capacity Required 
Actual 
Orders 
 Consumer Division ............ 40% 1,100 
 Commercial Division ........ 60% 2,200 
 
 How much Customer Service Department cost should be charged to the Consumer 
Division at the beginning of the year for performance evaluation purposes? 
 A) $123,200 
 B) $166,650 
 C) $111,100 
 D) $133,320 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting Appendix: 12B LO: 5 Level: Easy 
 
 Solution: 
 
 Customer Service Department cost charged to Consumer Division 
= ($46 per order × 1,100 orders) + ($181,500 × 40%) 
= $50,600 + $72,600 = $123,200 
 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-27 
 
 48. Levar Corporation has two operating divisions-a Consumer Division and a 
Commercial Division. The company's Order Fulfillment Department provides services 
to both divisions. The variable costs of the Order Fulfillment Department are budgeted 
at $73 per order. The Order Fulfillment Department's fixed costs are budgeted at 
$470,400 for the year. The fixed costs of the Order Fulfillment Department are 
determined based on the peak periodorders. 
 
 
 
Percentage of Peak Period 
Capacity Required 
Budgeted 
Orders 
 Consumer Division ............ 25% 1,800 
 Commercial Division ........ 75% 6,600 
 
 At the end of the year, actual Order Fulfillment Department variable costs totaled 
$621,600 and fixed costs totaled $473,970. The Consumer Division had a total of 
1,840 orders and the Commercial Division had a total of 6,560 orders for the year. For 
purposes of evaluation performance, how much Order Fulfillment Department cost 
should be charged to the Commercial Division at the END of the year? 
 A) $831,680 
 B) $855,588 
 C) $840,918 
 D) $846,240 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting Appendix: 12B LO: 5 Level: Easy 
 
 Solution: 
 
Order Fulfillment Department cost charged to Commercial Division 
= ($73 per order × 6,560 orders) + ($470,400 × 75%) 
= $478,880 + $352,800 = $831,680 
 
Chapter 12 Segment Reporting and Decentralization 
 
12-28 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 49. Schabel Corporation has two operating divisions-a Consumer Division and a 
Commercial Division. The company's Customer Service Department provides services 
to both divisions. The variable costs of the Customer Service Department are budgeted 
at $72 per order. The Customer Service Department's fixed costs are budgeted at 
$695,400 for the year. The fixed costs of the Customer Service Department are 
determined based on the peak period orders. 
 
 
 
Percentage of Peak Period 
Capacity Required 
Budgeted 
Orders 
 Consumer Division ............ 25% 2,600 
 Commercial Division ........ 75% 9,600 
 
 At the end of the year, actual Customer Service Department variable costs totaled 
$891,089 and fixed costs totaled $709,820. The Consumer Division had a total of 
2,610 orders and the Commercial Division had a total of 9,580 orders for the year. For 
performance evaluation purposes, how much actual Customer Service Department 
cost should NOT be charged to the operating divisions at the END of the year? 
 A) $13,409 
 B) $0 
 C) $14,420 
 D) $27,829 
 
 Ans: D AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting Appendix: 12B LO: 5 Level: Medium 
 
 Solution: 
 
 Actual Customer Service Department cost incurred 
= $891,089 + $709,820 = $1,600,909 
Customer Service Department cost charged to operating divisions 
= [$72 per order × (2,610 orders + 9,580 orders)] + $695,400 
= [$72 per order × 12,190 orders] + $695,400 
= $877,680 + $695,400 = $1,573,080 
Actual Customer Service Department cost not charged to operating divisions 
= $1,600,909 − $1,573,080 = $27,829 
 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-29 
 
 50. Mangiamele Corporation's Maintenance Department provides services to the 
company's two operating divisions-the Paints Division and the Stains Division. The 
variable costs of the Maintenance Department are budgeted based on the number of 
cases produced by the operating departments. The fixed costs of the Maintenance 
Department are budgeted based on the number of cases produced by the operating 
departments during the peak period. Data appear below: 
 
 Maintenance Department 
 Budgeted variable cost ....................................... $4 per case 
 Budgeted total fixed cost .................................... $693,000 
 
 Paints Division 
 Percentage of peak period capacity required ...... 30% 
 Actual cases ........................................................ 18,000 
 
 Stains Division 
 Percentage of peak period capacity required ...... 70% 
 Actual cases ........................................................ 59,000 
 
 For performance evaluation purposes, how much Maintenance Department cost should 
be charged to the Paints Division at the end of the year? 
 A) $234,000 
 B) $500,500 
 C) $279,900 
 D) $300,300 
 
 Ans: C AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting Appendix: 12B LO: 5 Level: Medium 
 
 Solution: 
 
 Maintenance Department cost charged to Paints Division 
= ($4 per case × 18,000 cases) + ($693,000 × 30%) 
= $72,000 + $207,900 = $279,900 
 
Chapter 12 Segment Reporting and Decentralization 
 
12-30 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 51. Tabarez Corporation's Maintenance Department provides services to the company's 
two operating divisions-the Paints Division and the Stains Division. The variable costs 
of the Maintenance Department are budgeted based on the number of cases produced 
by the operating departments. The fixed costs of the Maintenance Department are 
budgeted based on the number of cases produced by the operating departments during 
the peak period. Data appear below: 
 
 Maintenance Department 
 Budgeted variable cost ....................................... $2 per case 
 Budgeted total fixed cost .................................... $1,140,000 
 Actual total variable cost .................................... $239,400 
 Actual total fixed cost ........................................ $1,157,980 
 
 Paints Division 
 Percentage of peak period capacity required ...... 30% 
 Budgeted cases ................................................... 29,000 
 Actual cases ........................................................ 29,040 
 
 Stains Division 
 Percentage of peak period capacity required ...... 70% 
 Budgeted cases ................................................... 85,000 
 Actual cases ........................................................ 84,960 
 
 For performance evaluation purposes, how much Maintenance Department cost should 
be charged to the Stains Division at the END of the year? 
 A) $989,002 
 B) $1,041,416 
 C) $967,920 
 D) $1,019,520 
 
 Ans: C AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting Appendix: 12B LO: 5 Level: Medium 
 
 Solution: 
 
 Maintenance Department cost charged to Stains Division 
= ($2 per case × 84,960 cases) + ($1,140,000 × 70%) 
= $169,920 + $798,000 = $967,920 
 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-31 
 
Use the following to answer questions 52-56: 
 
O'Neill, Incorporated's income statement for the most recent month is given below. 
 
 Total Store A Store B 
 Sales ..................................... $300,000 $100,000 $200,000 
 Variable expenses ................. 192,000 72,000 120,000 
 Contribution margin ............. 108,000 28,000 80,000 
 Traceable fixed expenses ..... 76,000 21,000 55,000 
 Segment margin ................... 32,000 $ 7,000 $ 25,000 
 Common fixed expenses ...... 27,000 
 Net operating income ........... $ 5,000 
 
For each of the following questions, refer back to the original data. 
 
 52. If Store B sales increase by $20,000 with no change in traceable fixed expenses, the 
overall company net operating income should: 
 A) increase by $2,500 
 B) increase by $5,000 
 C) increase by $8,000 
 D) increase by $12,000 
 
 Ans: C AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting; Measurement LO: 1 Level: Medium 
 
 Solution: 
 
 Store B contribution margin ratio = $80,000 ÷ $200,000 = 40% 
Additional net operating income = $20,000 × 40% = $8,000 
 
Chapter 12 Segment Reporting and Decentralization 
 
12-32 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 53. The marketing department believes that a promotional campaign at Store A costing 
$5,000 will increase sales by $15,000. If its plan is adopted, overall company net 
operating income should: 
 A) decrease by $800 
 B) decrease by $5,800 
 C) increase by $5,800 
 D) increase by $10,000 
 
 Ans: A AACSB: AnalyticAICPA BB: Critical Thinking 
AICPA FN: Reporting; Measurement LO: 1 Level: Medium 
 
 Solution: 
 
 Store A contribution margin ratio = $28,000 ÷ $100,000 = 28% 
Change in net operating income = ($15,000 × 28%) − $5,000 
= $4,200 − $5,000 = $800 decrease 
 
 54. A proposal has been made that will lower variable expenses in Store A to 62% of 
sales. However, this reduction can only be accomplished by an increase in fixed 
expenses of $8,000. If this proposal is implemented and sales remain constant, overall 
company net operating income should: 
 A) remain the same 
 B) decrease by $4,200 
 C) increase by $2,000 
 D) increase by $8,000 
 
 Ans: C AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting; Measurement LO: 1 Level: Medium 
 
 Solution: 
 
 New amount for Store A variable expenses = $100,000 × 62% = $62,000 
Change in net operating income = ($72,000 − $62,000) − $8,000 
= $10,000 − $8,000 = $2,000 increase 
 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-33 
 
 55. If sales in Store B increase by $30,000 as a result of a $7,000 expenditure in fixed 
expenses: 
 A) the contribution margin should increase by $18,000 
 B) the segment margin should increase by $12,000 
 C) the contribution margin should increase by $11,000 
 D) the segment margin should increase by $5,000 
 
 Ans: D AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 1 Level: Hard 
 
 Solution: 
 
 Store B contribution margin ratio = $80,000 ÷ $200,000 = 40% 
Change in segment margin = ($30,000 × 40%) − $7,000 
= $12,000 − $7,000 = $5,000 increase 
 
 56. Currently the sales clerks receive a salary of $7,000 per month in Store B. A proposal 
has been made to change from a fixed salary to a sales commission of 5%. Assume 
that this proposal is adopted, and that as a result sales increase by $20,000. The new 
segment margin for Store B should be: 
 A) $29,000 
 B) $32,000 
 C) $39,000 
 D) $45,000 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting; Measurement LO: 1 Level: Hard 
 
 Solution: 
 
 Sales ...................................... $220,000 ($200,000 + $20,000) 
 Sales commissions ................ 11,000 ($220,000 × 5%) 
 Other variable expenses ........ 132,000 ($220,000 × 60%*) 
 Contribution margin ............. 77,000 
 Traceable fixed expenses ...... 48,000 ($55,000 − $7,000) 
 Segment margin .................... $ 29,000 
 
*Variable expenses ÷ Sales = $120,000 ÷ $200,000 = 60% 
 
Chapter 12 Segment Reporting and Decentralization 
 
12-34 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
Use the following to answer questions 57-59: 
 
Higgins Company sells three products, Product A, Product B, and Product C. Sales during 
June totaled $1,500,000 in the company. The company's overall contribution margin ratio was 
38%, and its fixed expenses totaled $525,000 for the year. Sales by product were: Product A, 
$750,000; Product B, $450,000; and Product C, $300,000. Traceable fixed expenses were: 
Product A, $180,000; Product B, $150,000; and Product C, $90,000. The variable expenses 
were: Product A, $450,000; Product B, $270,000; and Product C, $___?___. 
 
 57. The net operating income for the company as a whole for June was: 
 A) $45,000 
 B) $105,000 
 C) $150,000 
 D) $570,000 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting; Measurement LO: 1 Level: Medium 
 
 Solution: 
 
 Sales ...................................... $1,500,000 
 Contribution margin ratio ..... × 38% 
 Contribution margin ............. $570,000 
 Fixed expenses ...................... 525,000 
 Net operating income ............ $ 45,000 
 
 58. The contribution margin ratio for Product C for June was: 
 A) 0% 
 B) 30% 
 C) 38% 
 D) 70% 
 
 Ans: B AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 1 Level: Hard 
 
 Solution: 
 
 Company variable expenses = $1,500,000 × (100% − 38%) 
= $1,500,000 × 62% = $930,000 
Product C variable expenses = $930,000 − $450,000 − $270,000 = $210,000 
Product C contribution margin = $300,000 − $210,000 = $90,000 
Product C contribution margin ratio = $90,000 ÷ $300,000 = 30% 
 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-35 
 
 59. Common fixed expenses for Higgins Company for June were: 
 A) $45,000 
 B) $420,000 
 C) $150,000 
 D) $105,000 
 
 Ans: D AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 1 Level: Hard 
 
 Solution: 
 
 Common fixed expenses = Total fixed expenses – Traceable fixed expenses 
 = $525,000 – ($180,000 + $150,000 + $90,000) 
 = $525,000 – $420,000 = $105,000 
 
Use the following to answer questions 60-62: 
 
Azuki Corporation operates in two sales territories, urban and rural. Shown below is last 
year's income statement segmented by territory: 
 
 Urban Rural 
 Sales .............................................. $320,000 $80,000 
 Variable expenses .......................... 208,000 56,000 
 Contribution margin ...................... 112,000 24,000 
 Traceable fixed expenses .............. 48,000 30,000 
 Segment margin ............................ $64,000 $(6,000) 
 
Azuki's common fixed expenses were $25,000 last year. 
 
 60. What was Azuki Corporation's overall net operating income for last year? 
 A) $33,000 
 B) $45,000 
 C) $58,000 
 D) $83,000 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting; Measurement LO: 1 Level: Easy 
 
 Solution: 
 
 Segment margin ............................. $58,000 ($64,000 + -$6,000) 
 Common fixed expenses ................ 25,000 
 Net operating income ..................... $33,000 
Chapter 12 Segment Reporting and Decentralization 
 
12-36 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 61. If urban sales were 10% higher last year, by approximately how much would Azuki's 
net operating income have increased? (Assume no change in the revenue or cost 
structure.) 
 A) $4,400 
 B) $6,400 
 C) $11,200 
 D) $32,000 
 
 Ans: C AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 1 Level: Medium 
 
 Solution: 
 
 Urban contribution margin ratio = $112,000 ÷ $320,000 = 35% 
Increase in net operating income = $320,000 × 10% × 35% = $11,200 
 
 62. If operations in rural areas would have been discontinued at the beginning of last year, 
how would this have changed the net operating income of Azuki Company as a 
whole? 
 A) $5,000 increase 
 B) $6,000 increase 
 C) $11,000 increase 
 D) $24,000 decrease 
 
 Ans: B AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 1 Level: Easy 
 
 Solution: 
 
 Rural segment margin = Contribution margin − Traceable fixed expenses 
 = $24,000 − $30,000 = ($6,000) 
 
 Net operating income would have increased by $6,000 if operations in rural areas 
would have been discontinued at the beginning of last year. 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-37 
 
Use the following to answer questions 63-65: 
 
Tubaugh Corporation has two major business segments—East and West. In December, the 
East business segment had sales revenues of $690,000, variable expenses of $352,000, and 
traceable fixed expenses of $104,000. During the same month, the West business segment had 
sales revenues of $140,000, variable expenses of $56,000, and traceable fixed expenses of 
$24,000. The common fixed expenses totaled $162,000 and were allocated as follows: 
$89,000 to the East business segment and $73,000to the West business segment. 
 
 63. The contribution margin of the West business segment is: 
 A) $84,000 
 B) $234,000 
 C) $422,000 
 D) $145,000 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 1 Level: Easy 
 
 Solution: 
 
 West contribution margin = Sales − Variable expenses 
 = $140,000 − $56,000 = $84,000 
 
 64. A properly constructed segmented income statement in a contribution format would 
show that the segment margin of the East business segment is: 
 A) $352,000 
 B) $145,000 
 C) $234,000 
 D) $249,000 
 
 Ans: C AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting; Measurement LO: 1 Level: Easy 
 
 Solution: 
 
 Sales ............................................... $690,000 
 Variable expenses .......................... 352,000 
 Contribution margin ...................... 338,000 
 Traceable fixed expenses ............... 104,000 
 Segment margin ............................. $234,000 
 
Chapter 12 Segment Reporting and Decentralization 
 
12-38 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 65. A properly constructed segmented income statement in a contribution format would 
show that the net operating income of the company as a whole is: 
 A) $294,000 
 B) $422,000 
 C) $132,000 
 D) -$30,000 
 
 Ans: C AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting; Measurement LO: 1 Level: Easy 
 
 Solution: 
 
 
Total 
Company East West 
 Sales ................................... $830,000 $690,000 $140,000 
 Variable expenses .............. 408,000 352,000 56,000 
 Contribution margin .......... 422,000 338,000 84,000 
 Traceable fixed expenses ... 128,000 104,000 24,000 
 Segment margin ................. 294,000 $234,000 $60,000 
 Common fixed expenses .... 162,000 
 Net operating income ......... $132,000 
 
Use the following to answer questions 66-68: 
 
Data for January for Bondi Corporation and its two major business segments, North and 
South, appear below: 
 
 Sales revenues, North .......................... $660,000 
 Variable expenses, North .................... $383,000 
 Traceable fixed expenses, North ......... $79,000 
 Sales revenues, South .......................... $510,000 
 Variable expenses, South .................... $291,000 
 Traceable fixed expenses, South ......... $66,000 
 
In addition, common fixed expenses totaled $179,000 and were allocated as follows: $93,000 
to the North business segment and $86,000 to the South business segment. 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-39 
 
 66. The contribution margin of the South business segment is: 
 A) $198,000 
 B) $496,000 
 C) $219,000 
 D) $105,000 
 
 Ans: C AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 1 Level: Easy 
 
 Solution: 
 
 Sales ............................................... $510,000 
 Variable expenses .......................... 291,000 
 Contribution margin ...................... $219,000 
 
 67. A properly constructed segmented income statement in a contribution format would 
show that the segment margin of the North business segment is: 
 A) $105,000 
 B) $383,000 
 C) $198,000 
 D) $184,000 
 
 Ans: C AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting; Measurement LO: 1 Level: Easy 
 
 Solution: 
 
 North 
 Sales ................................... $660,000 
 Variable expenses .............. 383,000 
 Contribution margin .......... 277,000 
 Traceable fixed expenses ... 79,000 
 Segment margin ................. $198,000 
 
Chapter 12 Segment Reporting and Decentralization 
 
12-40 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 68. A properly constructed segmented income statement in a contribution format would 
show that the net operating income of the company as a whole is: 
 A) -$7,000 
 B) $172,000 
 C) $351,000 
 D) $496,000 
 
 Ans: B AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting; Measurement LO: 1 Level: Easy 
 
 Solution: 
 
 
 
Total 
Company North South 
 Sales ................................... $1,170,000 $660,000 $510,000 
 Variable expenses .............. 674,000 383,000 291,000 
 Contribution margin .......... 496,000 277,000 219,000 
 Traceable fixed expenses ... 145,000 79,000 66,000 
 Segment margin ................. 351,000 $198,000 $153,000 
 Common fixed expenses .... 179,000 
 Net operating income ......... $172,000 
 
Use the following to answer questions 69-71: 
 
Ferrar Corporation has two major business segments-Consumer and Commercial. Data for the 
segment and for the company for March appear below: 
 
 Sales revenues, Consumer ......................... $680,000 
 Sales revenues, Commercial ..................... $280,000 
 Variable expenses, Consumer ................... $394,000 
 Variable expenses, Commercial ................ $143,000 
 Traceable fixed expenses, Consumer ........ $102,000 
 Traceable fixed expenses, Commercial ..... $45,000 
 
In addition, common fixed expenses totaled $210,000 and were allocated as follows: 
$122,000 to the Consumer business segment and $88,000 to the Commercial business 
segment. 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-41 
 
 69. The contribution margin of the Commercial business segment is: 
 A) $137,000 
 B) $184,000 
 C) $62,000 
 D) $423,000 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 1 Level: Easy 
 
 Solution: 
 
 Sales ................................... $280,000 
 Variable expenses .............. 143,000 
 Contribution margin .......... $137,000 
 
 70. A properly constructed segmented income statement in a contribution format would 
show that the segment margin of the Consumer business segment is: 
 A) $164,000 
 B) $62,000 
 C) $394,000 
 D) $184,000 
 
 Ans: D AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting; Measurement LO: 1 Level: Easy 
 
 Solution: 
 
 Consumer 
 Sales ................................... $680,000 
 Variable expenses .............. 394,000 
 Contribution margin .......... 286,000 
 Traceable fixed expenses ... 102,000 
 Segment margin ................. $184,000 
 
Chapter 12 Segment Reporting and Decentralization 
 
12-42 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 71. A properly constructed segmented income statement in a contribution format would 
show that the net operating income of the company as a whole is: 
 A) $66,000 
 B) -$144,000 
 C) $423,000 
 D) $276,000 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting; Measurement LO: 1 Level: Easy 
 
 Solution: 
 
 Segments 
 
 
Total 
Company Consumer Commercial 
 Sales ................................... $960,000 $680,000 $280,000 
 Variable expenses .............. 537,000 394,000 143,000 
 Contribution margin .......... 423,000 286,000 137,000 
 Traceable fixed expenses ... 147,000 102,000 45,000 
 Segment margin ................. 276,000 $184,000 $92,000 
 Common fixed expenses .... 210,000 
 Net operating income ......... $66,000 
 
Use the following to answer questions 72-73: 
 
The Tipton Division of Dudley Company reported the following data last year: 
 
 Return on investment ....................... 20% 
 Minimum required rate of return ...... 12% 
 Residual income ............................... $50,000 
 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-43 
 
 72. Tipton Division's average operating assets last year were:A) $625,000 
 B) $250,000 
 C) $416,677 
 D) $333,333 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 2; 3 Level: Hard 
 
 Solution: 
 
Residual income = Average operating assets × (ROI − Minimum required rate of 
return) 
Average operating assets = Residual income ÷ (ROI − Minimum required rate of 
return) 
= $50,000 ÷ (20% − 12%) = $50,000 ÷ 8% = $625,000 
 
 73. The division's net operating income last year was: 
 A) $250,000 
 B) $125,000 
 C) $100,000 
 D) $75,000 
 
 Ans: B AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 2; 3 Level: Hard 
 
 Solution: 
 
 ROI = Net operating income ÷ Average operating assets 
Net operating income = ROI × Average operating assets 
= 20% × $625,000 = $125,000 
 
Chapter 12 Segment Reporting and Decentralization 
 
12-44 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
Use the following to answer questions 74-75: 
 
The following data pertain to Turk Company's operations last year: 
 
 Sales .............................................. $900,000 
 Net operating income .................... $36,000 
 Contribution margin ...................... $150,000 
 Average operating assets ............... $180,000 
 Stockholders’ equity ...................... $100,000 
 Plant, property, & equipment ........ $120,000 
 
 74. Turk's return on investment for the year was: 
 A) 4% 
 B) 15% 
 C) 36% 
 D) 20% 
 
 Ans: D AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 2 Level: Medium 
 
 Solution: 
 
 ROI = Net operating income ÷ Average operating assets 
 = $36,000 ÷ $180,000 = 20% 
 
 75. If the residual income for the year was $9,000, the minimum required rate of return 
must have been: 
 A) 15% 
 B) 4% 
 C) 20% 
 D) 36% 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 3 Level: Hard 
 
 Solution: 
 
Residual income = Net operating income − (Average operating assets × Minimum 
required rate of return) 
= $9,000 = $36,000 − ($180,000 × Minimum required rate of return) 
= $27,000 ÷ $180,000 
Minimum required rate of return = 15% 
 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-45 
 
Use the following to answer questions 76-77: 
 
The Hum Division of the Ho Company reported the following data for last year: 
 
 Sales .................................................... $800,000 
 Operating expenses ............................. $650,000 
 Interest expense ................................... $50,000 
 Tax expense ......................................... $30,000 
 Stockholders’ equity ............................ $200,000 
 Average operating assets ..................... $600,000 
 Minimum required rate of return ......... 12% 
 
 76. The residual income for the Hum Division last year was: 
 A) $126,000 
 B) $46,000 
 C) $78,000 
 D) $22,000 
 
 Ans: C AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 3 Level: Medium 
 
 Solution: 
 
 Sales ..................................................... $800,000 
 Operating expenses .............................. 650,000 
 Net operating income .......................... $150,000 
 
Residual income = Net operating income − (Average operating assets × Minimum 
required rate of return) = $150,000 − ($600,000 × 12%) = $150,000 − $72,000 = 
$78,000 
 
Chapter 12 Segment Reporting and Decentralization 
 
12-46 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 77. The return on investment last year for the Hum Division was: 
 A) 75% 
 B) 25% 
 C) 35% 
 D) 12% 
 
 Ans: B AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 2 Level: Medium 
 
 Solution: 
 
 ROI = Net operating income ÷ Average operating assets 
 = $150,000 ÷ $600,000 = 25% 
 
Use the following to answer questions 78-79: 
 
The following selected data pertain to Beck Co.'s Beam Division for last year: 
 
 Sales ....................................................... $2,000,000 
 Variable expenses ................................... $800,000 
 Traceable fixed expenses ....................... $900,000 
 Average operating assets ........................ $500,000 
 Minimum required rate of return ............ 20% 
 
Note: the traceable fixed expenses do not include any interest expense. 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-47 
 
 78. How much is the residual income? 
 A) $400,000 
 B) $200,000 
 C) $300,000 
 D) $500,000 
 
 Ans: B AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 3 Level: Medium Source: CPA; adapted 
 
 Solution: 
 
 Sales ........................................................ $2,000,000 
 Variable expenses ................................... 800,000 
 Traceable fixed expenses ........................ 900,000 
 Net operating income ............................. $ 300,000 
 
Residual income = Net operating income − (Average operating assets × Minimum 
required rate of return) = $300,000 − ($500,000 × 20%) = $300,000 − $100,000 = 
$200,000 
 
 79. How much is the return on the investment? 
 A) 25% 
 B) 45% 
 C) 20% 
 D) 60% 
 
 Ans: D AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 2 Level: Medium Source: CPA; adapted 
 
 Solution: 
 
 ROI = Net operating income ÷ Average operating assets 
 = $300,000 ÷ $500,000 = 60% 
 
Use the following to answer questions 80-81: 
 
Edith Carolina is president of the Deed Corporation. The company is decentralized, and 
leaves investment decisions up to the discretion of the division managers. Michael Sanders, 
manager of the Cosmetics Division, has had a return on investment of 14% for his division for 
the past three years and expects the division to have the same return in the coming year. 
Sanders has the opportunity to invest in a new line of cosmetics which is expected to have a 
return on investment of 12%. 
Chapter 12 Segment Reporting and Decentralization 
 
12-48 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 80. Suppose Deed Corporation evaluates managerial performance using return on 
investment. Edith Carolina, as president of the company, may view the opportunity for 
taking on the cosmetics line differently from Michael Sanders, manager of the 
Cosmetics Division. What action would each of them prefer with respect to the 
decision of whether to take on the new cosmetics line? 
 
 Carolina Sanders 
A) accept reject 
B) reject accept 
C) accept accept 
D) reject reject 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Decision Making; Reporting LO: 2 Level: Easy 
 
 81. If the Deed Corporation evaluates managerial performance using residual income 
based on the corporate minimum required rate of return of 8%, what decision would 
be preferred by Edith Carolina and Michael Sanders? 
 
 Carolina Sanders 
A) accept reject 
B) reject accept 
C) accept accept 
D) reject reject 
 
 Ans: C AACSB: Analytic AICPA BB: Decision Making 
AICPA FN: Reporting LO: 3 Level: Easy 
 
Use the following to answer questions 82-83: 
 
The following information relates to the Quilt Division of TDS Corporation for last year: 
 
 Sales .............................................. $200,000 
 Contribution margin ...................... $90,000 
 Net operating income .................... $65,000 
 Average operating assets ............... $500,000 
 Minimum desired rate of return .... 10% 
 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-49 
 
 82. What was the QuiltDivision's return on investment (ROI) for last year? 
 A) 13% 
 B) 18% 
 C) 40% 
 D) 45% 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 2 Level: Easy 
 
 Solution: 
 
 ROI = Net operating income ÷ Average operating assets 
 = $65,000 ÷ $500,000 = 13% 
 
 83. Assume that Quilt was being evaluated solely on the basis of residual income. Which 
of the following investment opportunities would Quilt want to invest in? 
 
 
An investment that 
generates a return of 12% 
An investment that 
generates a return of 16% 
A) Yes Yes 
B) No Yes 
C) Yes No 
D) No No 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Decision Making; Reporting LO: 3 Level: Medium 
 
Use the following to answer questions 84-87: 
 
Cecille Products is a division of a major corporation. Last year the division had total sales of 
$7,940,000, net operating income of $254,080, and average operating assets of $2,000,000. 
The company's minimum required rate of return is 12%. 
Chapter 12 Segment Reporting and Decentralization 
 
12-50 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 84. The division's margin is closest to: 
 A) 3.2% 
 B) 25.2% 
 C) 12.7% 
 D) 28.4% 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting Level: Easy 
 
 Solution: 
 
 Margin = Net operating income ÷ Sales = $254,080 ÷ $7,940,000 = 3.2% 
 
 85. The division's turnover is closest to: 
 A) 0.13 
 B) 3.52 
 C) 3.97 
 D) 31.25 
 
 Ans: C AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 2 Level: Easy 
 
 Solution: 
 
 Turnover = Sales ÷ Average operating assets = $7,940,000 ÷ $2,000,000 = 3.97 
 
 86. The division's return on investment (ROI) is closest to: 
 A) 2.6% 
 B) 12.7% 
 C) 0.4% 
 D) 50.4% 
 
 Ans: B AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 2 Level: Easy 
 
 Solution: 
 
 ROI = Net operating income ÷ Average operating assets 
 = $254,080 ÷ $2,000,000 = 12.7% 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-51 
 
 87. The division's residual income is closest to: 
 A) $(698,720) 
 B) $494,080 
 C) $254,080 
 D) $14,080 
 
 Ans: D AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 3 Level: Easy 
 
 Solution: 
 
Residual income = Net operating income − (Average operating assets × Minimum 
required rate of return) = $254,080 − ($2,000,000 × 12%) = $254,080 − $240,000 = 
$14,080 
 
Use the following to answer questions 88-91: 
 
Deanda Products is a division of a major corporation. The following data are for the last year 
of operations: 
 
 Sales ............................................................................ $28,630,000 
 Net operating income .................................................. $1,145,200 
 Average operating assets ............................................. $7,000,000 
 The company’s minimum required rate of return ....... 18% 
 
 88. The division's margin is closest to: 
 A) 4.0% 
 B) 16.4% 
 C) 24.4% 
 D) 28.4% 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 2 Level: Easy 
 
 Solution: 
 
 Margin = Net operating income ÷ Sales = $1,145,200 ÷ $28,630,000 = 4.0% 
Chapter 12 Segment Reporting and Decentralization 
 
12-52 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 89. The division's turnover is closest to: 
 A) 4.09 
 B) 0.16 
 C) 25.00 
 D) 3.51 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 2 Level: Easy 
 
 Solution: 
 
 Turnover = Sales ÷ Average operating assets = $28,630,000 ÷ $7,000,000 = 4.09 
 
 90. The division's return on investment (ROI) is closest to: 
 A) 16.4% 
 B) 3.2% 
 C) 67.1% 
 D) 0.6% 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 2 Level: Easy 
 
 Solution: 
 
 ROI = Net operating income ÷ Average operating assets 
 = $1,145,200 ÷ $7,000,000 = 16.4% 
 
 91. The division's residual income is closest to: 
 A) $(4,008,200) 
 B) $2,405,200 
 C) $(114,800) 
 D) $1,145,200 
 
 Ans: C AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 3 Level: Easy 
 
 Solution: 
 
Residual income = Net operating income − (Average operating assets × Minimum 
required rate of return) = $1,145,200 − ($7,000,000 × 18%) = $1,145,200 − 
$1,260,000 = $(114,800) 
 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-53 
 
Use the following to answer questions 92-94: 
 
Last year the Uptown Division of Gorcen Enterprises had sales of $300,000 and a net 
operating income of $24,000. The average operating assets at Uptown last year amounted to 
$120,000. 
 
 92. Last year at Uptown the return on investment was: 
 A) 8% 
 B) 12% 
 C) 20% 
 D) 40% 
 
 Ans: C AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 2 Level: Easy 
 
 Solution: 
 
 ROI = Net operating income ÷ Average operating assets 
 = $24,000 ÷ $120,000 = 20% 
 
 93. Last year at Uptown the margin amounted to: 
 A) 8% 
 B) 12% 
 C) 20% 
 D) 40% 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 2 Level: Easy 
 
 Solution: 
 
 Margin = Net operating income ÷ Sales = $24,000 ÷ $300,000 = 8% 
Chapter 12 Segment Reporting and Decentralization 
 
12-54 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 94. At Uptown the turnover last year was: 
 A) 0.4 
 B) 2.5 
 C) 3.2 
 D) 5.0 
 
 Ans: B AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 2 Level: Easy 
 
 Solution: 
 
 Turnover = Sales ÷ Average operating assets = $300,000 ÷ $120,000 = 2.5 
 
Use the following to answer questions 95-97: 
 
Ahartz Industries is a division of a major corporation. Data concerning the most recent year 
appears below: 
 
 Sales ..................................... $7,820,000 
 Net operating income ........... $445,740 
 Average operating assets ...... $2,000,000 
 
 95. The division's margin is closest to: 
 A) 22.3% 
 B) 25.6% 
 C) 5.7% 
 D) 31.3% 
 
 Ans: C AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 2 Level: Easy 
 
 Solution: 
 
 Margin = Net operating income ÷ Sales = $445,740 ÷ $7,820,000 = 5.7% 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-55 
 
 96. The division's turnover is closest to: 
 A) 3.20 
 B) 17.54 
 C) 0.22 
 D) 3.91 
 
 Ans: D AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 2 Level: Easy 
 
 Solution: 
 
 Turnover = Sales ÷ Average operating assets = $7,820,000 ÷ $2,000,000 = 3.91 
 
 97. The division's return on investment (ROI) is closest to: 
 A) 18.2% 
 B) 4.5% 
 C) 22.3% 
 D) 1.3% 
 
 Ans: C AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 2 Level: Easy 
 
 Solution: 
 
 ROI = Net operating income ÷ Average operating assets 
 = $445,740 ÷ $2,000,000 = 22.3% 
 
Use the following to answer questions 98-100: 
 
Beade Industries is a division of a major corporation. Last year the division had total sales of 
$16,760,000, net operating income of $770,960, and average operating assets of $4,000,000. 
Chapter 12 Segment Reporting and Decentralization 
 
12-56 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 98. The division's margin is closest to: 
 A) 28.5% 
 B) 23.9% 
 C) 4.6% 
 D) 19.3% 
 
 Ans: C AACSB: Analytic AICPA BB: Critical Thinking 
AICPAFN: Reporting LO: 2 Level: Easy 
 
 Solution: 
 
 Margin = Net operating income ÷ Sales = $770,960 ÷ $16,760,000 = 4.6% 
 
 99. The division's turnover is closest to: 
 A) 21.74 
 B) 4.19 
 C) 3.51 
 D) 0.19 
 
 Ans: B AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 2 Level: Easy 
 
 Solution: 
 
 Turnover = Sales ÷ Average operating assets = $16,760,000 ÷ $4,000,000 = 4.19 
 
 100. The division's return on investment (ROI) is closest to: 
 A) 16.1% 
 B) 0.9% 
 C) 19.3% 
 D) 3.7% 
 
 Ans: C AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 2 Level: Easy 
 
 Solution: 
 
 ROI = Net operating income ÷ Average operating assets 
 = $770,960 ÷ $4,000,000 = 19.3% 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-57 
 
Use the following to answer questions 101-102: 
 
The West Division of Cecchetti Corporation had average operating assets of $240,000 and net 
operating income of $42,200 in August. The minimum required rate of return for performance 
evaluation purposes is 19%. 
 
 101. What was the West Division's minimum required return in August? 
 A) $45,600 
 B) $42,200 
 C) $53,618 
 D) $8,018 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 3 Level: Easy 
 
 Solution: 
 
Minimum required return = Minimum required rate of return × Average operating 
assets = 19% × $240,000 = $45,600 
 
 102. What was the West Division's residual income in August? 
 A) -$8,018 
 B) $3,400 
 C) -$3,400 
 D) $8,018 
 
 Ans: C AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 3 Level: Easy 
 
 Solution: 
 
Residual income = Net operating income − (Average operating assets × Minimum 
required rate of return) = $42,200 − ($240,000 × 19%) = $42,200 − $45,600 = -$3,400 
 
Use the following to answer questions 103-104: 
 
The Consumer Products Division of Goich Corporation had average operating assets of 
$800,000 and net operating income of $81,300 in May. The minimum required rate of return 
for performance evaluation purposes is 10%. 
Chapter 12 Segment Reporting and Decentralization 
 
12-58 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 103. What was the Consumer Products Division's minimum required return in May? 
 A) $81,300 
 B) $8,130 
 C) $88,130 
 D) $80,000 
 
 Ans: D AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 3 Level: Easy 
 
 Solution: 
 
Minimum required return = Minimum required rate of return × Average operating 
assets = 10% × $800,000 = $80,000 
 
 104. What was the Consumer Products Division's residual income in May? 
 A) -$1,300 
 B) $8,130 
 C) $1,300 
 D) -$8,130 
 
 Ans: C AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 3 Level: Easy 
 
 Solution: 
 
Residual income = Net operating income − (Average operating assets × Minimum 
required rate of return) = $81,300 − ($800,000 × 10%) = $81,300 − $80,000 = $1,300 
 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-59 
 
Use the following to answer questions 105-108: 
 
(Appendix 12A) Division P of the Nyers Company makes a part that can either be sold to 
outside customers or transferred internally to Division Q for further processing. Annual data 
relating to this part are as follows: 
 
 Annual production capacity .................................. 80,000 units 
 Selling price of the item to outside customers ...... $35 
 Variable cost per unit ............................................ $23 
 Fixed cost per unit ................................................. $5 
 
Division Q of the Nyers Company requires 15,000 units per year and is currently paying an 
outside supplier $33 per unit. Consider each part below independently. 
 
 105. If outside customers demand only 50,000 units per year, then according to the formula 
in the text, what is the lowest acceptable transfer price from the viewpoint of the 
selling division? 
 A) $35 
 B) $33 
 C) $28 
 D) $23 
 
 Ans: D AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Decision Making; Reporting LO: 4 Level: Medium 
 
 Solution: 
 
 Transfer price  Variable cost per unit + (Total contribution margin on lost sales ÷ 
Number of units transferred) = $23 + ($0 ÷ 15,000) = $23 
Chapter 12 Segment Reporting and Decentralization 
 
12-60 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 106. If outside customers demand 80,000 units, then according to the formula in the text, 
what is the lowest acceptable transfer price from the viewpoint of the selling division? 
 A) $35 
 B) $33 
 C) $28 
 D) $23 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Decision Making; Reporting LO: 4 Level: Medium 
 
 Solution: 
 
Transfer price ≥ Variable cost per unit + (Total contribution margin on lost sales ÷ 
Number of units transferred) = $23 + [($35 − $23) × 15,000] ÷ 15,000 = $23 + $12 = 
$35 
 
 107. If outside customers demand 80,000 units and if, by selling to Division Q, Division P 
could avoid $4 per unit in variable selling expense, then according to the formula in 
the text, what is the lowest acceptable transfer price from the viewpoint of the selling 
division? 
 A) $35 
 B) $21 
 C) $31 
 D) $33 
 
 Ans: C AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Decision Making; Reporting LO: 4 Level: Hard 
 
 Solution: 
 
Transfer price ≥ Variable cost per unit + (Total contribution margin on lost sales ÷ 
Number of units transferred) = $23 + [($35 − $23 − $4) × 15,000] ÷ 15,000 = $23 + $8 
= $31 
 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-61 
 
 108. If outside customers demand 70,000 units, then according to the formula in the text, 
what is the lowest acceptable transfer price from the viewpoint of the selling division 
for each of the 15,000 units needed by Q? 
 A) $33 
 B) $27 
 C) $28 
 D) $29 
 
 Ans: B AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Decision Making; Reporting LO: 4 Level: Hard 
 
 Solution: 
 
Transfer price ≥ Variable cost per unit + (Total contribution margin on lost sales ÷ 
Number of units transferred) 
= $23 + [($35 − $23) × 5,000*] ÷ 15,000 = $23 + ($12 ÷ 3) 
= $23 + $4 = $27 
 
*Lost sales units = 15,000 − (80,000 − 70,000) = 15,000 − 10,000 = 5,000 
 
Use the following to answer questions 109-110: 
 
(Appendix 12A) Two of the decentralized divisions of Gamberi Electronics Corporation are 
the Plastics Division and the Components Division. The Plastics Division sells molded parts 
to both the Components Division and to customers outside the corporation. 
 
 109. Assume that the Plastics Division is currently operating at full capacity. Also assume 
that the Components Division wants to increase the number of parts it purchases from 
Plastics. In order to maintain its current level of profitability, the Plastics Division 
should not accept any transfer price on these additional parts that is below the: 
 A) variable cost of the additional parts. 
 B) full (absorption) cost of the additional parts. 
 C) variable cost of the additional parts plus the lost contribution margin on all units 
that could no longer be sold to customers outside the corporation. 
 D) full (absorption) cost of the additional parts plus the lost contribution margin on 
all units that could no longer be sold to customers outside the corporation. 
 
 Ans: C AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Decision Making; Reporting LO: 4 Level: Medium 
Chapter 12 SegmentReporting and Decentralization 
 
12-62 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 110. Assume that the Plastics Division is currently operating with idle capacity. Also 
assume that the Components Division wants to purchase from Plastics all of the 
additional parts that could be made with this idle capacity. In order to increase its 
current level of profitability, the Plastics Division should accept any transfer price on 
these additional parts that is above the: 
 A) variable cost of the additional parts. 
 B) full (absorption) cost of the additional parts. 
 C) variable cost of the additional parts plus the lost contribution margin on all units 
that could no longer be sold to customers outside the corporation. 
 D) full (absorption) cost of the additional parts plus the lost contribution margin on 
all units that could no longer be sold to customers outside the corporation. 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Decision Making; Reporting LO: 4 Level: Medium 
 
Use the following to answer questions 111-112: 
 
(Appendix 12B) Ampulla Production Studios charges the Sound Effects Department's costs to 
two operating departments, Audio and Video. Charges are made on the basis of labor-hours. 
Information pertaining to the labor-hours for the year follow: 
 
 Audio Video 
 Budgeted labor-hours for the year ............................... 18,000 27,000 
 Actual labor-hours for the year ................................... 14,700 27,300 
 Annual long-run average capacity in labor-hours ....... 15,000 25,000 
 
The following costs pertain to the Sound Effects Department: 
 
 Budgeted For Year Actual For Year 
 Variable costs ........ $315,000 $273,000 
 Fixed costs ............. $756,000 $819,000 
 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-63 
 
 111. How much of the Sound Effects Department's variable cost should be charged to the 
Video Department at year-end for performance evaluation purposes? 
 A) $175,000 
 B) $175,500 
 C) $177,450 
 D) $191,100 
 
 Ans: D AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 5 Level: Medium 
 
 Solution: 
 
 Variable cost charged to Video Department 
= Budgeted variable cost per lab-hour × Actual labor-hours 
= [$315,000 ÷ (18,000 + 27,000)] × 27,300 = ($315,000 ÷ 45,000) × 27,300 
= $7 × 27,300 = $191,100 
 
 112. How much of the Sound Effects Department's fixed cost should be charged to the 
Audio department at year-end for performance evaluation purposes? 
 A) $264,600 
 B) $283,500 
 C) $302,400 
 D) $307,125 
 
 Ans: B AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 5 Level: Medium 
 
 Solution: 
 
 Fixed cost charged to Audio department 
= Audio’s percent of total capacity × Budgeted fixed costs 
= [15,000 ÷ (15,000 + 25,000)] × $756,000 = (15,000 ÷ 40,000) × $756,000 
= 37.5% × $756,000 = $283,500 
 
Chapter 12 Segment Reporting and Decentralization 
 
12-64 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
Use the following to answer questions 113-114: 
 
(Appendix 12B) Wollan Corporation has two operating divisions-an East Division and a West 
Division. The company's Logistics Department services both divisions. The variable costs of 
the Logistics Department are budgeted at $44 per shipment. The Logistics Department's fixed 
costs are budgeted at $237,600 for the year. The fixed costs of the Logistics Department are 
determined based on peak-period demand. 
 
 
 
Percentage of Peak 
Period Capacity Required 
Budgeted 
Shipments 
 East Division ......... 40% 1,300 
 West Division ........ 60% 3,100 
 
At the end of the year, actual Logistics Department variable costs totaled $332,880 and fixed 
costs totaled $253,960. The East Division had a total of 4,300 shipments and the West 
Division had a total of 3,000 shipments for the year. 
 
 113. How much Logistics Department cost should be allocated to the West Division at the 
end of the year? 
 A) $289,176 
 B) $229,644 
 C) $241,167 
 D) $274,560 
 
 Ans: D AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 5 Level: Easy 
 
 Solution: 
 
 Logistics Department cost allocated to West Division 
= (Budgeted variable cost per unit × Actual shipments) + (Budgeted fixed costs × 
Percent of peak capacity required) 
= ($44 per shipment × 3,000 shipments) + (($237,600 × 60%) 
= $132,000 + $142,560 = $274,560 
 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-65 
 
 114. How much actual Logistics Department cost should not be allocated to the operating 
divisions at the end of the year? 
 A) $28,040 
 B) $0 
 C) $16,360 
 D) $11,680 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 5 Level: Easy 
 
 Solution: 
 
 Actual cost = $332,880 + $253,960 = $586,840 
Cost allocated to operating divisions 
= [$44 per shipment × (4,300 + 3,000 shipments)] + $237,600 
= [$44 per shipment × 7,300 shipments] + $237,600 = $321,200 + $237,600 
= $558,800 
Actual Logistics Department cost not allocated to operating divisions 
= $586,840 − $558,800 = $28,040 
 
Use the following to answer questions 115-116: 
 
(Appendix 12B) Azotea Corporation has two operating divisions-a Consumer Division and a 
Commercial Division. The company's Order Fulfillment Department provides services to both 
divisions. The variable costs of the Order Fulfillment Department are budgeted at $56 per 
order. The Order Fulfillment Department's fixed costs are budgeted at $233,700 for the year. 
The fixed costs of the Order Fulfillment Department are budgeted based on the peak period 
orders. 
 
 
Percentage of Peak Period 
Capacity Required 
Budgeted 
Orders 
 Consumer Division ............ 40% 1,200 
 Commercial Division ........ 60% 2,900 
 
At the end of the year, actual Order Fulfillment Department variable costs totaled $237,390 
and fixed costs totaled $239,140. The Consumer Division had a total of 1,240 orders and the 
Commercial Division had a total of 2,860 orders for the year. 
Chapter 12 Segment Reporting and Decentralization 
 
12-66 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 115. How much Order Fulfillment Department cost should be allocated to the Commercial 
Division at the end of the year? 
 A) $300,380 
 B) $309,078 
 C) $332,409 
 D) $323,180 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 5 Level: Easy 
 
 Solution: 
 
 Order Fulfillment Department cost allocated to Commercial Division 
= ($56 per order × 2,860 orders) + ($233,700 × 60%) 
= $160,160 + $140,220 = $300,380 
 
 116. How much actual Order Fulfillment Department cost should not be allocated to the 
operating divisions at the end of the year? 
 A) $7,790 
 B) $5,440 
 C) $13,230 
 D) $0 
 
 Ans: C AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 5 Level: Easy 
 
 Solution: 
 
 Actual cost = $237,390 + $239,140 = $476,530 
Cost allocated to operating divisions 
= [$56 per order × (1,240 + 2,860 orders)] + $233,700 
= [$56 per order × 4,100 orders] + $233,700 
= $229,600 + $233,700 = $463,300 
Actual Order Fulfillment cost not allocated to operating divisions 
= $476,530 − $463,300 = $13,230 
 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-67 
 
Use the following to answer questions 117-118: 
 
(Appendix 12B) Frame Corporation's Maintenance Department provides services to the 
company's two operating divisions-the Paints Division and the Stains Division. The variable 
costs of the Maintenance Department are budgeted based on the number of casesproduced by 
the operating departments. The fixed costs of the Maintenance Department are determined by 
the number of cases produced by the operating departments during the peak period. Data 
appear below: 
 
 Maintenance Department 
 Budgeted variable cost ....................................... $6 per case 
 Budgeted total fixed cost .................................... $328,000 
 Actual total variable cost .................................... $254,014 
 Actual total fixed cost ........................................ $331,940 
 
 Paints Division 
 Percentage of peak period capacity required ..... 35% 
 Budgeted cases ................................................... 12,000 
 Actual cases ........................................................ 12,010 
 
 Stains Division 
 Percentage of peak period capacity required ..... 65% 
 Budgeted cases ................................................... 29,000 
 Actual cases ........................................................ 28,960 
 
 117. How much Maintenance Department cost should be allocated to the Stains Division at 
the end of the year? 
 A) $395,313 
 B) $414,187 
 C) $405,610 
 D) $386,960 
 
 Ans: D AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 5 Level: Easy 
 
 Solution: 
 
 Maintenance Department cost allocated to Stains Division 
= ($6 per case × 28,960 cases) + ($328,000 × 65%) 
= $173,760 + $213,200 = $386,960 
 
Chapter 12 Segment Reporting and Decentralization 
 
12-68 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 118. How much actual Maintenance Department cost should not be allocated to the 
operating divisions at the end of the year? 
 A) $12,134 
 B) $8,194 
 C) $0 
 D) $3,940 
 
 Ans: A AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting LO: 5 Level: Easy 
 
 Solution: 
 
 Actual cost = $254,014 + $331,940 = $585,954 
Maintenance Department cost allocated to operating divisions 
= [$6 per case × (12,010 + 28,960 cases)] + $328,000 
= [$6 per case × 40,970 cases] + $328,000 
= $245,820 + $328,000 = $573,820 
Maintenance Department cost not allocated to operating divisions 
= $585,954 − $573,820 = $12,134 
 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-69 
 
Essay Questions 
 
 119. Fausnaught Corporation has two major business segments—Retail and Wholesale. In 
October, the Retail business segment had sales revenues of $730,000, variable 
expenses of $409,000, and traceable fixed expenses of $117,000. During the same 
month, the Wholesale business segment had sales revenues of $400,000, variable 
expenses of $220,000, and traceable fixed expenses of $48,000. Common fixed 
expenses totaled $218,000 and were allocated as follows: $122,000 to the Retail 
business segment and $96,000 to the Wholesale business segment. 
 
 Required: 
 
 Prepare a segmented income statement in the contribution format for the company. 
Omit percentages; show only dollar amounts. 
 
 Ans: 
 
 Total Retail Wholesale 
Sales .............................................. $1,130,000 $730,000 $400,000 
Variable expenses .......................... 629,000 409,000 220,000 
Contribution margin ...................... 501,000 321,000 180,000 
Traceable fixed expenses .............. 165,000 117,000 48,000 
Segment margin ............................. 336,000 $204,000 $132,000 
Common fixed expenses ............... 218,000 
Net operating income .................... $118,000 
 
 AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting; Measurement LO: 1 Level: Easy 
Chapter 12 Segment Reporting and Decentralization 
 
12-70 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 120. Spiess Corporation has two major business segments—Apparel and Accessories. Data 
concerning those segments for December appear below: 
 
 Sales revenues, Apparel ............................ $370,000 
 Variable expenses, Apparel ....................... $185,000 
 Traceable fixed expenses, Apparel ............ $48,000 
 Sales revenues, Accessories ...................... $670,000 
 Variable expenses, Accessories ................. $275,000 
 Traceable fixed expenses, Accessories ..... $114,000 
 
 Common fixed expenses totaled $309,000 and were allocated as follows: $142,000 to 
the Apparel business segment and $167,000 to the Accessories business segment. 
 
 Required: 
 
 Prepare a segmented income statement in the contribution format for the company. 
Omit percentages; show only dollar amounts. 
 Ans: 
 
 Total Apparel Accessories 
Sales .............................................. $1,040,000 $370,000 $670,000 
Variable expenses .......................... 460,000 185,000 275,000 
Contribution margin ...................... 580,000 185,000 395,000 
Traceable fixed expenses .............. 162,000 48,000 114,000 
Segment margin ............................. 418,000 $137,000 $281,000 
Common fixed expenses ............... 309,000 
Net operating income .................... $109,000 
 
 AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting; Measurement LO: 1 Level: Easy 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-71 
 
 121. Data for September concerning Greenberger Corporation's two major business 
segments—Fibers and Feedstocks—appear below: 
 
 Sales revenues, Fibers ............................... $750,000 
 Sales revenues, Feedstocks ........................ $620,000 
 Variable expenses, Fibers .......................... $368,000 
 Variable expenses, Feedstocks .................. $254,000 
 Traceable fixed expenses, Fibers ............... $98,000 
 Traceable fixed expenses, Feedstocks ....... $112,000 
 
 Common fixed expenses totaled $344,000 and were allocated as follows: $175,000 to 
the Fibers business segment and $169,000 to the Feedstocks business segment. 
 
 Required: 
 
 Prepare a segmented income statement in the contribution format for the company. 
Omit percentages; show only dollar amounts. 
 Ans: 
 
 Total Fibers Feedstocks 
Sales .................................. $1,370,000 $750,000 $620,000 
Variable expenses .............. 622,000 368,000 254,000 
Contribution margin .......... 748,000 382,000 366,000 
Traceable fixed expenses .. 210,000 98,000 112,000 
Segment margin ................. 538,000 $284,000 $254,000 
Common fixed expenses ... 344,000 
Net operating income ........ $194,000 
 
 AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting; Measurement LO: 1 Level: Easy 
Chapter 12 Segment Reporting and Decentralization 
 
12-72 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 122. The following data pertains to Timmins Company's operations last year: 
 
 Return on investment (ROI) ............. 20% 
 Sales .................................................. $800,000 
 Margin .............................................. 5% 
 Minimum required rate of return ...... 16% 
 
 Required: 
 
a. Compute the company's average operating assets. 
b. Compute the company's residual income for the year. 
 Ans: 
 
a. ROI = Margin × Turnover 
20% = 5% × Turnover 
Turnover = 20% ÷ 5% = 4 
Turnover = Sales ÷ Average operating assets 
4 = $800,000 ÷ Average operating assets 
Average operating assets = $800,000 ÷ 4 = $200,000 
 
b. Before the residual income can be computed, we must first compute the 
company’s net operating income for the year: 
Margin = Net operating income ÷ Sales 
5% = Net operating income ÷ $800,000 
Net operating income = 5% × $800,000 = $40,000 
 
 Average operating assets ................................. $200,000 
 Minimum required rate of return ..................... 16% 
 Minimum required net operatingincome ........ $32,000 
 
 Actual net operating income ............................ $40,000 
 Minimum required net operating income ........ 32,000 
 Residual income .............................................. $8,000 
 
 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting 
LO: 2; 3 Level: Medium 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-73 
 
 123. Ebel Wares is a division of a major corporation. The following data are for the latest 
year of operations: 
 
 Sales ................................................................................ $29,120,000 
 Net operating income ..................................................... $1,514,240 
 Average operating assets ................................................ $8,000,000 
 The company’s minimum required rate of return .......... 18% 
 
 Required: 
 
a. What is the division's margin? 
b. What is the division's turnover? 
c. What is the division's return on investment (ROI)? 
d. What is the division's residual income? 
 
 Ans: 
 
a. Margin = Net operating income ÷ Sales = $1,514,240 ÷ $29,120,000 = 5.2% 
 
b. Turnover = Sales ÷ Average operating assets = $29,120,000 ÷ $8,000,000 = 3.6 
 
c. ROI = Net operating income ÷ Average operating assets = $1,514,240 ÷ 
$8,000,000 = 18.9% 
 
d. Residual income = Net operating income − Minimum required rate of return × 
Average operating assets = $1,514,240 − 18% × $8,000,000 = $74,240 
 
 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting 
LO: 2; 3 Level: Easy 
 
Chapter 12 Segment Reporting and Decentralization 
 
12-74 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 124. The Clipper Corporation had net operating income of $380,000 and average operating 
assets of $2,000,000. The corporation requires a return on investment of 18%. 
 
 Required: 
 
a. Calculate the company's return on investment (ROI) and residual income (RI). 
b. Clipper Corporation is considering an investment of $70,000 in a project that will 
generate annual net operating income of $12,950. Would it be in the best interests 
of the company to make this investment? 
c. Clipper Corporation is considering an investment of $70,000 in a project that will 
generate annual net operating income of $12,950. If the division planning to make 
the investment currently has a return on investment of 20% and its manager is 
evaluated based on the division's ROI, will the division manager be inclined to 
request funds to make this investment? 
d. Clipper Corporation is considering an investment of $70,000 in a project that will 
generate annual net operating income of $12,950. If the division planning to make 
the investment currently has a residual income of $50,000 and its manager is 
evaluated based on the division's residual income, will the division manager be 
inclined to request funds to make this investment? 
 
 Ans: 
 
a. Return on investment = Net operating income ÷ Average operating assets = 
$380,000 ÷ $2,000,000 = 19% 
Residual income = Net operating income − (Average operating assets × Minimum 
required rate of return) = $380,000 − ($2,000,000 × 0.18) = $20,000 
 
b. Return on investment = Net operating income ÷ Average operating assets = 
$12,950 ÷ $70,000 = 18.5%. Since the return on investment of the project exceeds 
the company’s minimum required rate of return, the project should be accepted. It 
would increase both the company’s residual income and its return on investment. 
 
c. The manager of the division would not be inclined to request funds to make the 
investment in the new project since its return on investment is only 18.5%, which 
is less than the division’s current return on investment of 20%. The new project 
would drag down the division’s return on investment. 
 
d. The manager of the division would be inclined to request funds for the new 
project. The project’s return on investment of 18.5% exceeds the minimum 
required rate of return of 18%, which would result in an increase in residual 
income if the project were accepted. 
 
 AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Decision Making; Reporting LO: 2; 3 Level: Medium 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-75 
 
 125. Geballe Industries is a division of a major corporation. Last year the division had total 
sales of $21,420,000, net operating income of $2,270,520, and average operating 
assets of $6,000,000. The company's minimum required rate of return is 10%. 
 
 Required: 
 
a. What is the division's margin? 
b. What is the division's turnover? 
c. What is the division's return on investment (ROI)? 
 
 Ans: 
 
 
 
 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting 
LO: 2 Level: Easy 
 
 126. Ide Industries is a division of a major corporation. The following data are for the latest 
year of operations: 
 
 Required: 
 
 What is the division's residual income? 
 
 Ans: 
 
Residual income = Net operating income − Minimum required rate of return × 
Average operating assets = $1,743,000 - 18% × $7,000,000 = $483,000 
 
 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting 
LO: 3 Level: Easy 
Chapter 12 Segment Reporting and Decentralization 
 
12-76 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 127. Brodrick Corporation uses residual income to evaluate the performance of its 
divisions. The minimum required rate of return for performance evaluation purposes is 
19%. The Games Division had average operating assets of $140,000 and net operating 
income of $25,900 in August. 
 
 Required: 
 
 What was the Games Division's residual income in August? 
 
 Ans: 
 
Net operating income ............................................ $25,900 
Minimum required return (19% × $140,000) ........ 26,600 
Residual income .................................................... ($700) 
 
 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting 
LO: 3 Level: Easy 
 
 128. The Casket Division of Saal Corporation had average operating assets of $950,000 and 
net operating income of $135,200 in January. The company uses residual income to 
evaluate the performance of its divisions, with a minimum required rate of return of 
13%. 
 
 Required: 
 
 What was the Casket Division's residual income in January? 
 
 Ans: 
 
Net operating income ............................................ $135,200 
Minimum required return (13% × $950,000) ........ 123,500 
Residual income .................................................... $11,700 
 
 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting 
LO: 3 Level: Easy 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-77 
 
 129. Ulrich Company has a Castings Division which does casting work of various types. 
The company's Machine Products Division has asked the Castings Division to provide 
it with 20,000 special castings each year on a continuing basis. The special casting 
would require $12 per unit in variable production costs. 
 
 In order to have time and space to produce the new casting, the Castings Division 
would have to cut back production of another casting - the RB4 which it presently is 
producing. The RB4 sells for $40 per unit, and requires $18 per unit in variable 
production costs. Boxing and shipping costs of the RB4 are $6 per unit. Boxing and 
shipping costs for the new special casting would be only $1 per unit, thereby saving 
the company $5 per unit in cost. The company is now producing and selling 100,000 
units of the RB4 each year. Production and sales of this casting would drop by 25 
percent if thenew casting is produced. Some $240,000 in fixed production costs in the 
Castings Division are now being covered by the RB4 casting; 25 percent of these costs 
would have to be covered by the new casting if it is produced and sold to the Machine 
Products Division. 
 
 Required: 
 
 According to the formula in the text, what is the lowest acceptable transfer price from 
the viewpoint of the selling division? Show all computations. 
Chapter 12 Segment Reporting and Decentralization 
 
12-78 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 Ans: 
 
 Transfer Price = Variable cost + Lost contribution margin per unit on outside sales 
 
Variable costs: 
Variable production costs ............................. $12 
Boxing and shipping .................................... 1 
Total ............................................................. $13 
 
Lost contribution margin on outside sales: 
RB4 selling price per unit ............................ $40 
Variable costs per unit ($18 + $6) ................ 24 
Contribution margin per unit ........................ $16 
Loss in production (100,000 × 0.25) ............ × 25,000 
Total lost contribution margin ...................... $400,000 
 
$400,000 ÷ 20,000 new castings = $20 per casting. 
 
Therefore, the lower limit on the transfer price should be: 
 
Transfer price = $13 + $20 = $33 per casting. 
 
 AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Decision Making; Reporting Appendix: 12A LO: 4 Level: Hard 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-79 
 
 130. Ishtaki Corporation has a Parts Division that does work for other Divisions in the 
company as well as for outside customers. The company's Equipment Division has 
asked the Parts Division to provide it with 20,000 special parts each year. The special 
parts would require $16.00 per unit in variable production costs. 
 
 The Equipment Division has a bid from an outside supplier for the special parts at 
$25.00 per unit. In order to have time and space to produce the special part, the Parts 
Division would have to cut back production of another part-the PW27 that it presently 
is producing. The PW27 sells for $38.00 per unit, and requires $29.00 per unit in 
variable production costs. Packaging and shipping costs of the PW27 are $2.00 per 
unit. Packaging and shipping costs for the new special part would be only $0.50 per 
unit. The Parts Division is now producing and selling 40,000 units of the PW27 each 
year. Production and sales of the PW27 would drop by 40% if the new special part is 
produced for the Equipment Division. 
 
 Required: 
 
a. What is the range of transfer prices within which both the Divisions' profits would 
increase as a result of agreeing to the transfer of 20,000 special parts per year from 
the Parts Division to the Equipment Division? 
b. Is it in the best interests of Ishtaki Corporation for this transfer to take place? 
Explain. 
Chapter 12 Segment Reporting and Decentralization 
 
12-80 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 Ans: 
 
a. From the perspective of the Parts Division, profits would increase as a result of the 
transfer if and only if: 
Transfer price > Variable cost + Opportunity cost 
The opportunity cost is the contribution margin on the lost sales, divided by the 
number of units transferred: 
Opportunity cost = [($38.00-$29.00-$2.00)×16,000*]/20,000 = $5.60 
* 40%×40,000 = 16,000 
Therefore, Transfer price > ($16.00+$0.50)+$5.60 = $22.10. 
 
From the viewpoint of the Equipment Division, the transfer price must be less than 
the cost of buying the units from the outside supplier. Therefore, Transfer price < 
$25.00. 
Combining the two requirements, we get the following range of transfer prices: 
$22.10 < Transfer price < $25.00. 
 
b. Yes, the transfer should take place. From the viewpoint of the entire company, the 
cost of transferring the units within the company is $22.10, but the cost of 
purchasing the special parts from the outside supplier is $25.00. Therefore, the 
company’s profits increase on average by $2.90 for each of the special parts that is 
transferred within the company, even though this would cut into production and 
sales of another product. 
 
 AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Decision Making; Reporting Appendix: 12A LO: 4 Level: Hard 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-81 
 
 131. Division G has asked Division F of the same company to supply it with 5,000 units of 
part WD26 this year to use in one of its products. Division G has received a bid from 
an outside supplier for the parts at a price of $19.00 per unit. Division F has the 
capacity to produce 25,000 units of part WD26 per year. Division F expects to sell 
21,000 units of part WD26 to outside customers this year at a price of $18.00 per unit. 
To fill the order from Division G, Division F would have to cut back its sales to 
outside customers. Division F produces part WD26 at a variable cost of $12.00 per 
unit. The cost of packing and shipping the parts for outside customers is $2.00 per 
unit. These packing and shipping costs would not have to be incurred on sales of the 
parts to Division G. 
 
 Required: 
 
a. What is the range of transfer prices within which both the Divisions' profits would 
increase as a result of agreeing to the transfer of 5,000 parts this year from 
Division G to Division F? 
b. Is it in the best interests of the overall company for this transfer to take place? 
Explain. 
Chapter 12 Segment Reporting and Decentralization 
 
12-82 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 Ans: 
 
a. From the perspective of Division G, profits would increase as a result of the 
transfer if and only if: 
Transfer price > Variable cost + Opportunity cost 
The opportunity cost is the contribution margin on the lost sales, divided by the 
number of units transferred: 
Opportunity cost = [($18.00 - $12.00 - $2.00)×1,000*]/5,000 = $0.80 
 
* Demand from outside customers ............................... 21,000 
 Units required by Division G ..................................... 5,000 
 Total requirements ..................................................... 26,000 
 Capacity ..................................................................... 25,000 
 Required reduction in sales to outside customers ...... 1,000 
 
Therefore, Transfer price > $12.00 + $0.80 = $12.80. 
 
From the viewpoint of Division F, the transfer price must be less than the cost of 
buying the units from the outside supplier. Therefore, 
Transfer price < $19.00. 
Combining the two requirements, we get the following range of transfer prices: 
$12.80 < Transfer price < $19.00. 
 
b. Yes, the transfer should take place. From the viewpoint of the entire company, the 
cost of transferring the units within the company is $12.80, but the cost of 
purchasing them from the outside supplier is $19.00. Therefore, the company’s 
profits increase on average by $6.20 for each of the special parts that is transferred 
within the company. 
 
 AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Decision Making; Reporting Appendix: 12A LO: 4 
Level: Medium 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-83 
 
 132. Cannata Corporation has two operating divisions-a North Division and a South 
Division. The company's Logistics Department services both divisions. The variable 
costs of the Logistics Department are budgeted at $32 per shipment. The Logistics 
Department's fixed costs are budgeted at $372,300 for the year. The fixed costs of the 
Logistics Department are determined based on peak-period demand.Percentage of Peak 
Period Capacity Required 
Budgeted 
Shipments 
 North Division ....... 25% 1,700 
 South Division ....... 75% 5,600 
 
 At the end of the year, actual Logistics Department variable costs totaled $335,000 
and fixed costs totaled $382,850. The North Division had a total of 4,700 shipments 
and the South Division had a total of 5,300 shipments for the year. 
 
 Required: 
 
a. Prepare a report showing how much of the Logistics Department's costs should be 
charged to each of the operating divisions at the end of the year. 
b. How much of the actual Logistics Department costs should not be charged to the 
operating divisions at the end of the year? Who should be held responsible for 
these uncharged costs? 
Chapter 12 Segment Reporting and Decentralization 
 
12-84 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 Ans: 
 
a. The amount of cost that would be charged to each of the operating divisions at the 
end of the year would be as follows: 
 North Division South Division 
 Variable cost allocation: 
 $32 × 4,700 shipments ......... $150,400 
 $32 × 5,300 shipments ......... $169,600 
 Fixed cost allocation: 
 25% × $372,300 ................... 93,075 
 75% × $372,300 ................... 279,225 
 Total cost charged ................... $243,475 $448,825 
 
b. The uncharged costs are: 
 Variable Fixed 
 Total actual costs incurred ....... $335,000 $382,850 
 Costs charged .......................... 320,000 372,300 
 Spending variance ................... $15,000 $10,550 
 
The spending variance represents the difference between the Logistics Department’s 
actual costs and what those costs should have been, given the actual level of activity. 
This difference is properly the responsibility of the Logistics Department and should 
not be charged to the operating divisions. 
 
 AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting; Measurement Appendix: 12B LO: 5 Level: Medium 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-85 
 
 133. Sauseda Corporation has two operating divisions-an Inland Division and a Coast 
Division. The company's Customer Service Department provides services to both 
divisions. The variable costs of the Customer Service Department are budgeted at $38 
per order. The Customer Service Department's fixed costs are budgeted at $433,200 
for the year. The fixed costs of the Customer Service Department are determined 
based on the peak period orders. 
 
 
 
Percentage of Peak Period 
Capacity Required 
Budgeted 
Orders 
 Inland Division ...... 40% 2,400 
 Coast Division ....... 60% 5,200 
 
 At the end of the year, actual Customer Service Department variable costs totaled 
$303,240 and fixed costs totaled $450,280. The Inland Division had a total of 2,430 
orders and the Coast Division had a total of 5,170 orders for the year. 
 
 Required: 
 
a. Prepare a report showing how much of the Customer Service Department's costs 
should be charged to each of the operating divisions at the end of the year. 
b. How much of the actual Customer Service Department costs should not be charged 
to the operating divisions at the end of the year? Who should be held responsible 
for these uncharged costs? 
Chapter 12 Segment Reporting and Decentralization 
 
12-86 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 Ans: 
 
a. The amount of cost that would be charged to each of the operating divisions at the 
end of the year would be as follows: 
 Inland Division Coast Division 
 Variable cost allocation: 
 $38 × 2,430 orders .......... $92,340 
 $38 × 5,170 orders .......... $196,460 
 Fixed cost allocation: 
 40% × $433,200 ............. 173,280 
 60% × $433,200 ............. 259,920 
 Total cost charged ............. $265,620 $456,380 
 
b. The uncharged costs are: 
 Variable Fixed 
 Total actual costs incurred .... $303,240 $450,280 
 Costs charged ....................... 288,800 433,200 
 Spending variance ................ $14,440 $17,080 
 
The spending variance represents the difference between the Customer Service 
Department’s actual costs and what those costs should have been, given the actual 
level of activity. This difference is properly the responsibility of the Customer Service 
Department and should not be charged to the operating divisions. 
 
 AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting; Measurement Appendix: 12B LO: 5 Level: Medium 
Chapter 12 Segment Reporting and Decentralization 
 
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 12-87 
 
 134. Nealon Corporation's Maintenance Department provides services to the company's 
two operating divisions-the Paints Division and the Stains Division. The variable costs 
of the Maintenance Department are budgeted based on the number of cases produced 
by the operating departments. The fixed costs of the Maintenance Department are 
determined based on the number of cases produced by the operating departments 
during the peak period. Data appear below: 
 
 Maintenance Department 
 Budgeted variable cost ....................................... $7 per case 
 Budgeted total fixed cost .................................... $600,000 
 Actual total variable cost .................................... $432,072 
 Actual total fixed cost ........................................ $602,860 
 
 Paints Division 
 Percentage of peak period capacity required ...... 30% 
 Budgeted cases ................................................... 15,000 
 Actual cases ........................................................ 15,020 
 
 Stains Division 
 Percentage of peak period capacity required ...... 70% 
 Budgeted cases ................................................... 45,000 
 Actual cases ........................................................ 44,990 
 
 Required: 
 
a. Prepare a report showing how much of the Maintenance Department's costs should 
be charged to each of the operating divisions at the end of the year. 
b. How much of the actual Maintenance Department costs should not be charged to 
the operating divisions at the end of the year? Who should be held responsible for 
these uncharged costs? 
Chapter 12 Segment Reporting and Decentralization 
 
12-88 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 
 
 Ans: 
 
a. The amount of cost that would be charged to each of the operating divisions at the 
end of the year would be as follows: 
 Paints Division Stains Division 
 Variable cost allocation: 
 $7 × 15,020 orders .......... $105,140 
 $7 × 44,990 orders .......... $314,930 
 Fixed cost allocation: 
 30% × $600,000 ............. 180,000 
 70% × $600,000 ............. 420,000 
 Total cost charged ............. $285,140 $734,930 
 
b. The uncharged costs are: 
 Variable Fixed 
 Total actual costs incurred ....... $432,072 $602,860 
 Costs charged .......................... 420,070 600,000 
 Spending variance ................... $12,002 $2,860 
 
The spending variance represents the difference between the Maintenance 
Department’s actual costs and what those costs should have been, given the actual 
level of activity. This difference is the responsibility of the Maintenance 
Department and should not be charged to the operating divisions. 
 
 AACSB: Analytic AICPA BB: Critical Thinking 
AICPA FN: Reporting; Measurement Appendix: 12B LO: 5 Level: Easy