Evaluation in Decentralized Organizations

Eastern Performance Evaluation in Decentralized Organizations A. Cost Allocation Between Departments 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. North Division……. South Division……. Percentage of Peak Period Capacity Required 25% 75% Budgeted Shipments 1,700 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? B. Performance Evaluation Methods 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? C. Performance Evaluation Methods 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? …