ASSIGNMENT: Write your answer in your notebook.

1. Piedmont Novelties, Inc., sells merchandise through three retail outlets—in Raleigh, Charlotte, and Savannah—and operates a general corporate
headquarters in Charlotte. A review of the company’s income statement indicates a record year in terms of sales and profits. Management, though,
desires additional insights about the individual stores and has asked that Judson Wyatt, a newly hired intern, prepare a segmented income
statement. The following information has been extracted from Piedmont’s
accounting records:

• Sales volume, sales price, and purchase price data:

Raleigh Charlotte Savannah
Sales volume ........................................................ 37,000 units 41,000 units 46,000 units
Unit selling price ................................................... $18.00 $16.50 $14.25
Unit purchase price ............................................... 8.25 8.25 9.00
• The following expenses were incurred for sales commissions, local advertising, property taxes, management salaries, and other noncontrollable
(but traceable) costs:
Raleigh Charlotte Savannah
Sales commissions ............................................... 6% 6% 6%
Local advertising ................................................... $16,500 $33,000 $72,000
Local property taxes .............................................. 6,750 3,000 9,000
Sales manager salary ............................................ — — 48,000
Store manager salaries ......................................... 46,500 58,500 57,000
Other noncontrollable costs ................................... 8,700 6,900 26,700
Local advertising decisions are made at the store manager level. The sales manager’s salary in Savannah is determined by the Savannah store
manager; in contrast, store manager salaries are set by Piedmont Novelties’s vice president.
• Nontraceable fixed corporate expenses total $288,450.
• The company uses a responsibility accounting system.

Required:
1. Assume the role of Judson Wyatt and prepare a segmented income statement for Piedmont.
2. Determine the weakest-performing store and present an analysis of the probable causes of poor performance.
3. Assume that an opening has arisen at the Charlotte corporate headquarters and the company’s chief executive officer (CEO) desires to promote
one of the three existing store managers. In evaluating the store managers’ performance, should the CEO use a store’s segment contribution
margin, the profit margin controllable by the store manager, or a store’s segment profit margin? Justify your answer.

2. The following data pertain to British Isles Aggregates Company, a producer of sand, gravel, a nd cement, for the year just ended.
Sales revenue ........................................................................................................................................ £6,000,000
Cost of goods sold ................................................................................................................................ 3,300,000
Operating expenses ............................................................................................................................... 2,400,000
Average invested capital ........................................................................................................................ 3,000,000
£ denotes the British pound sterling, the national monetary unit of the United Kingdom. Although the euro is used in most European markets, the
U.K. continues to use pounds sterling for its national currency.
Required:
1. Compute the company’s sales margin, capital turnover, and ROI.
2. If the sales and average invested capital remain the same during the next year, to what level would total expenses have to be reduced in order to
improve the firm’s ROI to 15 percent?
3. Assume expenses are reduced, as calculated in requirement (2). Compute the firm’s new sales margin. Show how the new sales margin and the
old capital turnover together result in a new ROI of 15 percent.

3. Suburban Lifestyles, Inc., has manufactured prefabricated houses for over 20 years. T h e houses are constructed in sections to be assembled on
customers’ lots. Suburban Lifestyles expanded into the precut housing market when it acquired Fairmont Company, one of its suppliers. In this
market, various types of lumber are precut into the appropriate lengths, banded into packages, and shipped to customers’ lots for assembly.
Suburban Lifestyles’ management designated the Fairmont Division as an investment center. Suburban uses return on investment (ROI) as a
performance measure with investment defined as average productive assets. Management bonuses are based in part on ROI. All investments are
expected to earn a minimum return of 15 percent before income taxes. Fairmont’s ROI has ranged from 19.3 to 22.1 percent since it was acquired.
Fairmont had an investment opportunity in 20x1 that had an estimated ROI of 18 percent. Fairmont’s management decided against the investment
because it believed the investment would decrease the division’s overall ROI. The 20x1 income statement for Fairmont Division follows. The
division’s productive assets were $25,200,000 at the end of 20x1, a 5 percent increase over the balance at the beginning of the year.
FAIRMONT DIVISION
Income Statement
For the Year Ended December 31, 20x1
(in thousands)
Sales revenue ................................................................................................................................................. $48,000
Cost of goods sold ............................................................................................................................................ 31,600
Gross margin ............................................................................................................................................... $16,400
Operating expenses:
Administrative ............................................................................................................................ $4,280
Selling ....................................................................................................................................... 7,200 11,480
Income from operations before income taxes ..................................................................................................... $ 4,920
Required:
1. Calculate the following performance measures for 20x1 for the Fairmont Division.
a. Return on investment (ROI).
b. Residual income.
2. Would the management of Fairmont Division have been more likely to accept the investment opportunity it had in 20x1 if residual income were
used as a performance measure instead of ROI? Explain your answer.

4. Golden G ate Construction Associates, a real estate developer and building contractor in San Francisco, has two sources of long-term capital:
debt and equity. The cost to Golden Gate of issuing debt is the after-tax cost of the interest payments on the debt, taking into account the fact that
the interest payments are tax deductible. The cost of Golden Gate’s equity capital is the investment opportunity rate of Golden Gate’s investors, that
is, the rate they could earn on investments of similar risk to that of investing in Golden Gate Construction Associates. The interest rate on Golden
Gate’s $90 million of long-term debt is 10 percent, and the company’s tax rate is 40 percent. The cost of Golden Gate’s equity capital is 15 percent.
Moreover, the market value (and book value) of Golden Gate’s equity is $135 million.

The company has two divisions: the real estate division and the construction division. The divisions’ total assets, current liabilities, and before-tax
operating income for the most recent year are as follows:
Division Total Assets Current Liabilities Before-Tax Operating Income
Real estate ....................................................................... $150,000,000 $9,000,000 $30,000,000
Construction .................................................................... 90,000,000 6,000,000 27,000,000
Required: Calculate the economic value added (EVA) for each of Golden Gate Construction Associates’ divisions.

5. Megatronics Corporation, a massive retailer of electronic products, is organized in four separate divisions. The four divisional managers are
evaluated at year-end, and bonuses are awarded based on ROI. Last year, the company as a whole produced a 13 percent return on its investment.
During the past week, management of the company’s Western Division was approached about the possibility of buying a competitor that had
decided to redirect its retail activities. (If the competitor is acquired, it will be acquired at its book value.) The data that follow relate to recent
performance of the Western Division and the competitor:
Western Division Competitor
Sales .......................................................................................................... $4,200,000 $2,600,000
Variable costs .............................................................................................. 70% of sales 65% of sales
Fixed costs .................................................................................................. $1,075,000 $835,000
Invested capital ........................................................................................... $925,000 $312,500
Management has determined that in order to upgrade the competitor to Megatronics’ standards, an additional $187,500 of invested capital would be
needed.
Required:
1. Compute the current ROI of the Western Division and the division’s ROI if the competitor is acquired.
2. What is the likely reaction of divisional management toward the acquisition? Why?
3. What is the likely reaction of Megatronics’ corporate management toward the acquisition? Why?
4. Would the division be better off if it didn’t upgrade the competitor to Megatronics’ standards? Show computations to support your answer.
5. Assume that Megatronics uses residual income to evaluate performance and desires a 12 percent minimum return on invested capital. Compute
the current residual income of the Western Division and the division’s residual income if the competitor is acquired. Will divisional management be
likely to change its attitude toward the acquisition? Why?