Question

Exercise 10-19

The Ferrell Transportation Company uses a responsibility reporting system to measure the performance of its three investment centers: Planes, Taxis, and Limos. Segment performance is measured using a system of responsibility reports and return on investment calculations. The allocation of resources within the company and the segment managers’ bonuses are based in part on the results shown in these reports.

Recently, the company was the victim of a computer virus that deleted portions of the company’s accounting records. This was discovered when the current period’s responsibility reports were being prepared. The printout of the actual operating results appeared as follows.

Determine the missing pieces of information below.

		Planes			Taxis			Limos
Service revenue		$			$504,700			$
Variable costs		5,502,300						296,900
Contribution margin					255,000			485,420
Controllable fixed costs		1,504,900
Controllable margin					76,000			244,320
Average operating assets		25,002,400						1,527,000
Return on investment		12	%		8	%			%

Answer 1

First of all lets see the basic formulas needed to solve missing pieces.

1) Return on investment = Controllable margin/Average operating assets

2) Revenue- Variable cost = Contribution

3) Contribution - controllable fixed cost = controllable margin

Now lets look at the missing pieces one by one

Planes -

We need Revenue,Contribution,Margin

Lets start with Margin (formula 1 above) => Margin = ROI*Average assets

=> Margin = 12%*25002400 = 3,000,288

Now Contribution (formula 3) = fixed cost + Margin

Contribution = 1504900+3000288 = 4,505,188

Now revenue (formula 2) = contribution + variable cost

Revenue => 4,505,188+5,502,300 = 10,007,488

Taxis

Variable cost (see 2 )= Revnue - contribution = 504,700 - 255,000 = 249,700

Fixed cost = (see 3) = contribution - margin = 255,000 - 76,000 = 179,000

Average asstes = (see 1) = Margin/ROI = 76000/8% = 950,000

Limos

Revenue = variable cost + contribution = 296,900+485,420 = 782,320

Fixed cost = contribution - Margin = 485,420 - 244,320 = 241,100

ROI = (Margin/avg assets)*100 = 244,320/1,527,000 = 16%

Now lets plug all the gaps in the table with our answers above

	Planes	Taxiz	Limos
sales	10,007,488	504,700	782,320
variable cost	5,502,300	249,700	296,900
Contribution margin	4,505,188	255,000	485,420
controllable fixed cost	1,504,900	179,000	241,100
controllable margin	3,000,288	76,000	244,320
Average operating asset	25,002,400	950,000	1,527,000
Return on investment	12%	8%	16%