Chapter Ten, How do Managers Evaluate Performance Using Cost Variance Analysis?, we re-visit the flexible budget model we learned about in BU1301, Financial Accounting. This chapter takes us much deep
Pool Accessories, Inc., has two divisions—Furniture and Supplies. (This is the same company as the previous exercise. This exercise can be assigned independently.) Segmented income statement information for the most recent fiscal year ended December 31 is shown as follows. Assume the Furniture division had average operating assets totaling $6,500,000 for the year, and the Supplies division had average operating assets of $1,750,000.
| Pool Accessories, Inc. Segmented Income Statements For the Current Fiscal Year Ended December 31 (dollar amounts are in thousands) | ||
|
| Furniture Division | Supplies Division |
| Sales | $3,000,000 | $1,000,000 |
| Cost of Goods Sold | 1,600,000 | 430,000 |
| Gross Margin | $1,400,000 | $570,000 |
| Allocated Overhead | 375,000 | 125,000 |
| Selling and Administrative Expenses | 250,000 | 200,000 |
| Operating Income | $775,000 | $245,000 |
| Income Tax Expense (30% rate) | 232,500 | 73,500 |
| Net Income | $542,500 | $171,500 |
Required:
a. Calculate ROI for each division. What does ROI tell us about each division? Indicate why this measure is useful in evaluating investment centers.
