Question

QUESTION 23 Hasbro Company makes wheels which it uses in the production of children's bikes. Hasbro's costs to produce 100,000 wheels annually are as follows Direct Material $40,000 Variable Manufacturing Overhead An outside supplier has offered to sell Hasbro similar wheels for $1.80 per wheel. If the wheels are purchased from the outside supplier, $25,000 of annual fixed manufacturing overhead would be avoided and the facilities now being used to make the wheels would be rented to another company for $55,000 per year. If Hasbro chooses to buy the wheels from the outside supplier, then the change in annual net operating income is a: $5,000 decrease O $50,000 increase O $30,000 increase O $70,000 increase QUESTION 24 All other things equal, which of the following would increase a division's residual income? Increase in expenses Decrease in average operating assets Increase in minimum required return Decrease in net operating income QUESTION 25 Starship 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? O 1, $7,900 O 2. -$20,118 O 3. $20,118 O4.-$7,900

Answer 1

Solution 23:

Relevant cost of buying the wheel = Purchase cost - Income from renting the manufacturing facilities

= (100000*$1.80) - $55,000 = $125,000

Relevant cost of making = Direct material + Direct labor + Variable manufacturing overhead + Avoidable fixed manufacturing overhead

= $40,000 + $60,000 + $30,000 + $25,000 = $155,000

If hasbro choose to buy wheels from outside supplier then change in operating income = Cost of making - Cost of buying

= $155,000 - $125,000 = $30,000 increase

Hence 3rd option is correct.

Solution 24:

Decrease in average operating assets will increase a division's residual income.

Hence 2nd option is correct.

Solution 25:

Residual income = Net operating income - Minimum required return

= $143,700 - ($970,000*14%) = $7,900

Hence option 1 is correct.