Question

Froren Pools Inc. sells pools and patio fumiture in twe e in Oktawa and one in Gatineau, and offers an installation service throughout the country for over ten years. Last year. the President has decided to improve its accounting system to record transactions in three autonomous divisions. You will find, in table 1. the income statement at December 31, 2018 You will also find in table 2 the information on total assets of the company. The company requires a minimum rate of return of 2096 The president wants to use this information to evaluate the performance of the three divisions and their managers. A bonus of a golf trip will be granted to the manager showing the best performance REQUIRED 1. The president of Frozen Pools Inc. wants to know whether the current income statement (as shown in table 1) is suitable for decision making and especially for evaluating the performance of each division. a) Explain why the current income statement format is (or is not suitable for decision making. b) Describe an alternative income statement format that would be more suitable for decision making. Explain why it is better. 2. Assuming that the invested capital is equal to the total assets shown in Table 2, calculate for each of the three divisions: a. the rate of return on invested capital (ROI)

Answer 1

Answer to Q.no 1(a):

the income statement shown was not suitable for management decision making since the depreciation was charged on inappropriate basis .

depreciation on equipment was 12000 (120000*10%)

allocation for installation service - 12000*2/3 =8000

allocation for other departments- 12000-8000= 4000

to dept1=4000/2= 2000

to dept 2= 4000/2 = 2000.

Answer to Q.no 1(b):

so the income statement should be based on above figures and

fixed expenses would be removed from the income statement ,because they are uncontrollable with in the hands of managers and hence they cannot be evaluated based on uncontrollable costs for their performance.

therefore, fixed costs would be irrelevant while decision making.

Swet comportation of Retien on Captal Employed, particed capital fimplyed: - Gatineau particolares; ottawa store store .. 180,000 Given. . 6,00,000 20,000 Equipment : 20,000 : (1201000xYA *Y2) Troude 150,000, 6120,000, Capital employed: 1,35,750 1,38,250 Refuen (connected), Operating focomes (t fined common come (H) Deprccration El Depreciation Peugsed focome: (22950) 93,700 3000 (2000) 3000 (2000) 268, oor 92,000

. Rof ottawa Gatineau 268,000 Income (A) 92080 1,50.000 6,20,000 captical (6) Ror: (A/B) x100: 43.22% 61.33/. O: I Best Manger basech on Rof coll be Manger of Gatineaw having 61:37/(est) the Residual Income Gaffneach . Ottawa Controllaut fe contribution 210,000 3/201000 Gross profit? C1, 10,000) 1,20,000 & Variable carte 1,00,000 Controllable porget oution 9), 190,000 1,50 000 6120,000 20,000 y captal employed ngentinum Refcon 20%.) 134,000 700 DO Residual Income col Boto