Ch. 9 - Writing Assignment Yuma Foods acquired Aldo\'s Totillas several years ag

ID: 2600034 • Letter: C

Question

Ch. 9 - Writing Assignment Yuma Foods acquired Aldo's Totillas several years ago. Aldo's has continued to operate as an independent company, except that Yuma Foods has exclusive authority over capital investments, production quantity, and pricing decisions because Yuma has been Aldo's only customer since the acquisition. Yuma uses return on investment to evaluate the performance of Aldo's manager. The most recent performance report follows 6,000 (3,000) (1,000) (600) 1,400 (400) (500) 500 Sales Variable cost of goods sold Variable administrative expenses Variable corporate expenses (% of sales) Contribution margin Fixed overhead (includes depreciation, $100) Fixed administrative expenses Operating income Average assets invested 5,500 Return on investment (rounded) 9.09% 1 Analyze the items listed in the performance report, and identify the items that Aldo controls and those that Yuma controls. In your opinion, what type of responsibility center is Aldo's Tortillas? Explain your response. 2 Prepare a revised performance report for Aldo's Tortillas and an accompanying memo to the president of Yuma Foods that explains why it is important to change the conten of the report. Cite some basic principles of responsibility accounting to support your recommendation.

Explanation / Answer

1.There are three types of responsibility centers depending on items under control of the manager. The three types of responsibility centers are :

Cost center managers are responsible for incurring expenses within budgets and targets of achievement but do not generate revenues.

The profit center managers are responsible for revenues , expenses and profit. But they have no control over investments

Investment center manager is responsible for generating profits as well as making capital investment decisions

Profit center managers should be evaluated on profitability and the investment center should be evaluated on Return on Investment

Return on investment(ROI)=Income/Investment=(Income/Sales)*(Sales/Investment)

ROI=Profit Margine*Sales Turnover

In this case, Aldo does not have control on Capital investments.

Hence, it is a profit center having control on following items:

Yuma controls :

2. Basic Principles of Responsibility Accounting:

.a Accounting information are provided based on responsibilities of individual managers

.b Managers are evaluated based on items under the control of the manager

.c Responsibility report is prepared for each manager having control on revenue or expenses

.d Profit center Head is evaluated on profits

.e Investment Center Head is evaluated on Return on Investment (ROI)

REVISED PERFORMANCE REPORT OF ALDO'S Manager

Sales

$6,000

Variable cost of goods sold

($3,000)

Variable administrative expenses

($1,000)

Contribution Margin

$2,000

Fixed overhead(excluding depreciation

($300)

(400-100)

Fixed administrative expenses

($500)

Operating Income

$1,200

Profit margin

20%

(1200/6000)