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Principles of Accounting, Volume 2: Managerial Accounting

Problem Set B

Principles of Accounting, Volume 2: Managerial AccountingProblem Set B

Problem Set B

PB 1.

LO 12.1Match each of the following with its appropriate term:

PB 2.

LO 12.1Oleg Markov is the production manager of NASA Solvents. Due to limited capacity, the company can only produce one of two possible products:

  • an industrial concentrated solvent with a 15% probability of making a profit of $1 million and an 85% probability of making a profit of $200,000
  • a household diluted solvent with a 100% chance of making a profit of $310,000

Oleg will get a 20% bonus from his department. Oleg has the responsibility to choose between the two products and is more risk averse than most of the top management at NASA Solvents.

  1. Which option is Oleg more likely to choose and why?
  2. Which option would the company be more likely to choose and why?
  3. What changes should the company make to Oleg’s compensation to encourage managers to take appropriate risks
PB 3.

LO 12.3Evaluate the two departments for Moxie Products.

Compare the year’s performance of the two departments in terms of ROI and RI. Which department has created the most wealth for Moxie shareholders in the past year?

PB 4.

LO 12.3Banyan Industries has two divisions, a tax rate of 30%, and a minimum rate of return of 20%. Division A has a weighted average cost of capital of 9.5% and is looking at a new project that will generate a profit of $1,200,000 from a machine that costs $4,000,000. Division B has a weighted average cost of capital of 9.5% and is looking at a new project that will generate a profit of $1,350,000 from a machine that costs $5,000,000.

  1. Calculate the EVA for each of Banyan’s divisions.
  2. Calculate the RI for each of Banyan’s division.
  3. If Banyan uses EVA to evaluate the projects, which division has the better project and by how much?
  4. If Banyan uses RI, which division has the better project and by how much?
  5. What are some of the reasons for the similarity or difference that you found in the use of EVA versus RI?
PB 5.

LO 12.4Forty years ago, Vinfen was founded as a nonprofit company by psychiatrists and social workers at the Massachusetts Mental Health Center and Harvard Medical School to help people with psychiatric conditions transition to group homes for community living. Vinfen’s strategy map for fiscal 2006 shows how it is building from its mission to accelerating organizational learning and elevating agency performance through its balanced scorecard perspectives to bring value to the customer supported by operational excellence.5 The following are elements in the balanced scorecard and the four key perspectives. Match the elements with the correct perspectives.

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