Yuma Foos acquired Aldo’s Tortillas several years ago. Aldo’s has continued to o
ID: 2473837 • Letter: Y
Question
Yuma Foos acquired Aldo’s Tortillas 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 is as follows:
Yuma Foods Performance Report for Aldo's Tortillas For the Year Ended June 30
* Rounded
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 content of the report. Cite some basic principles of responsibility accounting to support your recommendation.
Sales $ 6,000 Variable cost of goods sold 3,000 Variable administrative expenses 1,000 Variable corporate expenses (% of sales) 600 Contribution margin $1,400 Fixed overhead (includes depreciation of $100) 400 Fixed administrative expenses 500 Operating income $500 Average assets invested $5,500 Return on investment 9.09%*Explanation / Answer
1) Sales $6,000 Yuma Variable cost of goods sold 3000 Aldo Variable administrative expenses 1000 Aldo Variable corporate expenses (% of sales) 600 Yuma Contribution margin $1,400 Aldo Fixed overhead (includes depreciation of $100) 400 Yuma Fixed administrative expenses 500 Aldo Operating income $500 Aldo Average assets invested $5,500 Return on investment 9.09%* Yuma Aldo's Tortillas is a profit centre. 2) Revised report and memorandum prepared for Aldo's Tortillas Yuma Foods Performance Report for Aldo's Tortillas For the Year Ended June 30 Variable cost of goods sold $3,000 Variable administrative expenses $1,000 Fixed administrative expenses $500 Fixed overhead $300 Centre Costs 4800 Memorandum To: President of Yuma Foods From Date Subject:Performance report for Aldo's Tortillas I have examined the current performance report for Aldo's Tortillas and the sources of the revenue and costs it contains. Aldo's Tortillas has been wrongly classified as a profit center. In fact, Aldo's Tortillas is a cost center because its manager controls only costs and not revenues.Aldo's Tortillas manager cannot control sales, variable corporate expenses, and depreciation, return on investment is not an appropriate performance measure to use in evaluating his or her performance. A more appropriate way to evaluate the manager of a cost center is to compare actual controllable costs to their corresponding amounts in the flexible and master budgets to determine how well the manager is carrying out his or her assigned responsibilities. I recommend that Aldo's Tortillas be treated as a cost center and evaluated accordingly.
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