Evaluating Divisional Performance Using Cost Accounting: Tyndall

This case study provides a comprehensive cost accounting analysis of Tyndall Red Wagon Inc., focusing on the Wheel Division's performance and its potential for external sales. It examines the current total cost of the wheel division, calculates the contribution margin from potential external sales, and analyzes the return on investment (ROI) with and without external sales. The study recommends against external sales based on ROI and suggests strategies for motivating the divisional manager. Furthermore, it calculates residual income for both the Wheel and Carriage Divisions to assess their economic profitability. The analysis includes detailed calculations of direct costs, fixed costs, and equity charges to provide a holistic view of the company's financial performance. Desklib offers similar solved assignments.

Cost accounting

Table of Contents
Part 1................................................................................................................................................3
Part 2................................................................................................................................................4
Part 3................................................................................................................................................4
Part 4................................................................................................................................................5
Part 5................................................................................................................................................6
References........................................................................................................................................8

PART 1
Computation of the present total cost of wheel division is as follow:
Table 1 Total cost of wheel division
Particulars Amount
Direct Material 6.25
Direct Labour 1.50
Variable Overhead 0.90
Fixed Overhead 2.75
Total Cost 11.40
For the potential external sales, Tyndall Red Wagon Inc. doesn’t have to incur any additional
fixed cost. If Wheel division is selling the product at $11 then it will fetch the contribution as
calculated below:
Table 2 Calculation of contribution
Particulars Amount
Sales 11.00
(-) Direct Material (6.25)
(-) Direct Labour (1.50)
(-) Variable Overhead (0.90)
Contribution $ 2.35/ Wheel
On the basis of the above calculations, it has been seen that the manager of the wheel division
will be interested in investigating the potential for external sales as it will generate the additional
contribution of $ 2.35 per wheel. At present, wheel division provided wheels to carriage division
at full cost only. On the other hand, if division sold the wheel externally, then it will earn the
contribution of $2.35 per wheel.
PART 2

2. Currently Wheel Division is transferring wheel to carriage division at $ 11.40 computed as
below:
Table 3 Calculation of transfer price
Particulars Amount
Direct Material 6.25
Direct Labour 1.50
Variable Overhead 0.90
Fixed Overhead 2.75
Total Cost 11.40
PART 3
Total Production = 60% of New Capacity
New Capacity = Twice of Old Capacity
Old Capacity = 5000 Units
Therefore Total Production = (5000*2)*60%
= 6000 Units (Out of these 6000 Units, 5000 Units will be transferred to Carriage Division and
rest 1000 Units will be sold externally.
Table 4 Statement Showing Computation of ROI with External Sales
Particulars Units Price/ Unit Total
Amount
Sales
To Carriage Division 5000 11.40 57000
External Sales 1000 11.00 11000
Total Sales 68000
Direct Cost

Direct Material 6000 6.25 (37500)
Direct Labour 6000 1.50 (9000)
Variable Overhead 6000 0.90 (5400)
Contribution 16100
Fixed Cost 5000 2.75 (13750)
Profit 2350
ROI (Profit / Operating Assets)* 100 1.95%
Table 5 Statement Showing Computation of ROI without External Sales
Particulars Units Price/ Unit Total
Amount
Sales
To Carriage Division 6000 11.40 68400
Total Sales 68400
Direct Cost
Direct Material 6000 6.25 (37500)
Direct Labour 6000 1.50 (9000)
Variable Overhead 6000 0.90 (5400)
Contribution 16500
Fixed Cost 5000 2.75 (13750)
Profit 2750
ROI (Profit / Operating Assets)* 100 2.29 %
PART 4
On the basis of the above calculation, it has been seen that, if the company made external sales
and also transfer to other division, then return on income is 1.95%, and if the company do not
want sell wheel externally and transfer to other division, then return on income 2.29%. Therefore
it is recommended that Rob, the company should not make the external sale of the wheel, it

should transfer to carriage division. Profit of wheel division is more, at the time of external sale,
but overall the profit of the company will increase at the time of transfer of wheel to carriage
division. For motivating the division manager of the wheel, Rob should give the participants in
the overall profit of the company (D'Onza, Greco & Allegrini, 2016). Further, financial reward,
promotion, ancillary benefits are some of the factors by which company can motivate the
divisional manager (Weygandt, Kimmel & Kieso, 2015). Rob should communicate to the
divisional manager, that if the overall company grows, then definitely it will be beneficial for all.
PART 5
Residual Income = Net Income – Equity Charge
Equity Charge = Total Equity * Cost of Equity
Statement Showing Residual Income
Particulars Wheel Division Carriage Division Total
Units Price /
Unit
Total Units Price /
Unit
Total
Total Sales 6000 12.50 75000 6000 250 1500000 1575000
Direct Cost
Wheel -- -- -- 6000 11 (66000) (66000)
Direct
Material
6000 6.25 (37500) 6000 85 (510000) (547500)
Direct Labour 6000 1.50 (9000) 6000 25 (150000) (159000)
Variable
Overhead
6000 0.90 (5400) 6000 6.20 (37200) (42600)
Contribution 23100 736800 759900
Total Fixed
Cost
--- --- ---- ---- ---- ---- (60000)
PBIT ---- ---- ----- ----- ----- ---- 699900
Equity
Charge
(Operating
Assets *
Minimum
Return
---- ---- 14400 ---- ---- 40800 (55200)

Requirement
)
Residual
Income
----- ------ ------- ------ ------ ------ 644700

REFERENCES
D'Onza, G., Greco, G., & Allegrini, M. (2016). Full cost accounting in the analysis of separated
waste collection efficiency: A methodological proposal. Journal of environmental
management, 167, 59-65.
Weygandt, J.J., Kimmel, P.D., & Kieso, D.E. (2015). Managerial accounting: Tools for business
decision making (7th ed.). Hoboken, New Jersey: John Wiley & Sons.