Yuma Foods 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
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%
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?