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139. Red Earth Company has two divisions, the Okla Division and the Homa Division. Last year, the Okla Division
earned $66,000 using average operating assets of $550,000. Last year, the Homa Division earned $260,000 using average
operating assets of $2,000,000. Minimum required rate of return for Red Earth is 9%.
A. For the Okla Division, residual income is __________________.
B. For the Homa Division, residual income is __________________.
Now assume that the minimum required rate of return for Red Earth is 12%.
C. For the Okla Division, residual income is __________________.
D. For the Homa Division, residual income is __________________.
140. The Southern Division of Jenkins Company had income of $48,300, average assets of $345,000 and sales of
$241,500. The minimum rate of return for Jenkins Company is 12%.
A. What is margin for the Southern Division?
B. What is turnover for the Southern Division?
C. What is ROI for the Southern Division?
D. What is residual income for the Southern Division?
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141. Dixie Company has the following data for last year:
Division A Division B
Sales $400,000 $300,000
Contribution margin $160,000 $125,000
Operating income $80,000 $30,000
Average operating assets $320,000 $200,000
Cost of capital 15% 15%
Dixie Company has a target ROI of 20%.
Required: Calculate the following amounts for each division:
A. Margin ratio
B. Turnover ratio
C. ROI
D. Residual income
E. EVA
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142. Paige Inc. has a division that makes paint and another division that constructs subdivision houses. The paint division
incurs the following costs for one gallon of paint:
Direct materials $1.10
Direct labor 1.45
Variable overhead 0.90
Fixed overhead 1.15
Total $4.60
The Paint Division can make 1,000,000 gallons per year, and is at capacity. The Construction Division currently buys its
paint from an outside supplier for $5.20 per gallon (the same price that the Paint Division receives).
A. The maximum transfer price per gallon of paint is $__________________; this price is set by which of the two
divisions?
B. The minimum transfer price per gallon of paint is $__________________; this price is set by which of the two
divisions?
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143. Paige Inc. has a division that makes paint and another division that constructs subdivisions. The paint division incurs
the following costs for one gallon of paint:
Direct materials $1.10
Direct labor 1.45
Variable overhead 0.90
Fixed overhead 1.15
Total $4.60
The Paint Division can make 1,000,000 gallons per year, and expects to produce 800,000 gallons next year. The
Construction Division currently buys 200,000 gallons of paint from an outside supplier for $5.30 per gallon (the same
price that the Paint Division receives).
A. The maximum transfer price per gallon of paint is $__________________.
B. The minimum transfer price per gallon of paint is $__________________.
C. Assume that the transfer takes place at $5 per gallon; calculate the amount by which each of the following will be
better off with the transfer than without it.
Paint Division $__________________
Construction Division $__________________
Paige Inc.,as a whole $__________________
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144. Paige Inc. has a division that makes paint and another division that constructs subdivisions. The paint division incurs
the following costs for one gallon of paint:
Direct materials $1.10
Direct labor 1.45
Variable overhead 0.90
Fixed overhead 1.15
Total $4.60
The Paint Division can make 1,000,000 gallons per year, and expects to produce 1,000,000 gallons next year. The
construction division currently buys 200,000 gallons of paint from an outside supplier for $5.20 per gallon (the same price
that the Paint Division receives).
A. The maximum transfer price per gallon of paint is $__________________.
B. The minimum transfer price per gallon of paint is $__________________.
C. Does it matter whether or not the two divisions transfer?
145. The Dear Division of Zimmer Company sells all of its output to the Finishing Division of the company. The only
product of the Dear Division is chair legs that are used by the Finishing Division. The retail price of the legs is $20 per
leg. Each chair completed by the Finishing Division requires four legs. Production quantity and cost data for last year are
as follows:
Chair legs 30,000
Direct materials $135,000
Direct labor 90,000
Overhead (25% is variable) 90,000
Required: Compute the transfer price for a chair leg using:
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A. market price.
B. variable product costs plus a fixed fee of 20%.
C. full cost plus 20% markup.
D. variable costs.
146. Bostonian Inc. has a number of divisions, including Delta Division and ListenNow Division. The ListenNow
Division owns and operates a line of MP3 players. Each year the ListenNow Division purchases component AZ in order
to manufacture the MP3 players. Currently it purchases this component from an outside supplier for $6.50 per component.
The manager of the Delta Division has approached the manager of the ListenNow Division about selling component AZ
to the ListenNow Division. The full product cost of component AZ is $3.10. The Delta Division can sell all of the
components AZ it makes to outside companies for $6.50. The ListenNow Division needs 18,000 component AZs per year;
the Delta Division can make up to 60,000 components per year.
Required:
A. Which division sets the maximum transfer price? Which division sets the minimum transfer price?
B. Suppose the company policy is that all transfer take place at full cost. What is the transfer price?
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147. Bostonian Inc. has a number of divisions, including Delta Division and ListenNow Division. The ListenNow
Division owns and operates a line of MP3 players. Each year the ListenNow Division purchases component AZ in order
to manufacture the MP3 players. Currently it purchases this component from an outside supplier for $6.50 per component.
The manager of the Delta Division has approached the manager of the ListenNow Division about selling component AZ
to the ListenNow Division. The full product cost of component AZ is $3.10. The Delta Division can sell all of the
components AZ it makes to outside companies for $6.50. The ListenNow Division needs 18,000 component AZs per year;
the Delta Division can make up to 60,000 components per year. Assume that the company policy is that all transfer prices
are negotiated by the divisions involved.
Required:
A. What is the maximum transfer price? Which division sets it?
B. What is the minimum transfer price? Which division sets it?
C. If the transfer takes place, what will be the transfer price?
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148. Bostonian Inc. has a number of divisions, including Delta Division and ListenNow Division. The ListenNow
Division owns and operates a line of MP3 players. Each year the ListenNow Division purchases component AZ in order
to manufacture the MP3 players. Currently it purchases this component from an outside supplier for $6.50 per component.
The manager of the Delta Division has approached the manager of the ListenNow Division about selling component AZ
to the ListenNow Division. The full product cost of component AZ is $3.10. The Delta Division can sell all of the
components AZ it makes to outside companies for $6.50. The ListenNow Division needs 18,000 component AZs per year;
the Delta Division can make up to 60,000 components per year. Although the Delta Division has been operating at
capacity (60,000 components per year), it expects to produce and sell only 45,000 components for $6.50 each next year.
The Delta Division incurs variable costs of $1.50 per component. The company policy is that all transfer prices are
negotiated by the divisions involved.
Required:
A. What is the maximum transfer price? Which division sets it?
B. What is the minimum transfer price? Which division sets it?
C. Suppose that the two divisions agree on a transfer price of $5.75. What is the change in operating income for the Delta
Division? For the ListenNow Division? For Bostonian Inc. as a whole?
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149. Each month, the vacuum cleaner manufacturing cell has 800 hours of time available. During that time, the cell could
have manufactured up to 2,400 vacuums; but only 1,600 vacuums were actually manufactured. Calculate the following:
A. Theoretical cycle time in minutes.
B. Theoretical velocity per hour.
C. Actual cycle time in minutes.
D. Actual velocity per hour.
150. The pager manufacturing cell has 1,200 hours of time available per quarter. The cell could make 7,200 pagers but
only made 6,000 during that time. Calculate the following:
A. Theoretical cycle time in minutes.
B. Theoretical velocity per hour.
C. Actual cycle time in minutes.
D. Actual velocity per hour.
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E. MCE is __________________ % (round your answer two digits).
151. The First National Bank has a mortgage loan office with conversion cost of $73,950 per month. There are five
employees who each work 170 hours per month. Last month, 1,020 loan applications were processed, but the staff
believes that system improvements could lead to the processing of as many as 1,700 per month. Calculate the following:
A. Actual cycle time in minutes.
B. Theoretical cycle time in minutes.
C. Actual velocity per hour.
D. Theoretical velocity per hour.
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152. The First National Bank has a mortgage loan office with conversion cost of $73,950 per month. There are five
employees who each work 170 hours per month. Last month, 1,020 loan applications were processed, but the staff
believes that system improvements could lead to the processing of as many as 1,700 per month. Calculate the following:
A. Conversion cost in minutes.
B. Theoretical conversion cost per unit.
C. Actual conversion cost per unit.
D. How much more is the department spending per application than it should be if perfect efficiency could be
attained?
153. Marshal Company has the following data for one of its manufacturing plants:
Maximum units produced in a quarter = 425,000 units
Actual units produced in a quarter = 354,500 units
Productive hours in one quarter = 35,450 hours
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Required:
A. Computer the theoretical cycle time (in minutes).
B. Computer the actual cycle time (in minutes).
C. Compute the theoretical velocity in units per hour.
D. Compute the actual velocity in units per hour.
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154. A(n) ___________ is a responsibility center in which a manager is responsible only for costs.
155. A(n) ___________ is a responsibility center in which a manager is responsible only for sales, or revenues.
156. A(n) ___________ is a responsibility center in which a manager is responsible for revenues, costs, and investments.
157. The manager of a(n) ___________ is evaluated on the basis of income.
158. The practice of delegating decision-making authority to lower levels is __________.
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159. The most common measure of performance for an investment center.
160. The ratio of operating income to sales.
161. The ratio of sales to average operating assets.
162. The dollar difference between operating income and minimum required return on a company’s operating assets.