Chapter 13 – Investment Centers and Transfer Pricing
47. The sales margin is:
48. The ROI is:
49. The residual income is:
50. For the period just ended, Global Industries’ Western Division reported profit of $31.9
million and invested capital of $220 million. Assuming an imputed interest rate of 12%,
which of the following choices correctly denotes Western’s return on investment (ROI) and
residual income?
ROI Residual Income
51. For the period just ended, Trek Corporation’s Trailer Division reported profit of $54
million and invested capital of $450 million. Assuming an imputed interest rate of 10%,
which of the following choices correctly denotes Trailer’s return on investment (ROI) and
residual income?
ROI Residual Income
52. Which of the following elements is not used when calculating the weighted-average cost
of capital?
53. The following information relates to the Falcon Division of Xenon Enterprises:
Interest rate on debt capital 8%
Cost of equity capital 12%
Market value of debt capital $50 million
Market value of equity capital $80 million
Income tax rate 30%
On the basis of this information, Falcon’s weighted-average cost of capital is closest to:
54. The market value of Galleon’s debt and equity capital totals $180 million, 80% of which
is equity related. An analysis conducted by the company’s finance department revealed a 7%
after-tax cost of debt capital and a 10% cost of equity capital. On the basis of this information,
Galleon’s weighted-average cost of capital:
55. Which of the following measures of performance is, in part, based on the weighted-
average cost of capital?
56. Economic value added:
57. Which of the following elements is not used in the calculation of economic value added
for an investment center?
58. Endotrope Corporation has an after-tax operating income of $3,200,000 and a 9%
weighted-average cost of capital. Assets total $7,000,000 and current liabilities total
$1,800,000. On the basis of this information, Endotrope’s economic value added is:
13–27
59. The following information relates to Attor, Inc.:
Total assets $9,000,000
After-tax operating income 1,500,000
Current liabilities 800,000
If the company has a 10% weighted-average cost of capital, its economic value added would
be:
60. Economic value added (EVA) analysis indicates:
61. Given that ROI measures performance over a period of time, invested capital would most
appropriately be figured by using:
62. When an organization allows divisional managers to be responsible for short-term loans
and credit, the division’s invested capital should be measured by
63. Horner Division has been stagnant over the past five years, neither growing nor
contracting in size and profitability. Investments in new property, plant, and equipment have
been minimal. Would the division’s use of total assets (valued at net book value) when
measuring ROI result in (1) using numbers that are consistent with those on the balance sheet
and (2) a rising ROI over time?
Consistent with Numbers
on the Balance Sheet?
Produce a Rising Return on
Investment Over Time?
64. The income calculation for a division manager’s ROI should be based on:
65. To partially eliminate the problems that are associated with the short-term focus of return
on investment, residual income, and EVA, the performance of a division’s major investments
is commonly evaluated through:
66. The amounts charged for goods and services exchanged between two divisions are known
as:
67. Nevada, Inc. has two divisions, one located in Las Vegas and the other located in Reno.
Las Vegas sells selected goods to Reno for use in various end-products. Assume that the
transfer between the two divisions takes place regardless of the transfer price set by Las
Vegas. Which of the following correctly describes the impact of the transfer prices on
divisional profits and overall company profit?
Las Vegas Profit
Reno Profit
Nevada Profit
68. Thurmond, Inc. has two divisions, one located in New York and the other located in
Arizona. New York sells a specialized circuit to Arizona and just recently raised the circuit’s
transfer price. This price hike had no effect on either the volume of circuits transferred or on
Arizona’s decision of whether to acquire the circuit from either New York or from an external
supplier. On the basis of this information, which of the following correctly shows the effect of
the transfer price on divisional profit and overall company profit?
New York Profit
Arizona Profit
Thurmond Profit
69. Which of the following describes the goal that should be pursued when setting transfer
prices?
70. A general calculation method for transfer prices that achieves goal congruence begins
with the additional outlay cost per unit incurred because goods are transformed and then
71. Macon Corporation has no excess capacity. If the firm desires to implement the general
72. Racine Corporation has excess capacity. If the firm desires to implement the general
transfer-pricing rule, opportunity cost would be equal to:
73. Buzz’s Florida Division is currently purchasing a part from an outside supplier. The
company’s Georgia Division, which has excess capacity, makes and sells this part for external
customers at a variable cost of $22 and a selling price of $34. If Georgia begins sales to
Florida, it (1) will use the general transfer-pricing rule and (2) will be able to reduce variable
cost on internal transfers by $4. If sales to outsiders will not be affected, Georgia would
establish a transfer price of:
74. Darrin’s Auto Northern Division is currently purchasing a part from an outside supplier.
The company’s Southern Division, which has no excess capacity, makes and sells this part for
external customers at a variable cost of $19 and a selling price of $31. If Southern begins
sales to Northern, it (1) will use the general transfer-pricing rule and (2) will be able to reduce
variable cost on internal transfers by $3. On the basis of this information, Southern would
establish a transfer price of:
75. Grand’s Auto Northern Division is currently purchasing a part from an outside supplier.
The company’s Southern Division, which has excess capacity, makes and sells this part for
external customers at a variable cost of $19 and a selling price of $31. If Southern begins
sales to Northern, it (1) will use the general transfer-pricing rule and (2) will be able to reduce
variable cost on internal transfers by $3. On the basis of this information, Southern would
establish a transfer price of:
Chapter 13 – Investment Centers and Transfer Pricing
Use the following information to answer Questions 77-79.
Genesis Scents has two divisions: the Cologne Division and the Bottle Division. The Bottle
Division produces containers that can be used by the Cologne Division. The Bottle Division’s
variable manufacturing cost is $2, shipping cost is $0.10, and the external sales price is $3. No
shipping costs are incurred on sales to the Cologne Division, and the Cologne Division can
purchase similar containers in the external market for $2.60.
76. The Bottle Division has sufficient capacity to meet all external market demands in
addition to meeting the demands of the Cologne Division. Using the general rule, the transfer
price from the Bottle Division to the Cologne Division would be:
77. Assume the Bottle Division has no excess capacity and could sell everything it produced
externally. Using the general rule, the transfer price from the Bottle Division to the Cologne
Division would be:
78. The maximum amount the Cologne Division would be willing to pay for each bottle
transferred would be:
A. $2.00.
79. Transfer prices can be based on:
80. Which of the following transfer-pricing methods can lead to dysfunctional decision-
making behavior by managers?
81. The Altamonte Division of Custom Industries is in need of a particular service. The
service can be obtained from another division of Custom at “cost,” with cost defined as the
summation of variable cost ($9) and fixed cost ($3). Alternatively, Altamonte can secure the
82. Clariton Corporation has two divisions, Kissimmee and Grant, and evaluates management
on the basis of return on investment. Kissimmee currently makes a part that it sells to both
Grant and outsiders. Selected data follow.
Selling price to Grant $25
Variable cost 18
Fixed costs 80,000
Kissimmee is seeking an increase in its selling price to $28 per unit because of rising costs.
Grant can obtain comparable units from an outside supplier for $26; however, if Grant uses
the supplier, Kissimmee will have idle capacity because of an inability to increase sales to
outsiders. From the perspective of Clariton Corporation:
A. Kissimmee should continue to do business with Grant and charge $28 per unit.
83. Division A transfers item no. 78 to Division B. Consider the following situations:
1—A is located in Texas and B is located in California.
2—A is located in Texas and B is located in Mexico.
Assuming that item no. 78 is unavailable in the open market, which of the following choices
correctly depicts the probable importance of federal income taxes when determining the
transfer price that is established for item no. 78?
Situation 1
Situation 2
A.
Important
Important
Important
Important
D.
It is not possible to judge based on the information presented.
84. Standard costs rather than actual costs should be used in transfer-pricing methods
because: