147. This question pertains to factors affecting the setting of transfer prices in an
international setting.
Required:
What are the primary factors affecting the setting of transfer prices between divisions of a
company that operates in different countries?
148. The microprocessor division of Zenith Systems Company sells a computer module to the
company’s Assembly Division, which puts together the finished product (viz., guidance systems).
The Microprocessor Division is currently working at capacity. The computer module costs
$10,000 to manufacture, and it can be sold externally to companies for approximately $13,500 per
unit.
Required:
1. Use the general transfer pricing rule to compute a transfer price for the computer module.
2. Explain the underlying logic of the general transfer pricing rule discussed in the chapter.
149. The Division A of Standard Products is planning its 2016 operating budget. Average
operating assets of $1,500,000 will be used during in the division during the year and per-unit
selling prices are expected to average $100. Variable costs of the division are budgeted at
$400,000, while fixed costs are set at $250,000. The company’s required rate of return for
purposes of calculating residual income (RI) is 18%.
Required:
1. Compute the sales volume (in units) necessary for Division A to achieve a 20% ROI in 2016.
2. The division manager receives a bonus of 50% of residual income (RI). What is his anticipated
bonus for 2016 for the division manager, assuming she achieves the 20% ROI target specified in
part (1)? below.
150. The major operating divisions of Grey Company are organized as investment centers for
performance-evaluation purposes. The division managers are evaluated, in part, on the basis of
the change in the return on investment (ROI) of their units. Operating results for the Division A
for the coming year, 2016, based on its existing assets are budgeted as follows:
Sales $5,000,000
Less variable costs 2,500,000
Contribution margin 2,500,000
Less fixed expenses 1,800,000
Operating income $700,000
Operating assets for the Division A are currently $3,600,000. For 2016, the division can add a
new product line for an investment of $600,000. The new product line is expected to generate
sales of $1,600,000 and will incur fixed expenses of $600,000 annually. Variable costs of the new
product are expected to average 60% of the selling price.
Required:
1. What is the effect on ROI of accepting the new product line?
2. If the company’s required rate of return is 6% and residual income is used to evaluate
managers, would this encourage the division to accept the new product line? Explain and show
computations.
151. Meridian Investments has three divisions (A, B, C) organized for performance-evaluation
purposes as investment centers. Each division’s required rate of return for purposes of
calculating residual income (RI) is 15%. Budgeted operating results for 2016 for each of the three
divisions are as follows:
Division Operating income Investment
A $15,000,000 $100,000,000
B $25,000,000 $125,000,000
C $11,000,000 $50,000,000
The company is planning an expansion, which will require each division to increase its
investments by $25,000,000 and its operating income by $4,500,000.
Required:
1. Compute the current ROI for each division.
2. Compute the current residual income (RI) for each division.
3. Rank the divisions according to their current ROIs and in terms of their residual incomes.
4. Determine the effects after adding the new project to each division’s ROI and residual income
(RI).
5. Assuming the managers are evaluated on either ROI or residual income (RI). Which divisions
are pleased with the expansion and which ones are unhappy? Explain briefly.
