155) Part 7B costs the Midwest Division of Frackle Corporation $30 to make, of which $21 is variable.
Midwest Division sells Part 7B to other companies for $47. The Northern Division of Frackle
Corporation can use Part 7B in one of its products. The Midwest Division has enough idle capacity
to produce all of the units of Part 7B that the Northern Division would require. What is the lowest
transfer price at which the Midwest Division should be willing to sell Part 7B to the Northern
Division?
A) $30 B) $21 C) $17 D) $47 E) $20
156) Division P of Launch Corporation has the capacity for making 75,000 wheel sets per year and
regularly sells 60,000 each year on the outside market. The regular sales price is $100 per wheel
set, and the variable production cost per unit is $65. Division Q of Launch Corporation currently
buys 30,000 wheel sets (of the kind made by Division P) yearly from an outside supplier at a price
of $90 per wheel set. If Division Q were to buy the 30,000 wheel sets it needs annually from
Division P at $87 per wheel set, the change in annual net operating income for the company as a
whole, compared to what it is currently, would be:
A) $135,000 B) $700,000 C) $600,000 D) $750,000 E) $225,000
157) Division X makes a part that it sells to customers outside of the company. Data concerning this part
appear below:
Selling price to outside customers
$ 50
Variable cost per unit
$ 30
Total fixed costs
$ 400,000
Capacity in units
25,000
Division Y of the same company would like to use the part manufactured by Division X in one of its
products. Division Y currently purchases a similar part made by an outside company for $49 per unit
and would substitute the part made by Division X. Division Y requires 5,000 units of the part each
period. Division X has ample excess capacity to handle all of Division Y’s needs without any
increase in fixed costs and without cutting into outside sales. According to the formula in the text,
what is the lowest acceptable transfer price from the standpoint of the selling division?
A) $30 B) $50 C) $46 D) $20 E) $49
158) Division A makes a part that it sells to customers outside of the company. Data concerning this part
appear below:
Selling price to outside customers
$ 40
Variable cost per unit
$ 30
Total fixed costs
$ 10,000
Capacity in units
20,000
Division B of the same company would like to use the part manufactured by Division A in one of its
products. Division B currently purchases a similar part made by an outside company for $38 per unit
and would substitute the part made by Division A. Division B requires 5,000 units of the part each
period. Division A has ample capacity to produce the units for Division B without any increase in
fixed costs and without cutting into sales to outside customers. If Division A sells to Division B
rather than to outside customers, the variable cost be unit would be $1 lower. What should be the
lowest acceptable transfer price from the perspective of Division A?
A) $40 B) $30 C) $29 D) $10 E) $38
159) The Mixed Nuts Division of Yummy Snacks, Inc. had the following operating results last year:
$ 70,000
42,000
$ 28,000
12,000
$ 16,000
Yummy expects identical operating results in the division this year. The Mixed Nuts Division has the
ability to produce and sell 200,000 pounds of product annually. Assume that the Trail Mix Division
of Yummy wants to purchase an additional 20,000 pounds of nuts from the Mixed Nuts Division.
Mixed Nuts will be able to increase its profit by accepting any transfer price above:
A) $0.10 per pound
B) $0.15 per pound
C) $0.25 per pound
D) $0.30 per pound
E) $0.08 per pound
160) The Dark Chocolate Division of Yummy Snacks, Inc. had the following operating results last year:
$ 60,000
37,500
22,500
12,000
$ 10,500
Assume that the Dark Chocolate Division is currently operating at its capacity of 200,000 pounds of
chocolate. Also assume again that the Peanut Butter Division wants to purchase an additional 20,000
pounds of chocolate from Dark Chocolate. Under these conditions, what amount per pound of
chocolate would Dark Chocolate have to charge Peanut Butter in order to maintain its current
profit?
A) $0.25 per pound
B) $0.08 per pound
C) $0.30 per pound
D) $0.15 per pound
E) $0.40 per pound
161) Division X makes a part with the following characteristics:
Production capacity 25,000 units
Selling price to outside customers $ 18
Variable cost per unit $ 11
Fixed cost, total $ 100,000
Division Y of the same company would like to purchase 10,000 units each period from Division X.
Division Y now purchases the part from an outside supplier at a price of $17 each. Suppose Division
X has ample excess capacity to handle all of Division Y’s needs without any increase in fixed costs
and without cutting into sales to outside customers. If Division X refuses to accept the $17 price
internally and Division Y continues to buy from the outside supplier, the company as a whole will
be:
A) worse off by $70,000 each period.
B) worse off by $20,000 each period.
C) better off by $10,000 each period.
D) better off by $60,000 each period.
E) worse off by $60,000 each period.
162) Division A produces a part with the following characteristics:
Capacity in units
50,000
Selling price per unit
$ 30
Variable cost per unit
$ 18
Fixed cost per unit
$ 3
Division B, another division in the company, would like to buy this part from Division A. Division B
is presently purchasing the part from an outside source at $28 per unit. If Division A sells to Division
B, $1 in variable costs can be avoided. Suppose Division A is currently operating at capacity and can
sell all of the units it produces on the outside market for its usual selling price. From the point of
view of Division A, any sales to Division B should be priced no lower than:
A) $27 B) $20 C) $29 D) $28 E) $21
SHORT ANSWER QUESTIONS
163) Match the appropriate definition with the following terms:
(a) A department or unit that incurs costs without directly generating revenues.
(b) A department or unit that generates revenues and incurs costs, in which the manager is also
responsible for investments made in operating assets.
(c) Costs that are incurred for the joint benefit of more than one department and cannot be readily
traced to only one department.
(d) Costs readily traced to a specific department because they are incurred for the sole benefit of that
department.
(e) Costs incurred to produce or purchase two or more products at the same time.
(f) Costs for which a manager has the power to determine or at least significantly affect.
(g) A department that generates revenues and incurs costs.
________ (1) Direct expenses
________ (2) Profit center
________ (3) Controllable costs
________ (4) Indirect expenses
________ (5) Cost center
________ (6) Joint cost
(7) Investment center
164) Match the appropriate definition a through h with the following terms:
(a) A department whose manager is judged on the ability to generate revenues in excess of the
department’s costs.
(b) A department or unit that generates revenues and incurs costs, in which the manager is also
responsible for investments made in operating assets.
(c) Set up to control costs and evaluate managers’ performances by assigning costs to the managers
responsible for controlling them.
(d) Compares actual and budgeted costs and expenses under the control of a manager.
(e) A department whose manager is judged on the ability to control costs by keeping them within a
satisfactory range.
(f) A measure of departmental sales less direct expenses.
(1) Investment center
(2) Performance report
________ (3) Cost center
________ (4) Departmental contribution to overhead
________ (5) Profit center
________ (6) Responsibility accounting system
ESSAY QUESTIONS
165) What is a profit center and how is its performance evaluated?
166) What is a cost center and how is its performance evaluated?
167) What is the main difference between a cost center and a profit center?
SHORT ANSWER QUESTIONS
168) What is the purpose of a departmental accounting system?
169) What is the purpose of a responsibility accounting system?
ESSAY QUESTIONS
170) What is an investment center and how is its performance evaluated?
171) Explain the difference between direct and indirect expenses in accounting for departments.
172) How do companies decide what allocation bases to use to allocate indirect costs to departments?
SHORT ANSWER QUESTIONS
173) Describe the information found on a responsibility accounting performance report.
ESSAY QUESTIONS
174) Define joint costs and explain how joint costs can be allocated.
175) In the process of preparing department income statements, a company uses there are three steps
before the statements can be completed. Describe those steps.
176) What is the cycle time for a manufacturer? What does it reveal about the manufacturing process?
177) Riu Corporation has a Parts Division that does work for other Divisions in the company as well as
for outside customers. The company’s Repair Division has asked the Parts Division to provide it
with 2,000 special parts each year. The special parts would require $17.00 per unit in variable
production costs. The Repair Division has a bid from an outside supplier for the special parts at
$28.00 per unit. In order to have time and space to produce the special part, the Parts Division
would have to cut back production of another part-the B83 that it presently is producing. The B83
sells for $34.00 per unit, and requires $22.00 per unit in variable production costs. Packaging and
shipping costs of the B83 are $4.00 per unit. Packaging and shipping costs for the new special part
would be only $0.50 per unit. The Parts Division is now producing and selling 10,000 units of the
B83 each year. Production and sales of the B83 would drop by 10% if the new special part is
produced for the Repair Division.
Required:
a. What is the range of transfer prices within which both the Divisions’ profits would increase as a
result of agreeing to the transfer of 2,000 special parts per year from the Parts Division to the Repair
Division?
b. Is it in the best interests of Riu Corporation for this transfer to take place? Explain.
178) Regal Furniture Company allocates its indirect salaries of $22,500 on the basis of sales. Determine
the indirect salaries allocated to Departments 1 and 2 using the following information.
Dept.1
Dept.2
Combined
Revenues from sales……..
$182,000
$78,000
$260,000
Direct Salaries……………..
42,250
22,750
65,000
Salaries allocated to Dept. 1 ________
Salaries allocated to Dept. 2 ________
179) A company rents a small building with 10,000 square feet of space for $100,000 per year. The rent
is allocated to the company’s three departments on the basis of the value of the space occupied by
each. Department One occupies 1,500 square feet of ground-floor space, Department Two occupies
3,500 square feet of ground-floor space, and Department Three occupies 5,000 square feet of
second-floor space. If rent for comparable floor space in the neighborhood averages $15.00 per sq.
ft. for ground-floor space and $10.00 per sq. ft. for second-floor space, what annual rent expense
should be charged to each department?
180) A retail store has three departments, A, B, and C, each of which has four full-time employees. The
store does general advertising that benefits all departments. Advertising expense totaled $90,000 for
the current year, and departmental sales were:
Department A………………
$308,000
Department B………………
644,000
Department C………………
448,000
Total sales…………………. $1,400,000
Calculate the amount of advertising expense that should be allocated to each department?
181) A company produces two joint products (called 301 and 302) in a single operation that uses one
raw material called Fruge. Four hundred gallons of Fruge were purchased at a cost of $800 and
were used to produce 150 gallons of Product 301, selling for $5 per gallon, and 75 gallons of
Product 302, selling for $15 per gallon. How much of the $800 cost should be allocated to each
product, assuming that the company allocates cost based on sales revenue?
182) A company produces two products, XX and YY, from a single raw material called Zub. Zub is
purchased in 55-gallon drums, and the contents of one drum are sufficient to produce 30 gallons of
XX and 15 gallons of YY. XX sells for $10.00 per gallon and YY sells for $30.00 per gallon.
During the current period, the company used 400 drums of Zub to produce XX and YY. The cost of
Zub was $90 per drum.
Required:
(1) If the cost of Zub is allocated to the XX and YY products on the basis of the number of gallons
produced, how much of the total cost of the 400 drums should be charged to each product?
(2) If the cost of Zub is allocated to the XX and YY products in proportion to their market values,
how much of the total cost of the 400 drums should be charged to each product?
(3) Which basis of allocating the cost is most likely to be used by the company?
183) Karl and Grady are managers of two product lines for Brewster Company. One of them is a
candidate for promotion based on performance. Using the data below, determine who had the better
performance using performance measures such as net income, profit margin, and return on
investment. Show your calculations and support your answer.
Karl
Grady
Revenue………………..
$412,000
$450,000
Costs……………………
380,000
411,000
Average Assets………
400,000
600,000