102. In the Bombadier Company, Division A has a product that can be sold either to outside customers or to
Division B. Information about these divisions is given below:
Case 1
Case 2
Division A:
Capacity in units
100,000
100,000
Number of units sold externally
100,000
60,000
Market selling price
$90
$75
Variable costs per unit
73
58
Fixed costs per unit based on capacity
10
10
Division B:
Number of units needed for production
40,000
40,000
Purchase price per unit from external supplier
$86
$74
The company uses the opportunity cost approach to transfer pricing. What is the minimum transfer price in Case 1?
103. In the Bombadier Company, Division A has a product that can be sold either to outside customers or to
Division B. Information about these divisions is given below:
Case 1
Case 2
Division A:
Capacity in units
100,000
100,000
Number of units sold externally
100,000
60,000
Market selling price
$90
$75
Variable costs per unit
73
58
Fixed costs per unit based on capacity
10
10
Division B:
Number of units needed for production
40,000
40,000
Purchase price per unit from external supplier
$91
$74
The company uses the opportunity cost approach to transfer pricing. What is the maximum transfer price in Case 1?
104. In the Bombadier Company, Division A has a product that can be sold either to outside customers or to
Division B. Information about these divisions is given below:
Case 1
Case 2
Division A:
Capacity in units
100,000
100,000
Number of units sold externally
100,000
60,000
Market selling price
$90
$75
Variable costs per unit
73
58
Fixed costs per unit based on capacity
10
10
Division B:
Number of units needed for production
40,000
40,000
Purchase price per unit from external supplier
$86
$74
The company uses the opportunity cost approach to transfer pricing. What is the minimum transfer price in Case 2?
105. In the Bombadier Company, Division A has a product that can be sold either to outside customers or to
Division B. Information about these divisions is given below:
Case 1
Case 2
Division A:
Capacity in units
100,000
100,000
Number of units sold externally
100,000
60,000
Market selling price
$90
$75
Variable costs per unit
73
58
Fixed costs per unit based on capacity
10
10
Division B:
Number of units needed for production
40,000
40,000
Purchase price per unit from external supplier
$86
$74
The company uses the opportunity cost approach to transfer pricing. What is the maximum transfer price in Case 2?
106. In the Bombadier Company, Division A has a product that can be sold either to outside customers or to
Division B. Information about these divisions is given below:
Case 1
Case 2
Division A:
Capacity in units
100,000
100,000
Number of units sold externally
100,000
60,000
Market selling price
$90
$75
Variable costs per unit
73
58
Fixed costs per unit based on capacity
10
10
Division B:
Number of units needed for production
40,000
40,000
Purchase price per unit from external supplier
$86
$74
The company uses the opportunity cost approach to transfer pricing. Which case should not be transferred internally?
107. When there is an outside market for an intermediate product that is perfectly competitive, the most
equitable method of transfer pricing is
108. The Engine Division provides diesel engines for the Motor Home Division of a company. The standard
unit costs for Engine Division are as follows:
Direct materials
$ 600
Direct labor
1,200
Variable overhead
300
Fixed overhead
150
Market price per unit
2,730
What is the best transfer price to avoid transfer price problems?
109. Negotiated prices are transfer prices
110. When there is an outside market for an intermediate product that is perfectly competitive, the most
equitable method of transfer pricing is
111. The “floor” in transfer pricing is
112. The Jet Engine Division provides engines for the Jet Plane Division of a company. The standard unit costs
for the Jet Engine Division are as follows:
Direct materials
$ 600
Direct labor
1,200
Variable overhead
300
Fixed overhead
150
Market price per unit
2,730
The engine department has excess capacity. What is the best transfer price to avoid transfer price problems?
113. Hydroxide Company has two divisions, the Blending Division and Canning Division. The Blending
Division sells chemicals to the Canning Division.
Standard costs for the Blending Division are as follows:
Direct materials
$3.00 per gallon
Direct labor
2.40 per gallon
The Canning Division uses the following predetermined overhead rate:
Variable overhead
$3.60 per gallon
Fixed overhead
2.40 per gallon
Total
$6.00 per gallon
What is the transfer price for the chemicals per gallon based on standard variable cost?
114. The Engine Division provides engines for the Truck Division of a company. The standard unit costs for the
Engine Division are as follows:
Direct materials
$ 600
Direct labor
1,200
Variable overhead
300
Fixed overhead
150
Market price per unit
2,730
What is the transfer price based on full cost plus a markup of 30 percent?
115. The Chasis Division provides frames for the Tractor Division of a company. The standard unit costs for the
Chasis Division are as follows:
Direct materials
$ 800
Direct labor
1,500
Variable overhead
400
Fixed overhead
350
Market price per unit
4,575
What is the transfer price based on full cost plus a markup of 20 percent?
116. The Engine Division provides engines for the Final Assembly Division of a company. The standard unit
costs for the Engine Division are as follows:
Direct materials
$ 600
Direct labor
1,200
Variable overhead
300
Fixed overhead
150
Market price per unit
2,730
What is the transfer price based on variable product costs plus a fixed fee of $210?
117. Gunnison Furniture had the following historical accounting data, per hundred board feet, concerning one of
its products:
Finished shelving:
Direct materials
$30
Direct labor
16
Variable overhead
10
Fixed overhead
12
Variable selling expenses
8
Fixed selling expenses
4
The shelving is normally transferred internally from the Cutting Division to the Finishing Division. It also may be sold externally for $110 per
hundred board feet. The minimum profit level accepted by the company is a markup of 20 percent.
If the negotiated price is used, Gunnison Furniture’s transfer price should be a
118. Gunnison Furniture had the following historical accounting data, per hundred board feet, concerning one of
its products:
Finished shelving:
Direct materials
$30
Direct labor
16
Variable overhead
10
Fixed overhead
12
Variable selling expenses
8
Fixed selling expenses
4
The shelving is normally transferred internally from the Cutting Division to the Finishing Division. It also may be sold externally for $110 per
hundred board feet. The minimum profit level accepted by the company is a markup of 20 percent.
If the variable manufacturing cost transfer price method is used without a fixed fee, Gunnison Furniture’s transfer price will be
119. Rags-to-Riches Corporation has two divisions, X and Y. Division X sells its product to Division Y.
Standard costs for Division X are as follows:
Direct materials
$ 4 per unit
Direct labor
2 per unit
Variable overhead
5 per unit
Fixed overhead
3 per unit
Total
$14 per unit
What is the transfer price for Division X based on standard variable cost plus a markup of 25 percent?
120. The Engine Division provides engines for the Tractor Division of a company. The standard unit costs for
the Engine Division are as follows:
Direct materials
$ 600
Direct labor
1,200
Variable overhead
300
Fixed overhead
150
Market price per unit
2,730
What is the transfer price based on variable product costs plus 20 percent?
121. Panther Company had the following historical accounting data per unit:
Direct materials
$60
Direct labor
30
Variable overhead
15
Fixed overhead
24
Variable selling expenses
45
Fixed selling expenses
9
The units are normally transferred internally from Division A to Division B. The units also may be sold externally for $210 per unit. The minimum
profit level accepted by the company is a markup of 30 percent. There were no beginning or ending inventories.
If the negotiated price is used, Division A’s transfer price should be a
122. Panther Company had the following historical accounting data per unit:
Direct materials
$60
Direct labor
30
Variable overhead
15
Fixed overhead
24
Variable selling expenses
45
Fixed selling expenses
9
The units are normally transferred internally from Division A to Division B. The units also may be sold externally for $210 per unit. The minimum
profit level accepted by the company is a markup of 30 percent. There were no beginning or ending inventories.
What would be the transfer price if Division X uses full cost plus markup?
123. Panther Company had the following historical accounting data per unit:
Direct materials
$60
Direct labor
30
Variable overhead
15
Fixed overhead
24
Variable selling expenses
45
Fixed selling expenses
9
The units are normally transferred internally from Division A to Division B. The units also may be sold externally for $210 per unit. The minimum
profit level accepted by the company is a markup of 30 percent. There were no beginning or ending inventories.
If variable manufacturing costs without a fixed fee are used as the transfer price, Division A’s transfer price would be
124. Worldwide Inc., is a multinational company with divisions around the world. Division A in the United
States purchases a part from Division G in China. The part can be purchased externally for $7 each.
Transportation costs amount to $1 and the commission of $.50 will not need to be paid.
What is the transfer price using the comparable uncontrolled price method?
125. Worldwide Inc., is a multinational company with divisions around the world. Division A in the United
States purchases a part from Division G in China. There is no outside market for the part. The part is sold for
$12 and normally receives a 20% markup on cost.
What is the transfer price using the resale price method?
126. Worldwide Inc., is a multinational company with divisions around the world. Division A in the United
States purchases a part from Division G in China. There is no outside market for the part because it is used to
manufacture another product. The manufacturing cost for the part is $5. Transportation is $1 and commissions
are $.5 but do not need to be paid.
What is the transfer price using the cost-plus method?
127. How are accountability, information, and responsibility, related?
128. How do the differences between centralization and decentralization affect decision making? Why would a
Company decentralize its operations?
129. Compare and discuss the advantages and disadvantages of the following performance measures: ROI,
EVA, and Residual Income.
130. Provide the missing data in the following situations:
Northern
Southern
Central
Division
Division
Division
Sales
$ (a)
$250,000
$ (g)
Operating assets
$ (b)
$ (d)
$800,000
Net operating income
$400,000
$10,000
$144,000
Margin
0.08
(e)
0.12
Turnover
(c)
(f)
1.5
Return on investment
16%
10%
(h)
$400,000/a = 0.08
a = $5,000,000
$400,000/b = 0.16
b = $2,500,000
c = $5,000,000/$2,500,000 = 2.0
$10,000/d = 0.10
d = $100,000
e = $10,000/$250,000 = 4%
f.
f = $250,000/$100,000 = 2.5 times
$144,000/g = 0.12
g = $1,200,000
h = 0.12 ´ 1.5 = 18%
131. O’Malley Company requires a return on capital of 15 percent. The following information is available for
2014:
Division X
Division Y
Division Z
Book
Current
Book
Current
Book
Current
Sales
$200,000
$200,000
$400,000
$400,000
$600,000
$600,000
Income
24,000
20,000
32,000
34,000
37,500
39,000
Assets
120,000
160,000
180,000
200,000
450,000
435,000
Required:
a.
Compute return on investment using both book and current values for each division. (Round answer to three decimal places.)
b.
Compute residual income for both book and current values for each division.
c.
Does book value or current value provide the better basis for performance evaluation?
d.
Which division do you consider the most successful?
Division X
Division Y
Division Z
Book
Current
Book
Current
Book
Current
a.
ROI
20.000%
12.500%
17.778%
17.000%
8.333%
8.966%
b.
$ 6,000
$(4,000)
$ 5,000
$4,000
$(30,000)
$(26,250)
d.
Division Y is the most successful division. It has a positive residual income using current values.
132. Sporadic Company has the following data for 2014:
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
Weighted average cost of capital
15%
15%
Sprint Company has a target ROI of 20 percent.
Required:
Calculate the following amounts for each division:
a.
Margin ratio
b.
Turnover ratio
c.
ROI
d.
Residual income
e.
EVA
a.
Margin ratio = $80,000/$400,000 = 20%
b.
Turnover ratio = $400,000/$320,000 = 1.25
d.
Residual income = $80,000 – 0.20($320,000) = $16,000
e.
EVA = $80,000 – 0.15($320,000) = $32,000
a.
Operating income margin = $30,000/$300,000 = 10%
b.
Turnover ratio = $300,000/$200,000 = 1.50
c.
ROI = 0.10 ´ 1.50 = 15%
d.
Residual income = $30,000 – 0.20($200,000) = $(10,000)
e.
EVA = $30,000 – 0.15($200,000) = $0
133. Nantucket Company has two divisions that report on a decentralized basis. Their results for 2014 were as
follows:
Helmet
Ball
Sales
$150,000
$300,000
Income
$ 15,000
$ 45,000
Asset base
$ 75,000
$150,000
Weighted average cost of capital
12%
12%
Required:
Compute the following amounts for each division:
a.
Return on investment (ROI).
b.
Residual income if the desired rate of return is 20 percent.
c.
EVA.
d.
Turnover.
e.
Margin for each division.
a.
Helmet Division:
ROI = $15,000/$75,000 = 20%
Ball Division:
ROI = $45,000/$150,000 = 30%
b.
Helmet
Ball
Asset base
$75,000
$150,000
Desired return rate
´ 0.20
´ 0.20
Minimum return
$15,000
$ 30,000
Earned income
$15,000
$ 45,000
Minimum return
15,000
30,000
Residual income
$ -0-
$ 15,000
c.
Helmet Division:
EVA = $15,000 – ($75,000 ´ 0.12) = $6,000
Ball Division:
EVA = $45,000 – ($150,000 ´ 0.12) = $27,000
d.
Helmet Division:
Turnover = $150,000/$75,000 = 2.0
Ball Division:
Turnover = $300,000/$150,000 = 2.0
e.
Helmet Division:
Margin = $15,000/$150,000 = 10%
Ball Division:
Margin = $45,000/$300,000 = 15%
134. Provide the missing data for the following divisions.
Epsilon
Chi
Lambda
Division
Division
Division
Sales
$300,000
$ (d)
$800,000
Income
$ 22,500
100,000
$ (g)
Asset base
$ (a)
$ (e)
$200,000
Return on investment
10%
20%
(h)
Operating income margin
(b)
0.10
0.12
Operating asset turnover
(c)
(f)
4.0
Asset base = $22,500/0.10 = $225,000
Operating income margin = $22,500/$300,000 = 7.5%
Operating asset turnover = $300,000/$225,000* = 1.33
*From part (a).
Sales = $100,000/0.10 = $1,000,000
Asset base = $100,000/0.20 = $500,000
Operating asset turnover = $1,000,000*/$500,000** = 2.0
*From part (d).
**From part (e).
Income = $800,000 ´ 0.12 = $96,000
Return on investment = 0.12 ´ 4.0 = 48%
135. The records for the Venusian Division show the following data:
Asset base
$500,000
Sales Revenues
$725,000
Expenses
$662,500
Required:
a.
What is the margin, turnover, and ROI for Venusian Division?
b.
Venusian has an option to make an additional investment that would add $100,000 to the asset base. It would generate an additional
$50,000 in sales revenue and no additional expenses. What would be the effect on margin, turnover, and ROI?
c.
Another alternative (independent of alternative ‘b’) for Venusian is to run an advertising campaign that would require additional
advertising expenses of $37,500, but the best estimate is the campaign would generate an additional $75,000 of revenue. What would
be the effect on margin, turnover, and ROI?
136. What problems do owners face in encouraging goal congruence of managers? What is a stock option? How
can stock options encourage goal congruence?
a
b
c
Asset base
$500,000
$600,000
$500,000
Revenue
$725,000
$775,000
$800,000
Expenses
$662,500
$662,500
$700,000
Operating Income
$ 62,500
$112,500
$100,000
(Revenue – Expense)
Margin
0.0862
0.1452
0.1250
(Operating Income / Revenue)
Turnover
1.45
1.2917
1.6
(Revenue / Asset Base)
ROI
0.125
0.1875
0.2
(Operating Income / Asset Base)
137. The Hampton Division of Long Island Company sells all of its output to the Finishing Division of the
company. The only product of the Hampton 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 2014 are as follows:
Chair legs
30,000
Direct materials
$135,000
Direct labor
$90,000
Factory overhead (25% is variable)
$90,000
Operating expenses (20% is variable)
$150,000
Required:
Compute the transfer price for a chair leg using:
a.
market price.
b.
variable product costs plus a fixed fee of 20 percent.
c.
full cost plus 20 percent markup.
d.
variable costs.
e.
full cost plus 10 percent markup.
a.
b.
1.20 ´ [$135,000 + $90,000 + (0.25 ´ $90,000)]/30,000 = $9.90
c.
1.20 ´ ($135,000 + $90,000 + $90,000)/30,000 = $12.60
d.
[$135,000 + $90,000 + (0.25 ´ $90,000) +
(0.20 ´ $150,000)]/30,000 = $9.25
e.
[1.10 ´ ($135,000 + $90,000 + $90,000 + $150,000)]/30,000 = $17.05
138. Benjamin Manufacturing Company has two divisions, X and Y. Division X prepares the steel for
processing. Division Y processes the steel into the final product. No inventories exist in either division at the
beginning or end of 2014. During the year, Division X prepared 80,000 lbs. of steel at a cost of $800,000. All
the steel was transferred to Division Y where additional operating costs of $5 per lb. were incurred. The final
product was sold for $3,000,000.
Required:
a.
Determine the gross profit for each division and for the company as a whole if the transfer price is $8 per lb.
b.
Determine the gross profit for each division and for the company as a whole if the transfer price is $12 per lb.
a.
Division X
Division Y
Total
Sales
$ 640,000
$3,000,000
$3,640,000
Cost of goods sold
800,000
1,040,000*
1,840,000
Gross profit
$(160,000)
$1,960,000
$1,800,000
*$640,000 + $5(80,000)
Division X
Division Y
Total
Sales
$960,000
$3,000,000
$3,960,000
Cost of goods sold
800,000
1,360,000*
2,160,000
Gross profit
$160,000
$1,640,000
$1,800,000
*$960,000 + $5(80,000)
139. The Uniforms Division of Baseball Company has just revised its actual cost data for 2014. Uniforms
Division transfers goods to the Sport Division. Sport Division can buy the same goods in the open market for
$122 each. Uniforms’s new cost data are as follows:
Direct materials
$ 40
Direct labor
30
Variable overhead
10
Fixed overhead
16
Variable selling expenses
6
Fixed selling and administrative expenses
12
Total costs
$114
Desired return
20
Sales price
$134
Current production is 200,000 units, and the Uniforms Division has a capacity of 300,000 units.
Required:
a.
What is the lowest price the Uniforms Division should charge for the internal transfers of its goods?
b.
What is the highest price the Sport Division should pay for the units?
c.
Give the primary reason why the Uniforms Division should reduce its price.
a.
Lowest price would be total variable costs per unit; ($40 + $30 + $10 + $6) = $86.
b.
Highest price would be the open market price: $122.