109. Figure 22-4.
The manager of Stock Division projects the following for next year:
Sales
$185,000
Operating income
$60,000
Operating assets
$375,000
The manager can invest in an additional project that would require $40,000 investment in additional assets and would generate $6,000 of additional
income. The company’s minimum rate of return is 14%.
Refer to Figure 22-4. Which of the following statements is true?
110. A price charged for a component by the selling division to the buying division of the same company is
called a(n)
111. The level of the transfer price can affect the overall company because
112. If there is a competitive outside market for the transferred product, then the best transfer price is the
113. If the selling division is operating at less than full capacity, the floor of the bargaining range would most
probably set at
114. The strategic management system that translates an organization’s mission and strategy into operational
objectives and performance measures is
115. The Balanced Scorecard perspective that describes the internal processes needed to provide value for
customers and owners is the ____ perspective.
116. The Balanced Scorecard perspective that describes the economic consequences of actions taken in the
other three perspectives is the ____ perspective.
117. The Balanced Scorecard perspective that defines the customer and market segments in which the business
unit will compete is the ____ perspective.
118. The Balanced Scorecard perspective that defines the capabilities that an organization needs to create long-
term growth and improvement is the ____ perspective.
119. Several transfer pricing policies are used in practice. These transfer pricing policies include
120. Figure 22-5.
Grey Inc. has many divisions that are evaluated on the basis of ROI. One division, Centra, makes boxes. A
second division, Mantra, makes chocolates and needs 80,000 boxes per year. Centra incurs the following costs
for one box:
Direct materials
$0.35
Direct labor
$0.60
Variable overhead
$0.40
Fixed overhead
$0.13
Total
$1.48
Centra has capacity to make 700,000 boxes per year. Mantra currently buys its boxes from an outside supplier for $1.80 each (the same price that
Centra receives).
Refer to Figure 22-5. Assume that Grey Inc. mandates that any transfers take place at full manufacturing cost. What would be the transfer price if
Centra transferred boxes to Mantra?
121. Figure 22-5.
Grey Inc. has many divisions that are evaluated on the basis of ROI. One division, Centra, makes boxes. A
second division, Mantra, makes chocolates and needs 80,000 boxes per year. Centra incurs the following costs
for one box:
Direct materials
$0.35
Direct labor
$0.60
Variable overhead
$0.40
Fixed overhead
$0.13
Total
$1.48
Centra has capacity to make 700,000 boxes per year. Mantra currently buys its boxes from an outside supplier for $1.80 each (the same price that
Centra receives).
Refer to Figure 22-5. Assume that Grey Inc. allows division managers to negotiate transfer price. Centra is producing 600,000 boxes. If Centra and
Mantra agree to transfer boxes, what is the ceiling of the bargaining range and which division sets it?
122. Figure 22-5.
Grey Inc. has many divisions that are evaluated on the basis of ROI. One division, Centra, makes boxes. A
second division, Mantra, makes chocolates and needs 80,000 boxes per year. Centra incurs the following costs
for one box:
Direct materials
$0.35
Direct labor
$0.60
Variable overhead
$0.40
Fixed overhead
$0.13
Total
$1.48
Centra has capacity to make 700,000 boxes per year. Mantra currently buys its boxes from an outside supplier for $1.80 each (the same price that
Centra receives).
Refer to Figure 22-5. Assume that Grey Inc. allows division managers to negotiate transfer price. Centra is producing 600,000 boxes. If Centra and
Mantra agree to transfer boxes, what is the floor of the bargaining range and which division sets it?
123. Figure 22-5.
Grey Inc. has many divisions that are evaluated on the basis of ROI. One division, Centra, makes boxes. A
second division, Mantra, makes chocolates and needs 80,000 boxes per year. Centra incurs the following costs
for one box:
Direct materials
$0.35
Direct labor
$0.60
Variable overhead
$0.40
Fixed overhead
$0.13
Total
$1.48
Centra has capacity to make 700,000 boxes per year. Mantra currently buys its boxes from an outside supplier for $1.80 each (the same price that
Centra receives).
Refer to Figure 22-5. Assume that Grey Inc. allows division managers to negotiate transfer price. Alpha is producing 700,000 boxes. If Centra and
Mantra agree to transfer boxes, what is the floor of the bargaining range and which division sets it?
124. Figure 22-6.
Quinn Inc. has a number of divisions. One division, Style, makes zippers that are used in the manufacture of
boots. Another division, LeatherStuff, makes boots that use the zippers and needs 90,000 zippers per year. Style
incurs the following costs for one zipper:
Direct materials
$0.23
Direct labor
$0.20
Variable overhead
$0.95
Fixed overhead
$1.32
Total
$2.70
Quinn has capacity to make 950,000 zippers per year, but due to a soft market, only plans to produce and sell 620,000 zippers next year. LeatherStuff
currently buys zippers from an outside supplier for $3.50 each (the same price that Style receives).
Refer to Figure 22-6. Assume that Quinn allows negotiated transfer pricing. What is the floor of the bargaining range and which division sets it?
125. Figure 22-6.
Quinn Inc. has a number of divisions. One division, Style, makes zippers that are used in the manufacture of
boots. Another division, LeatherStuff, makes boots that use the zippers and needs 90,000 zippers per year. Style
incurs the following costs for one zipper:
Direct materials
$0.23
Direct labor
$0.20
Variable overhead
$0.95
Fixed overhead
$1.32
Total
$2.70
Quinn has capacity to make 950,000 zippers per year, but due to a soft market, only plans to produce and sell 620,000 zippers next year. LeatherStuff
currently buys zippers from an outside supplier for $3.50 each (the same price that Style receives).
Refer to Figure 22-6. Assume that Quinn allows negotiated transfer pricing. What is the ceiling of the bargaining range and which division sets it?
126. Figure 22-6.
Quinn Inc. has a number of divisions. One division, Style, makes zippers that are used in the manufacture of
boots. Another division, LeatherStuff, makes boots that use the zippers and needs 90,000 zippers per year. Style
incurs the following costs for one zipper:
Direct materials
$0.23
Direct labor
$0.20
Variable overhead
$0.95
Fixed overhead
$1.32
Total
$2.70
Quinn has capacity to make 950,000 zippers per year, but due to a soft market, only plans to produce and sell 620,000 zippers next year. LeatherStuff
currently buys zippers from an outside supplier for $3.50 each (the same price that Style receives).
Refer to Figure 22-6. Assume that Style and LeatherStuff have agreed on a transfer price of $3.25. What are the total cost savings for LeatherStuff?
127. Figure 22-6.
Quinn Inc. has a number of divisions. One division, Style, makes zippers that are used in the manufacture of
boots. Another division, LeatherStuff, makes boots that use the zippers and needs 90,000 zippers per year. Style
incurs the following costs for one zipper:
Direct materials
$0.23
Direct labor
$0.20
Variable overhead
$0.95
Fixed overhead
$1.32
Total
$2.70
Quinn has capacity to make 950,000 zippers per year, but due to a soft market, only plans to produce and sell 620,000 zippers next year. LeatherStuff
currently buys zippers from an outside supplier for $3.50 each (the same price that Style receives).
Refer to Figure 22-6. Assume that Style and LeatherStuff have agreed on a transfer price of $3.25. What is the total benefit for Style?
128. Figure 22-6.
Quinn Inc. has a number of divisions. One division, Style, makes zippers that are used in the manufacture of
boots. Another division, LeatherStuff, makes boots that use the zippers and needs 90,000 zippers per year. Style
incurs the following costs for one zipper:
Direct materials
$0.23
Direct labor
$0.20
Variable overhead
$0.95
Fixed overhead
$1.32
Total
$2.70
Quinn has capacity to make 950,000 zippers per year, but due to a soft market, only plans to produce and sell 620,000 zippers next year. LeatherStuff
currently buys zippers from an outside supplier for $3.50 each (the same price that Style receives).
Refer to Figure 22-6. Assume that Style and LeatherStuff have agreed on a transfer price of $3.25. What is the total benefit for Quinn Inc.?
129. Mario Co. produces three products: LMC, DMC, KPC. For the coming year they expect to produce
160,000 units. Of these, 65,000 will be LMC, 40,000 will be DMC and 55,000 will be KPC. The following
information was provided for the coming year:
LMC
KPC
Price
$ 550
$ 625
Unit direct materials
250
300
Unit direct labor
180
205
Unit variable overhead
60
55
Unit variable selling expense
45
58
Total direct fixed overhead
240,000
400,000
Common fixed overhead is $984,000 and fixed selling and administrative expenses for Mario Co. is $881,000 per year.
Required:
A. Calculate the unit variable cost under variable costing.
B. Calculate the unit variable product cost.
C. Prepare a segmented variable-costing income statement for next year.
D. Should Mario Co. keep all product lines?
Unit direct materials
$ 250
$ 405
$ 300
Unit direct labor
$ 180
$ 210
$ 205
Unit variable overhead
$ 60
$ 72
$ 55
Unit variable selling expense
$ 45
$ 60
$ 58
Total variable cost
$ 535
$ 747
$ 618
Unit direct materials
$ 250
$ 405
$ 300
Unit direct labor
$ 180
$ 210
$ 205
Unit variable overhead
$ 60
$ 72
$ 55
Total unit variable product cost
$ 490
$ 687
$ 560
Sales
35,750,000
34,400,000
34,375,000
104,525,000
Variable cost of goods sold
31,850,000
27,480,000
30,800,000
90,130,000
Variable selling expense
2,925,000
2,400,000
3,190,000
8,515,000
Contribution margin
975,000
4,520,000
385,000
5,880,000
Less: direct fixed overhead
240,000
425,000
400,000
1,065,000
Less: common fixed expenses:
Common fixed overhead
984,000
Common selling and administrative
881,000
Operating income
2,950,000
130. Pollux Company had the following income statement for last year:
Sales
$360,000
Less: Cost of goods sold
195,000
Gross margin
$165,000
Less: Selling & administrative expense
78,600
Operating income
$86,400
Beginning assets were $559,000 and ending assets were $593,000.
(Carry computations out to three decimal places.)
A. What are average operating assets?
B. What is margin?
C. What is turnover?
D. What is ROI?
131. Noble Company has two divisions, the Domestic Division and the International Division. Last year, the
Domestic Division earned $360,000 using average operating assets of $1,440,000. Sales for the Domestic
Division were $3,600,000. Last year, the International Division earned $560,000 using average operating assets
of $2,800,000. Sales for the International Division were $7,000,000.
A. For the Domestic Division, margin is __________________. Turnover is __________________ and ROI is
__________________.
B. For the International Division, margin is __________________. Turnover is __________________ and ROI
is __________________.
C. If these are the only two divisions of Noble Company, what is ROI for Noble Company?
132. Chase Company had the following income statement for last year:
Sales
$180,000
Less: Cost of goods sold
97,500
Gross margin
$ 82,500
Less: Selling & Admin. Expense
39,300
Operating income
$ 43,200
Beginning assets were $279,500 and ending assets were $296,500.
A. Average operating assets were $__________________.
B. Margin was __________________.
C. Turnover was __________________.
D. Return on investment was __________________%.
133. Red Earth Company has two divisions, the Okla Division and the Homa Division. Last year, the Okla
Division earned $60,500 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
percent.
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 percent.
C. For the Okla Division, residual income is __________________.
D. For the Homa Division, residual income is __________________.
134. 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?
135. Figure 22-8
Monfett Manufacturing earned operating income last year as shown in the following income statement:
Sales
$620,000
Cost of goods sold
$316,000
Gross margin
$304,000
Selling and administrative expense
$219,000
Operating income
$85,000
Less: Income taxes (at 40%)
$34,000
Net income
$51,000
At the beginning of the year, the value of operating assets was $263,000. At the end of the year, the value of operating assets was
$336,000. Monfett Manufacturing requires a minimum rate of return of 15%. Total capital employed equal $350,000 and actual cost of capital is
6%.
Refer to Figure 22-8. Calculate the following:
A. Average operating assets
B. Margin
C. Turnover
D. Return on investment
(Carry computations out to two decimal places.)
Average operating assets = Beginning assets + ending assets/2
($263,000 + $336,000)/2 = $299,500
B.
Margin = Operating income/Sales
$85,000/$620,000 = .14 or 14%
Turnover = Sales/Average operating assets
$620,000/$299,500 = 2.07
ROI = Margin x Turnover
.14 x 2.07 = 0.29
136. Figure 22-8
Monfett Manufacturing earned operating income last year as shown in the following income statement:
Sales
$620,000
Cost of goods sold
$316,000
Gross margin
$304,000
Selling and administrative expense
$219,000
Operating income
$85,000
Less: Income taxes (at 40%)
$34,000
Net income
$51,000
At the beginning of the year, the value of operating assets was $263,000. At the end of the year, the value of operating assets was
$336,000. Monfett Manufacturing requires a minimum rate of return of 15%. Total capital employed equal $350,000 and actual cost of capital is
6%.
Refer to Figure 22-8. Calculate the following:
A. Residual income
B. EVA
137. 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?
Residual income = operating income – (minimum rate of return x average operating assets)
$85,000 – (15% x $299,500) = $40,075
Average operating assets = Beginning assets + ending assets/2
($263,000 + $336,000)/2 = $299,500
EVA = after-tax operating income – (actual percentage cost of capital x total capital employed)
138. Figure 22-7.
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
Refer to Figure 22-7. 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 $5.20 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. 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 $__________________
139. Figure 22-7.
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
Refer to Figure 22-7. 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?
140. Figure 22-9
Bostonian Inc. has a number of divisions, including Delta Division and ListenNow Division. The ListenNow
Division manufactures 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.
Refer to Figure 22-9.
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?
Full cost transfer price = $3.10
141. Figure 22-9
Bostonian Inc. has a number of divisions, including Delta Division and ListenNow Division. The ListenNow
Division manufactures 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.
Refer to Figure 22-9. 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?
142. Figure 22-9
Bostonian Inc. has a number of divisions, including Delta Division and ListenNow Division. The ListenNow
Division manufactures 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.
Refer to Figure 22-9. 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?
143. You decide
Explain the differences between centralized and decentralized decision making. Also list some of the reasons
why a company would choose to decentralize.
144. You decide
You have just become the controller for Artisan Industries. Artisan produces three different products and upon
review of their internal reports you notice that they have never prepared a segmented income
statement. Explain to the vice president what a segmented income statement consists of and why it can be
useful in decision making.
145. What is the difference between absorption-costing income and variable-costing income?
146. What are the advantages and disadvantages of return on investment (ROI)?
147. How is EVA (Economic Value Added) different from standard residual income calculations?
148. The Glass Division of a company makes glass vases which have the following unit costs:
Direct materials
$0.20
Direct labor
0.35
Variable overhead
0.15
Fixed overhead
1.30
Selling commission
0.50
149. Describe the four perspectives of the Balanced Scorecard.