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Exam 13: Investment Centers and Transfer Pricing

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Question 1

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Weston Company had sales revenue and operating expenses of $5,000,000 and $4,200,000,respectively,for the year just ended.If invested capital amounted to $6,000,000,the firm's ROI was:

A) 13.33%.
B) 83.33%.
C) 120.00%.
D) 750.00%.
E) some other figurE.

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Question 2

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The following data pertain to Corkscrew Corporation:

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Calculate Corkscrew Corporat...

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Question 3

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McKenna's Florida Division is currently purchasing a part from an outside supplier.The company's Alabama 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 Alabama 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,Alabama would establish a transfer price of:

Return on investment (ROI)and residual income (RI)are popular measures of divisional performance.Like any measure,there are disadvantages or weaknesses that are an inherent part of these tools.Briefly discuss a major weakness associated with each tool.

The basic idea behind residual income is to have a division maximize its:

Given that ROI measures performance over a period of time,invested capital would most appropriately be figured by using:

Standard costs rather than actual costs should be used in transfer-pricing methods because:

Sales margin shows:

Deborah Lewis,general manager of the Northwest Division of Berkshire Enterprises,has significant authority over pricing decisions as well as programs that involve cost reduction/control.The data that follow relate to upcoming divisional operations: Average invested capital: $15,000,000 Annual fixed costs: $3,900,000 Variable cost per unit: $80 Number of units expected to be sold: 120,000 Required: A.A 14% return on investment will require the Division to produce income of $2,100,000 ($15,000,000 * 14%).If X = selling price,then: 120,000X - (120,000 * $80)- $3,900,000 = $2,100,000 120,000X - $9,600,000 - $3,900,000 = $2,100,000 120,000X = $15,600,000 X = $130 A.Top management will promote Lewis if she can earn a 14% return on investment for the year.What unit selling price should she establish to get her promotion? B.If X = fixed cost,then: [($132 - $80)* 120,000] X - ($15,000,000 * 16%)= $200,000 $6,240,000 - X - $2,400,000 = $200,000 X = $3,640,000 To achieve her promotion,Lewis must reduce fixed costs by $260,000 ($3,900,000 - $3,640,000). B.Independent of part "A," assume the unit selling price is $132 and that Berkshire has a 16% imputed interest charge.Top management will promote Lewis to corporate headquarters if her division can generate $200,000 of residual income.If Lewis desires to move to corporate,what must the division do to the amount of annual fixed costs incurred? Show your calculations.

Imputed interest can best be described as:

ROI is most appropriately used to evaluate the performance of:

Consider the following statements about residual income: I.Residual income incorporates a firm's cost of acquiring investment capital. II.Residual income is a percentage measure,not a dollar measure. III.If used correctly,residual income may result in division managers making decisions that are in their own best interest and not in the best interest of the entire firm. Which of the above statements is (are) true?

A company's sales margin:

Underwood Company uses cost-based transfer pricing.Its Food Processing Division has a standard variable cost of $8.50 per case and allocated fixed overhead of $2.25.The Processing Division,which has excess capacity,sells its output to external customers for $12.00 per case.If Underwood uses full (or absorption) cost as its base,the transfer price charged to its Retail Division should be:

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?

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 irregardless 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?

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:

A division's return on investment may be improved by increasing sales margin and cost of capital.

New England Corporation has two divisions,Providence and Buffalo,and evaluates management on the basis of return on investment.Providence currently makes a part that it sells to both Buffalo and outsiders.Selected data follow. Providence is seeking an increase in its selling price to $28 per unit because of rising costs.Buffalo can obtain comparable units from an outside supplier for $23;however,if Buffalo uses the supplier,Providence will have idle capacity because of an inability to increase sales to outsiders.From the perspective of New England Corporation:

Which of the following measures of performance is,in part,based on the weighted-average cost of capital?