Exam 13: Investment Centers and Transfer Pricing

Economic value added:

Since most people exhibit risk aversion, managers must be compensated for the risk they must bear.

The income calculation for a division manager's ROI should be based on profit margin traceable to the division.

Neosho Corporation's Gauge Division manufactures and sells product no. 24, which is used in refrigeration systems. Per-unit variable manufacturing and selling costs amount to $23 and $7, respectively. The Division can sell this item to external domestic customers for $40 or, alternatively, transfer the product to the company's Refrigeration Division. Refrigeration is currently purchasing a similar unit from Taiwan for $36. Assume use of the general transfer-pricing rule. Required: A. What is the most that the Refrigeration Division would be willing to pay the Gauge Division for one unit? B. If Gauge had excess capacity, what transfer price would the Division's management set? C. If Gauge had no excess capacity, what transfer price would the Division's management set? D. Repeat part "C," assuming that Gauge was able to reduce the variable cost of internal transfers by $5 per unit.

Use the following information to answer the following Questions The following information pertains to Travis Concrete: The company's imputed interest rate is 8%. -For the period just ended, Global Industries' Western Division reported profit of $31.9 million and invested capital of $220 million. Assuming an imputed interest rate of 12%, which of the following choices correctly denotes Western's return on investment (ROI) and residual income?

Economic value added (EVA) analysis indicates:

Tempest Enterprises had a sales margin of 5%, sales of $4,000,000, and invested capital of $5,000,000. The company's ROI was:

Use the following information to answer the following Questions Genesis Scents has two divisions: the Cologne Division and the Bottle Division. The Bottle Division produces containers that can be used by the Cologne Division. The Bottle Division's variable manufacturing cost is $2, shipping cost is $0.10, and the external sales price is $3. No shipping costs are incurred on sales to the Cologne Division, and the Cologne Division can purchase similar containers in the external market for $2.60. -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:

Use the following information to answer the following Questions The following information pertains to Travis Concrete: The company's imputed interest rate is 8%. -The sales margin is:

If the transfer price is set at the market price, the producing division should have the option of either producing goods for internal transfer or selling in the external market.

One element of the general transfer-pricing rule is opportunity cost. Briefly define the term "opportunity cost" and then explain how it is computed for (1) companies that have excess capacity and (2) companies that have no excess capacity.

Investment center performance measures and transfer prices are two internal controls that prevent dysfunctional decisions by mid-level managers.

A company's sales margin:

Which of the following describes the goal that should be pursued when setting transfer prices?

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

Use the following information to answer the following Questions Genesis Scents has two divisions: the Cologne Division and the Bottle Division. The Bottle Division produces containers that can be used by the Cologne Division. The Bottle Division's variable manufacturing cost is $2, shipping cost is $0.10, and the external sales price is $3. No shipping costs are incurred on sales to the Cologne Division, and the Cologne Division can purchase similar containers in the external market for $2.60. -Transfer prices can be based on:

Ragtime Division, which is part of Conquer Enterprises, recently reported a sales margin of 30% and an ROI of 21%. Required: A. Briefly define sales margin, capital turnover, and return on investment. B. Assume that Ragtime has residual income of $220,000 and that Conquer uses an imputed interest rate of 10%. Compute Ragtime's capital turnover and invested capital. C. In answering this question, ignore the assumptions stated in requirement "B," and your answer. Instead, assume that Ragtime's invested capital amounted to $2,500,000. On the basis of this information, calculate income and sales revenue.

Foxmoor Corporation uses an imputed interest rate of 13% in the calculation of residual income. Division X, which is part of Foxmoor, had invested capital of $1,200,000 and an ROI of 16%. On the basis of this information, X's residual income was:

The following data pertain to Caldron Corporation:

The following data pertain to Darwin Industries: Interest rate on debt capital: 9% Cost of equity capital: 12% Before-tax operating income: $35 million Market value of debt capital: $60 million Market value of equity capital: $120 million Total assets: $150 million Income tax rate: 30% Total current liabilities: $15 million Required: A. Compute Darwin's weighted-average cost of capital. B. Compute Darwin's economic value added. C. Briefly explain the meaning of economic value added.