Exam 13: Investment Centers and Transfer Pricing

Concert Division reported a residual income of $200,000 for the year just ended. The division had $8,000,000 of invested capital and $1,000,000 of income. On the basis of this information, the imputed interest rate was:

As an organization grows, however, its managers need less formal information systems, including managerial accounting information, in order to maintain control.

Grand's Auto Northern Division is currently purchasing a part from an outside supplier. The company's Southern Division, which has excess capacity, makes and sells this part for external customers at a variable cost of $19 and a selling price of $31. If Southern begins sales to Northern, it (1) will use the general transfer-pricing rule and (2) will be able to reduce variable cost on internal transfers by $3. On the basis of this information, Southern would establish a transfer price of:

The biggest challenge in making a decentralized organization function effectively is to obtain goal congruence among the organization's autonomous managers.

Which of the following is the correct mathematical expression for return on investment?

Endotrope Corporation has an after-tax operating income of $3,200,000 and a 9% weighted-average cost of capital. Assets total $7,000,000 and current liabilities total $1,800,000. On the basis of this information, Endotrope's economic value added is:

The ROI calculation will indicate:

Roger Corporation produces goods in the United States, to be sold by a separate division located in Italy. More specifically, the Italian division imports units of product X34 from the U.S. and sells them for $950 each. (Imports of similar goods sell for $850.) The Italian division is subject to a 40% tax rate whereas the U.S. tax rate is only 30%. The manufacturing cost of product X34 in the United States is $720. Furthermore, there is a 10% import duty computed on the transfer price that will be paid by the Italian division and is deductible when computing Italian income. Tax laws of the two countries allow transfer prices to be set at U.S. manufacturing cost or the selling prices of comparable imports in Italy. Required: Analyze the profitability of the U.S. division, the Italian division, and Roger as a whole to determine if the overall corporation would be better off if transfers took place at (1) U.S. manufacturing cost or (2) the selling price of comparable imports.

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?

ROI, residual income, and EVA are computed for a period of time.

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 residual income is:

Clariton Corporation has two divisions, Kissimmee and Grant, and evaluates management on the basis of return on investment. Kissimmee currently makes a part that it sells to both Grant and outsiders. Selected data follow. Kissimmee is seeking an increase in its selling price to $28 per unit because of rising costs. Grant can obtain comparable units from an outside supplier for $26; however, if Grant uses the supplier, Kissimmee will have idle capacity because of an inability to increase sales to outsiders. From the perspective of Clariton Corporation:

What are the three objectives of internal controls in preventing suboptimal decisions and the costs of undermining divisional autonomy?.

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 capital turnover is:

The income calculation for a division manager's ROI should be based on:

A division's return on investment may be improved by increasing:

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

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 maximum amount the Cologne Division would be willing to pay for each bottle transferred would be:

Which of the following elements is not used in the calculation of economic value added for an investment center?

The following information relates to Attor, Inc.: If the company has a 10% weighted-average cost of capital, its economic value added would be: