Exam 13: Investment Centers and Transfer Pricing

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. -Assume the Bottle Division has no excess capacity and could sell everything it produced externally. Using the general rule, the transfer price from the Bottle Division to the Cologne Division would be:

The biggest challenge in making a decentralized organization function effectively is:

Overton 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 Overton uses full (or absorption) cost as its base, the transfer price charged to its Retail Division should be:

Income divided by sales revenue is called capital turnover.

The following data pertain to the Ouster Division of Klandestine Company: The company uses responsibility accounting concepts when evaluating performance; Ouster's division manager is contemplating the following three investments. He can invest up to $400,000. Required: A. Calculate the ROIs of the three investments. B. What is the division manager's current ROI, computed by using responsibility accounting concepts? C. Which of the three investments would be selected if the manager's focus is on Ouster's divisional performance, as judged by ROI? Why? D. If Klandestine has an imputed interest charge of 22%, compute the residual income of investment no. 3. If Ouster's Division manager is evaluated by residual income, is this investment attractive from Ouster's perspective? From Klandestine's perspective? Why?

The maximization of profits of the buying division is one of the goals that should be pursued when setting transfer prices.

Compuwork Corporation is organized in three separate divisions. The three divisional managers are evaluated at year-end, and bonuses are awarded based on ROI. Last year, the overall company produced a 12% return on its investment. Managers of Compuwork's Iowa Division recently studied an investment opportunity that would assist in the division's future growth. Relevant data follow. Required: A. Compute the current ROI of the Iowa Division and the division's ROI if the investment opportunity is pursued. B. What is the likely reaction of divisional management toward the acquisition? Why? C. What is the likely reaction of Compuwork's corporate management toward the investment? Why? D. Assume that Compuwork uses residual income to evaluate performance and desires an 11% minimum return on invested capital. Compute the current residual income of the Iowa Division and the division's residual income if the investment is made. Will divisional management likely change its attitude toward the acquisition? Why?

Consider the following statements about transfer pricing: I. Income taxes and import duties are an important consideration when setting a transfer price for companies that pursue international commerce. II. Transfer prices cannot be used by organizations in the service industry. III. Transfer prices are totally cost-based in nature, not market-based. Which of the above statements is (are) true?

Residual income facilitates goal congruence while ROI does not.

Jamison 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:

Macon Corporation has no excess capacity. If the firm desires to implement the general transfer-pricing rule, opportunity cost would be equal to:

Imputed interest can best be described as:

Which of the following transfer-pricing methods can lead to dysfunctional decision-making behavior by managers?

When an organization allows divisional managers to be responsible for short-term loans and credit, the division's invested capital should be measured by

The external market price transfer-pricing method can lead to dysfunctional decision-making behavior by managers.

Which of the following is used in the calculation of both return on investment and residual income?

Which of the following is the correct mathematical expression to derive a company's capital turnover?

Improving ROI is a balancing act that requires all the skills of an effective manager.

The following data pertain to Napal Company for 20x1: Required: A. Calculate the company's sales margin, capital turnover, and return on investment for 20x1. B. If the sales and average invested capital remain the same, to what level would total costs and expenses have to be reduced in 20x2 to achieve a 15% return on investment? C. Assume that costs and expenses are reduced, as calculated in requirement "B." Calculate the firm's new sales margin. D. Suggest two possible actions that will improve the company's capital turnover.

Tyke Corporation has two divisions: Springfield and Chicago. Springfield currently sells a condenser to manufacturers of cooling systems for $520 per unit. Variable costs amount to $380, and demand for this product currently exceeds the division's ability to supply the marketplace. Tyke is considering another use for the condenser, namely, integration into an enhanced refrigeration system that would be made by Chicago. Related information about the enhanced system follows: Selling price of refrigeration system: $1,285 Additional variable manufacturing costs Required: A. How would Springfield's divisional manager likely react to the decision to transfer condensers to Chicago? Show computations to support your answer. B. How would Chicago's divisional management likely react to the $490 transfer price? Show computations to support your answer. C. Assume that a lower transfer price is desired. What parties should be involved in setting the new price? D. From a contribution margin perspective, does Tyke benefit more if it sells the condensers externally or transfers the condensers to Chicago? By how much?