Exam 13: Investment Centers and Transfer Pricing

Sierra Corporation is a multi-divisional company whose managers have been delegated full profit responsibility and complete autonomy to accept or reject transfers from other divisions. Division X produces 2,000 units of a subassembly that has a ready market. One of these subassemblies is currently used by Division Y for each final product manufactured, the latter of which is sold to outsiders for $1,600. Y's sales during the current period amounted to 2,000 completed units. Division X charges Division Y the $1,100 market price for the subassembly; Division Y has additional variable costs of $600 per unit. Variable costs for Division X are $850 per unit. The manager of Division Y feels that X should transfer the subassembly at a lower price because Y is currently unable to make a profit. Required: A. Calculate the contribution margins (total dollars and per unit) of Divisions X and Y, as well as the company as a whole, if transfers are made at market price. B. Assume that conditions have changed and X can sell only 1,000 units in the market at $900 per unit. From the company's perspective, should X transfer all 2,000 units to Y or sell 1,000 in the market and transfer the remainder? Note: Y's sales would decrease to 1,000 units if the latter alternative is pursued.

Beach Corporation has a return on investment of 15%. A Beach division, which currently has a 13% ROI and $750,000 of residual income, is contemplating a massive new investment that will (1) reduce divisional ROI and (2) produce $120,000 of residual income. If Beach strives for goal congruence, the investment:

Which of the following elements is not used when calculating the weighted-average cost of capital?

Consider the following data of Twisted Corporation's Northern Division: Required: A. Calculate Northern's capital turnover. B. Calculate Northern's average invested capital. C. Calculate Northern's income. D. Calculate residual income.

What practice best describes when divisional managers throughout an organization work together to achieve the organization's goals?

The Holder Division of Extraordinary Enterprises has a negative residual income of $540,000. Holder's management is contemplating an investment opportunity that will reduce this negative amount to $400,000. The investment:

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.

Sales margin shows:

The Altamonte Division of Custom Industries is in need of a particular service. The service can be obtained from another division of Custom at "cost," with cost defined as the summation of variable cost ($9) and fixed cost ($3). Alternatively, Altamonte can secure the service from a source external to Custom for $10. Which of the following statements is true?

The following information relates to the Corner Division of Hometown Enterprises: Income for the period just ended: $1,500,000 Invested capital: $12,000,000 If the company has an imputed interest rate of 11%, Corner's residual income would be:

Capital turnover shows:

Which of the following is not considered in the calculation of divisional ROI?

Economic value added uses a firm's weighted-average cost of capital.

The market value of Galleon's debt and equity capital totals $180 million, 80% of which is equity related. An analysis conducted by the company's finance department revealed a 7% after-tax cost of debt capital and a 10% cost of equity capital. On the basis of this information, Galleon's weighted-average cost of capital:

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

Darrin's Auto Northern Division is currently purchasing a part from an outside supplier. The company's Southern Division, which has no 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:

Valient, Inc. has a Pennsylvania-based division that produces electronic components, with a very strong domestic market for circuit no. 222. The variable production cost is $140, and the division can sell its entire output for $190. Valient is subject to a 30% income tax rate. Alternatively, the Pennsylvania division can ship the circuit to a division that is located in Mississippi, to be used in the manufacture of a global positioning system (GPS). Information about the global positioning system and Mississippi's costs follow. Selling price: $380 Circuit shipping and handling fees to Mississippi: $10 Labor, overhead, and additional material costs of GPS: $120 Required: A. Assume that the transfer price for the circuit was $160. How would Pennsylvania's divisional manager likely react to a corporate decision to transfer the circuits to Mississippi? Why? B. Calculate Pennsylvania income, Mississippi income, and income for the company as a whole if the transfer took place at $160 per circuit. C. Assuming that transfers took place at a price higher than $160, would the revised price increase, decrease, or have no effect on Valient's income? Briefly explain. D. Assume that Valient moved its GPS production facility to a division located in Germany, which is subject to a 45% tax rate. The transfer took place at $180. Shipping fees (absorbed by the overseas division) doubled to $20; the German division paid an import duty equal to 10% of the transfer price; and labor, overhead, and additional material costs were $150 per GPS. If the German selling price of the GPS amounted to $450, calculate Pennsylvania income, German income, and income for Valient as a whole. E. Suppose that U.S. and German tax authorities allowed some discretion in how transfer prices were set. Given the difference in tax rates, should Valient attempt to generate the majority of its income in Pennsylvania or Germany? Why?

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 ROI is:

All of the following actions are likely to increase ROI except:

ROI is one performance measure that can motivate a manager to make decisions about costs he or she cannot control.