Exam 19: Strategic Performance Measurement: Investment Centers and Transfer Pricing

Selected data from Division A of Green Company are as follows: Sales \ 500,000 Average investment \ 300,000 Operating income \ 60,000 Minimum rate of return 15\% Division A's return on sales (ROS) is:

James Webb is the general manager of the Industrial Product Division, and his performance is measured using the residual income (RI) method.Webb is reviewing the followed forecasted information for his division for the coming year: Category Amount (thousands) Working capital \ 1,800 Revenue 30,000 Plant and equipment 17,200 If the imputed interest charge (i.e., divisional cost of capital) is 15% and Webb wants to achieve an RI target of $2 million, what will costs have to be in order to achieve the target?

Alice and Jon Harrison operate two full-service dry cleaning outlets in the St. Louis metropolitan area. One of the outlets generates over $800,000 revenue per year and has more than a million dollar investment in state-of-the-art equipment. The other outlet is older, generates $20,000 revenue per month, and has 20-25 year-old equipment currently worth approximately $85,000. Both outlets are profitable with growing market bases. (The ratio between operating income and sales for each unit, based on historical-cost accounting numbers, is roughly the same.) Managers at each location are currently paid a base salary, and receive a year-end bonus which is five percent of total operating profit produced by both outlets combined. Alice has just finished a workshop on investment center performance evaluation, and wants to change the evaluation and reward structure, hoping to motivate the two managers to produce greater revenue and profit. Required: What type of evaluation mechanisms should she propose for the two managers?

Selected data from Division A of Green Company are as follows: Sales \ 500,000 Average investment \ 300,000 Operating income \ 60,000 Minimum rate of return 15\% Division A's residual income (RI) is:

The manager of the processing division of XYZ Corporation is considering the purchase of new equipment, which would modernize an aging plant. Currently, the division has an asset base of $8,000,000 and net operating income of $1,200,000. The new equipment is expected to cost $1,000,000; it supports the corporate strategy of competing on the basis of quality and customer response time (CRT). The new investment is also expected to increase operating income by $100,000 next year, which is an acceptable return on investment (ROI) from the standpoint of corporate management. Required: 1. What is the current ROI for the processing division of XYZ Corporation? (Show calculations.) 2. What will be the divisional ROI if the new investment is undertaken? 3. Suppose that the compensation contract for the manager of the processing division consists of a base salary plus a bonus that is proportional to the ROI earned by the division. Is this manager's total compensation higher with or without the new investment? (Show calculations.) 4. What changes to the divisional manager's compensation contract might corporate management make that would better align divisional manager's compensation (and performance evaluation) with overall corporate goals?

Which one of the following determines the transfer price based on the seller's costs, plus a gross profit percentage determined from comparison of sales of the seller to those of unrelated parties?

In contrast to residual income (RI), economic value added (EVA®) uses in its calculation:

A primary characteristic of a negotiated transfer price is that it:

Decentralized firms can delegate authority and yet retain control and monitor managers' performances by structuring the organization into so-called "responsibility centers." Which one of the following business segments/responsibility centers is most like an independent business?

Return on investment (ROI) encourages business units—such as investment centers— to invest only in projects that earn:

As a general rule, leased assets should be included as part of the calculation of "investment" (for calculating ROI and residual income) since they represent assets used:

Consider the following data for three divisions of a company, X, Y, and Z: Divisional: X Y Z Sales \ 1,800,000 \ 900,000 \ 4,800,000 Operating Income 252,000 108,000 240,000 Investment in assets 630,000 540,000 3,000,000 The asset turnover (AT) for Division Z is:

Eikelberry, Inc.has the following financial results for 2019 for its three regional divisions: Current Cost Net Book Gross Replacement Liquidation Region Income Value Book Value Cost Value FINANCIAL DATA North Atlantic \ 45,000 \ 225,000 \ 450,600 \ 990,000 \ 350,000 Mid Atlantic 33,000 289,000 310,000 380,000 445,000 South Atlantic 22,000 115,000 166,000 650,000 980,000 Required: Calculate return on investment (ROI), asset turnover (AT), and return on sales (ROS) for each of the three divisions for 2019. The sales in the North, Mid and South Atlantic regions are $2,350,000, $1,450,000, and $500,000, respectively. Calculate ROI and asset turnover (AT) for each of the four measures of investment (i.e., for each of four possible denominators in determining ROI and AT). Round all answers except ROI to 2 decimal places, e.g., round 0.12487 to 12.49%. Round ROI to whole percentage amounts, e.g., 0.1998 to 20%.

The text notes that there are various objectives of transfer pricing. This raises the possibility of using multiple transfer pricing alternatives. For example, an organization could use one transfer pricing alternative for domestic transfers and another alternative for transnational transfers. Required: 1. Provide a reason why an organization might choose a particular transfer pricing alternative for domestic transfers and a different transfer pricing alternative for international transfers. 2. Provide a reason why an organization may not want to use two different transfer pricing systems, one for domestic transfers and another for international transfers.

An appropriate transfer price between two divisions of The Stark Company can be determined from the following data: Fabricating Division: Market price of the subassembly \ 50 Variable cost of the subassembly \ 20 Excess capacity (in units) 1,000 Assembly Division: Number of units needed 900 What is the natural bargaining range for the two divisions?

As noted in the text, the use of market price can be used to set the transfer price associated with interdivisional transfers of goods and services. Required: 1. What are the primary advantages of using market price as the transfer price? 2. What are the primary disadvantages of using market price as the transfer price?

The conventional return on investment (ROI) performance measure calculates "profit" and "investment" based on:

Assume that an organization's weighted-average cost of capital (minimum rate of return) is 8% and that Division A currently has a 12% return on investment (ROI). The manager of Department A, who is evaluated on the basis of divisional ROI, would most likely accept an investment that is expected to return:

Selected data from Chering Division's accounting records revealed the following: Sales \ 825,000 Average investment \ 440,000 Net operating income \ 66,000 Minimum rate of return (divisional cost of capital) 14\% Chering Division's return on sales (ROS) is:

This question pertains to the use of market-based transfer prices. Required: What is the primary advantage and what is the primary difficulty in using market-based transfer prices?