A company has two divisions, X and Y, each operated as an investment center.X charges Y $55 per unit for each unit transferred to Y.Other data are: \[\begin{array} { | l | r | l | } \hline \text { X's variable cost per unit } & \$ 40 & \\ \hline \text { X's fixed costs } & \$ 100,000 & \\ \hline \text { X's annual sales to Y } & 5,000 & \text { units } \\ \hline \text { X's sales to outsiders } & 10,000 & \text { units } \\ \hline \end{array}\] X is planning to raise its transfer price to $65 per unit. Division Y can purchase units at $50 each from outsiders, but doing so would idle X's facilities now committed to producing units for Y. Division X cannot increase its sales to outsiders. From the perspective of the short-term profit position of the company as a whole, from which source should Division Y acquire the units?

A) Outside vendors. B) Division X, but only at the variable cost per unit. C) Division X, but only until fixed costs are covered, then should purchase from outside vendors. D) Division X, in spite of the increased transfer price. E) It is not possible to tell without additional information. A) Outside vendors. B) Division X, but only at the variable cost per unit. C) Division X, but only until fixed costs are covered, then should purchase from outside vendors. D) Division X, in spite of the increased transfer price. E) It is not possible to tell without additional information.

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

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Return on investment (ROI), residual income (RI), and Economic Value Added (EVA®) all have in common which one of the following characteristics?

(Multiple Choice)

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Question 141

A primary limitation of return on investment (ROI) as a performance evaluation metric for investment centers is that ROI:

(Multiple Choice)

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Question 142

A company has two divisions, X and Y, each operated as an investment center.X charges Y $55 per unit for each unit transferred to Y.Other data are: X's variable cost per unit \ 40 X's fixed costs \ 100,000 X's annual sales to Y 5,000 units X's sales to outsiders 10,000 units X is planning to raise its transfer price to $65 per unit. Division Y can purchase units at $50 each from outsiders, but doing so would idle X's facilities now committed to producing units for Y. Division X cannot increase its sales to outsiders. From the perspective of the short-term profit position of the company as a whole, from which source should Division Y acquire the units?

(Multiple Choice)

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Question 143

Economic value added (EVA®):

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Question 144

A division's after-tax cash operating income less depreciation and less an imputed cost of capital is called its:

(Multiple Choice)

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Question 145

All of the following are true of cost-based transfer prices except:

(Multiple Choice)

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Question 146

The microprocessor division of Zenith Systems Company sells a computer module to the company's Assembly Division, which puts together the finished product (viz., guidance systems). The Microprocessor Division is currently working at capacity. The computer module costs $10,000 to manufacture, and it can be sold externally to companies for approximately $13,500 per unit. Required: 1. Use the general transfer pricing rule to compute a transfer price for the computer module. 2. Explain the underlying logic of the general transfer pricing rule discussed in the chapter.

(Essay)

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Question 147

Residual income (RI) may be a better measure for performance evaluation of an investment center than return on investment (ROI) because:

(Multiple Choice)

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Question 148

Use of net book value (NBV) in valuing investment in operating plant assets for investment centers, in contrast to using an estimate of current value, will:

(Multiple Choice)

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Question 149

Use of the market-price method (when such prices exist) satisfies a key objective of transfer pricing, namely:

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Question 150

This question pertains to factors affecting the setting of transfer prices in an international setting. Required: What are the primary factors affecting the setting of transfer prices between divisions of a company that operates in different countries?

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Question 151

Showing 141 - 151 of 151

Return on investment (ROI), residual income (RI), and Economic Value Added (EVA®) all have in common which one of the following characteristics?

A primary limitation of return on investment (ROI) as a performance evaluation metric for investment centers is that ROI:

Economic value added (EVA®):

A division's after-tax cash operating income less depreciation and less an imputed cost of capital is called its:

All of the following are true of cost-based transfer prices except:

Residual income (RI) may be a better measure for performance evaluation of an investment center than return on investment (ROI) because:

Use of net book value (NBV) in valuing investment in operating plant assets for investment centers, in contrast to using an estimate of current value, will:

Use of the market-price method (when such prices exist) satisfies a key objective of transfer pricing, namely:

This question pertains to factors affecting the setting of transfer prices in an international setting. Required: What are the primary factors affecting the setting of transfer prices between divisions of a company that operates in different countries?

Cost Management and Strategy

Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map

Basic Cost Management Concepts

Job Costing

Activity-Based Costing and Customer Profitability Analysis

Process Costing

Cost Allocation: Departments, Joint Products, and By-Products

Cost Estimation

Short-Term Profit Planning: Cost-Volume-Profit CVP Analysis

Strategy and the Master Budget

Decision Making With a Strategic Emphasis

Strategy and the Analysis of Capital Investments

Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing

Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial Performance Measures

Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management

Operational Performance Measurement: Further Analysis of Productivity and Sales

The Management and Control of Quality

Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard

Management Compensation, Business Analysis, and Business Valuation

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