Exam 13: Investment Centers and Transfer Pricing

For the period just ended,Techno Corporation's Stocker Division reported profit of $54 million and invested capital of $450 million.Assuming an imputed interest rate of 10%,which of the following choices correctly denotes Stocker's return on investment (ROI)and residual income?

Sunrise Corporation has a return on investment of 15%.A Sunrise 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 Sunrise strives for goal congruence,the investment:

The income calculation for a division manager's ROI should be based on profit margin traceable to the division.

Gamma Division of Vaughn Corporation produces electric motors,20% of which are sold to Vaughan's Omega Division and 80% to outside customers.Vaughn treats its divisions as profit centers and allows division managers to choose whether to sell to or buy from internal divisions.Corporate policy requires that all interdivisional sales and purchases be transferred at variable cost.Gamma Division's estimated sales and standard cost data for the year ended December 31,based on a capacity of 60,000 units,are as follows: A.Assuming that Gamma desires to maximize operating income,should it take on the new customer and discontinue sales to Omega? Why? (Note: Answer this question from Gamma's perspective. ) A.Yes.Gamma is currently selling motors to Omega at a transfer price of $55 per unit ($660,000 / 12,000 units).A price of $80 to the new customer will increase Gamma Division's operating income by $300,000 [($80 - $55)* 12,000 units]. B.Assume that Vaughn allows division managers to negotiate transfer prices.The managers agreed on a tentative price of $80 per unit,to be reduced by an equal sharing of the additional Gamma income that results from the sale to Omega of 12,000 motors at $80 per unit.On the basis of this information,compute the company's new transfer price. B.The additional operating income to Gamma is $300,000 [($80 - $55)* 12,000 units].Splitting this amount equally results in a new transfer price of $67.50,calculated as follows:

A general calculation method for transfer prices that achieves goal congruence begins with the additional outlay cost per unit incurred because goods are transformed and then

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

The information that follows relates to Kravitz Corporation: Sales margin: 7.5% Capital turnover: 2 Invested capital: $20,000,000 On the basis of this information,the company's sales revenue is:

Tunley Corporation has excess capacity.If the firm desires to implement the general transfer-pricing rule,opportunity cost would be equal to:

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

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

Economic value added (EVA)analysis indicates:

Which of the following describes the goal that should be pursued when setting transfer prices?

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

Hallen Division has been stagnant over the past five years,neither growing nor contracting in size and profitability.Investments in new property,plant,and equipment have been minimal.Would the division's use of total assets (valued at net book value)when measuring ROI result in (1)using numbers that are consistent with those on the balance sheet and (2)a rising ROI over time?

The capital turnover is:

One element of the general transfer-pricing rule is opportunity cost.Briefly define the term "opportunity cost" and then explain how it is computed for (1)companies that have excess capacity and (2)companies that have no excess capacity.

The residual income is:

Carolina 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,Carolina's economic value added is:

The Magellan Division of Global Corporation,which has income of $250,000 and an asset investment of $1,562,500,is studying an investment opportunity that will cost $450,000 and yield a profit of $67,500.Assuming that Global uses an imputed interest charge of 14%,would the investment be attractive to: 1-Divisional management if ROI is used to evaluate divisional performance? 2-Divisional management if residual income (RI)is used to evaluate divisional performance? 3-The management of Global Corporation?

Economic value added: