Exam 13: Responsibility Accounting,support Department Allocations,and Transfer Pricing

Castle Homes Corporation The Carpet Division of Castle Homes Corporation manufactures a single grade of residential grade carpeting.The division has the capacity to produce 500,000 square yards of carpet each year.Its current costs and revenues are shown here: Sales (400,000 square yards)                                 $\$ 2,000,000$ Variable costs per square yard: Production                                                             $\$ 2.00$ SG&A                                                                      1.00 Fixed costs per square yard (based on 500,000 yard capacity) Production                                                               $\$ 0.50$ SG&A                                                                      1.00 The Housing Division currently purchases 40,000 yards of carpeting (of the grade produced by the Carpet Division)each year at a cost of $6.50 per square yard from an outside vendor. Refer to Castle Homes Corporation.If the autonomous Housing and Carpet Divisions enter negotiations on the internal transfer of 40,000 square yards of carpeting,what is the maximum price that will be considered?

Texoma Corporation Texoma Corporation is comprised of two divisions: X and Y.X currently produces and sells a gear assembly used by the automotive industry in electric window assemblies.X is currently selling all of the units it can produce (25,000 per year)to external customers for $25 per unit.At this level of activity,X's per unit costs are: Variable: Procuction                                 $\$ 7$ SG&A                                        2 Fixed: Prochuction                                 6 SG&A                                         5 Y Division wants to purchase 5,000 gear assemblies per year from X Division.Y Division currently purchases these units from an outside vendor at $22 each. Refer to Texoma Corporation.What will be the effect on overall corporate profits if the two divisions agree to an internal transfer of 5,000 units?

Ecology Solutions Corporation The Green Division of Ecology Solutions Co.has developed a wind generator that requires a special "S" ball bearing.The Ball Bearing Division of Ecology Solutions Co.has the capability to produce such a ball bearing. Unfortunately,the Ball Bearing Division is operating at capacity and will need to reduce production of another existing product,the "T" bearing,by 1,000 units per month to provide the 600 "S" bearings needed each month by the Green Division.The "T" bearing currently sells for $50 per unit.Variable costs incurred to produce the "T" bearing are $30 per unit;variable costs to produce the new "S" bearing would be $60 per unit. The Green Division has found an external supplier that would furnish the needed "S" bearings at $100 per unit.Assume that both the Green Division and Ball Bearing Division are independent,autonomous investment centers. Refer to Ecology Solutions Co.What is the minimum price that Ball Bearing Division would consider to produce the "S" bearing if the Ball Bearing Division did not need to forfeit any of its existing sales to produce the "S" bearing?

Seminole Wire Corporation The Wire Products Division of Seminole Wire Corporation produces "bales" of steel wire that are used in various commercial applications.The bales sell for an average of $20 each and The Wire Products Division has the capacity to produce 10,000 bales per month.The Consumer Products Division of Seminole Wire Corporation uses approximately 2,000 bales of steel wire each month in its production of various appliances.The operating information for the Wire Products Division at its present level of operations (8,000 bales per month)follows: Sales (all external)                                          $\$ 160,000$ Variable costs per bale: Production                                                       $\$ 5$ Selling                                                             2 G\&A                                                               3 Fixed costs per bale (based on a 10,000 urit capacity): Production                                                     $\$ 2$ Selling                                                            3 $\mathrm{Ct} \& \mathrm{~A}$                                                           4 The Consumer Products Division currently pays $15 per bale for wire obtained from its external supplier. Refer to Seminole Wire Corporation.For the Wire Products Division to operate at break-even level,what would it need to charge for the production and transfer of 2,000 bales to the Consumer Products Division? Assume all variable costs indicated will be incurred by the Wire Products Division.

What are the two general rules that should be followed when computing a transfer price?

Magnificent Motor Corporation The Engine Division of Magnificent Motor Corporation uses 5,000 carburetors per month in its production of automotive engines.It presently buys all of the carburetors it needs from two outside suppliers at an average cost of $100.The Carburetor Division of Magnificent Motor Corporation manufactures the exact type of carburetor that the Engine Division requires.The Carburetor Division is presently operating at its capacity of 15,000 units per month and sells all of its output to a foreign car manufacturer at $106 per unit.Its cost structure (on 15,000 units)is: Variable prochuction costs                  $70 Variable selling costs                             10 All fixed costs                                        10 Assume that the Carburetor Division would not incur any variable selling costs on units that are transferred internally. Refer to Magnificent Motor Corporation.What is the maximum of the transfer price range for a transfer between the two divisions?

Bradley Corporation Bradley Corporation has three production departments A,B,and C.Bradley Corporation also has two service departments,Administration and Personnel.Administration costs are allocated based on value of assets employed,and Personnel costs are allocated based on number of employees.Assume that Administration provides more service to the other departments than does the Personnel Department. Admin. \ 900,000 25 \ 450,000 Personnel 350,000 10 600,000 A 700,000 15 300,000 B 200,000 5 150,000 C 250,000 10 800,000 Refer to Bradley Corporation.Assume that Administration costs have been allocated and the balance in Personnel is $860,000.What amount is allocated to C (round to the nearest dollar)?

When using a market-based transfer price,a decision must be made how price disputes will be handled.

Lincoln Corporation Lincoln Corporation distributes its service department overhead costs directly to producing departments without allocation to the other service departments.Information for January is presented here.                                                      $\text {\underline{ Mantenance} }$   $\text {\underline{ Utilities} }$ Overhead costsincurred \ 18,700 \ 9,000 Service provided to: Maintenance Dept. 10\% Utilities Dept. 20\% Producing Dept. A 40\% 30\% Producing Dept. B 40\% 60\% Refer to Lincoln Corporation.Using the step method,how much of Lincoln Corporation's Utilities Department cost is allocated between Departments A and B?

Magnificent Motor Corporation The Engine Division of Magnificent Motor Corporation uses 5,000 carburetors per month in its production of automotive engines.It presently buys all of the carburetors it needs from two outside suppliers at an average cost of $100.The Carburetor Division of Magnificent Motor Corporation manufactures the exact type of carburetor that the Engine Division requires.The Carburetor Division is presently operating at its capacity of 15,000 units per month and sells all of its output to a foreign car manufacturer at $106 per unit.Its cost structure (on 15,000 units)is: Variable prochuction costs                  $70 Variable selling costs                             10 All fixed costs                                        10 Assume that the Carburetor Division would not incur any variable selling costs on units that are transferred internally. Refer to Magnificent Motor Corporation.What is the minimum of the transfer price range for a transfer between the two divisions?

Office Systems Corporation Office Systems Corporation manufactures and sells various high-tech office automation products.Two divisions of Office Systems Corporation are the Computer Chip Division and the Computer Division.The Computer Chip Division manufactures one product,a "super chip," that can be used by both the Computer Division and other external customers.The following information is available on this month's operations in the Computer Chip Division: Selling price per chip \5 0 Variable costs per chip \2 0 Fixed production costs \ 60,000 Fixed SG\&A costs \ 90,000 Monthly capacity 10,000 chip External sales 6,000 chip Internal sales 0 chip Presently,the Computer Division purchases no chips from the Computer Chips Division,but instead pays $45 to an external supplier for the 4,000 chips it needs each month. Refer to Office Systems Corporation.If a transfer between the two divisions is arranged next period at a price (on 4,000 units of super chips)of $40,total profits in the Computer Chip division will

In an internal transfer,the buying division records the transaction by

To avoid waste and maximize efficiency when transferring products among divisions in a competitive economy,a large diversified corporation should base transfer prices on

Castle Homes Corporation The Carpet Division of Castle Homes Corporation manufactures a single grade of residential grade carpeting.The division has the capacity to produce 500,000 square yards of carpet each year.Its current costs and revenues are shown here: Sales (400,000 square yards)                                 $\$ 2,000,000$ Variable costs per square yard: Production                                                             $\$ 2.00$ SG&A                                                                      1.00 Fixed costs per square yard (based on 500,000 yard capacity) Production                                                               $\$ 0.50$ SG&A                                                                      1.00 The Housing Division currently purchases 40,000 yards of carpeting (of the grade produced by the Carpet Division)each year at a cost of $6.50 per square yard from an outside vendor. Refer to Castle Homes Corporation.Assume,for this question only,that the Carpet Division is producing and selling 500,000 square yards of carpet to external buyers at a price of $5 per square yard.What would be the effect on overall corporate profits if Carpet Division reduces external sales of carpet by 40,000 square yards and transfers the 40,000 square yards of carpet to the Housing Division?

An organizational unit that performs management activities,such as personnel services,that benefit the entire organization is referred to as a(n)________________________________________.

Texoma Corporation Texoma Corporation is comprised of two divisions: X and Y.X currently produces and sells a gear assembly used by the automotive industry in electric window assemblies.X is currently selling all of the units it can produce (25,000 per year)to external customers for $25 per unit.At this level of activity,X's per unit costs are: Variable: Procuction                                 $\$ 7$ SG&A                                        2 Fixed: Prochuction                                 6 SG&A                                         5 Y Division wants to purchase 5,000 gear assemblies per year from X Division.Y Division currently purchases these units from an outside vendor at $22 each. Refer to Texoma Corporation.What is the minimum price per unit that X Division could accept from Y Division for 5,000 units of the gear assembly and be no worse off than currently?

The algebraic method

A service department includes which of the following? $\text {\underline{Payroll } }$                  $\text {\underline{Production } }$

A responsibility accounting system should include the revenues and costs under a division manager's control.

The direct method of service department cost allocation allows a partial recognition of reciprocal relationships among service departments before assigning costs to revenue-producing areas.