Exam 11: Responsibility Accounting, Investment Centres, and Transfer Pricing

Simon Corporation reported a return on investment of 15%, a capital turnover of 10, and income of $200,000. On the basis of this information, the company's invested capital was:

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

The following data pertain to Mason's Creek Winery: Income \ 10,500,000 Sales Revenue 50,000,000 Average invested capital 60,000,000 Required: Calculate Mason's Creek Winery's sales margin, capital turnover, and ROI

Mobile Minx Incorporated is in the process of overhauling the performance evaluation system for its Mississauga Manufacturing Division, which produces and sells materials that are popular in the textiles industry. Which of the following is least likely to be chosen to evaluate the overall operations of the Mississauga Division?

Fog City Retail operates a retail store in Mississauga, Oakville, and Burlington. The following information relates to the Mississauga facility: ▪ The store sold 65,000 units at $18.00 each, after having purchased the units from various suppliers for $12.50. Mississauga salespeople are paid a 5% commission based on gross sales dollars. ▪ Mississauga's sales manager oversees the placement of local advertising contracts, which totalled $54,000 for the year. Local property taxes amounted to $14,500. ▪ The sales manager's $65,000 salary is set by Mississauga's store manager. In contrast, the store manager's $134,000 salary is determined by Fog City's vice president. ▪ Mississauga incurred $6,800 of other noncontrollable costs along with $10,000 of income tax expense. ▪ Nontraceable (common) corporate overhead totalled $68,000. ▪ Fog City's corporate headquarters is located in Burlington, and the company uses responsibility accounting to evaluate performance. Required: Prepare a segmented income statement for the Mississauga store, being sure to disclose the segment contribution margin, the segment profit margin, and net income.

Laissez Faire has two divisions: the Cologne Division and the Bottle Division. The Bottle Division produces containers that can be used by the Cologne Division. The Bottle Division's variable manufacturing cost is $2, shipping cost is $0.10, and the external sales price is $3. No shipping costs are incurred on sales to the Cologne Division, and the Cologne Division can purchase similar containers in the external market for $2.60. The maximum amount the Cologne Division would be willing to pay for each bottle transferred would be:

Delta Deluxe Incorporated, which produces auto parts in Canada, has a very strong local market for Part No. 85. The variable production cost is $30, and the company can sell its entire supply domestically for $100. The tax rate is 25%. Alternatively, Delta Deluxe can ship the part to a division that is located in Tennessee, to be used in a product that the Tennessee division will distribute throughout the Southern U.S. Information about the Tennessee product and the division's operating environment follows. Selling price of final product: $500 Shipping fees to import part no. 85: $25 Labor, overhead, and additional material costs of final product: $250 Import duties levied on part no. 85 (to be paid by the Tennessee division): 15% of transfer price Tennessee tax rate: 30% Based on Canadian and U.S. tax laws, the company has established a transfer price for Part No. 85 equal to the European market price. Assume that the Tennessee division can obtain Part No. 85 in the U.S. for $150. Required: A. If you were the head of the Tennessee division, would you be better off financially to conduct business with your Canadian division or buy Part No. 85 locally? Why? Show computations. B. Delta Deluxe's accounting department has figured that the company will make $66.40 for each unit transferred and used in the Tennessee division's product. Rather than proceed with a transfer, would the Company be better off to sell its goods domestically and allow the Tennessee division to acquire Part No. 85 in the U.S.? Show computations for both Canadian and Tennessee operations to support your answer. C. Generally speaking, when tax rates differ between countries, what income strategy should a company use in setting its transfer prices? If the seller is in a low tax-rate country, what type of price should it set? Why?

The following data pertain to the Oxnard Division of Kemp Company: Divisional contribution margin \ 700,000 Profit margin controllable by the divisional manager 320,000 Profit margin traceable to the division 294,400 Average asset investment 1,280,000 The Company uses responsibility accounting concepts when evaluating performance, and Oxnard's division manager is contemplating the following three investments. He can invest up to $400,000. No. 1 No. 2 No. 3 Cost \ 250.000 S300,000 \ 400.000 Expected income 50.000 54.000 96.000 Required: A. Calculate the ROIs of the three investments. B. What is the division manager's current ROI, computed by using responsibility accounting concepts? C. Which of the three investments would be selected if the manager's focus is on Oxnard's divisional performance? Why? D. If Kemp has an imputed interest charge of 22%, compute the residual income of investment no. 3. Is this investment attractive from Oxnard's perspective? From Kemp's perspective? Why?

Decentralized firms can delegate authority by structuring an organization into responsibility centres. Which of the following organizational segments is most like a totally independent, standalone business where managers are expected to "make it on their own?"

Excel Corporation has three divisions to service geographic areas across Canada: Vancouver, Montreal, and Toronto. Data for the company and for these divisions follow (in '000s). Variable costs as a percentage of service revenue are: Vancouver, 16.67%; Montreal, 9%; and Toronto, 60%. Required: A. Complete the segmented income statement for Excel Corporation. B. Evaluate the three segment managers for consideration of a pay raise. Base the managers' performance on an appropriate measure, and rank their performance with respect to absolute dollars and as a percentage of service revenue. What causes any difference in rankings between the two approaches?

Branson Corporation manufactures decorative, sculpted accessories that are sold by interior decorators and home furnishing stores. The following situation concerns two Branson employees: Deborah Philbun, head of the company's Billing Department, and Gary Bitner, the firm's general manager. Philbun's Billing Department makes heavy use of hourly employees and is evaluated as a cost centre. Understanding the need for prompt collection of receivables, Philbun strives to run a first-class operation. Philbun also understands the need to contribute in a big way to Branson's financial performance so she continually strives to minimize Billing Department expenses. Unfortunately, Philbun experienced a heated discussion with Bitner several weeks ago, the subject being the shoddy operation that she is running. Bitner complained loudly about the lack of timely billings to customers and the general lack of attention to detail, as many complaints have surfaced about erroneous invoices and customer statements. Required: A. What is meant by the term "responsibility accounting?" B. What measure(s) of performance would companies normally use to evaluate a cost-centre manager? C. Does Bitner have a valid reason to be upset with Philbun? Given the nature of the Billing Department, did Deborah err in her quest to minimize expenses? Explain. D. Is it likely that the Billing Department could be evaluated as a profit centre? Why?

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.

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

CableTech's Suburban Division is currently purchasing a part from an outside supplier. The company's Metro Division, which has no excess capacity, makes and sells this part for external customers at a variable cost of $20 and a selling price of $32. If Metro begins sales to Suburban, it (1) will use the general transfer-pricing rule and (2) will be able to reduce variable cost on internal transfers by $4. On the basis of this information, Metro would establish a transfer price of:

Seaway Hotels owns numerous hotels on many of the islands in the thousand islands region of the St. Lawrence Seaway. The company's performance reporting system is structured around the firm's organizational structure, with information flowing from operating departments at a particular property and later respectively grouped by individual hotel, island operation (i.e., division), and the company as a whole. Which of the following best depicts the detail level of the information given to a department manager versus that reported to a company vice-president? 1. Somewhat detailed Somewhat detailed 2. Somewhat detailed Somewhat summarized 3. Somewhat summarized Somewhat detailed 4. Somewhat summarized Somewhat summarized 5. Extremely vague Extremely detailed

Kanata Division reported a residual income of $100,000 for the year just ended. The division had $6,000,000 of invested capital and $500,000 of income. On the basis of this information, the imputed interest rate was:

All of the following actions will increase ROI except:

Sunrise Corporation has a return on investment of 15%. Recently, the Bottling Division reported the following: ROI 13\% Residual Income 750,000 The Bottling Division is contemplating a massive new investment that will (1) reduce divisional ROI and (2) produce $120,000 of residual income. If Sunrise Corporation wants to strive for goal congruence, the investment:

Alexandra Corp. uses an imputed interest rate of 14% in the calculation of residual income. The modeling division, which is part of Alexandra, had invested capital of $1,300,000 and an ROI of 16%. On the basis of this information, the modeling division's residual income was:

The South American Division of a multinational manufacturing organization would likely be classified as a(n):