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

Department No. 8 of Brockville Corporation reported a segment contribution margin of $600,000. If the profit margin controllable by the segment manager and the segment profit margin were $210,000 and $175,000, respectively, fixed expenses controllable by segment manager are:

Kendall Corporation has two divisions: Calgary and Regina. Calgary currently sells a condenser to manufacturers of cooling systems for $520 per unit. Variable costs amount to $380, and demand for this product currently exceeds the division's ability to supply the marketplace. Kendall is considering another use for the condenser, namely, integration into an enhanced refrigeration system that would be made by Regina. Related information about the enhanced system follows. Selling price of refrigeration system: $1,285 Additional variable manufacturing costs required: $820 Transfer price of condenser: $490 Top management is anxious to introduce the enhanced system; however, unless the transfer is made, an introduction will not be possible because of the difficulty of obtaining condensers in the quality and quantity desired. The company uses responsibility accounting and ROI when measuring divisional performance, and awards bonuses to divisional management. Required: A. How would Calgary's divisional manager likely react to the decision to transfer condensers to Regina? Show computations to support your answer. B. How would Regina's divisional management likely react to the $490 transfer price? Show computations to support your answer. C. Assume that a lower transfer price is desired. What parties should be involved in setting the new price? D. From a contribution margin perspective, does Kendall benefit more if it sells the condensers externally or transfers the condensers to Regina? By how much?

The ROI calculation will indicate:

Consider the following data of Springwater Corporation's Western Division: Sales revenue \ 18,750,000 Capital turnover ? Average invested capital ? Sales margin 4\% Income ? Return on investment 15\% Residual income ? Springwater's imputed interest rate 12\% Required: A. Calculate Western's capital turnover B. Calculate Western's average invested capital. C. Calculate Western's income. D. Calculate residual income.

The Tooling Division of Lakes Costmetics reported a profit of $4.6 million. Divisional capital was $10.5 million and the imputed interest rate is 13%. Residual income must be:

When the managers of subunits throughout an organization strive to achieve the goals set by top management, the result is:

Fraser Corporation's Western Division is currently purchasing a part from an outside supplier. The company's Eastern Division, which has excess capacity, makes and sells this part for external customers at a variable cost of $32 and a selling price of $44. If the Eastern Division begins sales to the Western Division, it (1) will use the general transfer-pricing rule and (2) will be able to reduce variable cost on internal transfers by $6. If sales to outsiders will not be affected, the Eastern Division would establish a transfer price of:

On a segmented income statement, common fixed expenses will have an effect on a company's:

Lottery Company has two divisions, one located in Vancouver and the other located in Regina. Vancouver sells selected goods to Regina for use in various end products. Assuming that the transfer prices set by Vancouver do not influence the decisions made by the two divisions, which of the following correctly describes the impact of the transfer prices on divisional profits and overall company profit? Vancouver Profit Regina Profit Lottery Company Profit 1 Affected Affected Affected 2 Affected Affected Not affected 3 Affected Not affected Affected 4 Not affected Not affected Affected 5 Not affected Not affected Not affected

Consider the following situation: The marketing manager of Gilroy Incorporated accepted a rush order for a nonstock item from a valued customer. The manager filed the necessary paperwork with the production department, and a production manager did the same with purchasing for needed raw materials. Unfortunately, a purchasing clerk temporarily lost the paperwork; by the time it was found, it was too late to order from Gilroy's regular supplier. A new supplier was located that quoted a very attractive price. The materials soon arrived and were found to be of poor quality, thus giving rise to a favourable materials price variance, an unfavourable materials quantity variance, and an unfavourable labour efficiency variance. These latter two variances, based on normal practice, appeared on the production manager's performance report for the period just ended. Required: A. Given that the company uses a responsibility accounting system, should the production manager be penalized for poor performance? Briefly discuss, keeping in mind that a production manager is generally in a very good position to control material usage and labour efficiency. B. Should anything be done to correct the situation? If "yes," briefly explain.

Wireless Incorporated provides a variety of telecommunications services to residential and commercial customers from its massive campus-like headquarters in suburban Orlando. For a number of years the firm's maintenance group has been organized as a cost centre, rendering services free of charge to the company's user departments (sales, billing, accounting, marketing, research, and so forth). Requests for maintenance have grown considerably, and demand is approaching the point where quality and timeliness of services provided are becoming an issue. As a result, management is studying whether the maintenance operation should be converted from a cost centre to a profit centre, with users to be billed for services performed. Required: A. Differentiate between a cost centre and a profit centre. How is each of these centres evaluated? B. What will likely happen to the number of user service requests if the company makes the switch to a profit-centre form of organization? Why? C. Assume that a user department has requested a particular service, one that is time consuming and costly to perform. The maintenance group's actual cost incurred in providing this service is $17,800, and the user has agreed to pay $20,800 if the switch to a profit centre is made. If this case is fairly typical within the firm, which of the two forms of organization (cost centre or profit centre) will result in a more responsive, service-oriented maintenance group for Wireless? Why?

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

When an organization allows divisional managers to be responsible for short-term loans and credit, the division's invested capital should be measured by

A cost pool is:

Gamma Division of Vaughan Corporation produces electric motors, 20% of which are sold to Vaughan's Omega Division and 80% to outside customers. Vaughan treats its divisions as profit centres 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 May 31, based on a capacity of 60,000 units, are as follows: $\begin{array}{|l|c|r|}\hline& \underline{ \text { Omega} }& \underline{ \text {Outsiders} }\\\hline \text { Sales } & \$ 660,000 & \$ 5,760.000 \\\hline \text { Less: Variable costs } & \underline{660,000} & \underline{2.640 .000} \\\hline \text { Contribution margin } & \$ \cdots & \$ 3.120,000 \\\hline \text { Less: Fixed cosis } & \underline{175,000} &\underline{900,000}\\\hline \text { Operating income (loss) } & \$(175,000) & \$ 2,220,000 \\\hline\\\hline \text { Unitsales }&12,000 & 48.000 \\\hline\end{array}$ Gamma can sell the 12,000 units shown above to an outside customer at $80 per unit. Omega can purchase the units it needs from an outside supplier for $92 each. Required: 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.) B. Assume that Vaughan 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.

Which of the following would be the best measure on which to base a segment manager's performance evaluation for purposes of granting a bonus?

Midland Division, which is part of Courtyard Enterprises, recently reported a sales margin of 30%, ROI of 21%, and residual income of $220,000. Courtyard uses an imputed interest rate of 10%. Required: A. Briefly define sales margin, capital turnover, and return on investment. B. Compute Midland's capital turnover and invested capital. C. Ignoring your work in requirement "B," assume that invested capital amounted to $2,500,000. On the basis of this information, calculate income and sales revenue.

Controllable costs, as used in a responsibility accounting system, consist of:

A segment contribution margin would reflect the impact of:

A manufacturer's raw material purchasing department would likely be classified as a: