Exam 13: Investment Centers and Transfer Pricing

The market value of Glenwood's debt and equity capital totals $180 million, 80% of which is equity related. An analysis conducted by the company's finance department revealed a 7% after-tax cost of debt capital and a 10% cost of equity capital. On the basis of this information, Glenwood's weighted-average cost of capital:

The biggest challenge in making a decentralized organization function effectively is:

Which of the following elements is not used in the calculation of economic value added for an investment center?

Sahara Corporation has no excess capacity. If the firm desires to implement the general transfer-pricing rule, opportunity cost would be equal to:

The maximization of profits of the buying division is one of the goals that should be pursued when setting transfer prices.

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? Attractive to Attractive to Attractive Magellan: ROI Magellan: RI to Global A. Yes Yes Yes B. Yes No No C. Yes No Yes D. No Yes Yes E. No Yes No

Which of the following measures of performance is, in part, based on the weighted-average cost of capital?

Thurmond, Inc. has two divisions, one located in New York and the other located in Arizona. New York sells a specialized circuit to Arizona and just recently raised the circuit's transfer price. This price hike had no effect on either the volume of circuits transferred or on Arizona's decision of whether to acquire the circuit from either New York or from an external supplier. On the basis of this information, which of the following correctly shows the effect of the transfer price on divisional profit and overall company profit? New York Profit Arizona Profit Thurmond Profit A. Increase Decrease Increase B. Increase Decrease No Effect C. Decrease Increase No Effect D. Increase Increase Increase E. No Effect No Effect No Effect

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

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

Consider the following statements about residual income: I. Residual income incorporates a firm's cost of acquiring investment capital. II. Residual income is a percentage measure, not a dollar measure. III. If used correctly, residual income may result in division managers making decisions that are in their own best interest and not in the best interest of the entire firm. Which of the above statements is(are) true?

Weston Company had sales revenue and operating expenses of $5,000,000 and $4,200,000, respectively, for the year just ended. If invested capital amounted to $6,000,000, the firm's ROI was:

The amounts charged for goods and services exchanged between two divisions are known as:

Division A transfers a profitable subassembly to Division B, where it is assembled into a final product. A is located in a European country that has a high tax rate; B is located in an Asian country that has a low tax rate. Ideally, (1) what type of before-tax income should each division report from the transfer and (2) what type of transfer price should Division A set for the subassembly?

Capital turnover shows:

Although the general rule for transfer prices is the outlay cost plus opportunity cost, many companies instead use negotiated prices to price their goods and services. When are negotiated transfer prices used? Are such prices consistent or inconsistent with responsibility accounting? Explain.

The following data pertain to the Oliver Division of Kemper Company: The company uses responsibility accounting concepts when evaluating performance; Oliver'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 \ 300,000 \ 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 Oliver's divisional performance, as judged by ROI? Why? D. If Kemper has an imputed interest charge of 22%, compute the residual income of investment no. 3. If Oliver's Division manager is evaluated by residual income, is this investment attractive from Oliver's perspective? From Kemper's perspective? Why?

The following information pertains to Bishop Concrete: Sales revenue \ 1,500,000 Gross margin 600,000 Income 90,000 Invested capital 450,000 The company's imputed interest rate is 8%. The sales margin is:

Return on investment (ROI) and residual income (RI) are popular measures of divisional performance. Like any measure, there are disadvantages or weaknesses that are an inherent part of these tools. Briefly discuss a major weakness associated with each tool.

What practice best describes when divisional managers throughout an organization work together to achieve the organization's goals?