Exam 13: Investment Centers and Transfer Pricing

Excel Division reported a residual income of $200,000 for the year just ended. The division had $8,000,000 of invested capital and $1,000,000 of income. On the basis of this information, the imputed interest rate was:

The external market price transfer-pricing method can lead to dysfunctional decision-making behavior by managers.

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

Underwood Company uses cost-based transfer pricing. Its Food Processing Division has a standard variable cost of $8.50 per case and allocated fixed overhead of $2.25. The Processing Division, which has excess capacity, sells its output to external customers for $12.00 per case. If Underwood uses variable costs as its base, the transfer price charged to its Retail Division should be:

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

Signature Scents 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:

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:

Imputed interest can best be described as:

Sales margin shows:

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

Underwood Company uses cost-based transfer pricing. Its Food Processing Division has a standard variable cost of $8.50 per case and allocated fixed overhead of $2.25. The Processing Division, which has excess capacity, sells its output to external customers for $12.00 per case. If Underwood uses full (or absorption) cost as its base, the transfer price charged to its Retail Division should be:

Transfer prices can be based on:

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 capital turnover is:

The Little Rock Division of Classics Companies currently reports a profit of $3.6 million. Divisional invested capital totals $9.5 million; the imputed interest rate is 12%. On the basis of this information, Little Rock's residual income is:

Standard costs rather than actual costs should be used in transfer-pricing methods because:

Cunningham, Inc., which produces electronic parts in the United States, has a very strong local market for part no. 54. The variable production cost is $40, and the company can sell its entire supply domestically for $110. The U.S. tax rate is 30%. Alternatively, Cunningham can ship the part to a division that is located in Switzerland, to be used in a product that the Swiss division will distribute throughout Europe. Information about the Swiss product and the division's operating environment follows. Selling price of final product: $400 Shipping fees to import part no. 54: $20 Labor, overhead, and additional material costs of final product: $230 Import duties levied on part no. 54 (to be paid by the Swiss division): 10% of transfer price Swiss tax rate: 40% Based on U.S. and Swiss tax laws, the company has established a transfer price for part no. 54 equal to the U.S. market price. Assume that the Swiss division can obtain part no. 54 in Switzerland for $125. Required: A. If you were the head of the Swiss division, would you be better off financially to conduct business with your U.S. division or buy part no. 54 locally? Why? Show computations. B. Cunningham's accounting department has figured that the company will make $66.40 for each unit transferred and used in the Swiss division's product. Rather than proceed with a transfer, would Cunningham be better off to sell its goods domestically and allow the Swiss division to acquire part no. 54 in Switzerland? Show computations for both U.S. and Swiss 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?

Kendall Corporation has two divisions: Phoenix and Tucson. Phoenix 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 Tucson. 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 Phoenix's divisional manager likely react to the decision to transfer condensers to Tucson? Show computations to support your answer. B. How would Tucson'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 Tucson? By how much?

The following information relates to the Atlas Division of Global Enterprises: Interest rate on debt capital 8\% Cost of equity capital 12\% Market value of debt capital \ 50 million Market value of equity capital \ 80 million Income tax rate 30\% On the basis of this information, Atlas's weighted-average cost of capital is closest to:

Consider the following statements about transfer pricing: I. Income taxes and import duties are an important consideration when setting a transfer price for companies that pursue international commerce. II. Transfer prices cannot be used by organizations in the service industry. III. Transfer prices are totally cost-based in nature, not market-based. Which of the above statements is(are) true?

The basic idea behind residual income is to have a division maximize its: