Exam 13: Investment Centers and Transfer Pricing

Green Auto's Northern Division is currently purchasing a part from an outside supplier. The company's Southern Division, which has no excess capacity, makes and sells this part for external customers at a variable cost of $19 and a selling price of $31. If Southern begins sales to Northern, it (1) will use the general transfer-pricing rule and (2) will be able to reduce variable cost on internal transfers by $3. On the basis of this information, Southern would establish a transfer price of:

Economic value added (EVA) analysis indicates:

A division's return on investment may be improved by increasing:

For the period just ended, United Corporation's Delta Division reported profit of $31.9 million and invested capital of $220 million. Assuming an imputed interest rate of 12%, which of the following choices correctly denotes Delta's return on investment (ROI) and residual income? ROI Residual Income A. 12.0\% \ 5.5 million B. 12.0\% \ 5.5 million C. 14.5\% \ 5.5 million ) D. 14.5\% \ 5.5 million E. 14.5\% \ 26.4 million

Cheney Corporation produces goods in the United States, to be sold by a separate division located in Italy. More specifically, the Italian division imports units of product X34 from the U.S. and sells them for $950 each. (Imports of similar goods sell for $850.) The Italian division is subject to a 40% tax rate whereas the U.S. tax rate is only 30%. The manufacturing cost of product X34 in the United States is $720. Furthermore, there is a 10% import duty computed on the transfer price that will be paid by the Italian division and is deductible when computing Italian income. Tax laws of the two countries allow transfer prices to be set at U.S. manufacturing cost or the selling prices of comparable imports in Italy. Required: Analyze the profitability of the U.S. division, the Italian division, and Cheney as a whole to determine if the overall corporation would be better off if transfers took place at (1) U.S. manufacturing cost or (2) the selling price of comparable imports.

The Pro Division of Custom Industries is in need of a particular service. The service can be obtained from another division of Custom at "cost," with cost defined as the summation of variable cost ($9) and fixed cost ($3). Alternatively, Pro can secure the service from a source external to Custom for $10. Which of the following statements is true?

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 residual income is:

The following data pertain to Darrell Industries: Interest rate on debt capital: 9% Cost of equity capital: 12% Before-tax operating income: $35 million Market value of debt capital: $60 million Market value of equity capital: $120 million Total assets: $150 million Income tax rate: 30% Total current liabilities: $15 million Required: A. Compute Darrell's weighted-average cost of capital. B. Compute Darrell's economic value added. C. Briefly explain the meaning of economic value added.

The following information relates to Hudston, Inc.: Total assets \ 9,000,000 After-tax operating income 1,500,000 Current liabilities 800,000 If the company has a 10% weighted-average cost of capital, its economic value added would be:

Given that ROI measures performance over a period of time, invested capital would most appropriately be figured by using:

The following data pertain to Nedra Company for 20x1: Sales revenue \ 1,000,000 Cost of goods sold 550,000 Operating expenses 400,000 Average invested capital 500,000 Required: A. Calculate the company's sales margin, capital turnover, and return on investment for 20x1. B. If the sales and average invested capital remain the same, to what level would total costs and expenses have to be reduced in 20x2 to achieve a 15% return on investment? C. Assume that costs and expenses are reduced, as calculated in requirement "B." Calculate the firm's new sales margin. D. Suggest two possible actions that will improve the company's capital turnover.

BFF Corporation uses an imputed interest rate of 13% in the calculation of residual income. Division X, which is part of BFF, had invested capital of $1,200,000 and an ROI of 16%. On the basis of this information, X's residual income was:

The following data pertain to Corkscrew Corporation: Income \ 8,000,000 Sales revenue 40,000,000 Average invested capital 50,000,000 Required: Calculate Corkscrew Corporation's sales margin, capital turnover, and return on investment.

The income calculation for a division manager's ROI should be based on:

To partially eliminate the problems that are associated with the short-term focus of return on investment, residual income, and EVA, the performance of a division's major investments is commonly evaluated through: