Responsibility Acctg, Transfer Pricing & GP Analysis

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Responsibility Accounting & Transfer Pricing

RETURN ON INVESTMENT Return on Investment Computation Based on Operating Income 1. The following selected data pertain to the belt division of Allen Corp. for last year: Sales $500,000 Average operating assets $200,000 Net operating income $80,000 Turnover 2.5 Minimum required return 20% How much is the return on investment? (M) a. 40% c. 20% b. 16% d. 15% AICPA, Adapted 2. Harstin Corporation has provided the following data: Sales Gross margin Net operating income Stockholders' equity Average operating assets Residual income The return on investment for the past year was: (M) a. 28%. c. 36%. b. 20%. d. 8%.

$625,000 70,000 50,000 90,000 250,000 20,000 G & N 9e

Investment 3. Apple Division of the American Fruit Co. had the following statistics for 2002: Assets available for use $1,000,000 Residual income 100,000 Return on investment 15% If the manager of Apple Division is evaluated based on return on investment, how much would she be willing to pay for an investment that promises to increase net segment income by $50,000? (M) a. $50,000 c. $1,000,000 b. $333,333 d. $500,000 Barfield

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Required Peso Sales 4. The manager of the Strong Division of Powers Company expects the following results in 2003 (pesos in millions); Sales P49.60 Variable costs (60%) 29.76 Contribution margin P19.84 Fixed costs 12.00 Profit P 7.84 Investment Plant equipment P19.51 Working capital 14.88 P34.39 ROI (P7.84/P34.39) 22.80% The division has a target ROI of 30%, and the manager has asked you to determine how much sales volume the division would need to reach. He states that the sales mix is relatively constant so variable costs should be close to 60% of sales, fixed cost and plant and equipment should remain constant, and working capital (cash, receivables and inventories) should vary closely with sales in the percentage reflected above. The peso sales that the division needs in order to reach the 30% ROI target is (D) A. P19,829,032. C. P44,373,871 B. P57,590,322 D. P59,510,000 Pol Bobadilla Dupont Model Sensitivity Analysis 5. If the operating income margin of 0.3 stayed the same and the operating asset turnover of 5.0 increased by 10 percent, the ROI (M) a. increase by 10 percent d. remain the same b. decrease by 10 percent e. increase to 1.5. c. increase by 15 percent H&M 6. If the investment turnover increased by 20% and ROS decreased by 30%, the ROI would (M) a. Increase by 20%. c. Increase by 4%. b. Decrease by 16%. d. None of the above. D, L & H 9e 7. If the investment turnover decreased by 20% and ROS decreased by 30%, the ROI would (M) a. Increase by 30%. c. Decrease by 44%. b. Decrease by 20%. d. None of the above. D, L & H 9e

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MANAGEMENT ADVISORY SERVICES 8. Company L had its operating asset turnover increased by 50% and the operating income margin increased by 50%. Company U had its operating asset turnover increased by 30% and the operating income margin decreased by 30%. What changes are expected for ROI of Company L and Company U, respectively? (M) Pol Bobadilla A. B. C. D. Company L 50% increase 125% increase 225% increase 125% increase Company U 9% decrease 9% decrease No change No change RESIDUAL INCOME Residual Income Computation 9. REB Service Co. is a computer service center. For the month of May 1995, REB had the following statistics: Sales $450,000 Operating income 25,000 Net profit after taxes 8,000 Total assets 500,000 Shareholders’ equity 200,000 Cost of capital 6% Based on the above information, which one of the following statements is correct? REB has a (M) a. ROI of 4% c. ROI of 1.6% CMA 0695 3-20 b. Residual income of $(5,000) d. Residual income of $(22,000) Target Cost 10. James Webb is the general manager of the Industrial Park Division, and his performance is measured using the residual income method. Webb is reviewing the following forecasted information for the division for next year. Category Amount (thousands) Working capital $ 1,800 Revenue 30,000 Plant and equipment 17,200 To establish a standard of performance for the division’s manager using the residual income approach, four scenarios are being considered. Scenario 1 assumes an imputed interest charge of 15% and a target residual income of $2,000,000. Scenario 2 assumes an imputed interest charge of 12% and a target residual income of $1,500,000. Scenario 3 assumes an imputed interest charge of 18% and a target residual income of $1,250,000. Scenario 4 assumes an imputed interest charge of 10% and a target residual income of $2,500,000. CHIANG KAI SHEK COLLEGE

Responsibility Accounting & Transfer Pricing Which of the scenarios assumes the lowest maximum cost? (M) a. Scenario 1. c. Scenario 3. b. Scenario 2. d. Scenario 4.

Gleim

RETURN ON INVESMENT, MINIMUM REQUIRED RATE OF RETURN & RESIDUAL INCOME Minimum Required Rate of Return & Residual Income Return on Investment 11. Fortree products have a residual net income of P1.8 million. If the imputed interest rate is 16%, compute the ROI (M) a. 5% c. 15% b. 10% d. not listed RPCPA 1091 12. Z Division of XYZ Corp. has the following information for 2002: Assets available for Target rate of return Residual income What was Z Division's return on investment for 2002? (M) a. 15% c. 25% b. 10% d. 20%

$1,800,000 10% $270,000 Barfield

13. Pasta Division of We Make Italian, is evaluated based on residual income generated. For 2002, the Division generated a residual income of $2,000,000 and net income of $5,000,000. The target rate of return for all divisions of We Make Italian is 20 percent. For 2002, what was the return on investment for Pasta Division? (M) a. 40% c. 20% b. 13% d. 33% Barfield Return on Investment, Minimum Required Rate of Return & Residual Income Investment Cost 14. In the X Division of S Co., 2002 segment income exceeded 2002 residual income by $15,000. Also for 2002, return on investment exceeded the target rate of return by 10 percent. What was the level of investment in the X Division for 2002? (M) a. $15,000 b. $100,000 c. $150,000 d. An answer can't be determined from this information. Barfield

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Return on Investment & Residual Income & Units Sold Questions 15 thru 17 are based on the following information. G & N 9e The Axle Division of LaBate Company makes and sells only one product. Annual data on the Axle Division's single product follow: Unit selling price $50 Unit variable cost $30 Total fixed costs $200,000 Average operating assets $750,000 Minimum required rate of return 12%

19. Watne Company has two divisions, M and N. Information for each division is as follows: Net earnings for division $65,000 Asset base for division $300,000 Target rate of return 18% Operating income margin 20% Weighted average cost of capital 12% What is EVA for N? a. $36,000 c. $54,000 b. $29,000 d. $11,000 H&M

15. If Axle sells 16,000 units per year, the return on investment should be: (M) a. 12%. c. 16%. b. 15%. d. 18%.

20. Family Company has two divisions, Ma and Pa. Information for each division is as follows:

16. If Axle sells 15,000 units per year, the residual income should be: (M) a. $30,000. c. $50,000. b. $100,000. d. $10,000.

G & N 9e

17. Suppose the manager of Axle desires an annual residual income of $45,000. In order to achieve this, Axle should sell how many units per year? (M) a. 14,500. c. 18,250. b. 16,750. d. 19,500. G & N 9e ECONOMIC VALUE-ADDED EVA Based on Operating Income 18. Division A had the following information: Asset base in Division A Net income in Division A Operating income margin for Division A Target ROI Weighted-average cost of capital What is EVA for Division A? a. $120,000 b. $96,000 c. $15,000

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$800,000 $100,000 20% 15% 12% d. $4,000 e. $(20,000) H&M

Ma Net earnings for division P20,000 Asset base for division P50,000 Target rate of return 15% Operating income margin 10% Weighted-average cost of capital 12% What is the Economic Value Added for Ma and Pa, respectively? A. P20,000, P36,000 C. P12,500; P11,000 B. P14,000; P29,000 D. P20,000; P29,000

Pa P65,000 P300,000 18% 20% 12%

Pol Bobadilla

EVA Based on Operating Income after Tax EVA - Given Operating Income Before Tax 21. McKenzie Oil had $440,000 in operating income before interest and taxes in the last year. McKenzie is in the 40% tax bracket. If capital employed by McKenzie was equal to $300,000, and the company's weighted-average after-tax cost of capital is 15%, what is McKenzie's Economic Value Added? A. $131,000 C. $198,000 B. $140,000 D. $219,000 Gleim 22. Valecon Co. reported the following information for the year just ended: Segment A Segment B Pre-tax operating income $ 4,000,000 $ 2,000,000 Current assets 4,000,000 3,000,000 Long-term assets 16,000,000 13,000,000 Current liabilities 2,000,000 1,000,000

Segment C $3,000,000 4,000,000 8,000,000 1,500,000 Page 3 of 22

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If the applicable income tax rate and after-tax weighted-average cost of capital for each segment are 30% and 10%, respectively, the segment with the highest economic value added (EVA) is (M) A. Segment A. C. Segment C. Gleim B. Segment B. D. Not determinable from this information. 23. Assume Avionics Industries reported at year-end that operating income before taxes for the year equaled $2,400,000. Long-term debt issued by Avionics has a coupon rate equal to 6%, and its cost of equity is 8%. The book value of the debt currently equals its fair value, and the book value of the equity capital for Avionics is $900,000 less than its fair value. Current assets are listed at $2,000,000 and long-term assets equal $9,600,000. The claims against those assets are in the form of $1,500,000 in current liabilities and $2,200,000 in long-term liabilities. The income tax rate for Avionics is 30%. What is the economic value added (EVA)? (D) a. $731,240 c. $1,668,760 b. $948,760 d. $1,680,000 Gleim Questions 24 thru 26 are based on the following information. Horngren Waldorf Company has two sources of funds: long-term debt with a market and book value of $10 million issued at an interest rate of 12%, and equity capital that has a market value of $8 million (book value of $4 million). Waldorf Company has profit centers in the following locations with the following operating incomes, total assets, and total liabilities. The cost of equity capital is 12%, while the tax rate is 25%. Operating Income Assets Current Liabilities St. Louis $ 960,000 $ 4,000,000 $ 200,000 Cedar Rapids $1,200,000 $ 8,000,000 $ 600,000 Wichita $2,040,000 $12,000,000 $1,200,000 24. What is the EVA for St. Louis? (M) a. $255,740 c. $392,540 b. $327,460 d. $720,000 25. What is the EVA for Cedar Rapids? (M) a. $135,580 b. $220,000

c. $234,000 d. $305,000

26. What is the EVA for Wichita? (M) a. $450,000 b. $1,530,000

c. $414,360 d. $1,115,640

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EVA Computation – Given Operating Income after Tax 27. Samovar Company has operating income after taxes of $50,000. It has $200,000 of equity capital, which has an after-tax weighted-average cost of 12%. Samovar also has $10,000 of current liabilities (noninterest-bearing) and no long-term liabilities. What is the company's economic value added (EVA) for the period? A. $(24,000) C. $24,000 B. $(26,000) D. $26,000 Gleim 28. Ralph, an investor, is interested in loaning money to a secure corporation. He always bases his decision on the company with the largest economic value added (EVA). Ralph has narrowed his choices down to four, and has collected the following information: Operating Income after Tax Equity Capital WACC Current Liabilities Company A $50,000 $200,000 12% $10,000 Company B 60,000 150,000 20% 18,000 Company C 45,000 220,000 10% 30,000 Company D 55,000 250,000 15% 5,000 Based on largest EVA and assuming that none of the companies have any long-term liabilities, which company should Ralph invest in? A. Company A. C. Company C. B. Company B. D. Company D. Gleim Equity Value Creation, Market Value Added & Total Shareholder Return Questions 29 thru 31 are based on the following information. Gleim Semibar Co. reports net income of $630,000. The information below or the year just ended is also available: Shareholders’ equity Share price Shares outstanding Cost of equity Dividends per share 29. Equity value creation is a. $630,000 b. $448,000

January 1 $4,200,000 $25 400,000 10%

December 31 $4,480,000 $30 400,000 10% $1.00

c. $420,000 d. $210,000 Page 4 of 22

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30. The market value added (MVA) is a. $2,000,000 b. $1,720,000

c. $400,000 d. $280,000

31. The total shareholder return is a. 24% b. 20%

c. 16.67% d. 4%

SENSITIVITY ANALYSIS 32. Apple Division of the American Fruit Co. had the following statistics for 2002: Assets available for use $1,000,000 Residual income 100,000 Return on investment 15% If expenses increased by $20,000 in Apple Division, (E) a. return on investment would decrease. c. the target rate of return would decrease. b. residual income would increase. d. asset turnover would decrease. Barfield 33. Division A had the following information: Asset base in Division A $800,000 Net income in Division A $100,000 Operating income margin for Division A 20% Target ROI 15% Weighted-average cost of capital 12% If the asset base is decreased by $200,000, with no other changes, the return on investment of Division A will be a. 100.0% d. 62.5% b. 16.7% e. 20.0% c. 600.0% H&M

Comprehensive Questions 34 through 38 are based on the following information. AICPA 1186 II-22 to 26 Oslo Co.’s industrial photo-finishing division, Rho, incurred the following costs and expenses in 1992: Variable Fixed Direct materials $200,000 Direct labor 150,000 Factory overhead 70,000 $42,000 General, selling and administrative 30,000 48,000 Totals $450,000 $90,000 During 1992, Rho produced 300,000 units of industrial photo-prints, which were sold for $2.00 each. Oslo’s investment in Rho was $500,000 and $700,000 at January 1, 1992 and December 31, 1992, respectively. Oslo normally imputes interest on investments at 15% of average invested capital. 34. For the year-ended December 31, 1992, Rho’s return on average investment was a. 15.0% c. 8.6% b. 10.0% d. (5.0%) 35. Assume that net operating income was $60,000 and that average invested capital was $600,000. For the year ended December 31, 1992, Rho’s residual income (loss) was a. $150,000 c. $(45,000) b. $60,000 d. $(30,000) 36. How many industrial photo-print units did Rho have to sell in 1992 to break-even? a. 180,000 c. 90,000 b. 120,000 d. 60,000 37. For the year ended December 31, 1992, Rho’s contribution margin was a. $250,000 c. $150,000 b. $180,000 d. $60,000

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38. Assume the variable cost per unit was $1.50. Based on Rho’s 1992 financial data, and an estimated 1993 production of 350,000 units of industrial photo-prints, Rho’s estimated 1993 total costs and expenses will be a. $525,000 c. $615,000 b. $540,000 d. $630,000 Page 5 of 22

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Questions 39 through 51 are based on the following information. Segment A Segment B Segment C Net income $ 5,000 Sales 60,000 $750,000 $135,000 Investment 24,000 500,000 45,000 Net income as % of sales Turnover of investment ROI 20% Minimum ROI-dollars Minimum ROI - % 20% 6% Residual income -0$2,250 39. For Segment B, net income as a percentage of sales is a. 8% c. 4% b. 6.67% d. 10% 40. For Segment C, net income as a percentage of sales is a. 5% c. 4% b. 6.67% d. 20% 41. For Segment C, the turnover of investment is a. 3 c. 2.5 b. 1.5 d. 4 42. For Segment D, the turnover of investment is a. 3 c. 2.5 b. 1.5 d. 4 43. For segment A, ROI is a. 6% b. 20%

c. 20.8% d. 7.5%

44. For segment B, ROI is a. 6% b. 20.8%

c. 20% d. 7.5%

CHIANG KAI SHEK COLLEGE

Gleim Segment D $ 90,000 1,800,000 7.5% $120,000 -

45. For segment A, the minimum dollar ROI is a. $30,000 b. $6,750

c. $4,800 d. $120,000

46. For Segment B, the minimum dollar ROI is a. $30,000 b. $6,750

c. $4,800 d. $120,000

47. For Segment C, the minimum dollar ROI is a. $30,000 b. $6,750

c. $4,800 d. $120,000

48. Assume that the minimum dollar ROI is $6,750 for Segment C. The minimum percentage of ROI is a. 20% c. 15% b. 6% d. 10% 49. In Segment D, the minimum percentage of ROI is a. 20% c. 15% b. 6% d. 10% 50. In Segment A, the residual income is a. $200 b. $12,000

c. $(30,000) d. $4,800

51. In Segment D, the residual income is a. $12,000 b. $(30,000)

c. $(60,000) d. $9,000

SEGMENTED INCOME STATEMENT Sales 52. During April, Division D of Carney Company had a segment margin ratio of 15%, a variable expense ratio of 60% of sales, and traceable fixed expenses of $15,000. Division D's sales were closest to: (M) a. $100,000. c. $33,333. b. $60,000. d. $22,500. G & N 9e

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MANAGEMENT ADVISORY SERVICES Segment Margin 53. Assume the following information for a product line: Sales revenue Variable manufacturing costs Direct fixed manufacturing costs Variable selling/administrative costs Direct fixed selling/admin. costs What is the segment margin of the product line? (E) a. $400,000 d. $275,000 b. $325,000 e. $215,000 c. $350,000

Responsibility Accounting & Transfer Pricing

$500,000 100,000 75,000 50,000 60,000

H&M

54. The data available for the current year are given below: Whole Co. Division 1 Division 2 Variable mfg. cost of goods sold $ 400,000 $ 220,000 $ 80,000 Unallocated costs (e.g., president’s salary) 100,000 Fixed costs controllable by Div. Managers (e.g., advertising, eng’g supervision costs) 90,000 50,000 40,000 Net revenue 1,000,000 600,000 400,000 Variable selling and administrative costs 130,000 70,000 60,000 Fixed costs controllable by others (e.g., depreciation, insurance) 120,000 70,000 50,000 Using the information presented above, the contribution by Division 1 was (M) a. $190,000 c. $310,000 b. $260,000 d. $380,000 CIA 1186 IV-17 55. A and B are autonomous divisions of a corporation. They have no beginning or ending inventories, and the number of units produced is equal to the number of units sold. Following is financial information relating to the two divisions. A B Sales $150,000 $400,000 Other revenue 10,000 15,000 Direct materials 30,000 65,000 Direct labor 20,000 40,000 Variable factory overhead 5,000 15,000 Fixed factory overhead 25,000 55,000 Variance S&A expense 15,000 30,000 Fixed S&A expense 35,000 60,000 CHIANG KAI SHEK COLLEGE

Central corporate expenses (allocated) 12,000 20,000 What is the total contribution to corporate profits generated by Division A before allocation of central corporate expenses? (M) a. $18,000 c. $30,000 b. $20,000 d. $80,000 CIA 1193 IV-20 Common Fixed Costs 56. Lyons Company consists of two divisions, A and B. Lyons Company reported a contribution margin of $50,000 for Division A, and had a contribution margin ratio of 30% in Division B, when sales in Division B were $200,000. Net income for the company was $25,000 and traceable fixed expenses were $40,000. Lyons Company's common fixed expenses were: (M) a. $85,000. c. $45,000. b. $70,000. d. $40,000. G & N 9e Company Net Income 57. Redding Company has two divisions with the following segment margins for the current year: Northern, $200,000; Southern, $400,000. Common expenses of the company are $50,000. What is Redding Company’s net income? (E) a. $150,000 d. $650,000 b. $550,000 e. $350,000 c. $600,000 H&M Comprehensive Questions 58 & 59 are based on the following information. H&M Barmore Company has the following information pertaining to its two divisions for 1995: Division A Division B Variable selling & administrative expenses $ 35,000 $ 45,000 Direct fixed manufacturing expenses 17,500 50,000 Sales 100,000 200,000 Direct fixed selling/admin. Expenses 15,000 35,000 Variable manufacturing expenses 20,000 50,000 Common expenses are $12,000 for 1995. 58. Common expenses are $12,000 for 1995. What is the segment margin for Division B? (E) a. $155,000 d. $20,000 b. $105,000 e. $8,000 c. $55,000 Page 7 of 22

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59. What is the net income for the Barmore Company? (E) a. $300,000 d. $32,500 b. $162,500 e. $20,500 c. $150,000

64. What is the segment margin for Division Y? (E) a. $310,000 d. $40,000 b. $210,000 e. $16,000 c. $110,000

Questions 60 & 61 are based on the following information. G & N 9e Canon Company has two sales areas: North and South. During last year, the contribution margin in the North Area was $50,000, or 20% of sales. The segment margin in the South was $15,000, or 8% of sales. Traceable fixed costs are $15,000 in the North and $10,000 in the South. During last year, the company reported total net income of $26,000.

Questions 65 thru 68 are based on the following information. G & N 9e Ieso Company has two stores: J and K. During November, Ieso Company reported a net income of $30,000 and sales of $450,000. The contribution margin in Store J was $100,000, or 40% of sales. The segment margin in Store K was $30,000, or 15% of sales. Traceable fixed expenses are $60,000 in Store J, and $40,000 in Store K.

60. The variable costs for the South Area for the year were: (M) a. $230,000. c. $162,500. b. $185,000. d. $65,000.

65. Sales in Store J totaled: (M) a. $400,000. b. $250,000.

c. $150,000. d. $100,000.

61. The total fixed costs (traceable and common) for Canon Company for the year were: (M) a. $49,000. c. $24,000. b. $25,000. d. $50,000.

66. Variable expenses in Store K totaled: (M) a. $70,000. b. $110,000.

c. $200,000. d. $130,000.

Questions 62 thru 64 are based on the following information. H&M Nauman Company has the following information pertaining to its two divisions for 1995: Division X Division Y Variable selling & administrative expenses $ 70,000 $ 90,000 Direct fixed manufacturing expenses 35,000 100,000 Sales 200,000 400,000 Direct fixed selling/admin. expenses 30,000 70,000 Variable manufacturing expenses 40,000 100,000 Common expenses are $24,000 for 1995.

67. The segment margin ratio in Store J was: (M) a. 16%. c. 40%. b. 24%. d. 60%.

62. What is the net income for the Nauman Company? (E) a. $600,000 d. $65,000 b. $325,000 e. $41,000 c. $300,000 63. What is the segment margin for Division X? (E) a. $90,000 d. $160,000 b. $25,000 e. $125,000 c. $1,000 CHIANG KAI SHEK COLLEGE

68. Ieso Company's total fixed expenses for the year were: (M) a. $40,000. c. $140,000. b. $100,000 d. $170,000. Sensitivity Analysis Questions 69 through 72 are based on the following information. CIA 1196 III-97 to 100 The segmented income statement for a retail company with three product lines is presented below: Total Product Product Product Company Line 1 Line 2 Line 3 Volume (in units) 20,000 28,000 50,000 Sales revenue $2,000,000 $800,000 $700,000 $500,000 Costs & expenses: Administrative $ 180,000 $ 60,000 $ 60,000 $ 60,000 Advertising 240,000 96,000 84,000 60,000 Commissions 40,000 16,000 14,000 10,000 Page 8 of 22

MANAGEMENT ADVISORY SERVICES Cost of sales 980,000 360,000 420,000 200,000 Rent 280,000 84,000 140,000 56,000 Salaries 110,000 54,000 32,000 24,000 Total costs & expenses $1,830,000 $670,000 $750,000 $410,000 Operating income (loss) $ 170,000 $130,000 $(50,000) $ 90,000 The company buys the goods in the three product lines directly from manufacturers' representatives. Each product line is directed by a manager whose salary is included in the administrative expenses. Administrative expenses are allocated to the three product lines equally because the administration is spread evenly among the three product lines. Salaries represent payments to the workers in each product line and therefore are traceable costs of each product line. Advertising promotes the entire company rather than the individual product lines. As a result, the advertising is allocated to the three product lines in proportion to the sales revenue. Commissions are paid to the salespersons in each product line based on 2% of gross sales. Rent represents the cost of the retail store and warehouse under a lease agreement with 5 years remaining. The product lines share the retail and warehouse space, and the rent is allocated to the three product lines based on the square footage occupied by each of the product lines. 69. The segmented income statement for this retail company does not facilitate performance evaluation because it does not distinguish between controllable and uncontrollable costs. The only costs and expenses controllable at the product-line level for this retail company are (M) A. Commissions, cost of sales, and rent. C. Commissions, cost of sales, and salaries. B. Advertising, cost of sales, and salaries. D. Administration, advertising, and rent. 70. The company has an opportunity to promote one of its product lines by making a one-time $7,000 expenditure. The company can choose only one of the three product lines to promote. The incremental sales revenue that would be realized from this $7,000 promotion expenditure in each of the product lines is estimated as follows: Increase in Sales Revenue Product Line 1 $15,000 Product Line 2 20,000 Product Line 3 14,000 In order to maximize profits, the promotion expenditure should be spent on , resulting in an increase in operating income of . (M) A. B. C. D. List A Product Line 2 Product Line 2 Product Line 3 Product Line 3 List B $13,000 $5,000 $1,400 $1,120 CHIANG KAI SHEK COLLEGE

Responsibility Accounting & Transfer Pricing 71. One company executive has expressed concern about the operating loss that has occurred in Product Line 2 and has suggested that Product Line 2 be discontinued. If Product Line 2 is dropped, the manager of the line would be retained and assigned other duties with the company, but the other employees would not be retained. Management has indicated that the nature of the company's advertising might change with the elimination of Product Line 2, but the total dollar amount would not change. If Product Line 2 were to be dropped, the operating income of the company would (M) A. Increase by $50,000. C. Decrease by $234,000. B. Decrease by $94,000. D. Increase by $416,000. 72. A customer, operating in an isolated foreign market, has approached the head salesperson for Product Line 1 and offered to purchase 4,000 units of a special-order product over the next 12 months. This product would be sold in the same manner as Product Line 1's other products except that the customer is hoping for a price break. Product Line 1's cost to purchase this product (cost of sales) would be $14.70. Product Line 1 has excess capacity, meaning that the rate or amount of the remaining operating costs would not change as a consequence of the purchase and sale of this special-order product. The minimum selling price for this specialorder product would be (M) A. $15.00 C. $27.50 B. $17.30 D. $30.20 SPECIAL ORDER Operating at Full Capacity Effect on Profit 73. Ajax Division of Carlyle Corporation produces electric motors, 20% of which are sold to Bradley Division of Carlyle and the remainder to outside customers. Carlyle treats its divisions as profit centers and allows division managers to choose their sources of sale and supply. Corporate policy requires that all interdivisional sales and purchases be recorded at variable cost as a transfer price. Ajax Division’s estimated sales and standard cost data for the year ending December 31, 2000, based on the full capacity of 100,000 units, are as follows: Bradley Outsiders Sales $900,000 $8,000,000 Variable costs (900,000) (3,600,000) Fixed costs (300,000) (1,200,000) Gross margin $(300,000) $(3,200,000) Unit sales 20,000 80,000

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MANAGEMENT ADVISORY SERVICES Ajax has an opportunity to sell the above 20,000 units to an outside customer at a price of $75 per unit during 2000 on a continuing basis. Bradley can purchase its requirements from an outside suppler at a price of $85 per unit. Assuming that Ajax Division desires to maximize its gross margin, should Ajax take on the new customer and drop its sales to Bradley for 2000, and why? a. No, because the gross margin of the corporation as a whole would decrease by $200,000. b. Yes, because Ajax Division’s gross margin would increase by $300,000. c. Yes, because Ajax division’s gross margin would increase by $600,000. d. No, because Bradley Division’s gross margin would decrease by $800,000. Operating with Excess Capacity Minimum Price 74. Houston Division of Texacon, Inc. expects the following result for 2004: Units sales 70,000 Units selling price P10 Unit variable cost P 4 Total fixed costs P300,000 Total investment P500,000 The minimum required ROI is 15%, and divisions are evaluated on residual income. A foreign customer has approached Houston’s manager with an offer to buy 10,000 units at P7 each. If Houston accepts the order, it would not lose any of the 70,000 units at the regular price. Accepting the order would increase fixed costs by P10,000 and investment by P40,000. What is the minimum price that Houston could accept for the order and still maintain its expected residual income? A. P5.00 C.P4.75 B. P5.60 D. P9.00 Pol Bobadilla Maximum Lost Units 75. Houston Division of Texacon, Inc. expects the following result for 2004: Units sales 70,000 Units selling price P10 Unit variable cost P 4 Total fixed costs P300,000 Total investment P500,000 The minimum required ROI is 15%, and divisions are evaluated on residual income. A foreign customer has approached Houston’s manager with an offer to buy 10,000 units at P7 each. If Houston accepts the order, it would not lose any of the 70,000 units at the regular price. Accepting the order would increase fixed costs by P10,000 and investment by P40,000. CHIANG KAI SHEK COLLEGE

Responsibility Accounting & Transfer Pricing At the price of P7 offered by foreign customer, what is the maximum number of units in regular sales that Houston could sacrifice and still maintain its expected residual income? A. 2,333 C. 2,667 B. 3,333 D. 3,667 Pol Bobadilla TRANSFER PRICING Transfer Pricing Formula 76. The management of James Corporation has decided to implement a transfer pricing system. James’ MIS department is currently negotiating a transfer price for its services with the four producing divisions of the company as well as the marketing department. Charges will be assessed based on number of reports (assume that all reports require the same amount of time and resources to produce). The cost to operate the MIS department at its full capacity of 1,000 reports per year is budgeted at $45,000. The user subunits expect to request 250 reports each this year. The cost of temporary labor and additional facilities used to produce reports beyond capacity is budgeted at $48.00 per report. James could purchase the same services from an external Information Services firm for $70,000. What amounts should be used as the ceiling and the floor in determining the negotiated transfer price? a. b. c. d. Floor $36.00 $45.60 $48.00 $57.00 Ceiling $56.00 $56.00 $70.00 $82.00 Questions 77 thru 80 are based on the following information. Barfield Bigole Corp. produces various products used in the construction industry. The Plumbing Division produces and sells 100,000 copper fittings each month. Relevant information for last month follows: Total sales (all external) $250,000 Expenses (all on a unit base): Variable manufacturing $0.50 Fixed manufacturing .25 Variable selling .30 Fixed selling .40 Variable G&A .15 Fixed G&A .50 Total $2.10 Top-level managers are trying to determine how a transfer price can be set on a transfer of 10,000 of the copper fittings from the Plumbing Division to the Bathroom Products Division.

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MANAGEMENT ADVISORY SERVICES 77. A transfer price based on variable cost will be set at ___________ per unit. a. $0.50 c. $0.95 b. $0.80 d. $0.75 78. A transfer price based on full production cost would be set at ___________ per unit. a. $0.75 c. $1.45 b. $2.10 d. $1.60 79. A transfer price based on market price would be set at ___________ per unit. a. $2.10 c. $1.60 b. $2.50 d. $2.25 80. If the Plumbing Division is operated as an autonomous investment center and its capacity is 100,000 fittings per month, the per-unit transfer price is not likely to be below a. $0.75. c. $2.10. b. $1.60. d. $2.50. Operating at Full Capacity Minimum Transfer Price 81. The High Division of Para Company produces a high quality kite. Unit production costs (based on capacity production of 100,000 units per year) follow: Direct materials P 60 Direct labor 25 Overhead (20% variable) 15 Other information Sales price 120 Selling expenses (15% variable) 20 The High Division is producing and selling at capacity. What is the minimum selling price that the division would consider as a “transfer price” to the Recreation Division on which no variable period costs would be incurred? (M) a. P120 c. P 91 b. P 88 d. P117 Pol Bobadilla 82. The Motor Division of Super Truck Co. uses 5,000 carburetors per month in its production of automotive engines. It presently buys all of the carburetors it needs from two outside suppliers CHIANG KAI SHEK COLLEGE

Responsibility Accounting & Transfer Pricing at an average cost of $100. The Carburetor Division of Super Truck Co. manufactures the exact type of carburetor that the Motor Division requires. The Carburetor Division is presently operating at its capacity of 15,000 units per month and sells all of its output to a foreign car manufacturer at $106 per unit. Its cost structure (on 15,000 units) is: Variable production costs $70 Variable selling costs 10 All fixed costs 10 Assume that the Carburetor Division would not incur any variable selling costs on units that are transferred internally. What is the minimum of the transfer price range for a transfer between the two divisions? (M) a. $96 c. $70 b. $90 d. $106 Barfield 83. Division A produces a part with the following characteristics: Capacity in units 50,000 Selling price per unit $30 Variable costs per unit $18 Fixed costs per unit $3 Division B, another division in the company, would like to buy this part from Division A. Division B is presently purchasing the part from an outside source at $28 per unit. If Division A sells to Division B, $1 in variable costs can be avoided. Suppose Division A is currently operating at capacity and can sell all of the units is produces on the outside market for its usual selling price. From the point of view of Division A, any sales to Division B should be priced no lower than: (M) a. $27. c. $20. b. $29. d. $28. G & N 9e Maximum Transfer Price 84. The Motor Division of Super Truck Co. uses 5,000 carburetors per month in its production of automotive engines. It presently buys all of the carburetors it needs from two outside suppliers at an average cost of $100. The Carburetor Division of Super Truck Co. manufactures the exact type of carburetor that the Motor Division requires. The Carburetor Division is presently operating at its capacity of 15,000 units per month and sells all of its output to a foreign car manufacturer at $106 per unit. Its cost structure (on 15,000 units) is: Variable production costs $70 Variable selling costs 10 All fixed costs 10 Page 11 of 22

MANAGEMENT ADVISORY SERVICES Assume that the Carburetor Division would not incur any variable selling costs on units that are transferred internally. What is the maximum of the transfer price range for a transfer between the two divisions? (M) a. $106 c. $90 b. $100 d. $70 Barfield Effect on Profit - Make 85. Division A makes a part with the following characteristics: Production capacity in units 15,000 units Selling price to outside customers $25 Variable cost per unit $18 Total fixed costs $60,000 Division B, another division of the same company, would like to purchase 5,000 units of the part each period from Division A. Division B is now purchasing these parts from an outside supplier at a price of $24 each. Suppose that Division A is operating at capacity and can sell all of its output to outside customers at its usual selling price. If Division A sells the parts to Division B at $24 per unit (Division B’s outside price), the company as a whole will be: (M) a. better off by $5,000 each period. b. worse off by $15,000 each period, c. worse off by $5,000 each period. d. there will be no change in the status of the company as a whole. G & N 9e 86. The Motor Division of Super Truck Co. uses 5,000 carburetors per month in its production of automotive engines. It presently buys all of the carburetors it needs from two outside suppliers at an average cost of $100. The Carburetor Division of Super Truck Co. manufactures the exact type of carburetor that the Motor Division requires. The Carburetor Division is presently operating at its capacity of 15,000 units per month and sells all of its output to a foreign car manufacturer at $106 per unit. Its cost structure (on 15,000 units) is: Variable production costs $70 Variable selling costs 10 All fixed costs 10 Assume that the Carburetor Division would not incur any variable selling costs on units that are transferred internally. If the two divisions agree to transact with one another, corporate profits will (M) a. drop by $30,000 per month. b. rise by $20,000 per month. CHIANG KAI SHEK COLLEGE

Responsibility Accounting & Transfer Pricing c. rise by $50,000 per month. d. rise or fall by an amount that depends on the level of the transfer price.

Barfield

Comprehensive Questions 87 and 88 are based on the following information. RPCPA 0585 Rosas Corporation has several operating divisions. Three divisions are treated as profit centers and its division managers are free to choose their sources of sale and supply. One of its divisions, Gumamela Division, manufactures steel containers, 20% of which are sold to Daisy Division and the balance to outside customers. Inter-divisional sales and purchases are recorded at variable cost as a transfer price. Based on a full capacity of 150,000 units, the estimated sales and standard cost data for Gumamela Division for the year 1985 are as follows: Daisy Outsiders Sales P 900,000 P 9,600,000 Variable costs (900,000) (3,600,000) Fixed costs (200,000) (800,000) Gross margin P(200,000) P 5,200,000 Unit sales 30,000 120,000 Gumamela has the option to sell the above 30,000 units to an outside customer at a price of P50 per unit during 1985 on a continuing basis. Daisy in turn may purchase its requirements from an outside supplier at a price of P60 per unit. 87. Assuming that Gumamela wishes to improve its gross margin, should Gumamela accept the order of the new customer, and drop its sales to Daisy for 1985 and why? (M) a. No, because the gross margin from the company’s overall viewpoint would decrease by P300,000. b. Yes, because Gumamela Division’s gross margin would increase by P300,000. c. Yes, because Gumamela Division’s gross margin would increase by P600,000. d. No, because Daisy Division’s gross margin would decrease by P900,000. 88. Assume, however, that Rosa Corporation allows the division managers to negotiate the transfer price for 1985. The managers agreed on a tentative transfer price of P50 per unit; to be reduced based on an equal sharing of the additional gross margin to Gumamela resulting from the sales to Daisy of 30,000 units at P50 per unit. The actual transfer price for 1985 would be (M) a. P35.50 c. P45.00 b. P40.00 d. P50.00 Page 12 of 22

MANAGEMENT ADVISORY SERVICES Questions 89 thru 91 are based on the following information. CMA 0696 3-26 to 28 Parkside, Inc. has several divisions that operate as decentralized profit centers. Parkside’s Entertainment Division manufactures video arcade equipment using the products of two of Parkside’s other divisions. The Plastics Division manufactures plastic components, one type that is made exclusively for the Entertainment Division, while other less complex components are sold to outside markets. The products of the Video Cards Division are sold in a competitive market, however, one video card model is also used by the Entertainment Division. The actual costs per unit used by the Entertainment Division are presented below. Plastic Components Video Cards Direct material $ 1.25 $ 2.40 Direct labor 2.35 3.00 Variable overhead 1.00 1.50 Fixed overhead 0.40 2.25 Total cost $ 5.00 $ 9.15 The Plastics Division sells its commercial products at full cost plus a 25% markup and believes the proprietary plastic component made for the Entertainment Division would sell for $6.25 per unit on the open market. The market price of the video card used by the Entertainment Division is $10.98 per unit. 89. A per-unit transfer price from the Video Cards Division to the Entertainment Division at full cost, $9.15, would (M) a. Allow evaluation of both divisions on a competitive basis. b. Satisfy the Video Cards Division’s profit desire by allowing recovery of opportunity costs. c. Provide no profit incentive for the Video Cards Division to control or reduce costs. d. Encourage the Entertainment Division to purchase video cards from an outside source. 90. Assume that the Entertainment Division is able to purchase a large quantity of video cards from an outside source at $8.70 per unit. The Video Cards Division having excess capacity, agrees to lower its transfer price to $8.70 per unit. This action would (M) a. Optimize the profit goals of the Entertainment Division while subverting the profit goals of Parkside, Inc. b. Allow evaluation of both divisions on the same basis. c. Subvert the profit goals of the Video Cards Division while optimizing the profit goals of the Entertainment Division. d. Optimize the overall profit goals of Parkside, Inc.

CHIANG KAI SHEK COLLEGE

Responsibility Accounting & Transfer Pricing 91. Assume that the Plastic Division has excess capacity and it has negotiated a transfer price of $5.60 per plastic component with the Entertainment Division. This price will (M) a. Cause the Plastics Division to reduce the number of commercial plastic components it manufactures. b. Motivate both divisions as estimated profits are shared. c. Encourage the Entertainment Division to seek an outside source for plastic components. d. Demotivate the Plastics Division causing mediocre performance. Operating with Partial Excess Capacity Minimum Transfer Price 92. Division X of Charter Corporation makes and sells a single product which is used by manufacturers of fork lift trucks. Presently it sells 12,000 units per year to outside customers at $24 per unit. The annual capacity is 20,000 units and the variable cost to make each unit is $16. Division Y of Charter Corporation would like to buy 10,000 units a year from Division X to use in its products. There would be no cost savings from transferring the units within the company rather than selling them on the outside market. What should be the lowest acceptable transfer price from the perspective of Division X? (D) a. $24.00 c. $17.60 b. $21.40 d. $16.00 G & N 9e 93. The Post Division of the M.T. Woodhead Company produces basic posts which can be sold to outside customers or sold to the Lamp Division of the M.T. Woodhead Company. Last Year the Lamp Division bought all of its 25,000 posts from Post at $1.50 each. The following data are available for last year's activities of the Post Division: Capacity in units 300,000 posts Selling price per post to outside customers $1.75 Variable costs per post $0.90 Fixed costs, total $150,000 Suppose the transfers of posts to the Lamp Division cut into sales to outside customers by 15,000 units. What is the lowest transfer price that would not reduce the profits of the Post Division? (D) a. $0.90. c. $1.41. b. $1.35. d. $1.75. G & N 9e

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MANAGEMENT ADVISORY SERVICES 94. The Vega Division of Ace Company makes wheels which can either be sold to outside customers or transferred to the Walsh Division of Ace Company. Last month the Walsh Division bought all 4,000 of its wheels from the Vega Division for $42 each. The following data are available from last month's operations for the Vega Company: Capacity 12,000 wheels Selling price per wheel to outside customers $45 Variable costs per wheel when sold to outside customers $30 If the Vega Division sells wheels to the Walsh Division, Vega can avoid $2 per wheel in sales commissions. An outside supplier has offered to supply wheels to the Walsh Division for $41 each. Suppose that Vega can sell 9,000 wheels each month to outside consumers, so transfers to the Walsh Division cut into outside sales. What should be the lowest acceptable transfer price from the perspective of the Vega Division? (VD) a. $28.00 c. $41.00 b. $31.75 d. $42.00 G & N 9e Effect on Profit - Make 95. Division P of Turbo Corporation has the capacity for making 75,000 wheel sets per year and regularly sells 60,000 each year on the outside market. The regular sales price is $100 per wheel set, and the variable production cost per unit is $65. Division Q of Turbo Corporation currently buys 20,000 wheel sets (of the kind made by Division P) yearly from an outside supplier at a price of $90 per wheel set. If Division Q were to buy the 30,000 wheel sets it needs annually from Division P at $87 per wheel set, the change in annual net operating income for the company as a whole, compared to what it is currently, would be: (D) a. $225,000. c. $500,000. b. $325,000 d. $75,000. G & N adapted Effect on Profit - Buy 96. The Post Division of the M.T. Woodhead Company produces basic posts which can be sold to outside customers or sold to the Lamp Division of the M.T. Woodhead Company. Last Year the Lamp Division bought all of its 25,000 posts from Post at $1.50 each. The following data are available for last year's activities of the Post Division: Capacity in units 300,000 posts Selling price per post to outside customers $1.75 Variable costs per post $0.90 Fixed costs, total $150,000 Suppose the transfers of posts to the Lamp Division cut into sales to outside customers by 15,000 units. Further suppose that an outside supplier is willing to provide the Lamp Division CHIANG KAI SHEK COLLEGE

Responsibility Accounting & Transfer Pricing with basic posts at $1.45 each. If the Lamp Division had chosen to buy all of its posts from the outside supplier instead of the Post Division, the change in net operating income for the company as a whole would have been: (D) a. $1,250 decrease. c. $1,000 decrease. b. $10,250 increase. d. $13,750 decrease. G & N 9e Operating at Idle Capacity Minimum Transfer Price 97. Division A makes a part that it sells to customers outside of the company. Data concerning this part appear below: Selling price to outside customers $40 Variable cost per unit $30 Total fixed costs $10,000 Capacity in units 20,000 Division B of the same company would like to use the part manufactured by Division A in one of its products. Division B currently purchases a similar part made by an outside company for $38 per unit and would substitute the part made by Division A. Division B requires 5,000 units of the part each period. Division A has ample capacity to produce the units for Division B without any increase in fixed costs and without cutting into sales to outside customers. If Division A sells to Division B rather than to outside customers, the variable cost be unit would be $1 lower. What should be the lowest acceptable transfer price from the perspective of Division A? (M) a. $40. c. $30. b. $38. d. $29. G & N 9e 98. Division A produces a part with the following characteristics: Capacity in units 50,000 Selling price per unit $30 Variable costs per unit $18 Fixed costs per unit $3 Division B, another division in the company, would like to buy this part from Division A. Division B is presently purchasing the part from an outside source at $28 per unit. If Division A sells to Division B, $1 in variable costs can be avoided. Suppose that Division A has ample idle capacity to handle all of Division B's needs without any increase in fixed costs and without cutting into its sales to outside customers. From the point of view of Division A, any sales to Division B should be priced no lower than: (M) a. $29. c. $18. b. $30. d. $17. G & N 9e Page 14 of 22

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Responsibility Accounting & Transfer Pricing

Maximum Transfer Price 99. Cline Company had the following historical accounting data per unit: Direct materials $20 Direct labor 10 Variable manufacturing overhead 5 Fixed manufacturing overhead 8 Variable selling expenses 15 Fixed selling expenses 3 The units are normally transferred internally from Division X to Division Y. The units also may be sold externally for $70 per unit. The minimum profit level accepted by the company is a markup of 30 percent. There were no beginning or ending inventories. If the negotiated price is used, Division X’s transfer price should be a. a maximum of $70.00 d. a minimum of $40.00 b. a minimum of $51.00 e. a minimum of $43.00. c. a maximum of $66.30 H&M

101.What is the maximum price per wheel that Walsh should be willing to pay Vega? (M) a. $28 c. $42 b. $41 d. $45 G & N 9e

Minimum & Maximum Transfer Price Questions 100 & 101 are based on the following information. G & N 9e The Vega Division of Ace Company makes wheels which can either be sold to outside customers or transferred to the Walsh Division of Ace Company. Last month the Walsh Division bought all 4,000 of its wheels from the Vega Division for $42 each. The following data are available from last month's operations for the Vega Company:

103.Nita Corp’s Department 1 produced component C that is used by OZM as a key part. Production and sales data for component C is as follows:

Capacity Selling price per wheel to outside customers Variable costs per wheel when sold to outside customers

12,000 wheels $45 $30

If the Vega Division sells wheels to the Walsh Division, Vega can avoid $2 per wheel in sales commissions. An outside supplier has offered to supply wheels to the Walsh Division for $41 each. 100.Suppose that the Vega Division has ample idle capacity so that transfers to the Walsh Division would not cut into its sales to outside customers. What should be the lowest acceptable transfer price from the perspective of the Vega Division? (M) a. $28 c. $42 b. $30 d. $45

CHIANG KAI SHEK COLLEGE

Optimal Transfer Price 102.Division Z of a company produces a component that it currently sells to outside customers for $20 per unit. At its current level of production, which is 60% of capacity, Division Z's fixed cost of producing this component is $5 per unit and its variable cost is $12 per unit. Division Y of the same company would like to purchase this component from Division Z for $10. Division Z has enough excess capacity to fill Division Y's requirements. The managers of both divisions are compensated based upon reported profits. Which of the following transfer prices will maximize total company profits and be most equitable to the managers of Division Y and Division Z? (M) A. $12 per unit. C. $20 per unit. B. $18 per unit. D. $22 per unit. CIA 0592 IV-19

Selling price per unit Variable cost per unit Fixed cost per unit (based on 10,000 annual capacity)

P100 36 24

Nita Corp.’s Department II is introducing a new product that will use component C. An outside supplier has quoted Department II a price of P96 per unit. This represents the usual P100 price less a quantity discount due to the large number of Department II’s requirements. The Company has transfer price formula of: Transfer price = Variable cost per unit + Lost contribution margin per unit on outside sales. Department I has enough excess capacity to handle all of Department II’s needs. For the overall interest of the company, Department I should (M) a. Sell to Department II at the same quoted price of P96 per unit. b. Sell to Department II at minimum price of P60 per unit. c. Not sell to Department II since it will lose P4 per unit. d. Sell to Department II at P100 per unit. RPCPA 1096

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MANAGEMENT ADVISORY SERVICES

Responsibility Accounting & Transfer Pricing

104.A company has two divisions, A and B, each operated as a profit center. A charges B $35 per unit for each unit transferred to B. Other data follows: A’s variable cost per unit A’s fixed costs A’s annual sales to B A’s sales to outsiders

$30 10,000 5,000 units 50,000 units

A is planning to raise its transfer price to $50 per unit, Division B can purchase units at $40 each from outsiders, but doing so would idle A’s facilities now committed to producing units for B. Division A cannot increase its sales to outsiders. From the perspective of the company as a whole, from whom should Division B acquire the units, assuming B’s market is unaffected? (M) a. Outside vendors. b. Division A, but only at the variable cost per unit. c. Division A, but only until fixed costs are covered, then from outside vendors. d. Division A, despite the increased transfer price. CIA 1183 IV-5 Effect on Profit Questions 105 & 106 are based on the following information. L & H 10e Alcatraz Division of XYZ Corp. sells 80,000 units of part X to the outside market. Part X sells for $40, has a variable cost of $22, and a fixed cost per unit of $10. Alcatraz has a capacity to produce 100,000 units per period. Capone Division currently purchases 10,000 units of part X from Alcatraz for $40. Capone has been approached by an outside supplier willing to supply the parts for $36. 105.What is the effect on XYZ's overall profit if Alcatraz REFUSES the outside price and Capone decides to buy outside? (M) a. no change c. $80,000 decrease in XYZ profits b. $140,000 decrease in XYZ profits d. $40,000 increase in XYZ profits 106.What is the effect on XYZ's overall profit if Alcatraz ACCEPTS the outside price and Capone continues to buy inside? (M) a. no change c. $80,000 decrease in XYZ profits b. $140,000 decrease in XYZ profits d. $40,000 increase in XYZ profits

CHIANG KAI SHEK COLLEGE

107.Division A makes a part with the following characteristics: Production capacity in units Selling price to outside customers Variable cost per unit Total fixed costs

15,000 units $25 $18 $60,000

Division B, another division of the same company, would like to purchase 5,000 units of the part each period from Division A. Division B is now purchasing these parts from an outside supplier at a price of $24 each. Suppose that Division A has ample idle capacity to handle all of Division B's needs without any increase in fixed costs and without cutting into sales to outside customers. If Division B continues to purchase parts from an outside supplier rather then from Division A, the company as a whole will be: (M) G & N 9e a. worse off by $30,000 each period. c. better off by $15,000 each period. b. worse off by $10,000 each period. d. worse off by $35,000 each period. International Transfer Pricing 108.Hancock Manufacturing has one plant located in Italy and another plant located in the U.S. The Italian plant manufactures a component used in a finished product manufactured at the U.S. plant. Currently, the Italian plant is operating at 75 percent capacity. In Italy the income tax rate is 32 percent; in the U.S. the corporate income tax rate is 35 percent. The market price of the component is $120 and the Italian plant’s costs to manufacture the component are as follows: Direct materials Direct labor Variable overhead Fixed overhead Which transfer price would be in the best interest of the overall corporation? a. $60 c. $75 b. $50 d. $120

$30 20 10 15 H&M

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MANAGEMENT ADVISORY SERVICES

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109.Pacific Company has three plants: one located in Malaysia, one in India and another plant located in the Philippines. Both plants manufactures a component used in a finished product manufactured in the Philippine plant. Currently, both plants are operating at 70% capacity. In Malaysia the income tax rate is 42% while in India the tax rate is 35%; in the Philippines, the corporate income tax rate is 40%. The market price of the component, in peso equivalent, is P100 and the foreign plant’s costs to manufacture the component are as follows: Direct materials Direct labor Variable overhead Fixed overhead

P10 20 5 25

Which transfer price would be in the best interest of the overall corporation? Pol Bobadilla A. B. C. Malaysia P35 P 35 P100 India P35 P100 P100

D. P100 P 35

Questions 110 thru 112 are based on the following information. H&M Hanover Manufacturing has one plant located in Belgium and another plant located in the U.S. The Belgium plant manufactures a component used in a finished product manufactured at the U.S. plant. Currently, the Belgium plant is operating at 70 percent capacity. In Belgium the income tax rate is 42 percent; in the U.S. the corporate income tax rate is 35 percent. The market price of the component is $100 and the Belgium plant’s costs to manufacture the component are as follows: Direct materials Direct labor Variable overhead Fixed overhead

$10 20 5 25

111. What is the maximum transfer price that the U.S. division would be willing to pay? a. $35 c. $60 b. $55 d. $100 112.Which transfer price would be in the best interest of the overall corporation? a. $35 c. $60 b. $55 d. $100 Questions 113 thru 115 are based on the following information. H&M Hampton Manufacturing has one plant located in Belgium and another plant located in the U.S. The Belgium plant manufactures a component used in a finished product manufactured at the U.S. plant. Currently, the Belgium plant is operating at 70 percent capacity. In Belgium the income tax rate is 30 percent; in the U.S. the corporate income tax rate is 35 percent. The market price of the component is $140 and the Belgium plant’s costs to manufacture the component are as follows: Direct materials Direct labor Variable overhead Fixed overhead

$15 25 6 28

113.What is the minimum transfer price that the Belgium division would be willing to accept? a. $140 c. $68 b. $74 d. $46 114.What is the maximum transfer price that the U.S. division would be willing to pay? a. $140 c. $68 b. $74 d. $46 115.Which transfer price would be in the best interest of the overall corporation? a. $140 c. $68 b. $74 d. $46

110.What is the minimum transfer price that the Belgium division would be willing to accept? a. $35 c. $60 b. $55 d. $100

CHIANG KAI SHEK COLLEGE

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MANAGEMENT ADVISORY SERVICES

Responsibility Accounting & Transfer Pricing

Comprehensive Questions 116 through 118 are based on the following information. CMA 1290 3-21 to 23 Adler Industries is a vertically integrated firm with several divisions that operate as decentralized profit centers. Adler's Systems Division manufactures scientific instruments and uses the products of two of Adler's other divisions. The Board Division manufactures printed circuit boards (PCBs). One PCB model is made exclusively for the Systems Division using proprietary designs, whereas less complex models are sold in outside markets. The products of the Transistor Division are sold in a well-developed competitive market; however, one transistor model is also used by the Systems Division. The costs per unit of the products used by the Systems Division are as follows: Direct materials Direct labor Variable overhead Fixed overhead Total cost

PCB $2.50 4.50 2.00 .80 $9.80

Transistor $ .80 1.00 .50 .75 $3.05

The Board Division sells its commercial products at full cost plus a 25% markup and believes the proprietary board made for the Systems Division would sell for $12.25 per unit on the open market. The market price of the transistor used by the Systems Division is $3.70 per unit. 116.A per unit transfer price from the Transistor Division to the Systems Division at full cost, $3.05, would A. Allow evaluation of both divisions on a competitive basis. B. Satisfy the Transistor Division's profit desire by allowing recovery of opportunity costs. C. Demotivate the Systems Division and cause mediocre performance. D. Provide no profit incentive for the Transistor Division to control or reduce costs. 117.Assume the Systems Division is able to purchase a large quantity of transistors from an outside source at $2.90 per unit. The Transistor Division, having excess capacity, agrees to lower its transfer price to $2.90 per unit. This action would A. Optimize the profit goals of the Systems Division while subverting the profit goals of Adler Industries. B. Allow evaluation of both divisions on the same basis. C. Subvert the profit goals of the Transistor Division while optimizing the profit goals of the Systems Division. D. Optimize the overall profit goals of Adler Industries. CHIANG KAI SHEK COLLEGE

118.The Board and Systems Divisions have negotiated a transfer price of $11.00 per printed circuit board. This price will A. Cause the Board Division to reduce the number of commercial printed circuit boards it manufactures. B. Motivate both divisions as estimated profits are shared. C. Encourage the Systems Division to seek an outside source for printed circuit boards. D. Demotivate the Board Division causing mediocre performance. Questions 119 through 123 are based on the following information. Barfield Office Products Inc. manufactures and sells various high-tech office automation products. Two divisions of Office Products Inc. are the Computer Chip Division and the Computer Division. The Computer Chip Division manufactures one product, a "super chip," that can be used by both the Computer Division and other external customers. The following information is available on this month's operations in the Computer Chip Division: Selling price per chip Variable costs per chip Fixed production costs Fixed SG&A costs Monthly capacity External sales Internal sales

$50 $20 $60,000 $90,000 10,000 chips 6,000 chips 0 chips

Presently, the Computer Division purchases no chips from the Computer Chips Division, but instead pays $45 to an external supplier for the 4,000 chips it needs each month. 119.Assume that next month's costs and levels of operations in the Computer and Computer Chip Divisions are similar to this month. What is the minimum of the transfer price range for a possible transfer of the super chip from one division to the other? a. $50 c. $20 b. $45 d. $35 120.Assume that next month's costs and levels of operations in the Computer and Computer Chip Divisions are similar to this month. What is the maximum of the transfer price range for a possible transfer of the chip from one division to the other? a. $50 c. $35 b. $45 d. $30 Page 18 of 22

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121.Two possible transfer prices (for 4,000 units) are under consideration by the two divisions: $35 and $40. Corporate profits would be _______ if $35 is selected as the transfer price rather than $40. a. $20,000 larger c. $20,000 smaller b. $40,000 larger d. the same

a. $106 b. $100

c. $90 d. $70

122.If a transfer between the two divisions is arranged next period at a price (on 4,000 units of super chips) of $40, total profits in the Computer Chip division will a. rise by $20,000 compared to the prior period. b. drop by $40,000 compared to the prior period. c. drop by $20,000 compared to the prior period. d. rise by $80,000 compared to the prior period. 123.Assume, for this question only, that the Computer Chip Division is selling all that it can produce to external buyers for $50 per unit. How would overall corporate profits be affected if it sells 4,000 units to the Computer Division at $45? (Assume that the Computer Division can purchase the super chip from an outside supplier for $45.) a. no effect c. $20,000 decrease b. $20,000 increase d. $90,000 increase Questions 124 thru 126 are based on the following information. Barfield The Motor Division of Super Truck Co. uses 5,000 carburetors per month in its production of automotive engines. It presently buys all of the carburetors it needs from two outside suppliers at an average cost of $100. The Carburetor Division of Super Truck Co. manufactures the exact type of carburetor that the Motor Division requires. The Carburetor Division is presently operating at its capacity of 15,000 units per month and sells all of its output to a foreign car manufacturer at $106 per unit. Its cost structure (on 15,000 units) is: Variable production costs Variable selling costs All fixed costs

$70 10 10

Assume that the Carburetor Division would not incur any variable selling costs on units that are transferred internally. 124.What is the maximum of the transfer price range for a transfer between the two divisions? CHIANG KAI SHEK COLLEGE

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MANAGEMENT ADVISORY SERVICES 125.What is the minimum of the transfer price range for a transfer between the two divisions? a. $96 c. $70 b. $90 d. $106 126.If the two divisions agree to transact with one another, corporate profits will a. drop by $30,000 per month. b. rise by $20,000 per month. c. rise by $50,000 per month. d. rise or fall by an amount that depends on the level of the transfer price. Questions 127 through 133 are based on the following information. Gleim The information was presented as part of Question 6 on Part 4 of the December 1981 CMA Examination. PortCo Products is a divisionalized furniture manufacturer. The divisions are autonomous segments, with each division being responsible for its own sales, costs of operations, working capital management, and equipment acquisition. Each division serves a different market in the furniture industry. Because the markets and products of the divisions are so different, there have never been any transfers between divisions. The Commercial Division manufactures equipment and furniture that are purchased by the restaurant industry. The division plans to introduce a new line of counter and chair units that feature a cushioned seat for the counter chairs. John Kline, the division manager, has discussed the manufacturing of the cushioned seat with Russ Flegel for a price for 100-unit lots of the cushioned seat. The following conversation took place about the price to be charged for the cushioned seats: Flegel: “John, we can make the necessary modifications to the cushioned seat easily. The raw materials used in your seat are slightly different and should cost about 10% more than those used in our deluxe office stool. However, the labor time should be the same because the seat fabrication operation basically is the same. I would price the seat at our regular rate – full cost plus 30% markup.” Kline: “This is higher than I expected. Russ, I was thinking that a good price would be your variable manufacturing costs. After all, your capacity costs will be incurred regardless of the job.” Flegel: “John, I’m at capacity. By making the cushion seats for you, I’ll have to cut my production of deluxe office stools. Of course, I can increase my production of economy office stools. The labor time freed by not having to fabricate the frame or assemble the deluxe stool can be shifted to the frame fabrication and assembly of the economy office stool. Fortunately, I can switch my labor force between these two models of stools without any loss of efficiency. As you know, overtime is CHIANG KAI SHEK COLLEGE

Responsibility Accounting & Transfer Pricing not a feasible alternative in our community. I’d like to sell it to you at variable cost, but I have excess demand for both products. I don’t mind changing my product mix to the economy model if I get a good return on the seats I make for you. Here are my standard costs for the two stools and a schedule of my manufacturing overhead.” Kline: “I guess I see your point, Russ, but I don’t want to price myself out of the market. Maybe we should talk to Corporate to see if they can give us any guidance.” Office Division Standard Costs and Prices Deluxe Office Stool Economy Office Stool Raw materials Framing $ 8.15 $ 9.76 Cushioned seat Padding 2.40 Vinyl 4.00 Molded seat (purchased) 6.00 Direct labor Frame fabrication (.5x$7.50/DLH) 3.75 (.5x$7.50/DLH) 3.75 Cushion fabrication 3.75 (.5x$7.50/DLH) Assembly* (.5x$7.50/DLH) 3.75 (.3x$7.50/DLH) 2.25 Manufacturing Overhead (1.5DLHx$12.60/DLH) 19.20 (.8DLHx$12.80/DLH) 10.24 Total standard cost $45.00 $32.00 Selling price (30% markup) $58.50 $41.60 * Attaching seats to frames and attaching rubber feet.

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Office Division Manufacturing Overhead Budget Overhead Item Supplies Indirect labor Supervision Power Heat and light

Nature Variable – at current market prices Variable Nonvariable Use varies with activity; rates are fixed Nonvariable – light is fixed regardless of production while heat/airconditioning varies with fuel charges Property taxes and Nonvariable – any change in amounts/rates is insurance taxes independent of production Depreciation Fixed dollar total Employee benefits 20% of supervision, direct and indirect labor Total overhead Capacity in DLH Overhead rate/DLH 127.What amount of employee benefit is associated with direct labor costs? (E) a. $675,000 c. $450,000 b. $75,000 d. $500,000

Amount $ 420,000 375,000 250,000 180,000 140,000

132.When computing the opportunity cost for the deluxe office stool, what is the contribution margin per unit produced? (E) a. $25.20 c. $45.00 b. $15.84 d. $33.30 133.What is the opportunity cost of the Office Division if 125 economy stools can be made in the time required for 100 deluxe stools? (E) a. $789 c. $1,329 b. $1,869 d. $540

200,000 1,700,000 575,000 $3,840,000 300,000 $12.80

128.What is the variable manufacturing overhead rate? (E) a. $7.80/hr. c. $5.17/hr. b. $11.25/hr. d. $5.00/hr. 129.What is the transfer price per 100-unit lot based on variable manufacturing costs to produce the modified cushioned seat? (E) a. $1,329 c. $789 b. $1,869 d. $1,986 130.What is the fixed manufacturing overhead rate? (E) a. $7.80/hr. c. $5.17/hr. b. $11.25/hr. d. $5.00/hr. 131.How many economy office stools can be produced with the labor hours currently used to make 100 deluxe stools? (E) a. 187 c. 100 b. 125 d. 150 CHIANG KAI SHEK COLLEGE

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Answer Key 1. A 2. B 3. B 4. B 5. A 6. B 7. C 8. B 9. B 10. A

11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

D C D C C D B D B B

21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

D C B B A C D B D B

31. 32. 33. 34. 35. 36. 37. 38. 39. 40.

A A B B D A C C C B

41. 42. 43. 44. 45. 46. 47. 48. 49. 50.

51. 52. 53. 54. 55. 56. 57. 58. 59. 60.

61. 62. 63. 64. 65. 66. 67. 68. 69. 70.

A E B D B D A C C D

71. 72. 73. 74. 75. 76. 77. 78. 79. 80.

C A C B A B C A B D

81. 82. 83. 84. 85. 86. 87. 88. 89. 90.

D A B B C B C B C D

91. B 92. C 93. C 94. B 95. B 96. C 97. D 98. D 99. A 100. A

B B E A C C B D E C

101. 102. 103. 104. 105. 106. 107. 108. 109. 110.

B B A D B A A D B A

111. 112. 113. 114. 115. 116. 117. 118. 119. 120.

D A D A A D D B C B

CHIANG KAI SHEK COLLEGE

121. 122. 123. 124. 125. 126. 127. 128. 129. 130.

D D C B A C C D A A

A B C A C A B C D A

131. B 132. A 133. D

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