Exam 5: Responsibility Accounting and Transfer Pricing

Which is true of a firm's transfer pricing policy?

Mesopotamian Materials Inc.(MMI)has two decentralized divisions (Ur and Babylon)that have decision making responsibility over the amount of resources invested in their divisions.Recent financial extracts for both divisions are presented below: Fixed assets, gross Accumulated depreciation Other assets Liabilities Sales Net income after tax* Average age of fixed assets (years) Ur \ 2,500 \ 1,500 \ 500 \ 500 \ 6,750 \ 743 15 Babylon: \ 4,000 \ 1,200 \ 750 \ 1,000 \ 7,200 \ 1,008 5 *Net income is after tax but before interest MMI's weighted average cost of capital (WACC)is 11.5%.The MMI measures division performance based on the book value of net assets.The producer price index 15 years ago was 100,116 five years ago,and currently is 125. Ur can increase its ROI by:

Grammy Girl Products (GGP)has two divisions,Bones and Biscuits,both of which usually have independence in sourcing and pricing decisions.There is an unlimited supply of raw bones.Biscuits manufactures,amongst other items,a specialty product called BisBone.The BisBone formula requires 70% bone meal and 30% cereal per pound,plus a dollop of meat flavoring.BisBone is usually sold in 20-pound cases and processed bones in 5-pound packs.Cost and sales pricing data appears below. Sales price, per case (pack) Raw bones, per pound Bone meal, per pound (external seller) Cereals, per pound Meat flavoring, per case Processing, per pound Packaging, per case (pack) Overhead per case (nack), 40 \% fixed BisBone \ 100.00 \ 3.00 \ 0.50 \ 3.00 \ 1.00 \ 1.25 \ 10.00 Bone: \2 0.00 \1 .50 \0 .80 \0 .75 \7 .00 In lieu of its normal processing,Bones sometimes grinds raw bones into bone meal (grinding costs $0.05 per pound)When bone meal is sold to Biscuits,bulk packaging is used which costs $1 per 100 pound sack;when sold to other firms,it is packed in 50-pound containers,costing $3 each.Bones prices the container product at $180.Biscuits just received an order for 800 cases of one of its specialty products,BisBone,and is contemplating purchasing bone meal from its sister division. Should Biscuits buy bone meal from Bones at the price of $3.55 per pound?

Grammy Girl Products (GGP)has two divisions,Bones and Biscuits,both of which usually have independence in sourcing and pricing decisions.There is an unlimited supply of raw bones.Biscuits manufactures,amongst other items,a specialty product called BisBone.The BisBone formula requires 70% bone meal and 30% cereal per pound,plus a dollop of meat flavoring.BisBone is usually sold in 20-pound cases and processed bones in 5-pound packs.Cost and sales pricing data appears below. Sales price, per case (pack) Raw bones, per pound Bone meal, per pound (external seller) Cereals, per pound Meat flavoring, per case Processing, per pound Packaging, per case (pack) Overhead per case (nack), 40 \% fixed BisBone \ 100.00 \ 3.00 \ 0.50 \ 3.00 \ 1.00 \ 1.25 \ 10.00 Bone: \2 0.00 \1 .50 \0 .80 \0 .75 \7 .00 In lieu of its normal processing,Bones sometimes grinds raw bones into bone meal (grinding costs $0.05 per pound)When bone meal is sold to Biscuits,bulk packaging is used which costs $1 per 100 pound sack;when sold to other firms,it is packed in 50-pound containers,costing $3 each.Bones prices the container product at $180.Biscuits just received an order for 800 cases of one of its specialty products,BisBone,and is contemplating purchasing bone meal from its sister division. If Bones is operating below capacity,what is the minimum price that it should quote Biscuits per sack of bone meal to maximize GGP's profits?

12. Grammy Girl Products (GGP)has two divisions,Bones and Biscuits,both of which usually have independence in sourcing and pricing decisions.There is an unlimited supply of raw bones.Biscuits manufactures,amongst other items,a specialty product called BisBone.The BisBone formula requires 70% bone meal and 30% cereal per pound,plus a dollop of meat flavoring.BisBone is usually sold in 20-pound cases and processed bones in 5-pound packs.Cost and sales pricing data appears below. Sales price, per case (pack) Raw bones, per pound Bone meal, per pound (external seller) Cereals, per pound Meat flavoring, per case Processing, per pound Packaging, per case (pack) Overhead per case (nack), 40 \% fixed BisBone \ 100.00 \ 3.00 \ 0.50 \ 3.00 \ 1.00 \ 1.25 \ 10.00 Bone: \2 0.00 \1 .50 \0 .80 \0 .75 \7 .00 In lieu of its normal processing,Bones sometimes grinds raw bones into bone meal (grinding costs $0.05 per pound)When bone meal is sold to Biscuits,bulk packaging is used which costs $1 per 100 pound sack;when sold to other firms,it is packed in 50-pound containers,costing $3 each.Bones prices the container product at $180.Biscuits just received an order for 800 cases of one of its specialty products,BisBone,and is contemplating purchasing bone meal from its sister division. Should GGP encourage an internal transaction for this order if Bones has outside customers for the bone meal,and,if so,at what price?

Mesopotamian Materials Inc.(MMI)has two decentralized divisions (Ur and Babylon)that have decision making responsibility over the amount of resources invested in their divisions.Recent financial extracts for both divisions are presented below: Fixed assets, gross Accumulated depreciation Other assets Liabilities Sales Net income after tax* Average age of fixed assets (years) Ur \ 2,500 \ 1,500 \ 500 \ 500 \ 6,750 \ 743 15 Babylon: \ 4,000 \ 1,200 \ 750 \ 1,000 \ 7,200 \ 1,008 5 *Net income is after tax but before interest MMI's weighted average cost of capital (WACC)is 11.5%.The MMI measures division performance based on the book value of net assets.The producer price index 15 years ago was 100,116 five years ago,and currently is 125. Using historical costs,which is true?

Economic value added (EVA):

10. Grammy Girl Products (GGP)has two divisions,Bones and Biscuits,both of which usually have independence in sourcing and pricing decisions.There is an unlimited supply of raw bones.Biscuits manufactures,amongst other items,a specialty product called BisBone.The BisBone formula requires 70% bone meal and 30% cereal per pound,plus a dollop of meat flavoring.BisBone is usually sold in 20-pound cases and processed bones in 5-pound packs.Cost and sales pricing data appears below. Sales price, per case (pack) Raw bones, per pound Bone meal, per pound (external seller) Cereals, per pound Meat flavoring, per case Processing, per pound Packaging, per case (pack) Overhead per case (nack), 40 \% fixed BisBone \ 100.00 \ 3.00 \ 0.50 \ 3.00 \ 1.00 \ 1.25 \ 10.00 Bone: \2 0.00 \1 .50 \0 .80 \0 .75 \7 .00 In lieu of its normal processing,Bones sometimes grinds raw bones into bone meal (grinding costs $0.05 per pound)When bone meal is sold to Biscuits,bulk packaging is used which costs $1 per 100 pound sack;when sold to other firms,it is packed in 50-pound containers,costing $3 each.Bones prices the container product at $180.Biscuits just received an order for 800 cases of one of its specialty products,BisBone,and is contemplating purchasing bone meal from its sister division. If Bones is at capacity and has sufficient outside customers for the containers,what is the minimum price that it should quote Biscuits per sack of bone meal to maximize GGP's profits?

Bobo,Inc.manufactures small motors used in refrigerators,washing machines,and other household appliances in JuJu division.JuJu division is located in a country with a 30% income tax rate.JuJu transfers the motors to LaSalle division which is located in a country with a 40% income tax rate.The variable cost per motor is $560 and LaSalle sells each motor for $960.Bobo,Inc.'s full cost per motor is $800.Should the transfer be priced at variable cost or full cost,and why?

5. Honolulu Enterprises has two decentralized divisions (Coconut and Guava)that have decision making responsibility over the amount of resources invested in their divisions.Recent financial extracts for both divisions are presented below: Fixed assets, gross Accumulated depreciation Other assets Liabilities Sales Net income after tax* Average age of fixed assets (years) Coconut \ 4,500 \ 2,700 \ 900 \ 900 \ 12,150 \ 1,330 15 Guava \7 ,200 \2 ,160 \1 ,350 \1 ,800 \1 2,960 \1 ,810 5 *Net income is after tax but before interest Honolulu's weighted average cost of capital (WACC)is 15% and the company uses residual income as a method to evaluate performance.Which of the following statements is correct?

Mesopotamian Materials Inc.(MMI)has two decentralized divisions (Ur and Babylon)that have decision making responsibility over the amount of resources invested in their divisions.Recent financial extracts for both divisions are presented below: Fixed assets, gross Accumulated depreciation Other assets Liabilities Sales Net income after tax* Average age of fixed assets (years) Ur \ 2,500 \ 1,500 \ 500 \ 500 \ 6,750 \ 743 15 Babylon: \ 4,000 \ 1,200 \ 750 \ 1,000 \ 7,200 \ 1,008 5 *Net income is after tax but before interest MMI's weighted average cost of capital (WACC)is 11.5%.The MMI measures division performance based on the book value of net assets.The producer price index 15 years ago was 100,116 five years ago,and currently is 125. Using historical costs,which is true?

Given the following division performance indicators,which is true? $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Division }$ B C Sales \ 500 Net profit \ 10 \ 20 Netastets \ 80 Retun an sales 6.0\% 4.0\% Asset tungver 10 5 Retion non aesete 15.0\%

Each of the following responsibility centers and decision rights are correctly matched,except: