Exam 10: Management Control in Decentralized Organizations

Higher- level managers have the best information concerning local conditions.

Transfer pricing systems exist to:

A division of Sarge Company is located in a country that places restrictions on the amount of funds that may be paid as dividends to foreign owners. If Sarge Company wishes to maximize the amount of cash received from the foreign division, Sarge Company should:

There is no perfect transfer pricing system.

A major reason for transfer pricing is to communicate data that will lead to goal- congruent decisions.

Morgan Company records reveal the following: The variable costs of Division Y will be incurred whether it buys from Division X or from an outside supplier. The highest price that Division Y would want to pay Division X for the components would be:

According to agency theory, employment contracts will trade off .

Multinational companies use transfer pricing to minimize their worldwide taxes, duties, and tariffs.

The variable cost of Part X is $50 and the full cost of the part is $80. The part is produced in country A and transferred to a plant in country B. Country A has a 30% income tax rate. Country B has a 50% income tax rate and an import duty equal to 10% of the price of the item. Part X can be transferred at full cost or variable cost. Assume that Part X is priced at full cost. The net tax effect is:

Decentralization is the delegation of freedom to make decisions.

Net asset value promotes a more conservative approach to asset replacement as compared with gross book value.

Historical costs may be subjective.

The following information pertains to Caravan Company: Total assets \ 150,000 Total current liabilities 110,000 Total expenses 60,000 Total liabilities 115,000 Total revenues 80,000 The income percentage of revenue is:

In general, use of residual income or EVA will promote goal congruence and lead to better decisions than using ROI.

Clarke Company records reveal the following: $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Division } X$ Market price of finished comp onent to outsiders \ 32 V ariable costs per component Contribution margin per comp onent Total contribution for 20,000 comp onents The variable costs of Division Y will be incurred whether it buys from Division X or from an outside supplier. If Division X is working at full capacity, the lowest transfer price it would be willing to accept from Division Y would be:

The following information pertains to Bundy Company: Total assets \ 50,000 Total current liabilities 30,000 Total expenses 60,000 Total liabilities 35,000 Total revenues 80,000 If invested capital is defined as total assets, the return on investment is:

It is recommended that budgeted or standard costs be used instead of actual costs for cost- based transfer prices.

The following information is available for the Soupy Company: Sales \ 1,000,000 Invested capital 350,000 ROI 10\% The capital turnover ratio is:

For each of the following transfer price descriptions or operating situations, tell which of the general methods of transfer pricing it is probably categorized as: a. Bargaining between selling and buying units b. Budgeted costs c. 145% of full costs d. Internal product transfers are required if goods are available internally e. Manufacturing plus marketing plus distribution plus customer service costs f. Prices listed in a trade journal g. Selling price less normal sales commissions h. Variable manufacturing cost plus a mark- up

Define decentralization and identify its expected benefits and costs.