Exam 10: Management Control in Decentralized Organizations

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 income tax effect per unit in country B is:

If there is a competitive market for the product or service being transferred internally, using the cost- based price as a transfer price will generally lead to the desired goal congruence and managerial effort.

In agency theory, incentive is:

The more subjective the measures of performance, the more likely managers will exert effort.

The Nicholson and Cage Divisions are part of the same company. Currently the Cage Division buys a part from Nicholson for $82. The Nicholson Division wants to increase the price of the part it sells to Cage to $100. Cage Division can buy the part from an outside supplier for $94. The cost data for the Nicholson Division is as follows: Direct materials \ 2550 Direct labor 3250 Variable overhead 2250 Fixed overhead 9.60 Required: a. If Nicholson ceases to produce the parts for Cage, it will be able to avoid one- fourth of the fixed manufacturing overhead. The Nicholson Division has excess capacity but no alternative uses for its facilities. From the standpoint of the company as a whole, should Cage continue to buy from Nicholson or start to buy from the outside supplier? b. What should the transfer price for the part be?

Top managers who wish to encourage decentralization will often make sure that both production and purchasing division managers understand all the facts and then allow the managers to negotiate a transfer price.

One reason companies use full- cost transfer pricing is that it provides:

is not a usual definition of cost assuming a company uses a cost- based pricing system for transfer pricing.

Managers in decentralized organizations tend to duplicate services (e.g., accounting).

When the allocation of an asset would be arbitrary, many managers believe that it is better to allocate based on divisional sales revenue.

"Both ROI and residual income use profit and invested capital to measure performance. Therefore, it really doesn't matter which we use." Do you agree? Explain.

Managers evaluated using net book value will tend to replace assets sooner than will those managers in firms using gross book value.

According to agency theory, employment contracts will trade off the following three factors: risk, incentive, and the cost of measuring performance.

The Table and Chair Divisions are part of the same company. Currently the Chair Division buys a part from Table for $384. The Table Division wants to increase the price of the part it sells to Chair by $96 to $480. The manager of Chair has stated that it cannot afford to go that high, as it will decrease the division's profit to near zero. Chair can buy the part from an outside supplier for $448. The cost data for the Table Division is as follows: Direct materials \ 136 Direct labor 200 Variable overhead 40 Fixed overhead 42 If Table ceases to produce the parts for Chair, it will be able to avoid one- third of the fixed manufacturing overhead. The Table Division has excess capacity but no alternative uses for its facilities. From the standpoint of the company as a whole, should Chair continue to buy from Table or start to buy from the outside supplier?

A transfer price exists when two segments of the same organization:

The joint formulation of a set of goals and plans for achieving the goals for a forthcoming period by a manager and his or her superior

The following information pertains to Clark Company: Property, plant and Currentassets \ 200,000 Currentliabilities \ 100,000 equipment 400,000 Long term liabilities 200,000 Constructioninprogress 50,000 Stockholders'equity 350,000 Total assets \6 50,000 Total equities \6 50,000 Currentassets \ 200,000 Currentliabilities \ 100,000 equipment 400,000 Long term liabilities 200,000 Constructioninprogress 50,000 Stockholders'equity 350,000 Total assets \6 50,000 Total equities \6 50,000 Invested capital is _ if it is defined as stockholders' equity.

Foreman Company's revenues are $300 on invested capital of $240. Expenses are currently 84% of sales. If Foreman Company can reduce its expenses to 75% of sales, return on investment will be:

United States multinational companies must use a transfer price that one division would pay another if they were independent companies.

Baker Company's records reveal the following: Division $A$ M arket pric of finished part to out siders \ 75 Variable costs per part 51 Contribution margin per part \ 24 Tot al contribution for 10000 parts \ 240,000 Division $B$ ales price of finished product \1 05 Variable costs: Division A (1 p art @ \ 51) \5 1 Division B Processing \2 7 Selling 12 39 -90 Contribution margin per unit \1 5 Total contribution for 10,000 \1 50,000 units The variable costs of Division B will be incurred whether it buys from Division A or from an outside supplier. If Division A is not at full capacity, the lowest transfer price at which it would be willing to sell to Division B would be: