Exam 11: Flexible Budgets, Segment Analysis, and Performance Reporting

The transfer price should be sufficient to cover both variable and fixed costs, as well as generate a reasonable gross profit for the supplier department.

Pierre & Sons is a baked-goods manufacturing firm. Pierre has two main divisions: Packaged Mixes and Finished Desserts. The Finished Desserts division is considering purchasing the mix for its cakes from an outside supplier. The Packaged Mixes department incurs the following costs for each batch of cake mix: In addition to the cost of the cake mix, the Finished Desserts Department would incur the following costs for each batch of cakes: Currently, the Packaged Mixes department has excess capacity. Peterson currently sells the mix for $500 per batch. The Finished Desserts department is able to purchase the mix for $350 from an outside supplier. The finished cakes from each batch will sell for a total of $1,000. Based on the decision that will maximize the overall benefit to Peterson & Sons, what is the contribution margin per batch that can be realized by the Finished Desserts department?

Use the following information to complete Problems below Komfort Mattress Co. produces foam-topped mattresses and foam mattress pads. The mattress pads were originally designed to be a component of the mattresses (1 pad per mattress). However, the market for mattress pads was profitable enough that management has opted to sell some of the pads on their own. Any pads produced beyond what is necessary to meet the needs of mattress production are sold at market prices. Normally, the transfer cost of the pads is equal to the market sale price. Because of the differentiation strategy, management at Komfort has decided that the Mattress department and the Pads department should be measured and tracked separately. When pads are transferred to the Mattress department, they are inventoried at market prices. The following information relates to the costs of production for the year for the two departments. Per the company policy, all inventories are kept at stable levels: in other words, sales and production are equal, and purchases of raw materials equal those requisitioned for production. -Right at the end of the year, Komfort received a special order for 200 mattresses. The Mattress department has the capacity to meet the order, but the Pads department is already at full capacity. Komfort has found a supplier of pads to purchase from when the supply of pads runs short. However, due to the rush nature of the special order, Komfort's supplier would charge them $80,000. What would be the minimum transfer price where the Pads department would agree to cancel current sales in order to fill this order? Should the Mattress department purchase the pads from the supplier or from the Pads department?

Profit center managers must be concerned about the costs incurred to generate revenues.

Christensen & Co. is a manufacturing company that has two major investment centers. Both divisions have required a significant investment, and management wants to compare the performance of the two divisions. Below is information related to the two divisions. Management currently requires investments to meet a rate of return on asset investment of 5%. Which Division has the greatest level of "residual income"?

Which of the following would not be indicated by analyzing various business segments?

Use the following information to complete Problems below Komfort Mattress Co. produces foam-topped mattresses and foam mattress pads. The mattress pads were originally designed to be a component of the mattresses (1 pad per mattress). However, the market for mattress pads was profitable enough that management has opted to sell some of the pads on their own. Any pads produced beyond what is necessary to meet the needs of mattress production are sold at market prices. Normally, the transfer cost of the pads is equal to the market sale price. Because of the differentiation strategy, management at Komfort has decided that the Mattress department and the Pads department should be measured and tracked separately. When pads are transferred to the Mattress department, they are inventoried at market prices. The following information relates to the costs of production for the year for the two departments. Per the company policy, all inventories are kept at stable levels: in other words, sales and production are equal, and purchases of raw materials equal those requisitioned for production. -Which department has the higher ROI? Is it due to greater profitability per sales dollar, or to efficient use of assets in generating sales?

How does the information from lower-department performance reports affect higher-level reporting?

The following information is available for Apex Manufacturing, Inc. for this last year: What is the Variable Overhead Flexible Budget Variance?

Cole Co. is a large company that segments its business into cost and profit centers. The Cost center for the manufacture of Product AC2 incurred the following costs in the previous period: The AC2 Department reports the results of production to the Sales department for the plant. Sales were 5,000 units last period. Each unit sells for $100. What were the total costs reported to the profit center last period?

Larson Bros. is a manufacturing company that has two major divisions. Both divisions have required a significant investment, and management wants to compare their performance. Below is information related to the two divisions. Management is confused that the ROI seems to be the same for both divisions and wants a deeper evaluation. Which division generates greater profitability per sales dollar?

If the market price of a good is above the minimum transfer price, the buying profit center should:

Profit Margin (Return on Sales) is calculated as:

Use the following information to answer Problems below Walkeasy Co. produces shoes and memory foam insoles. The memory foam insoles were originally designed to be a component of the shoes (1 insole per shoe). However, the market for memory foam insoles was profitable enough that management has opted to sell some of the insoles on their own. Any insoles produced beyond what is necessary to meet the needs of shoes production are sold at market prices. Normally, the transfer cost of the insoles is equal to the market sale price. Because of a differentiation strategy, management at Walkeasy has decided that the Shoes department and the Insoles department should be measured and tracked separately. When insoles are transferred to the Shoes department, they are inventoried at market prices. The following information relates to the costs of production for the year for the two departments. Per the company policy, all inventories are kept at stable levels: in other words, sales and production are equal, and purchases of raw materials equal those requisitioned for production. -Assume that in Problem 3, Walkeasy accepts the order and produces the memory foam insoles rather than purchasing them. What would be the overall static budget variance for the year for the whole company?

Pierre & Sons is a baked-goods manufacturing firm. Pierre has two main divisions: Packaged Mixes and Finished Desserts. The Finished Desserts division is considering purchasing the mix for its cakes from an outside supplier. The Packaged Mixes department incurs the following costs for each batch of cake mix: In addition to the cost of the cake mix, the Finished Desserts Department would incur the following costs for each batch of cakes: The current market price from an outside supplier for the quantity of mix needed by the Finished Desserts department is $500. The finished cakes from each batch of mix will sell for $1,000. What is the range of transfer prices within which the two departments could agree on a price to maximize Pierre & Sons' profit?

What is the responsibility of a profit center manager? Why is this a larger responsibility than that of a cost center manager?

The objective of transfer pricing between two profit centers is to maximize the contribution margin of the buying profit center.

What is the responsibility of a cost center manager?

The DuPont formula is:

Conner Manufacturing has two major divisions. Management wants to compare their relative performance. Information related to the two divisions is as follows: Division 1: Division 2: Management discovers that the ROI is the same for both divisions, and wants a deeper evaluation. Which division generates greater profitability per sales dollar?