Chat with AIExam 17: Management Control Systems and Transfer Pricing
A large public University has been undergoing some changes as it attempts to modernize and adopt a more online-friendly learning environment. The University has decided that one step that must be taken is to decentralize its operations. Previously, the President of the University was charged with making all decisions ranging from final say on supply purchases to hiring decisions. Which of the following examples shows a way that the University might successfully decentralize?
(32) 
VerifiedA
Ingen Production manufactures a top-of-the-line record player, and the Needle division manufactures one of many of the components needed to create the final product. The Needle division has an overall capacity of 150,000 units, which covers all internal needs and leaves enough capacity to sell directly to the external market. Thanks to proper planning, the Needle division has been able to successfully meet all of its production orders, both internally and externally. Ingen evaluates its management on the profitability of their respective divisions, so the managers are very interested in performing analysis on a regular basis. The manager of the Needle division has determined the following costs to be associated with the production of one needle (unit): 
The manager of the Record Player division mentioned that they can purchase needles externally for $3.70. Use this information to answer the following questions.
a. If the Needle Division sets the transfer price at $3.30, then would this be a good deal for both the Needle division and the Record Player division? Does this transfer price reflect variable cost, absorption cost, cost plus, market, or a cost of a different kind?
b. If the market price were to drop to $2.90, then would this still be a deal that the Needle division would find beneficial? Would they keep the same transfer price established in part a) or would they calculate a new one? Support your response with the appropriate calculations.
c. Assume the market continues to decrease in price. What is the lowest acceptable transfer price that the Needle division could accept? If this came to fruition, then what other measures could the Needle division take in order to try and increase their revenue or reduce their other costs?
The manager of the Record Player division mentioned that they can purchase needles externally for $3.70. Use this information to answer the following questions.
a. If the Needle Division sets the transfer price at $3.30, then would this be a good deal for both the Needle division and the Record Player division? Does this transfer price reflect variable cost, absorption cost, cost plus, market, or a cost of a different kind?
b. If the market price were to drop to $2.90, then would this still be a deal that the Needle division would find beneficial? Would they keep the same transfer price established in part a) or would they calculate a new one? Support your response with the appropriate calculations.
c. Assume the market continues to decrease in price. What is the lowest acceptable transfer price that the Needle division could accept? If this came to fruition, then what other measures could the Needle division take in order to try and increase their revenue or reduce their other costs? (40) Verifieda. Prior to determining whether or not this is a good deal, it would be beneficial to calculate how much of the costs that $3.30 would cover. The overall costs incurred by the Needle division to produce one unit are: $0.50 + $0.89 + $0.46 + $1.15 = $3.00. At the transfer price of $3.30, this would be a good deal for the Needle division since they are not only covering the full absorption cost but also earning an extra $0.30 per unit sold internally. This is also a good deal for the Record Player division since they are paying $0.40 less per needle than they would be by purchasing the needles externally.
b. If the market price dropped to $2.90, then this would still cover most of the costs incurred by the Needle division. With the new market price being lower than the transfer price established in part (a), they would not keep the transfer price of $3.30 and would have to establish a new one. Their variable costs are: $0.50 + $0.89 + $0.46 = $1.85. The new market price would cover all of the variable costs while also adding an extra $1.05 in revenue per needle that would almost cover the full absorption cost. The new transfer price could now be in a range from $1.85 at the low end up to $2.90 at the high end per unit. Anything less than $2.90 is likely to be enticing for the Record Player division as it is still less than they would have to pay if they were purchasing externally.
c. If the market continues to decrease in price, then they would have to adjust their minimum acceptable transfer price as well. The lowest they would be able to accept would be their variable cost: $0.50 + $0.89 + $0.46 = $1.85. If the market price eventually dropped below $1.85, then this would present a difficult challenge for the Needle division. In order to increase revenues, they would have to seek out additional vendors that would want or need their product. To reduce their variable costs, they could also seek out a reduction in their direct materials cost if they were able to negotiate this with the supplier they buy from.
Karen owns a small company that has several business units. The main product of this company is jackets sewn with a special insulated lining that can withstand extremely cold temperatures. One of her business units at the company is responsible for the production of the fancy decorative buttons sewn onto the front of this jacket. The button division has the capacity to meet both internal and external demand with an overall production capacity of 15,000 buttons annually. The company manufactured and sold 12,479 of its available units to the external companies. The Jacket Division just lost its main external button supplier and is in need of 8,788 buttons as soon as possible. The Jacket Division has been collecting external bids but has also requested that the Button Division provide a quote prior to making a final decision. The Button Division has produced the following numbers so far (all based upon sales to external customers): 
The jacket division has been given the following offers from external suppliers
Supplier A: $1.09 per button plus a 2% markup to cover shipping
Supplier B: $1.14 per button plus a $250 total shipping rate
a. What is the minimum acceptable transfer price for their internal purchase from the Button Division? What is the overall price they would need to pay for these buttons?
b. What is the overall price for Supplier A? What is the overall price for Supplier B? Which supplier has created the more appealing offer?
c. Since the jacket division needs these buttons quickly, what option should they select? Would your answer change if Supplier A and Supplier B both waived their shipping charges?
The jacket division has been given the following offers from external suppliers
Supplier A: $1.09 per button plus a 2% markup to cover shipping
Supplier B: $1.14 per button plus a $250 total shipping rate
a. What is the minimum acceptable transfer price for their internal purchase from the Button Division? What is the overall price they would need to pay for these buttons?
b. What is the overall price for Supplier A? What is the overall price for Supplier B? Which supplier has created the more appealing offer?
c. Since the jacket division needs these buttons quickly, what option should they select? Would your answer change if Supplier A and Supplier B both waived their shipping charges? (32) Verifieda. The minimum acceptable transfer price: idle capacity = $0.37 per button and no idle capacity = $0.86; therefore, the overall price is $6,322.39. This problem requires familiarity with the formula for the minimum acceptable transfer price when a factory has both idle capacity and when it has no idle capacity. This will result in two different minimum acceptable transfer prices. To determine how many are subject to each price, subtract the current production from the high threshold of the capacity. 15,000 - 12,479 = 2,521 buttons can still be produced using existing idle capacity. The minimum acceptable transfer price of these 2,521 buttons is the variable cost per unit, and that is equal to $4,675/12,479 buttons = $0.37 per button. The number of units charged at a different price other than the variable cost will be the total requested units minus the units able to be made before hitting capacity = 8,788 - 2,521 = 6,267 buttons. The minimum acceptable transfer price of these remaining 6,267 buttons will be the variable manufacturing cost per unit plus contribution margin per unit on external sales. Contribution margin = Sales - Variable Costs = $10,798 - $4,675 = $6,123. Now, divide this by the units sold externally: $6,123/12,479 buttons = $0.49 per button. The minimum acceptable transfer price = $0.37 + $0.49 = $0.86 per button. The total price that will be quoted is: (2,521 × $0.37) + (6,267 × $0.86) = $932.77 + $5,389.62 = $6,322.39.
b. Supplier A = $9,770.50, Supplier B = $10,268.32. Supplier A has created a more appealing offer between these two external vendors since their overall price is much lower even after the 2% markup
Supplier A = 8,788 buttons times $1.09 per button plus a 2% markup. (8,788 × $1.09) × 1.02 = $9,578.92 × 1.02 = $9,770.50.
Supplier B = 8,788 buttons times $1.14 per button plus a $250 shipping fee. (8,788 × $1.14) + $250 = $10,018.32 + $250 = $10,268.32.
c. Since the Jacket Division is in a hurry and must decide quickly, they are likely to select the offer from the Internal Button Division, assuming they can receive their order as soon as possible. If the Button Division is not able to deliver the buttons in an acceptable time frame, then the Jacket Division would then look more seriously at the offer from Supplier A. Even if Supplier A and Supplier B dropped their shipping surcharges, the internal Button Division would still offer a better price than either Supplier A or Supplier B. However, should the Button Division fall through, then the lack of shipping charges would make the offer from Supplier A more appealing than that quoted by Supplier B as the overall price would then be lower.
A small surveying company has decided they would like to move their accounting in-house and will be training a new employee. In anticipation of this new development, they have decided to purchase a new accounting software package that should service all of their needs. Bob, a manager, has put together the following information: 
If the company selects Software 2, then how much Operating Income should they expect it to generate?
If the company selects Software 2, then how much Operating Income should they expect it to generate? (43) Kit works for a company that creates brochures for travel agencies to distribute to their clients. The company's printer has recently broken down and will need to be replaced immediately so that they can meet several client deadlines. A manager has found a vendor that has a model available for sale and has compiled the following information and estimates: 
If the company has a Required Rate of Return of 7.75%, then what is the amount of Residual Income that they should anticipate after installing the new printer?
If the company has a Required Rate of Return of 7.75%, then what is the amount of Residual Income that they should anticipate after installing the new printer? (36) In an effort to optimize decentralization, work towards accomplishing its mission, and achieve goal-congruence, an organization will strive to utilize a lot of planning in the design and implementation of their management system. Which of the following represents one of the four pillars of management control systems?
(31) Comfy Critters is a factory that creates stylish and comfortable bedding for dogs of all sizes. They are entering their 6th year of business, and they have decided that one of their largest sewing machines is nearing the end of its useful life. Their production manager, Todd, is trying to help management decide how best to proceed with their next steps. Todd has the choices narrowed down to repairing the current machine (Repair), or replacing the machine with one of two different replacement options (New Machine 1 or New Machine 2). The numbers associated with each of these options are as follows: 
The company has chosen to utilize the straight-line method of depreciation calculation. The company has utilized a variety means to raise capital, and it is allocated as follows: 
Comfy Critters has a tax rate of 25% and a Required Rate of Return of 8.4%. (Do not round your calculations.)
a. What is the Weighted Average Cost of Capital (WACC) for Comfy Critters?
b. What are the Return on Investment (ROI), Residual Income (RI), and Economic Value Added (EVA) for the Repair option?
c. What are the Return on Investment, Residual Income, and Economic Value Added for the New Machine 1 option?
d. What are the Return on Investment, Residual Income, and Economic Value Added for the New Machine 2 option?
e. What should Todd recommend to management based on the analyses in parts b, c, and d? Provide as much detail as possible to support that decision.
The company has chosen to utilize the straight-line method of depreciation calculation. The company has utilized a variety means to raise capital, and it is allocated as follows: Comfy Critters has a tax rate of 25% and a Required Rate of Return of 8.4%. (Do not round your calculations.)
a. What is the Weighted Average Cost of Capital (WACC) for Comfy Critters?
b. What are the Return on Investment (ROI), Residual Income (RI), and Economic Value Added (EVA) for the Repair option?
c. What are the Return on Investment, Residual Income, and Economic Value Added for the New Machine 1 option?
d. What are the Return on Investment, Residual Income, and Economic Value Added for the New Machine 2 option?
e. What should Todd recommend to management based on the analyses in parts b, c, and d? Provide as much detail as possible to support that decision. (37) Dot Co. is a paint company, and it just completed its second quarter and is performing some analysis so that it can evaluate its top two paint divisions: Latex and Oil-Based. In their third quarter, the company has decided that it can give one or both divisions $15,000 of cash for investments if the analysis support it. Dot has requested that their head accountant gather some financial statement data and analyze it before they move forward with any potential investments. The accountant has compiled the following condensed income statements and selected balance sheet information for the second quarter: 
In the second quarter, each division purchased a new piece of mixing equipment that cost $286,000. The company's effective tax rate is 23%, it has a Required Rate of Return of 8.5%, and its Weighted Average Cost of Capital (WACC) is 7.6%. Use this information to answer the following questions.
a. What are the Return on Investment (ROI), Residual Income (RI), and the Economic Value Added (EVA) for the Latex Division?
b. What are the Return on Investment (ROI), Residual Income (RI), and the Economic Value Added (EVA) for the Oil-Based Division?
c. Based on this initial analysis, will either department be granted money to pursue the additional investment?
In the second quarter, each division purchased a new piece of mixing equipment that cost $286,000. The company's effective tax rate is 23%, it has a Required Rate of Return of 8.5%, and its Weighted Average Cost of Capital (WACC) is 7.6%. Use this information to answer the following questions.
a. What are the Return on Investment (ROI), Residual Income (RI), and the Economic Value Added (EVA) for the Latex Division?
b. What are the Return on Investment (ROI), Residual Income (RI), and the Economic Value Added (EVA) for the Oil-Based Division?
c. Based on this initial analysis, will either department be granted money to pursue the additional investment? (35) After a company has decided to vertically integrate with another, they will have to seriously consider whether to move upstream or downstream within their value chain. Each direction has its advantages and disadvantages and plays a crucial role in the improved efficiency post-acquisition. Which of the following is an example of an integration type other than forward vertical?
(44) The Production Department of Ollie Corp. has produced and sold 27,840 yards of fabric to local craft stores. The Sewing Department of Ollie Corp. would like to manufacture 12,300 scarves and needs fabric. Each scarf will require 1 yard of fabric and the Sewing Department has asked the Production Department for a quote. The Production Department's Sales were $35,360, with Variable Costs of $11,300, Fixed Costs of $16,540, and production capacity of 60,000 yards of fabric. The negotiated sales price from the Production Department is the absorption cost. What should the sales price per unit for the Sewing Department be if they would like to have an Operating Income of $4,940?
(33) The Riggs Company manufactures monogrammed t-shirts that are sold online. The manager of one of the business units would like to consider replacing their current embroidery machine and has a choice between buying either (a) a brand new one for $12,840 or (b) a refurbished model for $9,703. The new machine will incur $4,906 of expenses, and the refurbished machine will incur $4,677 of expenses. Both machines will have a Return on Investment (ROI) of 9%. How much Sales will the new machine generate? (Do not round calculations.)
(42) Turner Inc. is a factory that creates laptop bags that contain an added sleeve for increased protection. The sewing department is currently debating on the best way to proceed with sourcing the materials needed to create the end product. What is most likely to impact a potential price with an internal department?
(38) In a decentralized organization, business units are created to better achieve a sense of independence amongst management. In a business unit, management is responsible for ensuring that tasks in their department are being completed and for overseeing their subordinates. One of the three main characteristics of a decentralized organization is accountability, which means that one will have to answer for the job when it is done. Which of the following best represents the existence of accountability in an organization?
(37) The assembly department of Mifflin Inc. has negotiated a deal with the distribution department (internal department) to sell them laser printers. The assembly department has operating capacity of 76,000 printers annually and has made the following external sales: 
The negotiated deal will be to sell 19,804 printers to the distribution department for the minimum acceptable transfer price. If the distribution department would like to have an Operating Income of $8,456, then what is the overall amount of sales that they must have? Do not round intermediate calculations.
The negotiated deal will be to sell 19,804 printers to the distribution department for the minimum acceptable transfer price. If the distribution department would like to have an Operating Income of $8,456, then what is the overall amount of sales that they must have? Do not round intermediate calculations. (37) The Tortilla Chip business unit at Chipz Corp has reported the following results for years 1 and 2 of their operation: 
The Tortilla Chip business unit sold 69,870 bags in Year 1, and they sold 75,433 bags in Year 2. In the first year, they had an operating capacity of 75,000 bags and fulfilled a special order for an internal department of 12,465 bags. In the second year, they had an operating capacity of 80,000 bags and fulfilled a special order for an internal department of 14,788 bags. What is the difference in overall price for the special orders fulfilled for the internal department in years 1 and 2? (Round per unit cost to two decimal places.)
The Tortilla Chip business unit sold 69,870 bags in Year 1, and they sold 75,433 bags in Year 2. In the first year, they had an operating capacity of 75,000 bags and fulfilled a special order for an internal department of 12,465 bags. In the second year, they had an operating capacity of 80,000 bags and fulfilled a special order for an internal department of 14,788 bags. What is the difference in overall price for the special orders fulfilled for the internal department in years 1 and 2? (Round per unit cost to two decimal places.) (42) The lawn and garden center of a local hardware store would like to find additional ways to attract customers. One idea the manager of this section had was to purchase a machine that would allow customers to fill a reusable container of their choosing with grass seed. The customers would then pay by the ounce and could return to the store as often as needed to obtain more grass seed. The company also views this as an opportunity to promote a more earth-friendly approach to lawn center by reducing plastic waste from disposable bags of grass seed. A new dispenser machine could be purchased and installed at the store for $4,702. There would be yearly maintenance fee of $186 and other annual expenses (excluding depreciation) of $563. The machine would have a useful life of 15 years, and the company would like to use a straight-line depreciation calculation. The manager believes yearly sales would be $1,942. Prior to moving forward with this purchase, the manager would like to analyze some data. (Do not round your calculations.)
a. What is the Return on Sales or Profit Margin for the Dispenser? Discuss what this number means for the company.
b. What is the Investment Turnover for the Dispenser? Discuss what this number means for the company.
c. Should the manager seriously consider moving forward with this purchase if the ROI is 16% on average for the company? Would your answer change if the manager's evaluation was based upon ROI?
(38) In a well-structured organization, management will strive to achieve goal congruence. While managers may find that they are being evaluated on the performance of their own business unit, the overall congruence of goals must be kept in mind when setting objectives for these managers. Which of the following represents a suboptimal outcome that is misaligned with the company-wide objective of saving money?
(33) After a company has decided to vertically integrate with another, they will have to seriously consider whether to move upstream or downstream within their value chain. Each direction has its advantages and disadvantages and plays a crucial role in the improved efficiency post-acquisition. Which of the following is an example of forward vertical integration?
(44) A factory has several business units and is vertically integrated throughout most of its supply chain. One of the first ways the company moved in this direction was to purchase a Wholesale department where the Production department could directly sell its products. The Wholesale department purchases the final product from the Production department, packages the product, and then sells it to the external vendors. The results of this part of the operation are as follows: 
There is currently no external market for the Production department to sell its products, so all sales are from the 80,000 units sold to the Wholesale department. The product created by the Production department is very unique, and the Wholesale department cannot acquire it from another vendor or supplier. Assuming that the Production department uses the minimum acceptable transfer price, how much total variable costs are they incurring per unit once the Wholesale department sells overall?
There is currently no external market for the Production department to sell its products, so all sales are from the 80,000 units sold to the Wholesale department. The product created by the Production department is very unique, and the Wholesale department cannot acquire it from another vendor or supplier. Assuming that the Production department uses the minimum acceptable transfer price, how much total variable costs are they incurring per unit once the Wholesale department sells overall? (47) A company can choose not to set a particular transfer price policy and would instead prefer to empower business units to negotiate amongst themselves. When this occurs, this opens up the possibility of many options from the continuum of transfer prices to be an option for pricing. For this to be accurate, certain conditions exist. Which of the following best represents one of the conditions that must be present?
(43) 
Filters
- Essay(0)
- Multiple Choice(0)
- Short Answer(0)
- True False(0)
- Matching(0)