Exam 17: Management Control Systems and Transfer Pricing

A company has gathered the following information about a potential fixed asset purchase: If the company has a 24% tax rate and their Economic Value Added (EVA) is $246.00, then what is their Weighted Average Cost of Capital (WACC)?

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 1, then how much Operating Income should they expect it to generate?

Crosby Inc. creates handmade silk neckties that it then sells on their website through a monthly subscription service. In an effort to increase membership, Crosby has promised their customers a one-day turnaround time on all orders. The largest bottleneck Crosby experiences is the cutting department due to the delicate nature of the material. To improve this process, Crosby has decided to buy a new cutting machine that would cost $12,400 with a useful life of 5 years. They estimated that this machine would generate $17,500 of sales and incur $8,788 of asset-specific expenses (excluding depreciation). If the company has a Required Rate of Return of 9.5%, then what is the Residual Income of this investment?

Recently, a manager at a grocery store voiced concerns that the higher-ups have set completely unrealistic goals that the store can in no way achieve this year. This manager fears that the pressure of trying to succeed may lead some employees to make unethical decisions in order to achieve the unrealistic goals. Management and employees are evaluated on their abilities to meet these goals. Which of the following is an example that is indicative of unethical behavior that might be employed by someone to meet unrealistic goals?

Smith Industries is in desperate need of a new press machine for their production department. The manager has been asked to select the most favorable option while keeping in mind that any decision made may also impact their department's evaluation. Given this, the manager knows that performing a thorough analysis is crucial. A machine could be purchased from Grove Inc. for a total cost of $9,677 and would generate Operating Income of $3,705. A different machine could be purchased from Forest Inc. for a total cost of $9,003 and would generate Operating Income of $3,432. The company has provided the following information: What is the percentage difference in EVA for the press machine from Grove when compared to the press machine from Forest? (Do not round intermediate calculations.)

Most companies begin with a centralized organizational model and gradually move towards a decentralized model. As some companies grow, they acquire other companies in an effort to streamline operations and become more efficient. One result of these acquisitions is integration. Which of the following is an example of vertical integration?

Janice is in charge of the Staining department of a local woodworking business. She is ramping up for what is likely to be her busiest year so far. She anticipates that the department will need 18,000 oak planks to meet their order fulfillment. The internal Materials department would be able to fulfill half of this order before it meets its capacity and has reported the following information about their external sales: The Materials department has agreed to a negotiated sales price of the minimum acceptable transfer price. An external vendor has also said it could fulfill the other half for $2.15 per plank, or they would agree to $2.10 if Janice bought all 18,000 planks from them. What is the difference in overall price if Janice purchases half internally and half externally versus purchasing all planks externally? Do not round intermediate calculations.

Spiral Company is a pasta company that specializes in fun-shaped pasta specifically marketed towards kids. Currently, they manufacture all of their pasta internally and purchase boxes from an external vendor for $0.58 per box. Carol, the manager of the Pasta department has big decisions to make for her department for the New Year as she creates a budget. One of their largest pasta-cutting machines will need to be replaced, and she finally found a great vendor who has offered to sell them a new model for $14,600. Carol has calculated the following estimates for the new machine: Each unit contains 16 ounces of pasta and requires one cardboard box in which it will be packaged and shipped. Carol has also been speaking with their internal packaging department about purchasing boxes from them. The manager of that department is going to put together a sales quote and has gathered the following information about their sales for the year: The negotiated price will be the minimum acceptable transfer cost. Spiral Company has a tax rate of 25%, a weighted average cost of capital of 6.6%, and a minimum required rate of return of 8.1%. Use the above information to answer the following questions. a. What is the Return on Investment and Economic Value Added from the new machine? If repairing the existing machine would also cost $14,600 but it had no Economic Value Added, then which deal should Carol select? b. What is the per-unit minimum acceptable transfer price and overall price quoted by the internal packaging department? Calculate the percentage difference between the quotes from the internal packaging department and the external vendor? c. Which offer will Carol select for her department? What is the highest amount Carol should be willing to pay internally per unit before she should consider it to be a bad decision?

One of the potential ways that transfer pricing can be established is to use market-based prices. This is often considered an alternative to cost-based transfer prices. In market-based costing, internal transfer prices may be based upon the same pricing structure offered to external customers. Of the choices provided below, which is most likely to be indicative of a pricing system such as cost-based transfer pricing?

Stellar Notes is a factory that produces fun and colorful writing utensils marketed to students. Within the company, there are various business units including a Plastic Cap Division and a Pen Division. Tara, the production manager of the Pen division has been updating their production worksheets and realized that they will run out of caps before they have satisfied their current orders. They normally purchase their caps from a special supplier, but they are going to ask the internal Plastic Cap Division to see if they can assist with an order of 2,643 pen caps to meet the existing need. The Plastic Cap Division has a production capacity of 88,543 caps, and they have sold 87,433 caps to external customers resulting in external sales of $134,660. They had variable costs of $96,543. If the Plastic Cap Division provided a quote for the caps requested internally, what will the overall price quoted by Plastic Cap Division be for the 2,643 caps requested?

A company is debating replacing the GPS system in a company vehicle that is used every day of the work week. By replacing the current older model GPS system in the vehicle, the company anticipates being able to add an additional $1,324 of Operating Income this year that will ultimately result in an Economic Value Added (EVA) of $806.43. If the company has a tax rate of 22% and a Weighted Average Cost of Capital (WACC) of 7.5%, then what is the cost of the new investment?

The Assembly department of a factory has been asked to put together a sales quote for the Sales department, which is an internal division at the same company. The Assembly department has reported the following external sales information: The Assembly department has an operating capacity of 14,300 units. The Sales department would like to purchase 5,000 units from the Assembly department. What is the minimum acceptable transfer price, and the absorption cost per unit? (Do not round intermediate calculations.)

The Paper business unit of Home Supplies Inc. has had a busy year and has reported sales of 174,300 pounds of fully processed paper for $98,754. They also incurred $55,320 worth of variable expenses and are currently operating at capacity. The Plate division of Home Supplies Inc. would like to purchase 7,487 pounds of paper internally from the Paper business unit to continue making durable paper plates. The Paper division is considering taking on this order and has decided that a 12% markup would be needed to satisfy their own internal needs. The Plate division said that they won't pay more than $4,800 total for this deal. What is the minimum acceptable transfer price? Will this be a deal that the Paper division can proceed with? (Round all calculations to two decimal places.)

Jasmine Inc. is a small flower shop that is performing some analysis based on their most recent year. They have determined that their profit margin was 0.2876 and investment turnover was 0.2188. They had purchased a new piece of equipment for $3,000. Based upon this information, what was their Return on Investment (ROI)?

Cordelia is a machine operator for Forever Twenty-Five and specifically works on handbags. Forever Twenty-Five would like to begin offering tie-dyed backpacks. In addition to a new product, Forever Twenty-Five will also need to purchase a piece of equipment that is able to stretch and then tie-dye the fabric for the backpack. Cordelia has priced out two different machines. The first will cost $5,674, generate $1,560 of sales, and will incur $992 of operating expenses. The second will cost $6,782, generate $1,733 of sales, and will incur $1,020 of operating expenses. The company has Weighted Average Cost of Capital (WACC) of 6.1% and a Required Rate of Return of 7.2%. Forever Twenty-Five has a current tax rate of 22%. What will the Economic Value Added (EVA) be for the second machine? (Do not round intermediate calculations.)

Jones Enterprises is evaluating their divisions over the past few months to determine what department has done the most effective job at meeting or exceeding the Return on Investment (ROI) metric of 16% required by the company. They begin by looking at Sheila's division, which purchased a new machine in the last year. This large piece of equipment cost $9,000, generated $3,420 of sales, and incurred $1,904 of operating expenses. Given this information, what is the ROI of this new equipment, and was this a good decision made by Sheila?

When an organization wants to optimize decentralization, achieve goal-congruent outcomes, and accomplish its mission, management will look to implement a well-designed and well-planned management control system. A system such as this will utilize the four pillars of management control systems to achieve a major impact on employee behavior. Which of the following is an example of the proper usage of one of the pillars?

All business units are created with certain goals against which they are measured. Regardless of the type of business unit, evaluations are utilized to ensure that management is directing the team towards the achievement of goals that are congruent with the overall company goals set forth by the highest levels of management. Which of the following best represent metrics used to evaluate a profit center?

The crinkle-cut division for a French fry company had the following results last year with all production sold to outside customers: The crinkle-cut division has a 30,000-pound processing capacity. If the crinkle-cut division were to transfer the remaining capacity to an internal division or unit, what would the minimum additional amount of profit be?

The retail department of Dunder Corp. has been working out a deal with a new customer, Neal Inc. The Retail department will be selling ceramic houseplant pots created internally by the Molding department. The Retail department has agreed to sell 12,430 pots to Neal Inc. at a price of $157,115.20. The Molding department has been putting together an estimate and noted that its operating income is $2.64 per unit. If the company would like to see an overall operating income per unit of $3.98 for both the departments, then what is the sales price of the units supplied by the Molding department to the Retail department?