Exam 22: Management Control Systems, Transfer Pricing, and Multinational Considerations

The president of Silicon Company has just returned from a week of professional development courses and is very excited that she will not have to change the organization from a centralized structure to a decentralized structure just to have responsibility centers. However, she is somewhat confused about how responsibility centers relate to centralized organizations where a few managers have most of the authority. Required: Explain how a centralized organization might allow for responsibility centers.

Autonomy is the freedom for managers at lower levels of the organization to make decisions.

Answer the following questions using the information below: Greenlawn Corporation has two divisions, Distribution and Production. The company's primary product is fertilizer. Each division's costs are provided below: The Distribution Division has been operating at a capacity of 4,000,000 pounds a week and usually purchases 2,000,000 pounds from the Production Division and 2,000,000 pounds from other suppliers at $0.90 per pound. -What is the transfer price per barrel from the Production Division to the Distribution Division, assuming the method used to place a value on each pound of fertilizer is 120% of full costs?

A DISADVANTAGE of decentralization is that it:

The Mill Flow Company has two divisions. The Cutting Division prepares timber at its sawmills. The Assembly Division prepares the cut lumber into finished wood for the furniture industry. No inventories exist in either division at the beginning of 20X5. During the year, the Cutting Division prepared 60,000 cords of wood at a cost of $660,000. All the lumber was transferred to the Assembly Division, where additional operating costs of $6 per cord were incurred. The 600,000 boardfeet of finished wood were sold for $2,500,000. Required: a. Determine the operating income for each division if the transfer price from Cutting to Assembly is at cost - $11 a cord. b. Determine the operating income for each division if the transfer price is $9 per cord. c. Since the Cutting Division sells all of its wood internally to the Assembly Division, does the manager care what price is selected? Why? Should the Cutting Division be a cost center or a profit center under the circumstances?

Answer the following questions using the information below: Calculate the Division operating income for the Artic Air Company which manufactures only one type of air conditioner and has two divisions, the Compressor Division, and the Assembly Division. The Compressor Division manufactures compressors for the Assembly Division, which completes the air conditioner and sells it to retailers. The Compressor Division "sells" compressors to the Assembly Division. The market price for the Assembly Division to purchase a compressor is $38.50. (Ignore changes in inventory.)The fixed costs for the Compressor Division are assumed to be the same over the range of 5,000-10,000 units. The fixed costs for the Assembly Division are assumed to be $7.50 per unit at 10,000 units. -If the Assembly Division sells 1,000 air conditioners at a price of $375.00 per air conditioner to customers, what is the operating income of both divisions together?

A product may be passed from one subunit to another subunit in the same organization. The product is known as a(n):

If the product sold between divisions has no intermediate market, the opportunity cost of supplying the product internally is the variable cost of the product.

Management control systems motivate managers and other employees to exert effort through a variety of rewards tied to the achievement of goals.

A company has a plant in a high tax jurisdiction that produces products for a facility in a low tax jurisdiction. Suggest a strategy, including transfer prices, which will result in the lowest tax for the overall corporation.

Answer the following questions using the information below: Penn Oil Corporation has two divisions, Refining and Production. The company's primary product is Luboil Oil. Each division's costs are provided below: The Refining Division has been operating at a capacity of 40,000 barrels a day and usually purchases 25,000 barrels of oil from the Production Division and 15,000 barrels from other suppliers at $60 per barrel. -What is the transfer price per barrel from the Production Division to the Refining Division, assuming the method used to place a value on each barrel of oil is 180% of variable costs?

The essence of decentralization is the freedom for managers at lower levels of the organization to make decisions.

Sportswear Company manufactures sneakers. The Athletic Division sells its socks for $18 a pair to outsiders. Sneakers have manufacturing costs of $7.50 each for variable and $4.50 for fixed. The division's total fixed manufacturing costs are $315,000 at the normal volume of 70,000 units. The European Division has offered to buy 15,000 Sneakers at the full cost of $12. The Athletic Division has excess capacity and the 15,000 units can be produced without interfering with the current outside sales of 70,000. The 85,000 volume is within the division's relevant operating range. Explain whether the Athletic Division should accept the offer.

Answer the following questions using the information below: Calculate the Division operating income for the AlphaShoe Company which manufactures only one type of shoe and has two divisions, the Sole Division, and the Assembly Division. The Sole Division manufactures soles for the Assembly Division, which completes the shoe and sells it to retailers. The Sole Division "sells" soles to the Assembly Division. The market price for the Assembly Division to purchase a pair of soles is $40. (Ignore changes in inventory.)The fixed costs for the Sole Division are assumed to be the same over the range of 40,000-100,000 units. The fixed costs for the Assembly Division are assumed to be $14 per pair at 100,000 units. -What is the market-based transfer price per pair of soles from the Sole Division to the Assembly Division?

Market-based transfer prices are ideal when there is no idle capacity.in the selling division.

A major advantage of using actual costs for transfer prices is that often inefficiencies are NOT passed along to the receiving division.

When an industry has excess capacity, market prices may drop well below their historical average. If this drop is temporary, it is called:

Answer the following questions using the information below: Greenlawn Corporation has two divisions, Distribution and Production. The company's primary product is fertilizer. Each division's costs are provided below: The Distribution Division has been operating at a capacity of 4,000,000 pounds a week and usually purchases 2,000,000 pounds from the Production Division and 2,000,000 pounds from other suppliers at $0.90 per pound. -What is the transfer price per barrel from the Production Division to the Distribution Division, assuming the method used to place a value on each pound of fertilizer is 160% of variable costs?

Decentralizaion can sometimes lead to suboptimal decisions.

Which of the following statements is FALSE?