Exam 10: Management Control in Decentralized Organizations

The West and East Divisions are divisions in the same company.Currently the East Division buys a part from West Division for $384 per unit.The West Division wants to increase the price of the part it sells to East Division by $96 to $480.The manager of the East Division has stated that he cannot pay that much insofar as the division's profit goes below zero.The manager of the East Division can buy the part from an outside supplier for $448 per unit.The cost data pertaining to the part is supplied by the West Division: Direct materials \1 36 Direct labor 200 Variable overhead 40 Fixed overhead 42 If West Division does not produce the parts for the East Division,it will be able to avoid one-third of the fixed manufacturing overhead costs.The West Division has excess capacity but no alternative uses for the facilities.West Division normally sells the part outside the company for $400 per unit.What is the minimum transfer price per unit that West Division should charge East Division?

EVA equals adjusted after-tax operating income minus capital turnover.

A disadvantage of decentralization in organizations is higher overhead costs due to duplication.

High Division sells a part internally to Low Division.Low Division uses the part to produce inexpensive products sold at discount stores.High Division incurs costs of $1.50 per part,while Low Division incurs additional costs of $4.80 per product.High Division sells the part to Low Division for $2.00 per part. Low Division can purchase the part from an outside supplier for $1.00 per part,but does not accept the offer.The final product is sold to external customers for $8.00 each.Which of the following formulas correctly reflects the company's operating income?

In general,use of economic profit or EVA will promote goal congruence and lead to better investment decisions than the use of ROI.

Bombard Division has operating income of $200,000 for the year ending December 31,2011.Average invested capital is $1,000,000 and the weighted-average cost of capital is 10%.The division is considering a new investment that would cost $500,000 and earn 15% annually.If economic profit is the performance metric,should the manager of the Bombard Division accept the new investment?

Incentives do not increase managerial effort toward goal congruence.

Some level of decentralization in an organizational structure creates benefits for most organizations.

ABC Division is in the United States with high income tax rates.ABC Division produces a component for the Spain Division in a low income-tax-rate country.What transfer price should ABC Division set for the component sold to the Spain Division to minimize taxes?

Decentralization is more successful in organizations when ________.

Helen Company's records reveal the following: Division A Market price of finished part to outsiders \ 75 per unit Variable costs per part \ 51 per unit Division B Sale price of finished product per unit \ 105 per unit Variable costs: \begin{array} { l } \text {Division \mathrm{A}(1 part \( ) \) }&?\\ \text { Division B Processing}&27 \text { per unit } \\ \text {Division B Selling }&12 \text { per unit } \\\end{array} Division B wants to buy the part from Division A.The variable costs of Division B will be incurred whether it buys the part from Division A or from an outside supplier.Division B can buy the parts from an outside supplier at $70 per unit.Division A has no excess capacity.What is the highest price that Division B should pay to Division A for the parts per unit?

Return on sales can be increased by increasing expenses.

Which of the following statements about the establishment of transfer prices for internal sales and purchases between segments is FALSE?

Maralee Company's records reveal the following: Division X Market price of finished component to outsiders \ 32 per unit Variable costs per component \ 24 per unit Division Y Sale price of finished product \ 42 per unit Variable costs: Division X(1 component ) ? Division Y Assembly 9 per unit Division Y Packaging 4 per unit Division Y wants to buy the component from Division X.The variable costs of Division Y will be incurred whether it buys the component from Division X or from an outside supplier.Assume Division X is working at full capacity; there is no excess capacity.Division Y can buy the component from an outside supplier for $32 per unit.What is the lowest transfer price per unit Division X should accept from Division Y for the component?

Juan Company's after-tax operating income was $882 million.Average total assets were $5,900 million and average total stockholders' equity was $4,050 million.Juan Company's cost of capital was 10%.Juan Company uses total assets as the measure of invested capital.What is Juan Company's residual income?

There is(are)________ goal(s)of transfer pricing systems.There is no universally ________ transfer price.

Collier Products has a Valve Division that manufactures and sells a standard valve.The Valve Division has a capacity of 100,000 units.The variable costs per unit are $16.The fixed costs per unit are $9,based on the capacity of 100,000 units.None of the fixed costs are avoidable.The selling price to outside customers in the intermediate market are $30 per unit. The Pump Division wants to purchase the valve from the Valve Division for one of its pumps.The Pump Division is currently purchasing 10,000 valves per year from an overseas supplier at a cost of $29 per valve.The selling price of the completed pump is $100 per unit and the costs to complete the pump are $60 per unit,excluding the valve purchased from the other division. Required: A) Assume the Valve Division has ample idle capacity to produce the 10,000 valves for the Pump Division. What should be the transfer price between the two divisions? Give a range. Determine the minimum transfer price for the Valve Division and the maximum transfer price for the Pump Division. B) Assume the Valve Division does not have idle capacity to produce the valves for the Pump Division. It is selling all that it can produce to outside customers in the intermediate market. What should be the transfer price between the two divisions? Give a range. Determine the minimum transfer price for the Valve Division and the maximum transfer price for the Pump Division. Will a transfer occur? C) Assume the Valve Division does not have idle capacity to produce the valves for the Pump Division. It is selling all that it can produce to outside customers in the intermediate market. Now assume the Valve Division saves $3.00 per unit by selling internally. What should be the transfer price between the two divisions? Give a range. Determine the minimum transfer price for the Valve Division and the maximum transfer price for the Pump Division.

In designing management control systems,top managers should consider the system's impact on the behavior of employees.

An ideal performance metric would measure and reward the manager for ________ factors,and neither reward nor punish the manager for ________ factors.

If actual costs are used for transfer pricing by a selling division,the selling division has little incentive to control costs.