Deck 13: Investment Centers and Transfer Pricing

Question 1

Which of the following is the correct mathematical expression to derive a company's capital turnover?

A)Sales revenue / invested capital.
B)Contribution margin / invested capital.
C)Income / invested capital.
D)Invested capital / sales revenue.
E)Invested capital / incomE.

Answer 1

Sales revenue / invested capital.

Question 2

Capital turnover shows:

A)the income generated by each dollar of capital investment.
B)the sales dollars generated by each dollar of capital investment.
C)the contribution margin generated by each dollar of capital investment.
D)the capital investment generated by each sales dollar.
E)the capital investment generated by each dollar of incomE.

Answer 2

B

Question 3

What practice best describes when divisional managers throughout an organization work together to achieve the organization's goals?

A)Participatory management.
B)Goal attainment.
C)Goal congruence.
D)Centralization of objectives.
E)Negotiation by subordinates.

Answer 3

C

Question 4

A division's return on investment may be improved by increasing sales margin and cost of capital.

Question 5

Sullivan Enterprises had a sales margin of 5%,sales of $4,000,000,and invested capital of $5,000,000.The company's ROI was:

A)4.00%.
B)6.25%.
C)16.00%.
D)25.00%.
E)some other figurE.

Question 6

The maximization of profits of the buying division is one of the goals that should be pursued when setting transfer prices.

Question 7

Consider the following statements about goal congruence:
I)Goal congruence is obtained when managers of subunits throughout an organization strive to achieve the goals set by top management.
II)Managers are often more concerned about the performance of their own subunits rather than the performance of the entire organization.
III)Achieving goal congruence in most organizations is relatively straightforward and easy to accomplish.
Which of the above statements is (are)true?

A)I only.
B)II only.
C)I and II.
D)II and III.
E)I,II,and III.

Question 8

Which of the following performance measures is (are)used to evaluate the general financial success or failure of investment centers?

A)Residual income.
B)Return on investment.
C)Number of suppliers.
D)Economic value addeD.
E)All of these measures are used except "C."

Question 9

Vision,Inc.reported a return on investment of 12%,a capital turnover of 5,and income of $180,000.On the basis of this information,the company's invested capital was:

A)$300,000.
B)$900,000.
C)$1,500,000.
D)$7,500,000.
E)some other amount.

Question 10

Sales margin shows:

A)the amount of income generated by each dollar of capital investment.
B)the number of sales dollars generated by each dollar of capital investment.
C)the percentage of each sales dollar that remains as profit after all expenses are covered.
D)the amount of capital investment generated by each sales dollar.
E)the amount of capital investment generated by each dollar of incomE.

Question 11

A company's sales margin:

A)must,by definition,be greater than the firm's net sales.
B)has basically the same meaning as the term "contribution margin."
C)is computed by dividing sales revenue by income.
D)is computed by dividing income by sales revenue.
E)shows the sales dollars generated from each dollar of incomE.

Question 12

Weston Company had sales revenue and operating expenses of $5,000,000 and $4,200,000,respectively,for the year just ended.If invested capital amounted to $6,000,000,the firm's ROI was:

A)13.33%.
B)83.33%.
C)120.00%.
D)750.00%.
E)some other figurE.

Question 13

Economic value added uses a firm's weighted-average cost of capital.

Question 14

Which of the following is the correct mathematical expression for return on investment?

A)Sales margin / capital turnover.
B)Sales margin + capital turnover.
C)Sales margin - capital turnover.
D)Sales margin * capital turnover.
E)Capital turnover / sales margin.

Question 15

The biggest challenge in making a decentralized organization function effectively is:

A)earning maximum profits through fair practices.
B)minimizing losses.
C)taking advantage of the specialized knowledge and skills of highly talented managers.
D)obtaining goal congruence among division managers.
E)developing an adequate budgetary control system.

Question 16

The ROI calculation will indicate:

A)the percentage of each sales dollar that is invested in assets.
B)the sales dollars generated from each dollar of income.
C)how effectively a company used its invested capital.
D)the invested capital generated from each dollar of income.
E)the overall quality of a company's earnings.

Question 17

ROI is most appropriately used to evaluate the performance of:

A)cost center managers.
B)revenue center managers.
C)profit center managers.
D)investment center managers.
E)both profit center managers and investment center managers.

Question 18

The external market price transfer-pricing method can lead to dysfunctional decision-making behavior by managers.

Question 19

Which of the following is not considered in the calculation of divisional ROI?

A)Divisional income.
B)Earnings velocity.
C)Capital turnover.
D)Sales margin.
E)Sales revenuE.

Question 20

The income calculation for a division manager's ROI should be based on profit margin traceable to the division.

Question 21

Sunrise Corporation has a return on investment of 15%.A Sunrise division,which currently has a 13% ROI and $750,000 of residual income,is contemplating a massive new investment that will (1)reduce divisional ROI and (2)produce $120,000 of residual income.If Sunrise strives for goal congruence,the investment:

A)should not be acquired because it reduces divisional ROI.
B)should not be acquired because it produces $120,000 of residual income.
C)should not be acquired because the division's ROI is less than the corporate ROI before the investment is considered.
D)should be acquired because it produces $120,000 of residual income for the division.
E)should be acquired because after the acquisition,the division's ROI and residual income are both positive numbers.

Question 22

The Fitzhugh Division of General Enterprises has a negative residual income of $540,000.Fitzhugh's management is contemplating an investment opportunity that will reduce this negative amount to $400,000.The investment:

A)should be pursued because it is attractive from both the divisional and corporate perspectives.
B)should be pursued because it is attractive from the divisional perspective although not from the corporate perspective.
C)should be pursued because it is attractive from the corporate perspective although not from the divisional perspective.
D)should not be pursued because it is unattractive from both the divisional and corporate perspectives.
E)should not be pursued because it is unattractive from the divisional perspective although it is attractive from the corporate perspectivE.

Question 23

The ROI is:

A)6%.
B)15%.
C)20%.
D)30%.
E)40%.

Question 24

The Magellan Division of Global Corporation,which has income of $250,000 and an asset investment of $1,562,500,is studying an investment opportunity that will cost $450,000 and yield a profit of $67,500.Assuming that Global uses an imputed interest charge of 14%,would the investment be attractive to:
1-Divisional management if ROI is used to evaluate divisional performance?
2-Divisional management if residual income (RI)is used to evaluate divisional performance?
3-The management of Global Corporation?

A)Choice A
B)Choice B
C)Choice C
D)Choice D
E)Choice E

Question 25

For the period just ended,United Corporation's Delta Division reported profit of $31.9 million and invested capital of $220 million.Assuming an imputed interest rate of 12%,which of the following choices correctly denotes Delta's return on investment (ROI)and residual income?

A)Choice A
B)Choice B
C)Choice C
D)Choice D
E)Choice E

Question 26

Excel Division reported a residual income of $200,000 for the year just ended.The division had $8,000,000 of invested capital and $1,000,000 of income.On the basis of this information,the imputed interest rate was:

A)2.5%.
B)10.0%.
C)12.5%.
D)20.0%.
E)some other figurE.

Question 27

For the period just ended,Techno Corporation's Stocker Division reported profit of $54 million and invested capital of $450 million.Assuming an imputed interest rate of 10%,which of the following choices correctly denotes Stocker's return on investment (ROI)and residual income?

A)Choice A
B)Choice B
C)Choice C
D)Choice D
E)Choice E

Question 28

The sales margin is:

A)6%.
B)15%.
C)20%.
D)30%.
E)40%.

Question 29

BFF Corporation uses an imputed interest rate of 13% in the calculation of residual income.Division X,which is part of BFF,had invested capital of $1,200,000 and an ROI of 16%.On the basis of this information,X's residual income was:

A)$24,960.
B)$36,000.
C)$156,000.
D)$192,000.
E)some other amount.

Question 30

The residual income is:

A)$30,000.
B)$36,000.
C)$42,000.
D)$54,000.
E)$82,800.

Question 31

Consider the following statements about residual income:
I)Residual income incorporates a firm's cost of acquiring investment capital.
II)Residual income is a percentage measure,not a dollar measure.
III)If used correctly,residual income may result in division managers making decisions that are in their own best interest and not in the best interest of the entire firm.
Which of the above statements is (are)true?

A)I only.
B)II only.
C)I and II.
D)II and III.
E)I and III.

Question 32

Which of the following is used in the calculation of both return on investment and residual income?

A)Total stockholders' equity.
B)Retained earnings.
C)Invested capital.
D)Total liabilities.
E)The cost of capital.

Question 33

A division's return on investment may be improved by increasing:

A)cost of goods sold and expenses.
B)sales margin and cost of capital.
C)sales revenue and cost of capital.
D)capital turnover or sales margin.
E)capital turnover or cost of capital.

Question 34

Imputed interest can best be described as:

A)the company's weighted average cost of capital.
B)the prime interest rate on the date of the transaction.
C)the interest rate charged for the company's bonds.
D)the minimum required rate of return on invested capital.
E)the after-tax cost of the interest payments on debt.

Question 35

The Little Rock Division of Classics Companies currently reports a profit of $3.6 million.Divisional invested capital totals $9.5 million;the imputed interest rate is 12%.On the basis of this information,Little Rock's residual income is:

A)$432,000.
B)$708,000.
C)$1,140,000.
D)$2,460,000.
E)some other amount.

Question 36

The basic idea behind residual income is to have a division maximize its:

A)earnings per share.
B)income in excess of a corporate imputed interest charge.
C)cost of capital.
D)cash flows.
E)invested capital.

Question 37

The information that follows relates to Kravitz Corporation:
Sales margin: 7.5%
Capital turnover: 2
Invested capital: $20,000,000
On the basis of this information,the company's sales revenue is:

A)$1,500,000.
B)$3,000,000.
C)$10,000,000.
D)$40,000,000.
E)some other amount.

Question 38

All of the following actions are likely to increase ROI except:

A)an increase in sales revenues.
B)a decrease in operating expenses.
C)a decrease in a company's invested capital.
D)a decrease in the number of units solD.
E)an improvement in manufacturing efficiency.

Question 39

The following information relates to the Cliff Division of Mountain Enterprises:
Income for the period just ended: $1,500,000
Invested capital: $12,000,000
If the company has an imputed interest rate of 11%,Cliff's residual income would be:

A)$165,000.
B)$180,000.
C)$187,500.
D)some other dollar amount.
E)a percentage greater than 11%.

Question 40

The capital turnover is:

A)3.33.
B)5.00.
C)16.67.
D)20.00.
E)30.00.

Question 41

Which of the following elements is not used when calculating the weighted-average cost of capital?

A)Before-tax cost of debt capital.
B)After-tax cost of debt capital.
C)Cost of equity capital.
D)Market value of debt capital.
E)Market value of equity capital.

Question 42

Economic value added (EVA)analysis indicates:

A)the amount of income generated by each dollar of capital investment.
B)the number of sales dollars generated by each dollar of capital investment.
C)the percentage of each sales dollar that remains as profit after all expenses are covered.
D)the amount of increased capital generated by each dollar of income.
E)how much shareholder wealth is being created.

Question 43

Which of the following measures of performance is,in part,based on the weighted-average cost of capital?

A)Return on investment.
B)Capital turnover.
C)Book value.
D)Economic value added (EVA).
E)Gross margin.

Question 44

To partially eliminate the problems that are associated with the short-term focus of return on investment,residual income,and EVA,the performance of a division's major investments is commonly evaluated through:

A)postaudits.
B)sensitivity analysis.
C)performance operating plans.
D)horizontal analysis.
E)segmented reporting.

Question 45

Economic value added:

A)is a dollar amount rather than a percentage.
B)uses a firm's weighted-average cost of capital.
C)uses total assets in its computation and ignores current liabilities.
D)cannot be negative.
E)possesses characteristics "A" and "B" abovE.

Question 46

Which of the following describes the goal that should be pursued when setting transfer prices?

A)Maximize profits of the buying division.
B)Maximize profits of the selling division.
C)Allow top management to become actively involved when calculating the proper dollar amounts.
D)Establish incentives for autonomous division managers to make decisions that are in the overall organization's best interests (i.e. ,goal congruence).
E)Minimize opportunity costs.

Question 47

The following information relates to the Atlas Division of Global Enterprises:
Interest rate on debt capital: 8%
Cost of equity capital: 12%
Market value of debt capital: $50 million
Market value of equity capital: $80 million
Income tax rate: 30%
On the basis of this information,Atlas's weighted-average cost of capital is closest to:

A)7.3%.
B)8.3%.
C)9.5%.
D)10.8%.
E)some other figurE.

Question 48

Given that ROI measures performance over a period of time,invested capital would most appropriately be figured by using:

A)beginning-of-year assets.
B)average assets.
C)end-of-year assets.
D)total assets.
E)only current assets.

Question 49

The following information relates to Hudston,Inc.:
If the company has a 10% weighted-average cost of capital,its economic value added would be:

A)$(200,000).
B)$530,000.
C)$680,000.
D)$970,000.
E)some other amount.

Question 50

Hallen Division has been stagnant over the past five years,neither growing nor contracting in size and profitability.Investments in new property,plant,and equipment have been minimal.Would the division's use of total assets (valued at net book value)when measuring ROI result in (1)using numbers that are consistent with those on the balance sheet and (2)a rising ROI over time?

A)Choice A
B)Choice B
C)Choice C
D)Choice D
E)Choice E

Question 51

The amounts charged for goods and services exchanged between two divisions are known as:

A)opportunity costs.
B)transfer prices.
C)standard variable costs.
D)residual prices.
E)target prices.

Question 52

Thurmond,Inc.has two divisions,one located in New York and the other located in Arizona.New York sells a specialized circuit to Arizona and just recently raised the circuit's transfer price.This price hike had no effect on either the volume of circuits transferred or on Arizona's decision of whether to acquire the circuit from either New York or from an external supplier.On the basis of this information,which of the following correctly shows the effect of the transfer price on divisional profit and overall company profit?

A)Choice A
B)Choice B
C)Choice C
D)Choice D
E)Choice E

Question 53

A general calculation method for transfer prices that achieves goal congruence begins with the additional outlay cost per unit incurred because goods are transformed and then

A)adds the opportunity cost per unit to the organization because of the transfer.
B)subtracts the opportunity cost per unit to the organization because of the transfer.
C)adds the sunk cost per unit to the organization because of the transfer.
D)subtracts the sunk cost per unit to the organization because of the transfer.
E)adds the sales revenue per unit to the organization because of the transfer.

Question 54

Nevada,Inc.has two divisions,one located in Las Vegas and the other located in Reno.Las Vegas sells selected goods to Reno for use in various end-products.Assume that the transfer between the two divisions takes place irregardless of the transfer price set by Las Vegas.Which of the following correctly describes the impact of the transfer prices on divisional profits and overall company profit?

A)Choice A
B)Choice B
C)Choice C
D)Choice D
E)Choice E

Question 55

Sahara Corporation has no excess capacity.If the firm desires to implement the general transfer-pricing rule,opportunity cost would be equal to:

A)zero.
B)the direct expenses incurred in producing the goods.
C)the total difference in the cost of production between two divisions.
D)the contribution margin forgone from the lost external sale.
E)the summation of variable cost plus fixed cost.

Question 56

The income calculation for a division manager's ROI should be based on:

A)divisional contribution margin.
B)profit margin controllable by the division manager.
C)profit margin traceable to the division.
D)divisional income before interest and taxes.
E)divisional net incomE.

Question 57

The market value of Glenwood's debt and equity capital totals $180 million,80% of which is equity related.An analysis conducted by the company's finance department revealed a 7% after-tax cost of debt capital and a 10% cost of equity capital.On the basis of this information,Glenwood's weighted-average cost of capital:

A)is 7.6%.
B)is 8.5%.
C)is 9.4%.
D)cannot be determined based on the data presented because the cost of debt capital must be stated on a before-tax basis.
E)cannot be determined based on the data presented because the cost of equity capital must be stated on an after-tax basis.

Question 58

Which of the following elements is not used in the calculation of economic value added for an investment center?

A)An investment center's after-tax operating income.
B)An investment center's total assets.
C)An investment center's return on investment.
D)An investment center's current liabilities.
E)A company's weighted-average cost of capital.

Question 59

When an organization allows divisional managers to be responsible for short-term loans and credit,the division's invested capital should be measured by

A)total assets minus total liabilities.
B)average total assets minus average current liabilities.
C)average total assets minus average total liabilities.
D)average total liabilities minus average current assets.
E)average total liabilities minus total assets.

Question 60

Carolina Corporation has an after-tax operating income of $3,200,000 and a 9% weighted-average cost of capital.Assets total $7,000,000 and current liabilities total $1,800,000.On the basis of this information,Carolina's economic value added is:

A)$2,408,000.
B)$2,732,000.
C)$3,668,000.
D)$3,992,000.
E)some other amount.

Question 61

The maximum amount the Cologne Division would be willing to pay for each bottle transferred would be:

A)$2.00.
B)$2.10.
C)$2.60.
D)$2.90.
E)$3.00.

Question 62

Which of the following transfer-pricing methods can lead to dysfunctional decision-making behavior by managers?

A)Variable cost.
B)Full cost.
C)External market price.
D)A professionally negotiated,amicable settlement between the buying and selling divisions.
E)None of thesE.

Question 63

New England Corporation has two divisions,Providence and Buffalo,and evaluates management on the basis of return on investment.Providence currently makes a part that it sells to both Buffalo and outsiders.Selected data follow.
Providence is seeking an increase in its selling price to $28 per unit because of rising costs.Buffalo can obtain comparable units from an outside supplier for $23;however,if Buffalo uses the supplier,Providence will have idle capacity because of an inability to increase sales to outsiders.From the perspective of New England Corporation:

A)Providence should continue to do business with Buffalo and charge $28 per unit.
B)Providence should continue to do business with Buffalo and charge $25 per unit.
C)Providence should continue to do business with Buffalo because Providence's variable cost per unit is only $18.
D)Buffalo should do business with the outside supplier.
E)Buffalo should split its business between Providence and the outside supplier.

Question 64

General Auto's Northern Division is currently purchasing a part from an outside supplier.The company's Southern Division,which has excess capacity,makes and sells this part for external customers at a variable cost of $19 and a selling price of $31.If Southern begins sales to Northern,it (1)will use the general transfer-pricing rule and (2)will be able to reduce variable cost on internal transfers by $3.On the basis of this information,Southern would establish a transfer price of:

A)$16.
B)$19.
C)$28.
D)$31.
E)some other amount.

Question 65

Deborah Lewis,general manager of the Northwest Division of Berkshire Enterprises,has significant authority over pricing decisions as well as programs that involve cost reduction/control.The data that follow relate to upcoming divisional operations:
Average invested capital: $15,000,000
Annual fixed costs: $3,900,000
Variable cost per unit: $80
Number of units expected to be sold: 120,000
Required:
A.A 14% return on investment will require the Division to produce income of $2,100,000 ($15,000,000 * 14%).If X = selling price,then:
120,000X - (120,000 * $80)- $3,900,000 = $2,100,000
120,000X - $9,600,000 - $3,900,000 = $2,100,000
120,000X = $15,600,000
X = $130
A.Top management will promote Lewis if she can earn a 14% return on investment for the year.What unit selling price should she establish to get her promotion?
B.If X = fixed cost,then:
[($132 - $80)* 120,000] X - ($15,000,000 * 16%)= $200,000
$6,240,000 - X - $2,400,000 = $200,000
X = $3,640,000
To achieve her promotion,Lewis must reduce fixed costs by $260,000 ($3,900,000 - $3,640,000).
B.Independent of part "A," assume the unit selling price is $132 and that Berkshire has a 16% imputed interest charge.Top management will promote Lewis to corporate headquarters if her division can generate $200,000 of residual income.If Lewis desires to move to corporate,what must the division do to the amount of annual fixed costs incurred? Show your calculations.

Question 66

Consider the following statements about transfer pricing:
I)Income taxes and import duties are an important consideration when setting a transfer price for companies that pursue international commerce.
II)Transfer prices cannot be used by organizations in the service industry.
III)Transfer prices are totally cost-based in nature,not market-based.
Which of the above statements is (are)true?

A)I only.
B)II only.
C)I and II.
D)II and III.
E)I,II,and III.

Question 67

Standard costs rather than actual costs should be used in transfer-pricing methods because:

A)financial accounting rules (GAAP)require the use of standard costs.
B)tax rules require the use of standard costs.
C)standard costs are more readily available than actual costs.
D)standard costs facilitate a professionally negotiated,amicable settlement between the buying and selling divisions.
E)inefficient producing divisions could pass on their inefficiencies to buying divisions in the transfer pricE.

Question 68

Underwood Company uses cost-based transfer pricing.Its Food Processing Division has a standard variable cost of $8.50 per case and allocated fixed overhead of $2.25.The Processing Division,which has excess capacity,sells its output to external customers for $12.00 per case.If Underwood uses variable costs as its base,the transfer price charged to its Retail Division should be:

A)$14.25.
B)$12.00 plus a markup.
C)$10.75 plus a markup.
D)$8.50 plus a markup.
E)negotiated between the managers of the Processing and Retail Divisions.

Question 69

The Pro Division of Custom Industries is in need of a particular service.The service can be obtained from another division of Custom at "cost," with cost defined as the summation of variable cost ($9)and fixed cost ($3).Alternatively,Pro can secure the service from a source external to Custom for $10.Which of the following statements is true?

A)Pro should compare $10 vs.$3 in deciding where to acquire the service.
B)Pro should compare $10 vs.$9 in deciding where to acquire the service.
C)Pro should compare $10 vs.$12 in deciding where to acquire the service.
D)From Custom's perspective,the proper decision is reached by comparing $10 vs.$9.
E)Both "C" and "D" are truE.

Question 70

Transfer prices can be based on:

A)variable cost.
B)full cost.
C)an external market price.
D)a negotiated settlement between the buying and selling divisions.
E)all of thesE.

Question 71

Sonoma Corporation is a multi-divisional company whose managers have been delegated full profit responsibility and complete autonomy to accept or reject transfers from other divisions.Division X produces 2,000 units of a subassembly that has a ready market.One of these subassemblies is currently used by Division Y for each final product manufactured,the latter of which is sold to outsiders for $1,600.Y's sales during the current period amounted to 2,000 completed units.Division X charges Division Y the $1,100 market price for the subassembly;Division Y has additional variable costs of $600 per unit.Variable costs for Division X is $850 per unit.
The manager of Division Y feels that X should transfer the subassembly at a lower price because Y is currently unable to make a profit.
Required:
A.

A.Calculate the contribution margins (total dollars and per unit)of Divisions X and Y,as well as the company as a whole,if transfers are made at market price.
B.

Division X should transfer all 2,000 units to Division Y to produce an additional $100,000 ($300,000 - $200,000)of contribution margin.
B.Assume that conditions have changed and X can sell only 1,000 units in the market at $900 per unit.From the company's perspective,should X transfer all 2,000 units to Y or sell 1,000 in the market and transfer the remainder? Note: Y's sales would decrease to 1,000 units if the latter alternative is pursueD.

Question 72

Tunley Corporation has excess capacity.If the firm desires to implement the general transfer-pricing rule,opportunity cost would be equal to:

A)zero.
B)the direct expenses incurred in producing the goods.
C)the total difference in the cost of production between two divisions.
D)the contribution margin forgone from the lost external sale.
E)the summation of variable cost plus fixed cost.

Question 73

Green Auto's Northern Division is currently purchasing a part from an outside supplier.The company's Southern Division,which has no excess capacity,makes and sells this part for external customers at a variable cost of $19 and a selling price of $31.If Southern begins sales to Northern,it (1)will use the general transfer-pricing rule and (2)will be able to reduce variable cost on internal transfers by $3.On the basis of this information,Southern would establish a transfer price of:

A)$16.
B)$19.
C)$28.
D)$31.
E)some other amount.

Question 74

The Bottle Division has sufficient capacity to meet all external market demands in addition to meeting the demands of the Cologne Division.Using the general rule,the transfer price from the Bottle Division to the Cologne Division would be:

A)$2.00.
B)$2.10.
C)$2.60.
D)$2.90.
E)$3.00.

Question 75

Underwood Company uses cost-based transfer pricing.Its Food Processing Division has a standard variable cost of $8.50 per case and allocated fixed overhead of $2.25.The Processing Division,which has excess capacity,sells its output to external customers for $12.00 per case.If Underwood uses full (or absorption)cost as its base,the transfer price charged to its Retail Division should be:

A)$14.25.
B)$12.00.
C)$10.75.
D)$8.50 plus a markup.
E)negotiated between the managers of the Processing and Retail Divisions.

Question 76

Division A transfers a profitable subassembly to Division B,where it is assembled into a final product.A is located in a European country that has a high tax rate;B is located in an Asian country that has a low tax rate.Ideally,(1)what type of before-tax income should each division report from the transfer and (2)what type of transfer price should Division A set for the subassembly?

A)Choice A
B)Choice B
C)Choice C
D)Choice D
E)Choice E

Question 77

Assume the Bottle Division has no excess capacity and could sell everything it produced externally.Using the general rule,the transfer price from the Bottle Division to the Cologne Division would be:

A)$2.00.
B)$2.10.
C)$2.60.
D)$2.90.
E)$3.00.

Question 78

Gamma Division of Vaughn Corporation produces electric motors,20% of which are sold to Vaughan's Omega Division and 80% to outside customers.Vaughn treats its divisions as profit centers and allows division managers to choose whether to sell to or buy from internal divisions.Corporate policy requires that all interdivisional sales and purchases be transferred at variable cost.Gamma Division's estimated sales and standard cost data for the year ended December 31,based on a capacity of 60,000 units,are as follows:
A.Assuming that Gamma desires to maximize operating income,should it take on the new customer and discontinue sales to Omega? Why? (Note: Answer this question from Gamma's perspective. )
A.Yes.Gamma is currently selling motors to Omega at a transfer price of $55 per unit ($660,000 / 12,000 units).A price of $80 to the new customer will increase Gamma Division's operating income by $300,000 [($80 - $55)* 12,000 units].
B.Assume that Vaughn allows division managers to negotiate transfer prices.The managers agreed on a tentative price of $80 per unit,to be reduced by an equal sharing of the additional Gamma income that results from the sale to Omega of 12,000 motors at $80 per unit.On the basis of this information,compute the company's new transfer price.
B.The additional operating income to Gamma is $300,000 [($80 - $55)* 12,000 units].Splitting this amount equally results in a new transfer price of $67.50,calculated as follows:

Question 79

McKenna's Florida Division is currently purchasing a part from an outside supplier.The company's Alabama Division,which has excess capacity,makes and sells this part for external customers at a variable cost of $22 and a selling price of $34.If Alabama begins sales to Florida,it (1)will use the general transfer-pricing rule and (2)will be able to reduce variable cost on internal transfers by $4.If sales to outsiders will not be affected,Alabama would establish a transfer price of:

A)$18.
B)$22.
C)$30.
D)$34.
E)some other amount.

Question 80

The following data pertain to Corkscrew Corporation: