Deck 23: Transfer Pricing and Multinational Management Control Systems

Question 1

A management control system is a means of gathering and using information to aid and coordinate the process of making planning and control decisions throughout the organization, and to guide employee behaviour.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

Subunit managers are better informed about their suppliers than top management is.

Answer 3

True

Question 4

Suboptimal decision making is also called congruent decision making.

Question 5

The degree of freedom to make decisions is known as decentralization.

Question 6

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

Question 7

The goal of a management control system is to improve the collective decisions in an organization in an economically feasible way.

Question 8

A decentralized organizational structure may result in duplication of activities.

Question 9

A benefit of decentralization should be increased motivation of subunit managers.

Question 10

A well-designed management control system obtains all of its information from within the company.

Question 11

Management control systems reflect only financial data.

Question 12

Which of the following is False concerning profit centres and cost centres?

A) A profit centre can exist within a centralized organization.
B) A profit centre can exist within a decentralized organization.
C) A cost centre can exist within a centralized organization.
D) A cost centre can exist within a decentralized organization.
E) If a profit centre exists within a centralized organization, there cannot be any cost centres in the organization.

Question 13

A management control system would include both formal as well as informal control mechanisms.

Question 14

A management control system should have all of the following characteristics, EXCEPT

A) it should motivate employees.
B) it should be closely aligned to organizational goals and objectives.
C) it should provide information for individual managers for decision making.
D) it should motivate managers.
E) it should always focus on customer satisfaction.

Question 15

Effort in terms of management control systems is defined in terms of physical exertion such as a worker producing at a faster rate.

Question 16

Motivation is the desire to attain a selected goal combined with the resulting drive or pursuit toward that goal.

Question 17

The costs of decentralization include all of the following, except

A) management development and learning.
B) duplication of activities.
C) increased costs of information-gathering.
D) too many cost centres.
E) decreased loyalty to the organization as a whole.

Question 18

Management control systems collect which type of data?

A) financial
B) non-financial
C) data from outside of the company
D) financial and non-financial
E) financial and non-financial, including data from both within the company and outside of the company

Question 19

One benefit of centralization is an increase in development of an experienced pool of management talent to fill higher-level management positions.

Question 20

An important advantage of decentralized operations is that it improves corporate control.

Question 21

All of the following are benefits of decentralization EXCEPT

A) it creates greater responsiveness to local needs.
B) it decreases management and worker morale.
C) it leads to quicker decision making.
D) it sharpens the focus of managers.
E) it leads to better supplier relationships.

Question 22

Companies may approach tax authorities to obtain an APA (Advanced Transfer Price Arrangement).

Question 23

No matter how low the transfer price, the manager of the selling division should sell the division's product to other company divisions in the interests of overall company profitability.

Question 24

Products transferred between subunits within an organization are considered intermediate products.

Question 25

Exertion towards a goal is

A) motivation.
B) effort.
C) goal congruence.
D) incentive.
E) loyalty.

Question 26

Which of the following is NOT a responsibility centre within an organization, whether centralized or decentralized?

A) cost centre
B) profit centre
C) revenue centre
D) savings centre
E) investment centre

Question 27

For each of the following activities, characteristics, and applications, tell whether they are primarily labelled as being found in a centralized organization, a decentralized organization, or both types of organizations.
a. Freedom for managers at lower organizational levels to make decisions.
b. Gathering information may be very expensive.
c. Greater responsiveness to user needs.
d. Have few interdependencies among divisions.
e. Maximum constraints and minimum freedom for managers at lowest levels.
f. Maximization of benefits over costs.
g. Minimization of duplicate functions.
h. Minimum of sub optimization.
i. Multiple responsibility centres with various reporting units.
j. Profit centres

Question 28

Department A charges Department B $1,350 for copying services provided. The $1,350 is considered a transfer price.

Question 29

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 centres. However, she is somewhat confused about how responsibility centres relate to centralized organizations where a few managers have most of the authority.
Required:
Explain how a centralized organization might allow for responsibility centres.

Question 30

Which of the following statements is False?

A) A centralized structure does not empower employees to handle customer complaints directly.
B) A decentralized structure forces top management to lose some control over the organization.
C) Decentralization slows responsiveness to local needs for decision making.
D) The extent to which decisions are pushed downward, and the types of decisions that are pushed down, provide a measure of the level of centralization/decentralization in an organization.
E) Decentralization can increase motivation by allowing managers to exercise greater individual initiative.

Question 31

Examples of market-based transfer prices include variable manufacturing costs, full manufacturing costs, and full product costs.

Question 32

The degree of freedom to make decisions is

A) decentralization.
B) autonomy.
C) centralization.
D) motivation.
E) goal congruence.

Question 33

What is the purpose of the internal control system within an organization?

Question 34

The costs used in cost-based transfer prices can only be actual costs.

Question 35

Discuss the possible problems a corporation might have if its operations are totally decentralized.

Question 36

Discuss some of the recent legislation and frameworks relating to assurance and internal controls.

Question 37

The choice of a transfer-pricing method has minimal effect on the allocation of company-wide operating income among divisions.

Question 38

Market price is the only price that a firm should use when transferring goods from one subunit to another subunit.

Question 39

An advantage of decentralization is that it

A) creates greater responsiveness to local needs.
B) focuses manager's attention on the organization as a whole.
C) does not result in a duplication of activities.
D) reduces the cost of gathering information.
E) increases loyalty toward the organization as a whole.

Question 40

Negotiated transfer prices are always transacted at the top management levels.

Question 41

Answer the following question(s) using the information below.
Beta Shoe Ltd. 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 $20. (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 $7 per pair at 100,000 units.
Sole's costs per pair of soles are:
Assembly's costs per completed pair of shoes are:

What is the market-based transfer price per pair of soles from the Sole Division to the Assembly Division?

A) $9
B) $10
C) $20
D) $16
E) $27

Question 42

Answer the following question(s) using the information below:
Greenlawn Ltd. 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 kilograms a week and usually purchases 2,000,000 kilograms from the Production Division and 2,000,000 kilograms from other suppliers at $0.45 per kilogram.
What is the transfer price per kilogram from the Production Division to the Distribution Division, assuming the method used to place a value on each kilogram of fertilizer is 160% of variable costs?

A) $0.05
B) $0.11
C) $0.08
D) $0.40
E) $0.48

Question 43

Subunits X and Y determined the price for interdepartmental services during the last monthly meeting, using the selling prices charged to outside parties. This is an example of

A) subunit transfer prices.
B) negotiated transfer prices.
C) market-based transfer prices.
D) cost-based transfer prices.
E) multinational transfer pricing.

Question 44

Use the information below to answer the following question(s).
Blackoil Corp. has two divisions, Refining and Production. The company's primary product is Clean Oil. Each division's costs are provided below:
The Production Division is able to sell the oil to other areas for $24 per litre. The Refining Division has been operating at a capacity of 80,000 litres a day, using oil from the Production Division and oil purchased from other suppliers. The Refining Division usually purchases 50,000 litres of oil, on average, from the Production Division and 30,000 litres, on average, from other suppliers at $40/litre.
What is the transfer price per litre from the Production Division to the Refining Division assuming the method is 120% of full costs?

A) $16.80
B) $12.00
C) $9.50
D) $7.20
E) $12.50

Question 45

Use the information below to answer the following question(s).
Blackoil Corp. has two divisions, Refining and Production. The company's primary product is Clean Oil. Each division's costs are provided below:
The Production Division is able to sell the oil to other areas for $24 per litre. The Refining Division has been operating at a capacity of 80,000 litres a day, using oil from the Production Division and oil purchased from other suppliers. The Refining Division usually purchases 50,000 litres of oil, on average, from the Production Division and 30,000 litres, on average, from other suppliers at $40/litre.
What is the Production Division's operating income per 200 litres of oil reported under the 175% of variable costs method?

A) $1,500
B) $880
C) $100
D) $(100)
E) $1,200

Question 46

Use the information below to answer the following question(s).
Blackoil Corp. has two divisions, Refining and Production. The company's primary product is Clean Oil. Each division's costs are provided below:
The Production Division is able to sell the oil to other areas for $24 per litre. The Refining Division has been operating at a capacity of 80,000 litres a day, using oil from the Production Division and oil purchased from other suppliers. The Refining Division usually purchases 50,000 litres of oil, on average, from the Production Division and 30,000 litres, on average, from other suppliers at $40/litre.
What is the Refining Division's operating income if 150 litres of oil are sold at $110 /litre and 200 litres are transferred in? Assume the transfer price is based on 175% of variable costs.

A) $16,500
B) $15,600
C) $8,400
D) $7,500
E) $8,500

Question 47

The price one subunit of an organization charges for a product or service supplied to another subunit of the same organization is called

A) an interdepartmental product price.
B) an intermediate product price.
C) a subunit price.
D) a transfer price.
E) a fixed price.

Question 48

Answer the following question(s) using the information below.
Beta Shoe Ltd. 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 $20. (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 $7 per pair at 100,000 units.
Sole's costs per pair of soles are:
Assembly's costs per completed pair of shoes are:

What is the transfer price per pair of soles from the Sole Division to the Assembly Division if the method used to place a value on each pair of soles is 180% of variable costs?

A) $14.40
B) $12.60
C) $16.20
D) $28.80
E) $32.40

Question 49

All of the following criteria may be used to choose a transfer-pricing method EXCEPT

A) promotion of quality products.
B) promotion of a sustained high level of management effort.
C) promotion of a high level of subunit autonomy.
D) promotion of goal congruence.
E) promotion of optimal decision making.

Question 50

Use the information below to answer the following question(s).
Blackoil Corp. has two divisions, Refining and Production. The company's primary product is Clean Oil. Each division's costs are provided below:
The Production Division is able to sell the oil to other areas for $24 per litre. The Refining Division has been operating at a capacity of 80,000 litres a day, using oil from the Production Division and oil purchased from other suppliers. The Refining Division usually purchases 50,000 litres of oil, on average, from the Production Division and 30,000 litres, on average, from other suppliers at $40/litre.
Division A sells soybean paste internally to Division B, which, in turn, produces soybean burgers that sell for $5 per kilogram. Division A incurs costs of $0.75 per kilogram, while Division B incurs additional costs of $2.50 per kilogram. What is Division B's operating income per kilogram assuming the transfer price of the soybean paste is set at $1.25 per kilogram?

A) $0.500
B) $0.875
C) $1.250
D) $1.625
E) $1.525

Question 51

Use the information below to answer the following question(s).
Blackoil Corp. has two divisions, Refining and Production. The company's primary product is Clean Oil. Each division's costs are provided below:
The Production Division is able to sell the oil to other areas for $24 per litre. The Refining Division has been operating at a capacity of 80,000 litres a day, using oil from the Production Division and oil purchased from other suppliers. The Refining Division usually purchases 50,000 litres of oil, on average, from the Production Division and 30,000 litres, on average, from other suppliers at $40/litre.
What is the transfer price per litre assuming the method used is 175% of variable costs?

A) $10.50
B) $12.00
C) $17.50
D) $24.50
E) $12.50

Question 52

All of the following are appropriate methods for determining transfer prices EXCEPT

A) cost-based transfer prices.
B) market-based transfer prices.
C) negotiated transfer prices.
D) taxation policies.
E) cost based transfer prices at 110% of full cost.

Question 53

Use the information below to answer the following question(s).
Blackoil Corp. has two divisions, Refining and Production. The company's primary product is Clean Oil. Each division's costs are provided below:
The Production Division is able to sell the oil to other areas for $24 per litre. The Refining Division has been operating at a capacity of 80,000 litres a day, using oil from the Production Division and oil purchased from other suppliers. The Refining Division usually purchases 50,000 litres of oil, on average, from the Production Division and 30,000 litres, on average, from other suppliers at $40/litre.
Division A sells soybean paste internally to Division B, which, in turn, produces soybean burgers that sell for $5 per kilogram. Division A incurs costs of $0.75 per kilogram, while Division B incurs additional costs of $2.50 per kilogram. What is Division A's operating income per kilogram assuming the transfer price of the soybean paste is set at $1.25 per kilogram?

A) $0.500
B) $0.875
C) $1.250
D) $1.625
E) $1.525

Question 54

Market based transfer prices are generally accepted by tax authorities because they represent arm's length prices.

Question 55

Use the information below to answer the following question(s).
Blackoil Corp. has two divisions, Refining and Production. The company's primary product is Clean Oil. Each division's costs are provided below:
The Production Division is able to sell the oil to other areas for $24 per litre. The Refining Division has been operating at a capacity of 80,000 litres a day, using oil from the Production Division and oil purchased from other suppliers. The Refining Division usually purchases 50,000 litres of oil, on average, from the Production Division and 30,000 litres, on average, from other suppliers at $40/litre.
Division A sells soybean paste internally to Division B, which, in turn, produces soybean burgers that sell for $5 per kilogram. Division A incurs costs of $0.75 per kilogram, while Division B incurs additional costs of $2.50 per kilogram. Which of the following formulas correctly reflects the company's operating income per kilogram?

A) $5.00 - ($0.75 +$2.50) = $1.75
B) $5.00 - ($1.25 +$2.50) = $1.25
C) $5.00 - ($0.75 +$3.75) = $0.50
D) $5.00 - ($0.25 +$1.25 +$3.50) = 0
E) $5.00 - ($0.25 +$1.25 +$1.50) = $2.00

Question 56

A product may be passed from one subunit to another subunit in the same organization. The product is known as

A) an interdepartmental product.
B) an intermediate product.
C) a subunit product.
D) a transfer product.
E) a secondary product.

Question 57

A transfer pricing method should lead to which of the following results?

A) managers always acting in their own best interest
B) managers acting in their own best interest and their decisions being in the long-term best interest of the manager's subunit
C) managers acting in their own best interest and their decisions being in the long-term best interest of the company
D) managers acting in their own best interest and their decisions being in the short-term best interest of the company
E) managers competing with each other

Question 58

Use the information below to answer the following question(s).
Blackoil Corp. has two divisions, Refining and Production. The company's primary product is Clean Oil. Each division's costs are provided below:
The Production Division is able to sell the oil to other areas for $24 per litre. The Refining Division has been operating at a capacity of 80,000 litres a day, using oil from the Production Division and oil purchased from other suppliers. The Refining Division usually purchases 50,000 litres of oil, on average, from the Production Division and 30,000 litres, on average, from other suppliers at $40/litre.
What is the transfer price per litre from production to refining if the market price method of pricing is used?

A) $24
B) $32
C) $36
D) $40
E) $38

Question 59

Answer the following question(s) using the information below:
Greenlawn Ltd. 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 kilograms a week and usually purchases 2,000,000 kilograms from the Production Division and 2,000,000 kilograms from other suppliers at $0.45 per kilogram.
What is the transfer price per kilogram from the Production Division to the Distribution Division, assuming the method used to place a value on each kilogram of fertilizer is 120% of full costs?

A) $0.30
B) $0.36
C) $0.45
D) $0.55
E) $0.42

Question 60

Answer the following question(s) using the information below:
Greenlawn Ltd. 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 kilograms a week and usually purchases 2,000,000 kilograms from the Production Division and 2,000,000 kilograms from other suppliers at $0.45 per kilogram.
Assume 100,000 kilograms are transferred from the Production Division to the Distribution Division for a transfer price of $0.40 per kilogram. The Distribution Division sells the 100,000 kilograms at a price of $0.55 each to customers. What is the operating income of both divisions together?

A) $10,000
B) $15,000
C) $20,000
D) $25,000
E) $0

Question 61

For each of the following transfer price descriptions or operating situations, tell which of the general methods of transfer pricing it is probably categorized as:
a. Bargaining between selling and buying units.
b. Budgeted costs.
c. 145% of full costs.
d. Internal product transfers are required if goods are available internally.
e. Manufacturing plus marketing plus distribution plus customer service costs.
f. Prices listed in a trade journal.
g. Selling price less normal sales commissions.
h. Variable manufacturing cost plus a mark-up.

Question 62

The Brownshoe Company has three specialized divisions. The Casual Shoe Division has asked the Sole Division to supply it with a large quantity of soles. The Sole Division is currently at capacity. The Sole Division sells soles outside for $5.00 each. The Casual Shoe Division, which is operating at 50 percent capacity, has offered to pay $4.00 per sole. The Sole Division has a variable cost of $3.60 per sole. The Casual Shoe Division has the following cost structure:
The manager of Casual Shoe believes that the $4 price from Sole is necessary if the division is to compete in the market for casual shoes.
Required:
a. As manager of Sole Division, would you recommend that your division supply the soles to Casual Shoe? Why?
b. Would it be desirable for the division to supply Casual Shoe with the soles for $4 assuming the Sole Division had excess capacity? Why?
c. What would be the corporate position assuming the Sole Division has excess capacity?

Question 63

Briefly explain each of the three general methods used to determine a transfer price.

Question 64

Answer the following question(s) using the information below.
Cool Air Ltd. 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 $77. (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 $15.00 per unit at 10,000 units.
Compressor's costs per compressor are:
Assembly's costs per completed air conditioner are:

What is the transfer price per compressor from the Compressor Division to the Assembly Division if the transfer price per compressor is 110% of full costs?

A) $84.70
B) $80.00
C) $76.45
D) $59.95
E) $77.00

Question 65

Bedtime Bedding Ltd. manufactures pillows. The Cover Division makes covers and the Assembly Division makes the finished products. The covers can be sold separately for $5.00. The pillows sell for $6.00. The information related to manufacturing for the most recent year is as follows:
Required:
Compute the operating income for each division and the company as a whole. Use market value as the transfer price. Are all managers happy with this concept? Explain.

Question 66

Explain what transfer prices are, and what are the four criteria used to evaluate them?

Question 67

Vancouver Valley Ltd. has two divisions, Computer Services and Management Advisory Services. In addition to its external customers, each division performs work for the other division. The external fees earned by each division in the past year were $200,000 for Computer Services and $350,000 for Management Advisory Services. Computer Services worked 3,000 hours for Management Advisory Services and Management Advisory Services in turn worked 1,200 hours for Computer Services. The total costs of external services performed by Computer Services were $110,000 and $240,000 by Management Advisory Services respectively.
Required:
a. Determine the operating income for each division and for the company as a whole if the transfer price from Computer Services to Management Advisory Services is $15 per hour and the transfer price from Management Advisory Services to Computer Services is $12.50 per hour.
b. Determine the operating income for each division and for the company as a whole if the transfer price from each to the other is $15 per hour.
c. What are the operating income results for each division and for the company as a whole if the two divisions net their hours worked for each other and charge $12.50 per hour for the one with the excess? Which division manager prefers this arrangement?

Question 68

Answer the following question(s) using the information below.
Cool Air Ltd. 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 $77. (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 $15.00 per unit at 10,000 units.
Compressor's costs per compressor are:
Assembly's costs per completed air conditioner are:

What is the transfer price per compressor from the Compressor Division to the Assembly Division if the method used to place a value on each compressor is 150% of variable costs?

A) $81.75
B) $77.00
C) $9.00
D) $72.75
E) $51.00

Question 69

Answer the following question(s) using the information below.
Cool Air Ltd. 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 $77. (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 $15.00 per unit at 10,000 units.
Compressor's costs per compressor are:
Assembly's costs per completed air conditioner are:

What is the market-based transfer price per compressor from the Compressor Division to the Assembly Division?

A) $34.00
B) $54.50
C) $69.50
D) $77.00
E) $115.50

Question 70

Answer the following question(s) using the information below.
Cool Air Ltd. 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 $77. (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 $15.00 per unit at 10,000 units.
Compressor's costs per compressor are:
Assembly's costs per completed air conditioner are:

If the Assembly Division sells 1,000 air conditioners at a price of $750.00 per air conditioner to customers, what is the operating income of both divisions together?

A) $200,500
B) $207,000
C) $194,000
D) $165,750
E) $230,500

Question 71

Answer the following question(s) using the information below.
Beta Shoe Ltd. 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 $20. (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 $7 per pair at 100,000 units.
Sole's costs per pair of soles are:
Assembly's costs per completed pair of shoes are:

What is the transfer price per pair of shoes from the Sole Division to the Assembly Division per pair of soles if the transfer price per pair of soles is 125% of full costs?

A) $10.00
B) $12.50
C) $11.25
D) $20.00
E) $8.75

Question 72

Transfer prices among divisions within Canada are irrelevant. Do you agree with this statement? Explain.

Question 73

Answer the following question(s) using the information below.
Beta Shoe Ltd. 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 $20. (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 $7 per pair at 100,000 units.
Sole's costs per pair of soles are:
Assembly's costs per completed pair of shoes are:

If the Assembly Division sells 100,000 pairs of shoes at a price of $60 a pair to customers, what is the operating income of both divisions together?

A) $4,400,000
B) $3,400,000
C) $3,000,000
D) $2,600,000
E) $2,400,000

Question 74

Alsation Ltd. has two divisions: Machining and Assembly. The Machining Division prepares the raw materials into component parts and the Assembly Division assembles the components into finished product. No inventories exist in either division at the beginning of the year. During the year the Machining Division prepared 80,000 square metres of sheet metal at a cost of $480,000. All production was transferred to the Assembly Division where the metal was converted into 800,000 units of finished product at an additional costs of $5 per unit. The 800,000 units were sold for $2,000,000.
Required:
a. Determine the operating income for each division if the transfer price from Machining to Assembly is at cost, $6/square metre.
b. Determine the operating income for each division if the transfer price is $5/square metre.
c. Since the Machining Division has all of its sales internally to the Assembly Division, does the manager care what price is selected? Why? Should the Machining Division be a cost centre or a profit centre under the circumstances?

Question 75

Sportswear Ltd. manufactures socks. The Athletic Division sells its socks for $6 a pair to outsiders.
Socks have manufacturing costs of $2.50 each for variable and $1.50 for fixed. The division's total fixed
manufacturing costs are $105,000 at the normal volume of 70,000 units.
The European Division has offered to buy 15,000 socks at the full cost of $4. 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.

Question 76

Answer the following question(s) using the information below.
Beta Shoe Ltd. 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 $20. (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 $7 per pair at 100,000 units.
Sole's costs per pair of soles are:
Assembly's costs per completed pair of shoes are:

Assume the transfer price for a pair of soles is 180% of total costs of the Sole Division and 40,000 of soles are produced and transferred to the Assembly Division. The Sole Division's operating income is:

A) $320,000
B) $360,000
C) $248,000
D) $440,000
E) $400,000

Question 77

Centralia Components Ltd. manufactures cable assemblies used in transportation, recreational products and medical industries in its Assemblies Division. The capacity of the Assemblies Division is currently 200,000 units and it sells 160,000 units to the outside market at an average price of $96/unit. Cost to manufacture the cable assemblies are $42 variable and $8 fixed. Fixed costs per unit are based on its normal volume of 160,000 units.
Centralia's Mobility Division uses cable assemblies in the manufacture of wheelchairs. It has offered to buy 25,000 units from the Assemblies Division at $48 per unit. Calculate the operating income of the Assemblies Division with and without the offer from the Mobility Division. Should Assemblies accept the offer?

Question 78

Briefly describe the arm's length principle and how it applies to transfers among international divisions.

Question 79

Answer the following question(s) using the information below.
Cool Air Ltd. 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 $77. (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 $15.00 per unit at 10,000 units.
Compressor's costs per compressor are:
Assembly's costs per completed air conditioner are:

Assume the transfer price for a compressor is 150% of total costs of the Compressor Division and 1,000 of the compressors are produced and transferred to the Assembly Division. The Compressor Division's operating income is:

A) $31,750
B) $32,750
C) $34,750
D) $36,500
E) $49,750

Question 80

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 the year. 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 centre or a profit centre under the circumstances?