ACCO 330 Study Guide - Final Guide: Transfer Pricing, Fixed Cost, Variable Cost

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amberfrog615

25 Apr 2015

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Xy, inc. , is a completely decentralized corporation with two divisions, division 1 and division. 2, producing products x and y, respectively; the sales and cost information are as follows: Product x can be used further in the production of product y in division 2; both products have separate markets. The manager, division 2, has the authority to use an external source, or to buy product x internally from division 1. In the interest of goal congruence and keeping the divisional managers equipped with essential information for making informed short-run decisions, management of xy, inc. , recommends the dual transfer pricing policy for recording internal transfers of products. Assume that division 1 has idle capacity and division 2 can buy product x externally at. Division i"s price for intra-divisional transfers is full cost plus mark-up of. . 50 (i. e. , 130 percent of , plus ); it saves per unit in selling expense on an internal transfer.

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I need all the awncers to thease questions some timesyou onley give me te first three.Multiple Choice

Select the best answer to each question. Space is provided forcomputations after the quantitative questions.

____ 1. (CMA adapted) Which of the following isdecentralization least likely to accomplish?

a. Provide a pool of management talent.

b. Shorten decision time.

c. Heighten goal congruence.

d. Increase motivation of subunit managers.

____ 2. (CPA) Brent Co. has intracompany servicetransfers from Division Core, a cost center, to Division Pro, aprofit center. Under stable economic conditions, which of thefollowing transfer prices is likely to be most conducive toevaluating whether both divisions have met theirresponsibilities?

a. Actual cost

b. Standard variable cost

c. Actual cost plus a markup

d. Negotiated price

____ 3. Designing the transfer-pricing system ismost difficult in organizations that are:

a. highly decentralized with many interdependenciesamong subunits.

b. highly centralized with many interdependenciesamong subunits.

c. highly decentralized with few interdependenciesamong subunits.

d. highly centralized with few interdependenciesamong subunits.

___ 4. (CMA) Parkside Inc. has several divisionsthat operate as decentralized profit centers. ParksideâsEntertainment Division manufactures video arcade equipment usingthe products of two of Parksideâs other divisions. The PlasticsDivision manufactures plastic components; one type is madeexclusively for the Entertainment Division, while other lesscomplex components are sold to external markets. The products ofthe Video Cards Division are sold in a competitive market, but onevideo card model is also used by the Entertainment Division. Theactual manufacturing cost per unit of the Entertainment Division isas follows:

Plastics Components

Video Cards

Direct materials used

$1.25

$2.40

Direct manuf. labor

2.35

3.00

Variable overhead

1.00

1.50

Fixed overhead

.40

2.25

Total cost per unit

$5.00

$9.15

The Plastics Division sells its commercial products at full costplus a 25% markup based on cost and believes the proprietaryplastic component made for the Entertainment Division would sellfor $6.25 per unit on the open market. The market price of thevideo card used by the Entertainment Division is $10.98 perunit.

Assuming the Video Cards Division has no unused capacity, atransfer price to the Entertainment Division of $9.15 per unitwill:

a. allow evaluation of both divisions on acompetitive basis.

b. satisfy the Video Cards Divisionâs profit desireby allowing recovery of opportunity costs.

c. not motivate the Entertainment Division and willcause mediocre performance.

d. provide no incentive for the Video Cards Divisionto control or reduce costs.

e. encourage the Entertainment Division to purchasevideo cards from an external source.

____ 5. Use the information in question 4 but assumethe Entertainment Division is able to purchase a large quantity ofvideo cards from an external supplier at $8.70 per unit. The VideoCards Division, having unused capacity, agrees to lower thetransfer price to $8.70 per unit. This action will:

a. optimize the profit goals of the EntertainmentDivision while subverting the profit goals of Parkside Inc.

b. provide no profit incentive for the Video CardsDivision.

c. subvert the profit goals of the Video CardsDivision while optimizing the profit goals of the EntertainmentDivision.

d. cause mediocre performance in the Video CardsDivision because opportunity costs increase.

e. optimize the overall profit goals of ParksideInc.

____ 6. Use the information in question 4 and assumethe Plastics Division has unused capacity and negotiates a transferprice of $5.60 per plastic component with the EntertainmentDivision. This price will:

a. cause the Plastics Division to reduce the numberof commercial plastic components it manufactures.

b. motivate both divisions.

c. encourage the Entertainment Division to seek anexternal supplier for plastic components.

d. not motivate the Plastics Division, causingmediocre performance.

e. satisfy the Plastics Divisionâs profit desire byallowing recovery of opportunity costs.

____ 7. (CPA adapted) Mar Company has twodecentralized divisions, X and Y. Division X has been purchasingcertain component parts from Division Y at $75 per unit. BecauseDivision Y plans to raise the price to $100 per unit, Division Xdesires to purchase these parts from external suppliers for $75 perunit. The following information is available:

Yâs variable cost per unit

$70

Yâs annual fixed costs

$15,000

Yâs annual production of these parts for X

1,000 units

If Division X buys from an external supplier, the facilitiesDivision Y uses to manufacture these parts will be idle. AssumingDivision Yâs fixed costs cannot be avoided, what is the result ifMar requires Division X to buy from Division Y at a transfer priceof $100 per unit?

a. It is suboptimal for the company as a wholebecause X should buy from external suppliers at $75 per unit.

b. It is more profitable for the company as a wholethan allowing X to buy from external suppliers at $75 per unit.

c. It provides higher overall company operatingincome than a transfer price of $75 per unit.

d. It provides lower overall company operatingincome than a transfer price of $75 per unit.

Transfer Pricing: Various Computations Corning Company has a decentralized organization with a divisional structure. Two of these divisions are the Appliance Division and the Manufactured Housing Division. Each divisional manager is evaluated on the basis of ROI. The Appliance Division produces a small automatic dishwasher that the Manufactured Housing Division can use in one of its models. Appliance can produce up to 24,000 of these dishwashers per year. The variable costs of manufacturing the dishwashers are $96. The Manufactured Housing Division inserts the dishwasher into the model house and then sells the manufactured house to outside customers for $74,500 each. The division's capacity is 4,800 units. The variable costs of the manufactured house (in addition to the cost of the dishwasher itself) are $43,700. Required: Assume each part is independent, unless otherwise indicated. 1. Assume that all of the dishwashers produced can be sold to external customers for $314 each. The Manufactured Housing Division wants to buy 4,800 dishwashers per year. What should the transfer price be? $ per unit 2. Refer to Requirement 1. Assume $18 of avoidable distribution costs. Identify the maximum and minimum transfer prices. Maximum $ per unit Minimum $ per unit Identify the actual transfer price, assuming that negotiation splits the difference. $ per unit 3. Assume that the Appliance Division is operating at 75 percent capacity. The Manufactured Housing Division is currently buying 4,800 dishwashers from an outside supplier for $280 each. Assume that any joint benefit will be split evenly between the two divisions. What is the expected transfer price? $ per unit How much will the profits of the Appliance Division increase, assuming that it sells the extra 4,800 dishwashers internally? $ How much will the profits of the firm increase under this arrangement? $

raspberrygnat404

(JUST NEED HELP WITH THE LAST REQUIRMENT 5 PLEASE) The Cutler Company isâ decentralized, and divisions are considered investment centers. Cutler has one division that manufactures oak dining room chairs with upholstered seat cushions. The Chair Divisionâ cuts, assembles, and finishes the oak chairs and then purchases and attaches the seat cushions.

The Chair Division currently purchases the cushions for

$ 26$26

from an outside vendor. The Cushion Division manufactures upholstered seat cushions that are sold to customers outside the company. The Chair Division currently sells

1 comma 0001,000

chairs perâ quarter, and the Cushion Division is operating atâcapacity, which is

1 comma 0001,000

cushions per quarter. The two divisions report the followingâ information:

Chair Division		Cushion Division
Sales Price per Chair	$65	Sales Price per Cushion	$32
Variable Cost (other than cushion)	30	Variable Cost per Cushion	11
Variable Cost (cushion)	26
Contribution Margin per Chair	$9	Contribution Margin per Cushion	$21

Requirement 1. Determine the total contribution margin for

CutlerCutler

Company for the quarter.

	Number of units	x	Contribution margin per unit	=	Total contribution margin
Chair Division	1000	x	9	=	9000
Cushion Division	1000	x	21	=	21000
Total					30000

Requirement 2. Assume the Chair Division purchases the

1 comma 0001,000

cushions needed from the Cushion Division at its current sales price. What is the total contribution margin for each division and theâ company?

	Number of units	x	Contribution margin per unit	=	Total contribution margin
Chair Division	1000	x	3	=	3000
Cushion Division	1000	x	21	=	21000
Total					24000

Requirement 3. Assume the Chair Division purchases the

1 comma 0001,000

cushions needed from the Cushion Division at its current variable cost. What is the total contribution margin for each division and theâ company? â(Enter "0" for any zeroâ amounts.)

	Number of units	x	Contribution margin per unit	=	Total contribution margin
Chair Division	1000	x	24	=	24000
Cushion Division	1000	x	0	=	0
Total					24000

Requirement 4. Review your answers for Requirementsâ 1, 2, and 3. What is the best option for

CutlerCutler

âCompany?

The best option for

CutlerCutler

the current scenario (Requirement 1).

for the Chair Division to purchase cushions internally at the current sales price (Requirement 2).

for the Chair Division to purchase cushions internally at the current variable cost (Requirement 3).

By having the Chair Division purchase the cushions from an outsideâ vendor, the company would generate

less

in total contribution margin than if the division purchases cushions internally.

Requirement 5. Assume the Cushion Division has capacity of 2,000 cushions per quarter and can continue to supply its outside customers with

1,000 cushions per quarter and also supply the Chair Division with 1,000 cushions per quarter. What transfer price should Cutler

Companyâ set? Explain your reasoning. Using the transfer price youâ determined, calculate the total contribution margin for the quarter.

Cutler Company should set the transfer price at $		because the Chair Division would not be willing to pay more than

Using the transfer price youâ determined, calculate the total contribution margin for the quarter.

	Number of units	x	Contribution margin per unit	=	Total contribution margin
Chair Division		x		=
Cushion Divisionâexternal		x		=
Cushion Divisionâinternal		x		=
Total

emeraldhound566

ACCO 330 Study Guide - Final Guide: Transfer Pricing, Fixed Cost, Variable Cost

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