Question: Alpha and Beta are divisions within the
Alpha and Beta are divisions within the same company. The managers of both divisions are evaluated based on their own division’s return on investment (ROI). Assume the following information relative to the two divisions: 
Managers are free to decide if they will participate in any internal transfers. All transfer prices are negotiated. Required: 1. Refer to case 1 shown above. Alpha Division can avoid $2 per unit in commissions on any sales to Beta Division. a. What is the lowest acceptable transfer price from the perspective of the Alpha Division? b. What is the highest acceptable transfer price from the perspective of the Beta Division? c. What is the range of acceptable transfer prices (if any) between the two divisions? Will the managers probably agree to a transfer? Explain. 2. Refer to case 2 shown above. A study indicates that Alpha Division can avoid $5 per unit in shipping costs on any sales to Beta Division. a. What is the lowest acceptable transfer price from the perspective of the Alpha Division? b. What is the highest acceptable transfer price from the perspective of the Beta Division? c. What is the range of acceptable transfer prices (if any) between the two divisions? Would you expect any disagreement between the two divisional managers over what the exact transfer price should be? Explain. d. Assume Alpha Division offers to sell 30,000 units to Beta Division for $88 per unit and that Beta Division refuses this price. What will be the loss in potential profits for the company as a whole? 3. Refer to case 3 shown above. Assume that Beta Division is now receiving an 8% price discount from the outside supplier. a. What is the lowest acceptable transfer price from the perspective of the Alpha Division? b. What is the highest acceptable transfer price from the perspective of the Beta Division? c. What is the range of acceptable transfer prices (if any) between the two divisions? Will the managers probably agree to a transfer? Explain d. Assume Beta Division offers to purchase 20,000 units from Alpha Division at $60 per unit. If Alpha Division accepts this price, would you expect its ROI to increase, decrease, or remain unchanged? Why? 4. Refer to case 4 shown above. Assume that Beta Division wants Alpha Division to provide it with 120,000 units of a different product from the one Alpha Division is producing now. The new product would require $21 per unit in variable costs and would require that Alpha Division cut back production of its present product by 45,000 units annually. What is the lowest acceptable transfer price from Alpha Division’s perspective?
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Case 2 3 4 Alpha Division: Capacity in units ... Number of units now being sold to outside 80,000 400,000 150,000 300,000 customers . 80,000 400,000 100,000 300,000 Selling price per unit to outside customers $30 $90 $75 $50 Variable costs per unit ..... $18 $65 $40 $26 Fixed costs per unit (based on capacity) $6 $15 $20 $9 Beta Division: Number of units needed annually ... Purchase price now being paid to an 5,000 30,000 20,000 120,000 outside supplier .. $27 $89 $75* *Before any purchase discount.
> Walsh Company manufactures and sells one product. The following information pertains to each of the company’s first two years of operations: Variable costs per unit: Manufacturing: Direct materials…………………………. .............................$25 Direct labo
> Parker Products, Inc. is a manufacturer whose absorption costing income statement reported sales of $123 million and a net operating loss of $18 million. According to a CVP analysis prepared for management, the company’s break-even point is $115 million
> Shannon Company segments its income statement into its North and South Divisions. The company’s overall sales, contribution margin ratio, and net operating income are $500,000, 46%, and $10,000, respectively. The North Division’s contribution margin and
> Piedmont Company segments its business into two regions—North and South. The company prepared the contribution format segmented income statement as shown below: Required: 1. Compute the companywide break-even point in dollar sales. 2.
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> Bracey Company manufactures and sells one product. The following information pertains to the company’s first year of operations: Variable cost per unit: Direct materials ..................................................................$19 Fixed costs p
> Vitex, Inc. manufactures a popular consumer product and it has provided the following data excerpts from its standard cost system: The company’s manufacturing overhead cost is applied to production on the basis of direct labor hours. A
> Tom Emory and Jim Morris strolled back to their plant from the administrative offices of Ferguson & Son Manufacturing Company. Tom is manager of the machine shop in the company’s factory; Jim is manager of the equipment maintenance department. The men ha
> O’Brien Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations: Variable costs per unit: Manufacturing: Direct materials ...................................................
> O’Brien Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations: Variable costs per unit: Manufacturing: Direct materials ...................................................
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> The Excel worksheet form that appears below is to be used to recreate the main example in the text pertaining to Colonial Pewter Company. Download the workbook containing this form from Connect, where you will also receive instructions about how to use t
> The Excel worksheet form that appears below is to be used to recreate the Review Problem relating to Harrald’s Fish House. Download the workbook containing this form from Connect, where you will also receive instructions about how to us
> Ogilvy Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations: Variable cost per unit: Direct materials ............................................................$16 Fixe
> The Excel worksheet form that appears below is to be used to recreate the Review Problem related to Mynor Corporation. Download the workbook containing this form from Connect, where you will also receive instructions about how to use this worksheet form.
> The Excel worksheet form that appears below is to be used to recreate the Review Problem pertaining to Ferris Corporation. Download the workbook containing this form from Connect, where you will also receive instructions about how to use this worksheet f
> The Excel worksheet form that appears below is to be used to recreate portions of Review Problem 1 relating to Dexter Corporation. Download the workbook containing this form from Connect, where you will also receive instructions about how to use this wo
> Refer to the financial statements for Rusco Company in Problem 14–13. Because the Cash account decreased so dramatically during this year, the company’s executive committee is anxious to see how the income statement wo
> Refer.to.the.data.for.Carmono.Company.in.Exercise.14–6. Data.given.in.Exercise.14-6: Comparative.financial.statement.data.for.Carmono.Company.follow: For this year the company reported net income as follows: Sales…
> Refer to the data for Pavolik Company in Exercise 14–4. Data given in Exercise 14–4: The following changes took place last year in Pavolik Company’s balance sheet accounts: Long-term investments th
> Refer to the financial statements for Rusco Company in Problem 14–13. Because the Cash account decreased so dramatically during this year, the company’s executive committee is anxious to see how the income statement wo
> Refer to the data for Hanna Company in Exercise 14–2.The company’s income statement for the year appears below: Sales ...............................................................$350,000 Cost of goods sold ........
> Refer to the data for Carmono Company in Exercise 14–6. Data.given.in.Exercise.14-6: Comparative.financial.statement.data.for.Carmono.Company.follow: For this year the company reported net income as follows: Sales…
> Kelly Company manufactures and sells one product. The following information pertains to each of the company’s first two years of operations: Variable cost per unit: Direct materials .....................................................................$1
> Refer to the data for Pavolik Company in Exercise 14–4. Data given in Exercise 14–4: The following changes took place last year in Pavolik Company’s balance sheet accounts: Long-term investments tha
> Shimano Company has an opportunity to manufacture and sell one of two new products for a five year period. The company’s tax rate is 30% and its after-tax cost of capital is 14%. The cost and revenue estimates for each product are as fo
> Rosman Company has an opportunity to pursue a capital budgeting project with a five-year time horizon. After careful study, Rosman estimated the following costs and revenues for the project: Cost of new equipment needed ………………………………………. $420,000 Sale of
> Lander Company has an opportunity to pursue a capital budgeting project with a five-year time horizon. After careful study, Lander estimated the following costs and revenues for the project: Cost of equipment needed ……………………………………………….. $250,000 Working
> Winthrop Company has an opportunity to manufacture and sell a new product for a five-year period. To pursue this opportunity, the company would need to purchase a piece of equipment for $130,000. The equipment would have a useful life of five years and z
> Gaston Company is considering a capital budgeting project that would require a $2,000,000 investment in equipment with a useful life of five years and no salvage value. The company’s tax rate is 30% and its after-tax cost of capital is
> Aldean Company wants to use absorption cost-plus pricing to set the selling price on a new product. The company plans to invest $200,000 in operating assets to produce and sell 16,000 units. Its required return on investment (ROI) in its operating assets
> Wilderness Products, Inc., has designed a self-inflating sleeping pad for use by backpackers and campers. The following information is available about the new product: a. An investment of $1,350,000 will be necessary to carry inventories and accounts rec
> The postal service of St. Vincent, an island in the West Indies, obtains a significant portion of its revenues from sales of special souvenir sheets to stamp collectors. The postal service purchases the souvenir sheets from a supplier for $0.80 each. St.
> Valmont Company has developed a new industrial piece of equipment called the XP–200. The company is considering two methods of establishing a selling price for the XP–200—absorption cost-plus pricing and value-based pricing. Valmont’s cost accounting sys
> Lyons Company manufactures and sells one product. The following information pertains to the company’s first year of operations: Variable cost per unit: Direct materials ......................................................................$13 Fixed cost
> Northport Company manufactures numerous products, one of which is called Sea Breeze Skin Cleanser. The company has provided the following data regarding this product: Unit sales (a) .......................................................................
> McDermott Company has developed a new industrial component called IC–75. The company is excited about IC–75 because it offers superior performance relative to the comparable component sold by McDermott’s primary competitor. The competing part sells for $
> Maria Lorenzi owns an ice cream stand that she operates during the summer months in West Yellowstone, Montana. She is unsure how to price her ice cream cones and has experimented with two prices in successive weeks during the busy August season. The numb
> The managers of Midwest Whitetails magazine (a magazine dedicated to deer hunters) want to establish a price for customers wishing to place a full-page advertisement in their magazine for one month. To help with the price setting decision, the managers i
> Messina Company wants to use absorption cost-plus pricing to establish the selling price for a new product. The company plans to invest $650,000 in operating assets that provide the capacity to make 30,000 units. Its required return on investment (ROI) i
> National Restaurant Supply, Inc., sells restaurant equipment and supplies throughout most of the United States. Management is considering adding a machine that makes sorbet to its line of ice cream making machines. Management will negotiate the purchase
> Currington Company wants to use absorption cost-plus pricing to set the selling price on a newly remodeled product. The company plans to invest $150,000 in operating assets to produce and sell 12,000 units. Its required return on investment (ROI) in its
> Weller Industries is a decentralized organization with six divisions. The company’s Electrical Division produces a variety of electrical items, including an X52 electrical fitting. The Electrical Division (which is operating at capacity) sells this fitti
> Stavos Company’s Screen Division manufactures a standard screen for high-definition televisions (HDTVs). The cost per screen is: Variable cost per screen………â€&brvba
> Norwall Company’s budgeted variable manufacturing overhead cost is $3.00 per machine-hour and its budgeted fixed manufacturing overhead is $300,000 per month. The following information is available for a recent month: a. The denominator activity of 60,00
> Hrubec Products, Inc., operates a Pulp Division that manufactures wood pulp for use in the production of various paper goods. Revenue and costs associated with a ton of pulp follow: Hrubec Products has just acquired a small company that manufactures pap
> In each of the cases below, assume Division X has a product that can be sold either to outside customers or to Division Y of the same company for use in its production process. The managers of the divisions are evaluated based on their divisional profits
> Division A manufactures electronic circuit boards. The boards can be sold either to Division B of the same company or to outside customers. Last year, the following activity occurred in Division A: Selling price per circuit board …………………………………………………..$1
> What does a manufacturing cycle efficiency (MCE) of less than 1 mean? How would you interpret an MCE of 0.40?
> Why is it a good idea to create a “Budgeting Assumptions” tab when creating a master budget in Microsoft Excel?
> What are the two stages of allocation in activity-based costing?
> If the units produced equals the units sold, which method would you expect to show the higher net operating income, variable costing or absorption costing? Why?
> Why aren’t transactions involving accounts payable considered to be financing activities?
> Should a company allocate its common fixed costs to business segments when computing the break-even point for those segments? Why?
> What general guidelines can you provide for interpreting the statement of cash flows?
> Sunk costs are easy to spot—they’re the fixed costs associated with a decision.” Do you agree? Explain.
> Stahl Company is conducting a time-driven activity-based costing study in its Shipping Department. To aid the study, the company provided the following data regarding its Shipping Department and the customers served by the department: Required: 1. Usin
> Refer to the data in Exercises 7A–1 and 7A–2. Now assume that Saratoga Company would like to answer the following “what if” question using its time-driven activity-based costing syst
> Sako Company’s Audio Division produces a speaker that is used by manufacturers of various audio products. Sales and cost data on the speaker follow: Selling price per unit on the intermediate market ……………………………….$60 Variable costs per unit……………………………………
> Refer to the data in Exercise 7A–1. In addition, assume that Saratoga Company provided the following activity data for all jobs produced during the year: Data given in Exercise 7A–1: Saratoga Company manufactures job
> Saratoga Company manufactures jobs to customer specifications. The company is conducting a time-driven activity-based costing study in its Purchasing Department to better understand how Purchasing Department labor costs are consumed by individual jobs. T
> Markus Company’s common stock sold for $2.75 per share at the end of this year. The company paid a common stock dividend of $0.55 per share this year. It also provided the following data excerpts from this year’s finan
> Ravenna Company is a merchandiser that uses the indirect method to prepare the operating activities section of its statement of cash flows. Its balance sheet for this year is as follows: During the year, Ravenna paid a $6,000 cash dividend and it sold a
> Cardinal Company is considering a five-year project that would require a $2,975,000 investment in equipment with a useful life of five years and no salvage value. The company’s discount rate is 14%. The project would provide net operati
> Cane Company manufactures two products called Alpha and Beta that sell for $120 and $80, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 100,000 units of each product
> Westerville Company reported the following results from last year’s operations: Sales .................................................................$1,000,000 Variable expenses ................................................300,000 Contribution marg
> Preble Company manufactures one product. Its variable manufacturing overhead is applied to production based on direct labor-hours and its standard cost card per unit is as follows: The planning budget for March was based on producing and selling 25,000
> Adger Corporation is a service company that measures its output based on the number of customers served. The company provided the following fixed and variable cost estimates that it uses for budgeting purposes and the actual results for May as shown belo
> Morganton Company makes one product and it provided the following information to help prepare the master budget: a. The budgeted selling price per unit is $70. Budgeted unit sales for June, July, August, and September are 8,400, 10,000, 12,000, and 13,00
> Bowen Company manufactures one product, it does not maintain any beginning or ending inventories, and its uses a standard cost system. Its predetermined overhead rate includes $1,000,000 of fixed overhead in the numerator and 50,000 direct labor-hours in
> Hickory Company manufactures two products—14,000 units of Product Y and 6,000 units of Product Z. The company uses a plantwide overhead rate based on direct labor-hours. It is considering implementing an activity-based costing (ABC) sys
> Diego Company manufactures one product that is sold for $80 per unit in two geographic regions— the East and West regions. The following information pertains to the company’s first year of operations in which it produced 40,000 units and sold 35,000 unit
> Refer to Exhibit 13–8. Is the return on this investment proposal exactly 14%, more than 14%, or less than 14%? Explain. Exhibit 13–8: A D. F G Year Now 2 3 4. $ (60,000) $ (100,000) 3 Purchase of equipment 4 Invest
> If a product is generating a loss, then it should be discontinued.” Do you agree? Explain.
> Why is the form of activity-based costing described in this chapter unacceptable for external financial reports?
> How is it possible for a fixed cost that is traceable to a segment to become a common fixed cost if the segment is divided into further segments?
> Why aren’t common fixed costs allocated to segments under the contribution approach?
> Explain how the contribution margin differs from the segment margin.
> Distinguish between a traceable fixed cost and a common fixed cost. Give several examples of each.
> If the units produced exceed the units sold, which method would you expect to show the higher net operating income, variable costing or absorption costing? Why?
> Swain Company manufactures one product, it does not maintain any beginning or ending inventories, and its uses a standard cost system. The company’s beginning balance in Retained Earnings is $70,000.It sells one product for $165 per uni
> What assumption is implicitly made about cost behavior when actual results are directly compared to a static planning budget? Why is this assumption questionable?
> Refer to the financial statements and other data in Problem 15–18. Assume Paul Sabin has asked you to assess his company’s profitability and stock market performance. Financial statements and other data in Problem 15&
> Pecunious Products, Inc.’s financial results for the past three years are summarized below: Your boss has asked you to review these results and then answer the following questions: a. Is it becoming easier for the company to pay its bi
> A comparative balance sheet for Lomax Company containing data for the last two years is as Follows: The following additional information is available about the company’s activities during this year: a. The company declared and paid a c
> Mary Walker, president of Rusco Company, considers $14,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $8,000 in cash was available at the end of this year. Since the company reported a large
> A comparative balance sheet and an income statement for Burgess Company are given below: Burgess Company Income Statement (dollars in millions) Sales .....................................................................$3,600 Cost of goods sold ........
> Yoric Company listed the net changes in its balance sheet accounts for the past year as follows: The following additional information is available about last year’s activities: a. Net income for the year was $?. b. The company sold equ
> Joyner Company’s income statement for Year 2 follows: Sales ......................................................................$900,000 Cost of goods sold ...................................................500,000 Gross margin .....
> Brock.Company.is.a.merchandiser.that.prepared.the.statement.of.cash.flows.and.income.statement.provided.below: Brock. Company Income .Statement Sales................................................................................................$5,200 C
> Saxon Products, Inc., is investigating the purchase of a robot for use on the company’s assembly line. Selected data relating to the robot are provided below: Cost of the robot ………………………….…………………………………………………. $1,600,000 Installation and software . ……………
> Forsyth Company manufactures one product, it does not maintain any beginning or ending inventories, and its uses a standard cost system. During the year, the company produced and sold 10,000 units at a price of $135 per unit Its standard cost per unit p
> In five years, Kent Duncan will retire. He is exploring the possibility of opening a self-service car wash. The car wash could be managed in the free time he has available from his regular occupation, and it could be closed easily when he retires. After
> The Elberta Fruit Farm of Ontario always has hired transient workers to pick its annual cherry crop. Janessa Wright, the farm manager, just received information on a cherry picking machine that is being purchased by many fruit farms. The machine is a mot
> Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five-year period. His annual pay raises are determined by his division’s return on investment (ROI), which has e
