3.99 See Answer

Question: Assume that Pat Borges, CEO of Crango,

Assume that Pat Borges, CEO of Crango, has mandated a transfer price equal to 200% of full cost. Now she decides to decentralize some management decisions and sends around a memo that states: “Effective immediately, each division of Crango is free to make its own decisions regarding the purchase of direct materials and the sale of finished products.”

1. Give an example of a goal-congruence problem that will arise if Crango continues to use a transfer price of 200% of full cost and Borges’s decentralization policy is adopted.
2. Borges feels that a dual transfer-pricing policy will improve goal congruence. She suggests that transfers out of the harvesting division be made at 200% of full cost and transfers into the processing division be made at market price. Compute the operating income of each division under this dual transfer-pricing method when 181,440 kilograms of cranberries are harvested during June 2015 and processed into juice.
3. Why is the sum of the division operating incomes computed in requirement 2 different from Crango’s operating income from harvesting and processing 181,440 kilograms of cranberries?
4. Suggest two problems that may arise if Crango implements the dual transfer prices described in requirement 2.

> Leonard Company began operations late in 2016 and adopted the conventional retail inventory method. Because there was no beginning inventory for 2016 and no markdowns during 2016, the ending inventory for 2016 was $14,000 under both the conventional reta

> Keller Company began operations on January 1, 2016, adopting the conventional retail inventory system. None of the company’s merchandise was marked down in 2016 and, because there was no beginning inventory, its ending inventory for 201

> At the beginning of 2017, Aristotle Company acquired a mine for $970,000. Of this amount, $100,000 was ascribed to the land value and the remaining portion to the minerals in the mine. Surveys conducted by geologists have indicated that approximately 12,

> The following transactions occurred during 2017. Assume that depreciation of 10% per year is charged on all machinery and 5% per year on buildings, on a straight-line basis, with no estimated salvage value. Depreciation is charged for a full year on all

> Five Satins Company purchased a piece of equipment at the beginning of 2014. The equipment cost $430,000. It has an estimated service life of 8 years and an expected salvage value of $70,000. The sum of-the-years’-digits method of depreciation is being u

> Diderot Drilling Company has leased property on which oil has been discovered. Wells on this property produced 18,000 barrels of oil during the past year that sold at an average sales price of $55 per barrel. Total oil resources of this property are esti

> On December 31, 2016, Main Inc. borrowed $3,000,000 at 12% payable annually to finance the construction of a new building. In 2017, the company made the following expenditures related to this building: March 1, $360,000; June 1, $600,000; July 1, $1,500

> Cannondale Company purchased an electric wax melter on April 30, 2017, by trading in its old gas model and paying the balance in cash. The following data relate to the purchase. List price of new melter……………………………………………$15,800 Cash paid……………………………………………

> Harrisburg Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $5,000,000 on January 1, 2017. Harrisburg expected to complete the building by December 31, 2017. Harrisburg has the

> Wallace Company lost most of its inventory in a fire in December just before the year-end physical inventory was taken. The corporation’s books disclosed the following. Merchandise with a selling price of $21,000 remained undamaged af

> Presented below is the current liabilities section of Micro Corporation. Instructions Answer the following questions. a. What are the essential characteristics that make an item a liability? b. How does one distinguish between a current liability and

> Cardinals Corporation purchased a computer on December 31, 2016, for $105,000, paying $30,000 down and agreeing to pay the balance in five equal installments of $15,000 payable each December 31 beginning in 2017. An assumed interest rate of 10% is implic

> Chippewas Inc. has decided to purchase equipment from Central Michigan Industries on January 2, 2017, to expand its production capacity to meet customers’ demand for its product. Chippewas issues an $800,000, 5-year, zero-interest-bearing note to Central

> Worf Co. both purchases and constructs various equipment it uses in its operations. The following items for two different types of equipment were recorded in random order during the calendar year 2017. Purchase Cash paid for equipment, including sales ta

> At December 31, 2017, Indigo Girls Company has outstanding noncancelable purchase commitments for 36,000 gallons, at $3.00 per gallon, of raw material to be used in its manufacturing process. The company prices its raw material inventory at cost or marke

> The following three situations involve the capitalization of interest. Situation I: On January 1, 2017, Oksana Baiul, Inc. signed a fixed-price contract to have Builder Associates construct a major plant facility at a cost of $4,000,000. It was estimate

> During 2017, Pretenders Furniture Company purchases a carload of wicker chairs. The manufacturer sells the chairs to Pretenders for a lump sum of $59,850 because it is discontinuing manufacturing operations and wishes to dispose of its entire stock. Thre

> On July 31, 2017, Amsterdam Company engaged Minsk Tooling Company to construct a special-purpose piece of factory machinery. Construction was begun immediately and was completed on November 1, 2017. To help finance construction, on July 31 Amsterdam issu

> Corrs Company began operations in 2016 and determined its ending inventory at cost and at lower-of-LIFO cost-or-market at December 31, 2016, and December 31, 2017. This information is presented below. Instructions a. Prepare the journal entries require

> Referring to the inventory data for Sedato Company in E9-3, assume that Sedato follows the practice of pricing its inventory at the lower-of-cost-or-market, on an individual-item basis. Instructions From the information above, determine the amount of

> LaGreca Company uses the LCNRV method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2017, included product X. Relevant per-unit data for product X are as follows. Estimated selling price………………$50 Cost……………………

> Cuevas Co. is in the process of developing a revolutionary new product. A new division of the company was formed to develop, manufacture, and market this new product. As of year-end (December 31, 2017), the new product has not been manufactured for resal

> Ben Sisko Supply Company, a newly formed corporation, incurred the following expenditures related to Land, to Buildings, and to Machinery and Equipment. Instructions Determine the amounts that should be debited to Land, to Buildings, and to Machinery

> Dover Company began operations in 2017 and determined its ending inventory at cost and at LCNRV at December 31, 2017, and December 31, 2018. This information is presented below. Instructions a. Prepare the journal entries required at December 31, 2017

> Sedato Company follows the practice of pricing its inventory at LCNRV, on an individual-item basis. Instructions From the information above, determine the amount of Sedato Company inventory. Cost to Complete and Sell Cost Estimated per Unit Sellin

> Rembrandt Company acquired a plant asset at the beginning of Year 1. The asset has an estimated service life of 5 years. An employee has prepared depreciation schedules for this asset using three different methods to compare the results of using one meth

> Presented below are various account balances of K.D. Lang Inc. a. Unamortized premium on bonds payable, of which $3,000 will be amortized during the next year. b. Bank loans payable of a winery, due March 10, 2021. (The product requires aging for 5 yea

> Otis Thorpe Corporation has 10,000 shares of $100 par value, 8%, preferred stock and 50,000 shares of $10 par value common stock outstanding at December 31, 2017. Instructions Answer the questions in each of the following independent situations. a. If

> Pistons Inc. recently hired a new accountant with extensive experience in accounting for partnerships. Because of the pressure of the new job, the accountant was unable to review what he had learned earlier about corporation accounting. During the first

> Lindsey Hunter Corporation is authorized to issue 50,000 shares of $5 par value common stock. During 2017, Lindsey Hunter took part in the following selected transactions. 1. Issued 5,000 shares of stock at $45 per share, less costs related to the issuan

> Dave Matthew Inc. issues 500 shares of $10 par value common stock and 100 shares of $100 par value preferred stock for a lump sum of $100,000. Instructions a. Prepare the journal entry for the issuance when the market price of the common shares is $165

> Faith Evans Corporation is a regional company which is an SEC registrant. The corporation’s securities are thinly traded on NASDAQ. Faith Evans Corp. has issued 10,000 units. Each unit consists of a $500 par, 12% subordinated debenture and 10 shares of $

> On June 30, 2017, your client, Ferry Company, was granted two patents covering plastic cartons that it had been producing and marketing profitably for the past 3 years. One patent covers the manufacturing process, and the other covers the related product

> Twenty-five thousand shares reacquired by Elixir Corporation for $53 per share were exchanged for undeveloped land that has an appraised value of $1,700,000. At the time of the exchange, the common stock was trading at $62 per share on an organized excha

> Morgan Sondgeroth Inc. began operations in January 2015 and reported the following results for each of its 3 years of operations. At December 31, 2017, Morgan Sondgeroth Inc. capital accounts were as follows. 8% cumulative preferred stock, par value $

> Cajun Company has outstanding 2,500 shares of $100 par, 6% preferred stock and 15,000 shares of $10 par value common. The following schedule shows the amount of dividends paid out over the last 4 years. Instructions Allocate the dividends to each type

> Matt Schmidt Company’s ledger shows the following balances on December 31, 2017. 7% Preferred stock—$10 par value, outstanding 20,000 shares…………...$ 200,000 Common stock—$100 par value, outstanding 30,000 shares…………...3,000,000 Retained earnings………………………

> The outstanding capital stock of Edna Millay Corporation consists of 2,000 shares of $100 par value, 8% preferred, and 5,000 shares of $50 par value common. Instructions Assuming that the company has retained earnings of $90,000, all of which is to be

> Presented below is information from the annual report of Emporia Plastics, Inc. Instructions a. Compute the return on common stockholders’ equity and the rate of interest paid on bonds. (Assume balances for debt and equity accounts a

> Kathleen Battle Corporation was organized on January 1, 2017. It is authorized to issue 10,000 shares of 8%, $100 par value preferred stock, and 500,000 shares of no-par common stock with a stated value of $1 per share. The following stock transactions w

> Shown below is the liabilities and stockholders’ equity section of the balance sheet for Jana Kingston Company and Mary Ann Benson Company. Each has assets totaling $4,200,000. For the year, each company has earned the same income bef

> Anne Cleves Company reported the following amounts in the stockholders’ equity section of its December 31, 2016, balance sheet. Preferred stock, 10%, $100 par (10,000 shares authorized, 2,000 shares issued) ………………………………………………………...$200,000 Common stock,

> Bruno Corporation’s post-closing trial balance at December 31, 2017, is shown as follows. At December 31, 2017, Bruno had the following number of common and preferred shares. The dividends on preferred stock are $4 cumulative. In a

> Sinise Industries acquired two copyrights during 2017. One copyright related to a textbook that was developed internally at a cost of $9,900. This textbook is estimated to have a useful life of 3 years from September 1, 2017, the date it was published. T

> Recall from Chapter 13 that Hincapie Co. (a specialty bike-accessory manufacturer) is expecting growth in sales of some products targeted to the low-price market. Hincapie is contemplating a preferred stock issue to help finance this expansion in operati

> LVT is an international manufacturer of fragrances for women. Management at LVT is considering expanding the product line to men’s fragrances. From the best estimates of the marketing and production managers, annual sales (all for cash) for this new line

> Fox Valley Healthcare Inc. is a not-for-profit organization that operates eight nursing homes and 10 assisted-living facilities. The company has grown considerably over the last three years and expects to continue to expand in the years ahead, particular

> Argone division of Gemini Corporation is located in the United States. Its effective income tax rate is 20%. Another division of Gemini, Calcia, is located in Canada, where the income tax rate is 38%. Calcia manufactures, among other things, an intermedi

> The Ottawa Valley Instrument Company (OVIC) consists of the semiconductor division and the process-control division, each of which operates as an independent profit centre. The semiconductor division employs craftsmen who produce two different electronic

> Crango Products is a cranberry cooperative that operates two divisions: a harvesting division and a processing division. Currently, all of Harvesting’s output is converted into cranberry juice by the processing division, and the juice i

> As a way to incent competition between divisions, the president of Industrial Products told the division managers that a quarterly bonus would be paid only to the most profitable division. However, absolute division operating income as conventionally com

> Light Seating Canada produces recliners, the device inside car seats that allows the seats to recline to a position comfortable to the driver but prevents the seat from trapping the driver in the case of a front crash. The company has always been associa

> Coventry Inc. is a diversified multidivisional corporation. One of its business units manufactures and sells industrial pumps. Coventry’s corporate management gives Industrial Pumps management considerable operating and investment autonomy in running the

> Corners Ltd. owns and manages three convenience stores. The following information has been collected for the year 2015: Required: 1. Compute the ROI for each store, where investment is measured at (a) historical cost and (b) current cost. 2. How would

> Transfer pricing is confined to profit centres.” Do you agree? Why?

> The following forecast variable costing income statement was prepared for Electric Machines Ltd. for the year ending April 2015: Sales ……………………………………..$100,000,000 Variable costs …………………………….45,000,000 Contribution margin ……………………55,000,000 Fixed costs

> Leader Automotive Canada is a Tier 1 supplier in the automotive industry (direct supplier to car assemblies), an industry that is considered the most competitive in the manufacturing sector. A couple of years ago the CEO decided to revise the bonus plan

> Mineral Waters Ltd. operates three divisions that process and bottle sparkling mineral water. The historical-cost accounting system reports the following data for 2015: Mineral Waters estimates the useful life of each plant to be 12 years with a zero t

> When the Smith & Bain Company formed three divisions a year ago, the president told the division managers that an annual bonus would be paid to the most profitable division. However, absolute division operating income as conventionally computed would

> United Forest Products (UFP) is a large timber and wood processing plant. UFP’s performance-evaluation system pays its managers substantial bonuses if the company achieves annual budgeted profit numbers. In the last quarter of 2015, Amy Kimbell, UFP’s co

> Hamilton Semiconductors manufactures specialized chips that sell for $20 each. Hamilton’s manufacturing costs consist of variable cost of $2 per chip and fixed costs of $9,000,000. Hamilton also incurs $400,000 in fixed marketing costs each year. Hamilto

> Community Credit Union (CCU) recently introduced a new bonus plan for its business unit executives. The company believes that current profitability and customer satisfaction levels are equally important to the bank’s long-term success.

> Murdoch Turner seeks your advice on revising the existing bonus plan for division managers of Green News Group. Assume division managers do not like bearing risk. Turner is considering three ideas: ■ Make each division manager’s compensation depend on di

> Green News Group has two major divisions: Print and Internet. Summary financial data (in millions) for 2014 and 2015 are as follows: he two division managers’ annual bonuses are based on division ROI (defined as operating income divid

> Italian Sausages Inc. is still a family-owned company located in Maple, Ontario. It has experienced significant growth in the last 10 years, and nowadays it employs more than 100 persons in production-related activities and another 20 persons in support

> Under the general transfer-pricing guideline, the minimum transfer price will vary depending on whether or not the supplying division has idle capacity.” Do you agree? Explain.

> Mark’s division has been judged on the basis of its profit and return on investment. Top management has been working to gain effective results from a policy of decentralizing responsibility for all decisions except those relating to overall company polic

> Blue Ribbon Fisheries is a fishing company located on the Canadian Pacific coast. It has three divisions: 1. Harvesting—operates a fleet of 20 trawling vessels. 2. Processing—processes the raw fish into fillets. 3. Marketing—packages fillets in two-kilog

> Whengon Manufacturing makes electronic hearing aids. Department A manufactures 10,000 units of part HR-7 and Department B uses this part to make the finished product. HR-7 is a specific part for a patented product that cannot be purchased or sold outside

> The management of Kleinburg Industrial Bakery is analyzing two competing investment projects and they must decide which one can be done immediately and which one can be postponed for at least a year. The details of each proposed investment are shown on t

> LudmillaQuagg owns a fitness centre and is thinking of replacing the old Fit-O-Matic machine with a brand new Flab-Buster 3000. The old FitO-Matic has a historical cost of $50,000 and accumulated depreciation of $46,000, but has a trade-in value of $5,00

> Met-All Manufacturing manufactures over 20,000 different products made from metal, including building materials, tools, and furniture parts. The manager of the Furniture Parts division has proposed that his division expand into bicycle parts as well. The

> Nate Stately, a manager of the Plate division for the Great Slate Manufacturing Company, has the opportunity to expand the division by investing in additional machinery costing $320,000. He would depreciate the equipment using the straight-line method, a

> You have the opportunity to expand your business b y purchasing new equipment for $189,000. You expect to incur fixed costs of $96,000 per year to use this new equipment, and you expect to incur variable costs in the amount of approximately 10% of annual

> Christen Granite sells granite counter tops to the construction industry. Christen Granite has three customers: Homebuilders, a small construction company that builds private luxury homes; Kitchen Constructors, a company that designs and builds kitchens

> Refer to Exercise 21-28. Required: 1. Suppose the manager of Division A has the option of (a) cutting the external price to $195, with the certainty that sales will rise to 1,000 units or (b) maintaining the external price of $200 for the 800 units and

> Give two reasons why a dual-price approach to transfer pricing is not widely used.

> Europa Inc., has two divisions, A and B, which manufacture expensive bicycles. Division A produces the bicycle frame, and Division B assembles the rest of the bicycle onto the frame. There is a market for both the subassembly and the final product. Each

> Clover Inc. manufactures and sells television sets. Its assembly division (AD) buys television screens from the screen division (SD) and assembles the TV sets. The SD, which is operating at capacity, incurs an incremental manufacturing cost of $80 per sc

> Refer to Exercise 21-25. Assume that Division A can sell the 2,000 units to other customers at $155 per unit, with variable marketing cost of $5 per unit. Required: 1. Determine whether Allison-Chambers will benefit if Division C purchases the 2,000 uni

> Ajax Corporation has two divisions. The mining division makes toldine, which is then transferred to the metals division. The toldine is further processed by the metals division and sold to customers at a price of $150 per unit. The mining division is cur

> British Columbia Lumber has a raw lumber division and a finished lumber division. The variable costs are: ■ Raw lumber division: $100 per 100 board feet of raw lumber. ■ Finished lumber division: $125 per 100 board feet of finished lumber. Assume that no

> Zzwuig Multinational Inc. has divisions in Canada, Germany, and New Zealand. The Canadian division is the oldest and most established of the three, and has a cost of capital of 6%. The German division was started three years ago when the exchange rate fo

> Konekopf Corporation has a division in Canada and another in France. The investment in the French assets was made when the exchange rate was $1.20 per euro. The average exchange rate for the year was $1.30 per euro. The exchange rate at the end of the fi

> Peach Computer Corporation is the largest personal computer company in the world. The CEO of Peach is retiring, and the board of directors is considering external candidates to fill the position. The board’s top two choices are CEOs Pet

> Nature’s Elixir Corporation operates three divisions that process and bottle natural fruit juices. The historical-cost accounting system reports the following information for 2015: Nature’s Elixir estimates the usefu

> Brasskey (BK) Company makes doorbells. It has a weighted-average cost of capital of 8%, and total assets of $5,690,000. BK has current liabilities of $700,000. Its operating income for the year was $649,000. BK does not have to pay any income taxes. One

> Bill Watts, president of Western Publications, accepts a capital-budgeting project advocated by Division X. This is the division in which the president spent his first 10 years with the company. On the same day, the president rejects a capital-budgeting

> The Dexter Division of AMCO sells car batteries. AMCO’s corporate management gives Dexter management considerable operating and investment autonomy in running the division. AMCO is considering how it should compensate Jim Marks, the general manager of th

> Lada Manufacturing makes fashion products and competes on the basis of quality and leading-edge designs. The company has $3,000,000 invested in assets in its clothing manufacturing division. After-tax operating income from sales of clothing this year is

> The Grandlund Corporation manufactures similar products in Canada and Norway. The Canadian and Norwegian operations are organized as decentralized divisions. The following information is available for 2016; ROI is calculated as operating income divided b

> Bailey Corporation recently announced a bonus plan to be awarded to the manager of the most profitable division. The three division managers are to choose whether ROI or RI will be used to measure profitability. In addition, they must decide whether inve

> Performance Auto Company operates a New Car Division (that sells high-performance sports cars) and a Performance Parts Division (that sells performance improvement parts for family cars). Some division financial measures for 2015 are as follows: Requir

> YardScapes Corporation manufactures furniture in several divisions, including the Patio Furniture division. The manager of the Patio Furniture division plans to retire in two years. The manager receives a bonus based on the division’s ROI, which is curre

> Summit Equipment specializes in the manufacture of medical equipment, a field that has become increasingly competitive. Approximately two years ago, Ben Harrington, president of Summit, decided to revise the bonus plan (based, at the time, entirely on op

> Ohms Motor Company makes electric cars and has only two products, the Simplegreen and the Superiorgreen. To produce the Simplegreen, Ohms Motor employed assets of $13,500,000 at the beginning of the period, and $13,400,000 of assets at the end of the per

> The Outdoor Sports Company produces a wide variety of outdoor sports equipment. Its newest division, Golf Technology, manufactures and sells a single product: AccuDriver, a golf club that uses global positioning satellite technology to improve the accura

> Learning World Inc. has two divisions: Test Preparation and Language Arts. Results (in millions) for the past three years are partially displayed here: Required: 1. Complete the table by filling in the blanks. 2. Use the DuPont method of profitability

> List and briefly describe the five major categories of cash flows included in capital investment projects.

> Return on investment (ROI) is often expressed as follows: Required: 1. What advantages are there in the breakdown of the computation into two separate components? 2. Fill in the following blanks: After filling in the blanks, comment on the relative p


See Answer