Athena Company has two divisions. Spartan Division, which has an investment base of $8,400,000, produces and sells 450,000 units of a product at a market price of $28 per unit. Its variable costs total $8 per unit. The division also charges each unit $14 of fixed costs based on a capacity of 500,000 units. Trojan Division wants to purchase 100,000 units from Spartan. However, it is willing to pay only $16 per unit because it has an opportunity to accept a special order at a reduced price. The order is economically justifiable only if Trojan can acquire Spartan’s output at a reduced price. Required a. What is the ROI for Spartan without the transfer to Trojan? b. What is Spartan’s ROI if it transfers 100,000 units to Trojan at $16 each? c. What is the minimum transfer price for the 100,000-unit order that Spartan would accept if it were willing to maintain the same ROI with the transfer as it would accept by selling its 450,000 units to the outside market?
> Refer to the data in Exercise 8-22. In Exercise 8-22. The following information pertains to the Davenport plant for the month of May (all materials are added at the beginning of the process): Required Compute the cost per equivalent unit for materials
> The following information pertains to the Davenport plant for the month of May (all materials are added at the beginning of the process): Required Compute the cost per equivalent unit for materials using the weighted-average method. Units Material
> Delhi, Inc., seeks your assistance in developing cash and other budget information for August, September, and October. At July 31, the company had cash of $22,000, accounts receivable of $1,748,000, inventories of $1,237,600, and accounts payable of $532
> Capstone Corporation has just received its sales expense report for January, which follows. Item _____________________Amount Sales commissions . . . . . . . . . . . . . . . . . $121,500 Sales staff salaries . . . . . . . . . . . . . . . . . . . 28,800 Te
> Lotus Fixtures, Inc. (LFI), manufactures steel fittings. Each fitting requires both steel and an alloy that allows the fitting to be used under extreme conditions. The following data apply to the production of the fittings: Direct materials per unit 2 po
> Refer to the data in Problem 13-42. Estimate the cash from operations expected in year 2. In Problem 13-42 Cameron Parts has the following data from year 1 operations, which are to be used for developing year 2 budget estimates: Sales revenue (12,500 un
> Refer to the data in Problem 13-40. Estimate the cash from operations expected in year 2. In Problem 13-40 The following information is available for year 1 for Dancer Components: Sales revenue (300,000 units) . . . . . . $5,700,000 Manufacturing costs
> Bay Area Limos operates transportation services to Bay City airport. The price of service is fixed at a flat rate for each trip and most costs of providing the service are fixed for each trip. Betty Smith, the owner, forecasts income by estimating two fa
> Sanjana’s Sweet Shoppe operates on the boardwalk of a New England coastal town. The store only opens for the summer season and the business is heavily dependent on the weather and the economy in addition to new competition. Sanjana Swee
> Elizabeth Jablonski is the director of Research and Development for Galaxy Electronics. Last week, she submitted the following funding request as part of the annual budget process. Project ___________________Funding Request 1. Portable audio project . .
> Bears, Inc., adds materials at the beginning of the process in Department MO. The following information on physical units for Department MO for the month of July is available: Work in process, July 1 (75% complete with respect to conversion). . . . . .
> The controller of Northwest Hardware has just received two forecasts for sales in the Montana District for the coming year. Based on an econometric analysis of consumer spending and economic trends, a marketing research firm estimates sales of $1 million
> BK Consulting is a management consulting fi rm. Other than the senior leadership (who manage the firm, but do not actively consult), the managers and staff are billed to clients on an hourly basis. The workload varies quite a bit from month to month requ
> Carreras Café is a Spanish restaurant in a college town. The owner expects that the number of meals served in June will be 40 percent below those served in May, because so many students leave for the summer. In May, the restaurant served 4,200 meals at a
> Rhodes, Inc., is a fast-growing start-up firm that manufactures bicycles. The following income statement is available for July: Sales revenue (200 units @ $500 per unit) . . . . $100,000 Less Manufacturing costs Variable costs . . . . . . . . . . . . . .
> Refer to the data in Exercise 13-31. Varmit-B-Gone estimates that the number of subscribers in September should fall 10 percent below August levels, and the number of service calls per subscriber should decrease by an estimated 20 percent. The following
> Varmit-B-Gone is a pest control service that operates in a suburban neighborhood. The company attempts to make service calls at least once a month to all homes that subscribe to its service. It makes more frequent calls during the summer. The number of s
> Scare-2-B-U (S2BU) specializes in costumes for all occasions. The average price of each of its costumes is $240. For each occasion, S2BU receives a 20 percent deposit two months before the occasion, 50 percent the month before, and the remainder on the d
> Nassau Products is preparing a cash budget for April. The following information on accounts receivable collections is available from past collection experience: Percent of current month’s sales collected this month . . . . . . . . . . . . . . . . . . . .
> Duluth Company is preparing its cash budget for December. The following information is available concerning its accounts receivable: Estimated credit sales for December . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300,000 Act
> Ashland Corporation, a merchandising fi rm, is preparing its cash budget for October. The following information is available concerning its inventories: Inventories at beginning of October . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
> Refer to the data in Exercise 8-18. In Exercise 8-18. Missouri Corporation shows the following information concerning the work in process at its plant: • Beginning inventory was partially complete (materials are 100 percent complete; conversion costs ar
> What are the characteristics of industries most likely to use process costing?
> White Products wishes to purchase goods in one month for sale in the next. On March 31, the company has 8,000 portable music players in stock, although sales for the next month (April) are estimated to total 8,600 players. Total sales of players are expe
> Westile Company buys plain ceramic tiles and prints different designs on them for souvenir and gift stores. It buys the tiles from a small company in Europe, so at all times it keeps on hand a stock equal to the tiles needed for three months’ sales. The
> The Casings Plant of Wyoming Machines makes plastics shells for the company’s calculators. (Each calculator requires one shell.) For each of the next two years, Wyoming expects to sell 160,000 calculators. The beginning finished goods inventory of shells
> Hamilton Corp. manufactures a component used in a popular gaming console. Demand has been strong and the executive staff at Hamilton is planning for next year. On October 1, they call you into a budgeting meeting where production plans are being reviewed
> The board of directors of the Cortez Beach Yacht Club (CBYC) is developing plans to acquire more equipment for lessons and rentals and to expand club facilities. The board plans to purchase about $50,000 of new equipment each year and wants to begin a fu
> When the fraud at PepsiCo occurred, the company had five somewhat diverse groups of divisions: food products, such as Frito-Lay, Inc.; transportation, such as northAmerican Van Lines, Inc.; sporting goods, such as Wilson Sporting Goods Co.; food service,
> Overview River Beverages is a food and soft drink company with worldwide operations. The company is organized into five regional divisions with each vice president reporting directly to the CEO, Cindy Wilkins. Each vice president has a Strategic Research
> An article in The Wall Street Journal indicated that dressmaker Fallo Me (name changed) backdated invoices to record revenue in the quarter before sales were actually made. As long as sales remained strong, the practice went undetected. When a recession
> Your company has a travel policy that reimburses employees for the “ordinary and necessary” costs of business travel. Employees often mix a business trip with pleasure by either extending the time at the destination or
> Paulista Corporation’s division managers have been expressing growing dissatisfaction with the methods the organization uses to measure division performance. Division operations are evaluated every quarter by comparing them with a budget prepared during
> Missouri Corporation shows the following information concerning the work in process at its plant: • Beginning inventory was partially complete (materials are 100 percent complete; conversion costs are 60 percent complete). • Started this month, 180,000 u
> Hall O’ Fame Products is a nationwide sporting goods manufacturer. The company operates with a widely based manufacturing and distribution system that has led to a highly decentralized management structure. Each division manager is resp
> SPG Company manufactures and sells metal products that are used in many manufacturing operations. The management at SPG believes strongly in decentralized decision making and using performance evaluation and compensation to encourage high-performing mana
> In the late 1980s, General Electric Company (GE), whose CEO at the time was Jack Welch, acquired Kidder Peabody, an investment banking firm founded in 1824. In 1991, Kidder hired a bond trader named Joseph Jett. Jett’s job was trading STRIPS, which are s
> “We can’t drop our prices below $210 per hundred pounds,” exclaimed Greg Berman, manager of Forwarders, a division of Custom Freight Systems. “Our margins are already razor thin. Our
> Refer to Problem 15-41. Suppose Health Services could sell time on the machine to other companies in the area on a per-hour basis. Further, it can sell all the time available for $30 per hour. In Problem 15-41 CHS is a large multidivision fi rm. One div
> CHS is a large multidivision fi rm. One division, Health Services, is well known inside CHS for its efficient information technology (IT). A smaller division, Optics, has approached Health Services with a proposal that it provide IT support in the form o
> Refer to the data in Problem 15-39. At the end of the year, the following data are available on actual operations at the landfill. Volume of trash . . . . . . . . . . . . . . . . . . . . . . 1,250 tons (400 loads) Preparation costs (per load) . . . . .
> Mathes Corporation manufactures paper products. The company operates a landfill, which it uses to dispose of nonhazardous trash. The trash is hauled from the two nearby manufacturing facilities in trucks that can carry up to five tons of trash in a load.
> Gage Corporation has two operating divisions in a semiautonomous organizational structure. Adams Division, located in the United States, produces a specialized electrical component that is an input to Bute Division, located in the south of England. Adams
> Western States Supply, Inc. (WSS), consists of three divisions—California, Northwest, and Southwest—that operate as if they were independent companies. Each division has its own sales force and production facilities. Each division manager is responsible
> Refer to the data in Exercise 8-16. Assume that beginning inventory is 50 percent complete with respect to materials and 30 percent complete with respect to conversion costs. In Exercise 8-16. Clean Corporation manufactures liquid window cleaner. The fo
> Oriole, Inc. is a large consumer products company, which manufactures health and beauty products sold at grocery and drug stores throughout the country. One division, PS, does both manufacturing and shipping and operates a warehouse and transportation ac
> Cochise Corporation’s Southern Division is operating at capacity. It has been asked by Northern Division to supply it a thermal switch, which Southern sells to its regular customers for $60 each. Northern, which is operating at 70 percent capacity, is wi
> Skane Shipping Ltd. (SSL) operates a fleet of container ships in international trade between Sweden and Singapore. All of the shipping income (that is, that related to SSL’s ships) is deemed to be earned in Sweden. SSL also owns a dock facility in Singap
> Refer to the data in Problem 15-29. Division managers are evaluated using residual income using a 15 percent cost of capital. In Problem 15-29 Athena Company has two divisions. Spartan Division, which has an investment base of $8,400,000, produces and s
> Perth Corporation has two operating divisions, a casino and a hotel. The two divisions meet the requirements for segment disclosures. Before transactions between the two divisions are considered, revenues and costs are as follows: The casino and the ho
> Leapin’ Larry’s Pre-Owned Cars has two divisions, Operations and Financing. Operations is responsible for selling Larry’s inventory as quickly as possible and purchasing cars for future sale. Financing Division takes loan applications and packages loans
> Refer to the information in Exercise 15-25. Suppose Manufacturing is located in Country A with a tax rate of 60% and Assembly in Country B with a tax rate of 40%. All other facts remain the same. In Exercise 15-25 Mountain Industries operates a Manufact
> Mountain Industries operates a Manufacturing Division and an Assembly Division. Both divisions are evaluated as profit centers. Assembly buys components from Manufacturing and assembles them for sale. Manufacturing sells many components to third parties
> Refer to the data in Exercise 15–17. Suppose that Government Division will charge the client interested in implementing an activity-based costing system by the hour based on cost plus a fixed fee, where the cost is primarily the consultant’s hourly pay.
> Clean Corporation manufactures liquid window cleaner. The following information concerns its work in process: • Beginning inventory, 12,000 partially complete gallons. • Transferred out, 63,000 gallons. • Ending inventory (materials are 20 percent comple
> Trans Atlantic Metals has two operating divisions. Its forging operation in Finland forges raw metal, cuts it, and then ships it to the United States where the company’s Gear Division uses the metal to produce finished gears. Operating expenses amount to
> Carmen Seville and Don Turco jointly own Bright Green Temp Services (BGTS). Carmen owns 60 percent and Don owns 40 percent. The company provides temporary clerical services at a rate of $40 per hour. During the past year, its clients used 14,000 hours of
> Seattle Transit Ltd. operates a local mass transit system. The transit authority is a state governmental agency. It has an agreement with the state government to provide rides to senior citizens for 50 cents per trip. The government will reimburse Seattl
> Division A offers its product to outside markets for $60. It incurs variable costs of $22 per unit and fixed costs of $75,000 per month based on monthly production of 4,000 units. Division B can acquire the product from an alternate supplier for $62 per
> A company permits its decentralized units to “lease” space to one another. Uptown Division has leased some of its idle warehouse space to Downtown Division for $60 per square foot per month. Recently, Uptown obtained a new five-year contract, which will
> Mississippi Company has two decentralized divisions, Illinois and Iowa. Illinois always has purchased certain units from Iowa at $60 per unit. Because Iowa plans to raise the price to $80 per unit, Illinois is considering buying these units from outside
> Best Practices, Inc., is a management consulting fi rm. Its Corporate Division advises private firms on the adoption and use of cost management systems. Government Division consults with state and local governments. Government Division has a client that
> In what ways is transfer pricing like cost allocation? In what ways is it different?
> When setting a transfer price for goods that are sold across international boundaries, what factors should management consider?
> How does the choice of a transfer price affect the operating profits of both segments involved in an intracompany transfer? Why is the choice of a transfer price important if the total profits of the firm are unaffected by this choice?
> Would process costing work well for a service firm? Why or why not?
> Alpha Division and Beta Division are both profit centers. Alpha has no external markets for its one product, an electrical component. Beta uses the component but cannot purchase it from any other source. What transfer pricing system would you recommend f
> What should an effective transfer pricing system accomplish in a decentralized organization?
> What is the general transfer pricing rule? What is the transfer price that results from this rule when: a. There is a perfect market for the product? b. The selling division is operating below capacity?
> What are the advantages and disadvantages of a negotiated transfer price system?
> What is the basis for choosing between actual and standard costs for cost-based transfer pricing?
> When would you advise a firm to use prices other than market prices for interdivisional transfers?
> When would you advise a firm to use direct intervention to set transfer prices? What are the disadvantages of such a practice?
> What are the limitations of market-based transfer prices? What are the limitations of cost-based transfer prices?
> Assume that all of the information is the same as in Integrative Case 15-43, but instead of receiving only one outside bid, Logistics receives two. The new bid is from World Services for $195 per hundred pounds. World has offered to use Air Cargo for tra
> By using economic value-added, we avoid managers focusing on short-term gains like they would with accounting income. Do you agree with this statement?
> When using the weighted-average method of process costing, total equivalent units produced for a given period equal: a. The number of units started and completed during the period plus the number of units in beginning work in process plus the number of u
> “If every division manager maximizes divisional income, we will maximize firm income. Therefore, divisional income is the best performance measure.” Comment.
> A company prepares the master budget by taking each division manager’s estimate of revenues and costs for the coming period and entering the data into the budget without adjustment. At the end of the year, division managers are given a bonus if their act
> What are the dangers of using only business unit measures to evaluate the performance of business unit managers?
> How does EVA differ from residual income?
> What are the advantages of using an ROI-type measure rather than the absolute value of division profits as a performance evaluation technique for business units?
> By using economic value-added, we avoid managers focusing on short-term gains like they would with accounting income. Do you agree with this statement?
> “If every division manager maximizes divisional income, we will maximize firm income. Therefore, divisional income is the best performance measure.” Comment.
> A company prepares the master budget by taking each division manager’s estimate of revenues and costs for the coming period and entering the data into the budget without adjustment. At the end of the year, division managers are given a bonus if their act
> What are the dangers of using only business unit measures to evaluate the performance of business unit managers?
> How does EVA differ from residual income?
> In computing the cost per equivalent unit, the weighted-average method considers: a. Current costs only. b. Current costs plus costs in beginning WIP inventory. c. Current costs plus the cost of ending WIP inventory. d. Current costs less costs in beginn
> What are the advantages of using an ROI-type measure rather than the absolute value of division profits as a performance evaluation technique for business units?
> I thought evaluating performance would be easier than this. I have three vice presidents, operating the same business in three different countries. I need to be able to compare them in order to prepare compensation recommendations to the board. The probl
> Biddle Company uses EVA to evaluate the performance of division managers. For the Wallace Division, after-tax divisional income was $400,000 in year 3. The company adjusts the after-tax income for advertising expenses. First, it adds the annual advertisi
> Suwon Pharmaceuticals invests heavily in research and development (R&D), although it must currently treat its R&D expenditures as expenses for financial accounting purposes. To encourage investment in R&D, Suwon evaluates its division managers using EVA.
> Several years ago, Seville Company acquired Salvador Components. Prior to the acquisition, Salvador manufactured and sold automotive components to third-party customers. Since becoming a division of Seville, Salvador has manufactured components only for
> Division managers at Asher Company are granted a wide range of decision authority. With the exception of managing cash, which is done at corporate headquarters, divisions are responsible for sales, pricing, production, costs of operations, and management
> Refer to the facts in Problem 14–39. Assume that Pitt’s performance measurement and bonus plans are based on residual income instead of ROI. Pitt uses a cost of capital of 12 percent in computing residual income. In Problem 14–39 Refer to the facts in P
> Refer to the facts in Problem 14–37. Assume that Pitt’s performance measurement and bonus plans are based on residual income instead of ROI. Pitt uses a cost of capital of 12 percent in computing residual income. In Problem 14–37 Oscar Clemente is the m
> Oscar Clemente (Problem 14–37) is still assessing the problem of whether to acquire LSI’s assembly machine. He learns that the new machine could be acquired next year, but if he waits until then, it will cost 15 percent more. The salvage value would stil
> Refer to the data in Exercise 14-34. In Exercise 14-34 Back Mountain Industries (BMI) has two divisions: East and West. BMI has a cost-of-capital of 15%. Selected financial information (in thousands of dollars) for the first year of business follows:
> By mistake, the production supervisor transposed the digits on the production report and reported a higher percentage of completion for each inventory component. Assume that there was no beginning inventory. What is the effect of this error on the follow
> Refer to the data in Exercise 14-34. In Exercise 14-34 Back Mountain Industries (BMI) has two divisions: East and West. BMI has a cost-of-capital of 15%. Selected financial information (in thousands of dollars) for the first year of business follows:
