Question: Continental Industries is a diversified corporation
Continental Industries is a diversified corporation with separate operating divisions. E ach division’s performance is evaluated on the basis of profit and return on investment. The Air Comfort Division manufactures and sells air-conditioner units. The coming year’s budgeted income statement, which follows, is based upon a sales volume of 15,000 units.
![Continental Industries is a diversified corporation with separate operating divisions. E ach division’s performance is evaluated on the basis of profit and return on investment. The Air Comfort Division manufactures and sells air-conditioner units. The coming year’s budgeted income statement, which follows, is based upon a sales volume of 15,000 units.
Air Comfort’s division manager believes sales can be increased if the price of the air-conditioners is reduced. A market research study by an independent firm indicates that a 5 percent reduction in the selling price would increase sales volume 16 percent or 2,400 units. The division has sufficient production capacity to manage this increased volume with no increase in fixed costs.
The Air Comfort Division uses a compressor in its units, which it purchases from an outside supplier at a cost of $140 per compressor. The Air Comfort Division manager has asked the manager of the Compressor Division about selling compressor units to Air Comfort. The Compressor Division currently manufactures and sells a unit to outside firms which is similar to the unit used by the Air Comfort Division. The specifications of the Air Comfort Division compressor are slightly different, which would reduce the Compressor Division’s direct material cost by $3 per unit. In addition, the Compressor Division would not incur any variable selling costs in the units sold to the Air Comfort Division. The manager of the Air Comfort Division wants all of the compressors it uses to come from one supplier and has offered to pay $100 for each compressor unit.
The Compressor Division has the capacity to produce 75,000 units. Its budgeted income statement for the coming year, which follows, is based on a sales volume of 64,000 units without considering Air Comfort’s proposal.
Required:
1. Should the Air Comfort Division institute the 5 percent price reduction on its air-conditioner units even if it cannot acquire the compressors internally for $100 each? Support your conclusion with appropriate calculations.
2. Independently of your answer to requirement (1), assume the Air Comfort Division needs 17,400 units. Should the Compressor Division be willing to supply the compressor units for $100 each? Support your conclusions with appropriate calculations.
3. Independently of your answer to requirement (1), assume Air Comfort needs 17,400 units. Suppose Continental’s top management has specified a transfer price of $100. Would it be in the best interest of Continental Industries for the Compressor Division to supply the compressor units at $100 each to the Air Comfort Division? Support your conclusions with appropriate calculations.
4. Is $100 a goal-congruent transfer price? [Refer to your answers for requirements (2) and (3).]](../images/continental-industries-is-a-diversified-corporation-with-separate-operating-divisions--e-45236-1.jpg)
Air Comfort’s division manager believes sales can be increased if the price of the air-conditioners is reduced. A market research study by an independent firm indicates that a 5 percent reduction in the selling price would increase sales volume 16 percent or 2,400 units. The division has sufficient production capacity to manage this increased volume with no increase in fixed costs.
The Air Comfort Division uses a compressor in its units, which it purchases from an outside supplier at a cost of $140 per compressor. The Air Comfort Division manager has asked the manager of the Compressor Division about selling compressor units to Air Comfort. The Compressor Division currently manufactures and sells a unit to outside firms which is similar to the unit used by the Air Comfort Division. The specifications of the Air Comfort Division compressor are slightly different, which would reduce the Compressor Division’s direct material cost by $3 per unit. In addition, the Compressor Division would not incur any variable selling costs in the units sold to the Air Comfort Division. The manager of the Air Comfort Division wants all of the compressors it uses to come from one supplier and has offered to pay $100 for each compressor unit.
The Compressor Division has the capacity to produce 75,000 units. Its budgeted income statement for the coming year, which follows, is based on a sales volume of 64,000 units without considering Air Comfort’s proposal.
![Continental Industries is a diversified corporation with separate operating divisions. E ach division’s performance is evaluated on the basis of profit and return on investment. The Air Comfort Division manufactures and sells air-conditioner units. The coming year’s budgeted income statement, which follows, is based upon a sales volume of 15,000 units.
Air Comfort’s division manager believes sales can be increased if the price of the air-conditioners is reduced. A market research study by an independent firm indicates that a 5 percent reduction in the selling price would increase sales volume 16 percent or 2,400 units. The division has sufficient production capacity to manage this increased volume with no increase in fixed costs.
The Air Comfort Division uses a compressor in its units, which it purchases from an outside supplier at a cost of $140 per compressor. The Air Comfort Division manager has asked the manager of the Compressor Division about selling compressor units to Air Comfort. The Compressor Division currently manufactures and sells a unit to outside firms which is similar to the unit used by the Air Comfort Division. The specifications of the Air Comfort Division compressor are slightly different, which would reduce the Compressor Division’s direct material cost by $3 per unit. In addition, the Compressor Division would not incur any variable selling costs in the units sold to the Air Comfort Division. The manager of the Air Comfort Division wants all of the compressors it uses to come from one supplier and has offered to pay $100 for each compressor unit.
The Compressor Division has the capacity to produce 75,000 units. Its budgeted income statement for the coming year, which follows, is based on a sales volume of 64,000 units without considering Air Comfort’s proposal.
Required:
1. Should the Air Comfort Division institute the 5 percent price reduction on its air-conditioner units even if it cannot acquire the compressors internally for $100 each? Support your conclusion with appropriate calculations.
2. Independently of your answer to requirement (1), assume the Air Comfort Division needs 17,400 units. Should the Compressor Division be willing to supply the compressor units for $100 each? Support your conclusions with appropriate calculations.
3. Independently of your answer to requirement (1), assume Air Comfort needs 17,400 units. Suppose Continental’s top management has specified a transfer price of $100. Would it be in the best interest of Continental Industries for the Compressor Division to supply the compressor units at $100 each to the Air Comfort Division? Support your conclusions with appropriate calculations.
4. Is $100 a goal-congruent transfer price? [Refer to your answers for requirements (2) and (3).]](../images/continental-industries-is-a-diversified-corporation-with-separate-operating-divisions--e-45236-2.jpg)
Required:
1. Should the Air Comfort Division institute the 5 percent price reduction on its air-conditioner units even if it cannot acquire the compressors internally for $100 each? Support your conclusion with appropriate calculations.
2. Independently of your answer to requirement (1), assume the Air Comfort Division needs 17,400 units. Should the Compressor Division be willing to supply the compressor units for $100 each? Support your conclusions with appropriate calculations.
3. Independently of your answer to requirement (1), assume Air Comfort needs 17,400 units. Suppose Continental’s top management has specified a transfer price of $100. Would it be in the best interest of Continental Industries for the Compressor Division to supply the compressor units at $100 each to the Air Comfort Division? Support your conclusions with appropriate calculations.
4. Is $100 a goal-congruent transfer price? [Refer to your answers for requirements (2) and (3).]
Transcribed Image Text:
AIR COMFORT DIVISION Budgeted Income Statement (In thousands) Total Per Unit Sales revenue . $12,000 $800 Manufacturing costs: Compressor. $2,100 $140 Other direct material 1,110 74 Direct labor 900 60 Variable overhead 1,350 90 Fixed overhead. Total manufacturing costs 960 64 $6,420 $428 Gross margin. $5,580 $372 Operating expenses: Variable selling $ 540 $ 36 Fixed selling. Fixed administrative. 570 38 1,140 76 Total operating expenses $2,250 $150 Net income before taxes $3,330 $222
> Why might income-tax laws affect the transfer-pricing policies of multinational companies?
> Describe four methods by which transfer prices may be set.
> Identify and explain the managerial accountant’s primary objective in choosing a transfer-pricing policy
> Discuss the importance of nonfinancial information in measuring investment-center performance.
> List three nonfinancial measures that could be used to evaluate a division of an insurance company.
> How does inflation affect investment-center performance measures?
> Describe an alternative to using ROI or residual income to measure investment-center performance
> Explain why it is important in performance evaluation to distinguish between investment centers and their managers.
> Why do some companies use gross book value instead of net book value to measure a division’s invested capital?
> Distinguish between the following measures of invested capital, and briefly explain when each should be used: (a) total assets, (b) total productive assets, and (c) total assets less current liabilities.
> Explain three strategies of environmental cost management.
> Define the term economic value added. How does it differ from residual income?
> Why is there typically a rise in ROI or residual income across time in a division? What undesirable behavioral implications could this phenomenon have?
> What is the chief disadvantage of ROI as an investment center performance measure? How does the residual income measure eliminate this disadvantage?
> Create an example showing how residual income is calculated. What information is used in computing residual income that is not used in computing ROI?
> Explain how the manager of the Automobile Division of an insurance company could improve her division’s ROI.
> Define and give three examples of an investment center.
> Describe the managerial approach known as management by objectives or MBO.
> Define goal congruence, and explain why it is important to an organization’s success.
> Explain the role of import duties, or tariffs, in affecting the transfer-pricing policies of multinational companies
> Redstone Industrial Resources Company (RIRC) has several divisions. However, only two divisions transfer products to other divisions. The Mining Division refines toldine, which is then transferred to the Metals Division. The toldine is processed into an
> Industrial Technologies, Inc. (ITI), produces two compression machines that are popular with manufacturers of plastics: no. 165 and no. 172. Machine no. 165 has an average selling price of $30,000, whereas no. 172 typically sells for approximately $27,50
> Weathermaster Window Company manufactures windows for the home-building industry. T he window frames are produced in the Frame Division. The frames are then transferred to the Glass Division, where the glass and hardware are installed. The companyâ
> Mitachlordion Technology, Inc. (MTI), has two divisions: Birmingham and Tampa. Birmingham currently sells a diode reducer to manufacturers of aircraft navigation systems for $1,550 per unit. Variable costs amount to $1,000, and demand for this product cu
> Cape Cod Lobster Shacks, Inc. (CCLS), is a seafood restaurant chain operating throughout the northeast. The company has two sources of long-term capital: debt and equity. The cost to CCLS of issuing debt is the after-tax cost of the interest payments on
> Maple Leaf Industries, headquartered in Toronto, is a multiproduct company with three divisions: Pacific Division, Plains Division, and Atlantic Division. The company has two sources of long-term capital: debt and equity. The interest rate on Maple Leaf&
> Hoosier Industries manufactures a variety of household products. Roy Washburn, head of the company’s Hardware Division, has just completed a miserable nine months. “If it could have gone wrong, it did. Sales are down,
> Prepare a table similar to Exhibit 13–3, which focuses on residual income. Use a 10 percent rate to compute the imputed interest charge. The table should show the residual income on the investment during each year in its five-year life.
> Refer to Exhibit 13–3. Prepare a similar table of the changing ROI assuming the following accelerated depreciation schedule. Assume the same income before depreciation as shown in Exhibit 13–3. (If there is a loss, lea
> Megatronics Corporation, a massive retailer of electronic products, is organized in four separate divisions. The four divisional managers are evaluated at year-end, and bonuses are awarded based on ROI. Last year, the company as a whole produced a 13 per
> Refer to the data for problem 1 regarding Omaha Grain Company. Data from problem 1: Omaha Grain Company has two divisions, which reported the following results for the most recent year Required: Compute each division’s residual incom
> Refer to the preceding problem about Calrisian Enterprises. Data from preceding problem: The following data pertain to three divisions of Calrisian Enterprises. The company’s required rate of return on invested capital is 8 percent. R
> Great Outdoze, Inc., manufactures high-quality sleeping bags, which sell for $130 each. The variable costs of production are as follows: Direct material .............................................................. $40 Direct la.........................
> The following data pertain to three divisions of Calrisian Enterprises. The company’s required rate of return on invested capital is 8 percent. Required: Fill in the blanks above. Division I Division II Division III $40,000,000 $8
> Omaha Grain Company has two divisions, which reported the following results for the most recent year c/ Required: Which was the most successful division during the year? Think carefully about this, and explain your answer.
> Delta Telecom, Inc., which produces telecommunications equipment in the United States, has a very strong local market for its circuit board. The variable production cost is $390, and the company can sell its entire supply domestically for $510. The U.S.
> Refer to the preceding exercise. The Fabrication Division’s full (absorption) cost of a component is $510, which includes $60 of applied fixed-overhead costs. The transfer price has been set at $561, which is the Fabrication Division’s full cost plus a 1
> Milwaukee Metallurgy Corporation (MMC) has two divisions. The Fabrication Division transfers partially completed components to the Assembly Division at a predetermined transfer price. The Fabrication Division’s standard variable production cost per unit
> Refer to the data in the preceding exercise for Golden Gate Construction Associates. The company has two divisions: the real estate division and the construction division. The divisions’ total assets, current liabilities, and before-tax
> Golden Gate Construction Associates, a real estate developer and building contractor in San Francisco, has two sources of long-term capital: debt and equity. The cost to Golden Gate of issuing debt is the after-tax cost of the interest payments on the de
> Galviston Supply Company is an auto parts supplier. At the end of each month, the employee who maintains all of the inventory records takes a physical inventory of the firm’s stock. When discrepancies occur between the recorded inventory and the physical
> Refer to Exhibit 13–3 . Assume that you are a consultant who has been hired by Suncoast Food Centers. Exhibit 13–3: Required: Write a memorandum to the company president explaining why the ROI based on net book value
> Suburban Lifestyles, Inc., has manufactured prefabricated houses for over 20 years. T h e houses are constructed in sections to be assembled on customers’ lots. Suburban Lifestyles expanded into the precut housing market when it acquire
> Ozarks Lighting Company had operating income for the first 10 months of the current year of $300,000. One hundred thousand units were manufactured during this period, and 100,000 units were sold. Fixed manufacturing overhead was $3,000,000 over the 10-mo
> Select one of the following companies (or any company of your choosing) and use the Internet to explore the company’s most recent annual report. American Airlines (www.americanair.com) Deere and Company (www.deere.com) Bridgestone www.bridgestone.com IBM
> The following data pertain to British Isles Aggregates Company, a producer of sand, gravel, and cement, for the year just ended. Sales revenue .............................................................. £6,000,000 Cost of goods sold ..................
> Refer to the data for Exercise 1. Assume that the company’s minimum desired rate o f return on invested capital is 11 percent. Data from exercise 2: Income .............................................................................. $ 10,000,000 Sales
> Refer to the preceding exercise. Data from preceding exercise: Income .............................................................................. $ 10,000,000 Sales revenue .................................................................... 125,000,
> The following data pertain to Pensacola Division’s most recent year of operations. Income .............................................................................. $ 10,000,000 Sales revenue ..........................................................
> General Instrumentation Corporation manufactures dashboard instruments for heavy construction equipment. The firm is based in Baltimore, but operates several divisions in the United States, Canada, and Europe. The Hudson Bay Division manufactures complex
> Fun Times Entertainment Corporation (FTEC), a subsidiary of New Age Industries, manufactures go-carts and other recreational vehicles. Family recreational centers that feature not only go-cart tracks but miniature golf, batting cages, and arcade games as
> Using the measures selected in question 12-24, explain the difference between lead and lag measures.
> Using the Internet, identify the organizational strategy for a company of your choosing and suggest two performance measures in each of the four balanced scorecard categories.
> Adelphia Corporation, which uses absorption costing, just completed its first year of operations. Planned and actual production equaled 10,000 units, and sales totaled 9,600 units at $216 per unit. Cost data for the year are as follows: Direct material (
> Refer to the information given in the preceding case for Huron Chalk Company . Information in preceding case: Huron Chalk Company manufactures sidewalk chalk which it sells online by the box at $25 per unit. Huron uses an actual costing system, which me
> What is meant by aggregate productivity, and what are its limitations?
> List four examples of customer acceptance measures.
> What is meant by customer profitability analysis? Give an example of an activity that might be performed more commonly for one customer than for another.
> Can a common cost for one segment be a traceable cost for another segment? Explain your answer.
> Why is it important in responsibility accounting to distinguish between segments and segment managers?
> Referring to Exhibit 12–5, why are marketing costs distributed to the Waikiki Sands Hotel’s departments on the basis of budgeted sales dollars? Exhibit 12-5: Cost Pool Responsibily Center Allocation Base Percentag
> Define the term cost allocation base. What would be a sensible allocation base for assigning advertising costs to the various components of a large theme park?
> Explain how and why cost allocation might be used to assign the costs of a mainframe computer system used for research purposes in a university.
> Give an example of a common resource in an organization. List some of the opportunity costs associated with using the resource. Why might allocation of the cost of the common resource to its users be useful?
> Define and give examples of the following terms: cost pool, cost object, and cost allocation (or distribution).
> Outback, Ltd., manufactures tactical LED flashlights in Melbourne, Australia. The firm uses an absorption-costing system for internal reporting purposes; however, the company is considering using variable costing. Data regarding planned and actual operat
> Performance reports based on controllability are impossible. Nobody really controls anything in an organization!” Do you agree or disagree? Explain your answer.
> Explain how to get positive behavioral effects from a responsibility-accounting system.
> What is the key feature of activity-based responsibility accounting? Briefly explain.
> Explain the relationship between performance reports and flexible budgeting.
> Define and give examples of the following terms: cost center, revenue center, profit center, and investment center.
> Why is goal congruence important to an organization’s success? How does a responsibility-accounting system foster goal congruence?
> Explain how an improvement in employee retention (a learning and growth measure) could flow through each of the balanced scorecard perspectives to result in improved financial performance.
> Southern Plastics Corporation manufactures a range of molded plastic products, such as kitchen utensils and desk accessories. The production process in the Baton Rouge plant utilizes a just-in-time inventory and production management system. Each month t
> Diagnostic Technology, Inc., manufactures diagnostic testing equipment used in hospitals. The company practices just-in-time inventory management and has a state-of-the-art manufacturing system. The following nonfinancial data were collected biweekly in
> Ujvari Equipment Company, which is located in Stutgardt, Germany, manufactures heavy construction equipment. The company’s primary product, an especially powerful bulldozer, is among the best produced in Europe. The company operates in
> Skinny Dippers, Inc., produces nonfat frozen yogurt which it sells to restaurants and ice cream shops. The product is sold in 10-gallon containers, which have the following price and variable costs. Sales price ...........................................
> Piedmont Novelties, Inc., sells merchandise through three retail outlets—in Raleigh, Charlotte, and Savannah—and operates a general corporate headquarters in Charlotte. A review of the company’s incom
> RELY Cleaning Services, Inc., was started a number of years ago by Rick Ely to provide c leaning services to both large and small businesses in their home city. Over the years, as local businesses reduced underutilized building maintenance staffs, more a
> Buckeye Department Stores, Inc., operates a chain of department stores in Ohio. The company’s organization chart appears below. Operating data for 20x5 follow. The following fixed expenses are controllable at the divisional level: depr
> Refer to the organization chart for Mount Ranier General Hospital given in the preceding problem. Ignore the rest of the data in that problem. The following table shows the cost application bases used to distribute various costs among the hospitalâ
> Mount Ranier General Hospital serves three counties in the state of Washington. The hospital is a nonprofit organization which is supported by patient billings, county and state funds, and private donations. The hospital’s organization chart foll
> The following partial organization chart is an extension of Exhibit 12–1 for Aloha Hotels and Resorts. Each of the hotel’s five main departments is managed by a director (e.g., director of hospitality). The Front Desk
> After designing your company in the preceding problem, design a set of performance reports for the subunits you identified in your chart. Make up numbers for the performance reports, and show the relationship between the reports. Refer to Exhibit 12&acir
> Here is your chance to be a tycoon. Create your own company. You will be the president and chief executive officer. It could be a manufacturer, retailer, or service industry firm, but not a hotel or bank. Draw an organization chart for your company, simi
> CommLine Equipment Corporation specializes in the manufacture of communications equipment, a field that has become increasingly competitive. Approximately two years ago, Ben Harrington, president of CommLine, became concerned that the companyâ€
> Hiawatha Hydrant Company manufactures fire hydrants in Oswego, New York. The following Information pertains to operations during May. Processing time (average per batch) ............................................... 4.25 hours Inspection time (average
> Cincinnati Cylinder Company began operations on January 1 to produce pneumatic cylinders used in a variety of machines. It used an absorption costing system with a planned production volume of 100,000 units. During its first year of operations, 100,000 u
> Ontario Bank and T rust Company’s total output of financial services during the year just ended was valued at $11 million. The total cost of the firm’s inputs, primarily direct labor and overhead, was $10 million. Required: 1. Compute Ontario’s aggregat
> Tri-County Cable Services, Inc., is organized with three segments: Metro, Suburban, and Outlying. Data for these segments for the year just ended follow. In addition to the expenses listed above, the company has $45,000 of common fixed expenses. Income-
> Wyoming Community College has three divisions: Liberal Arts, Sciences, and Business Administration. The college’s comptroller is trying to decide how to allocate the costs of the Admissions Department, the Registrar’s
> Xerox Corporation has been an innovator in its responsibility-accounting system. In one initiative, management changed the responsibility-center orientation of its Logistics and Distribution Department from a cost center to a profit center. The departmen
> How should a responsibility-accounting system handle each of the following scenarios? 1. Department A manufactures a component, which is then used by Department B. Department A recently experienced a machine breakdown which held up production of the comp
> The following data pertain to the Waikiki Sands Hotel for the month of March. Required: Prepare a March performance report similar to the lower portion of Exhibit 12–4 . The report should have six numerical columns with headings analog
> For each of the following organizational subunits, indicate the type of responsibility center that is most appropriate. 1. An orange juice factory operated by a large orange grower. 2. The College of Engineering at a large state university. 3. The Europe
> Oradell Electronics Company manufactures complex circuit boards for the aerospace industry. Demand for the company’s products has fallen in recent months, and the firm has cut its production significantly. Many unskilled workers have been temporarily lai
> Think carefully about the overall mission and goals of your college or university. Required: 1. How does the task of building a balanced scorecard for an educational institution differ from that for a profit-seeking enterprise? 2. Design a simple balanc
> Elite Classic Clothes is a retailer that sells to professional women in the northeast. The firm leases space for stores in upscale shopping centers, and the organizational structure consists of regions, districts, and stores. Each region consists of two
> Chenango Can Company manufactures metal cans used in the food-processing industry. A case of cans sells for $25. The variable costs of production for one case of cans are as follows: Direct material .......................................................
> North American Industries is a diversified company whose products are marketed both domestically and internationally. The company’s major product lines are furniture, sports equipment, and household appliances. At a recent meeting of th
