Professional Documents
Culture Documents
True/False
1.
F
Medium
Contributionmarginandsegmentmarginmeanthesamething.
2.
F
Hard
Assumingthatasegmenthasbothvariableexpensesandtraceablefixed
expenses,anincreaseinsalesshouldincreaseprofitsbyanamount
equaltothesalestimesthesegmentmarginratio.
3.
T
Medium
Thesalarypaidtoastoremanagerisatraceablefixedexpenseofthe
store.
4.
T
Easy
Segmentedstatementsforinternaluseshouldbepreparedinthe
contributionformat.
5.
T
Medium
Fixedcoststhataretraceabletoasegmentmaybecomecommonifthe
segmentisdividedintosmallerunits.
6.
F
Medium
Inresponsibilityaccounting,eachsegmentinanorganizationshould
bechargedwiththecostsforwhichitisresponsibleandoverwhich
ithascontrolplusitsshareofcommonorganizationalcosts.
7.
T
Easy
Onlythosecoststhatwoulddisappearovertimeifasegmentwere
eliminatedshouldbeconsideredtraceablecostsofthesegment.
8.
T
Easy
Somemanagersbelievethatresidualincomeissuperiortoreturnon
investmentasameansofmeasuringperformance,sinceitencourages
themanagertomakeinvestmentdecisionsthataremoreconsistentwith
theinterestsofthecompanyasawhole.
9.
T
Easy
Thereturnoninvestmentcanordinarilybeimprovedbyeither
increasingsales,reducingexpenses,orreducingoperatingassets.
ManagerialAccounting,9/e
181
10.
F
Medium
Sincethesalesfigureisneutralinthereturnoninvestment(ROI)
formulaROI=MarginXTurnover,achangeintotalsaleswillnot
affectROI.
11.
T
Medium
Allocationsofcorporateheadquartersexpensestodivisionsusedin
returnoninvestmentcalculationsshouldbelimitedtothecostof
thoseactualservicesprovidedbycentralheadquarterswhichthe
divisionsotherwisewouldhavetoprovideforthemselves.
12.
T
Medium
Theuseofreturnoninvestmentasaperformancemeasuremaylead
managerstomakedecisionsthatarenotinthebestinterestsofthe
companyasawhole.
13.
T
Easy
Residualincomeisthenetoperatingincomethataninvestmentcenter
earnsabovetheminimumrequiredreturnontheinvestmentinoperating
assets.
14.
T
Medium
(Appendix)Whenadivisionisoperatingatfullcapacity,thetransfer
pricetootherdivisionsshouldincludeopportunitycosts.
15.
F
Hard
(Appendix)Whenanintermediatemarketpriceforatransferreditem
exists,itrepresentsalowerlimitonthechargethatshouldbemade
ontransfersbetweendivisions.
Multiple Choice
16.
B
Easy
Agoodexampleofacommoncostwhichnormallycouldnotbeassigned
toproductsonasegmentedincomestatementexceptonanarbitrary
basiswouldbe:
a.productadvertisingoutlays.
b.salaryofacorporationpresident.
c.directmaterials.
d.theproductmanager'ssalary.
17.
C
Medium
Allotherthingsbeingequal,ifadivision'straceablefixedexpenses
increase:
a.thedivision'scontributionmarginratiowilldecrease.
b.thedivision'ssegmentmarginratiowillremainthesame.
c.thedivision'ssegmentmarginwilldecrease.
d.theoverallcompanyprofitwillremainthesame.
18.
D
Easy
Turnoveriscomputedbydividingaverageoperatingassetsinto:
a.investedcapital.
b.totalassets.
c.netoperatingincome.
d.sales.
182ManagerialAccounting,9/e
19.
C
Medium
Whichofthefollowingstatementsprovide(s)anargumentinfavorof
includingonlyaplant'snetbookvalueratherthangrossbookvalue
aspartofoperatingassetsintheROIcomputation?
I.Netbookvalueisconsistentwithhowplantand
equipmentitemsarereportedonabalancesheet.
II.Netbookvalueisconsistentwiththecomputationof
netoperatingincome,whichincludesdepreciationasan
operatingexpense.
III.NetbookvalueallowsROItodecreaseovertimeas
assetsgetolder.
a.OnlyI.
b.OnlyIII.
c.OnlyIandII.
d.OnlyIandIII.
20.
A
Medium
IncomputingthemargininaROIanalysis,whichofthefollowingis
used?
a.Salesinthedenominator
b.Netoperatingincomeinthedenominator
c.Averageoperatingassetsinthedenominator
d.Residualincomeinthedenominator
21.
D
Easy
Whichofthefollowingisnotanoperatingasset?
a.Cash
b.Inventory
c.Plantequipment
d.Commonstock
22.
C
Medium
CPA
adapted
Assumingthatsalesandnetincomeremainthesame,acompany'sreturn
oninvestmentwill:
a.increaseifoperatingassetsincrease.
b.decreaseifoperatingassetsdecrease.
c.decreaseifturnoverdecreases.
d.decreaseifturnoverincreases.
23.
C
Medium
CPA
adapted
Allotherthingsequal,acompany'sreturnoninvestment(ROI)would
generallyincreasewhen:
a.averageoperatingassetsincrease.
b.salesdecrease.
c.operatingexpensesdecrease.
d.operatingexpensesincrease.
24.
B
Easy
Acompany'sreturnoninvestmentisthe:
a.margindividedbyturnover.
b.marginmultipliedbyturnover.
c.turnoverdividedbyaverageoperatingassets.
d.turnovermultipliedbyaverageoperatingassets.
ManagerialAccounting,9/e
183
25.
A
Easy
Allotherthingsequal,acompany'sreturnoninvestmentisaffected
byachangein:
TurnoverMargin
a.YesYes
b.NoYes
c.NoNo
d.YesNo
26.
D
Medium
Netoperatingincomeisdefinedas:
a.salesminusvariableexpenses.
b.salesminusvariableexpensesandtraceablefixedexpenses.
c.contributionmarginminustraceableandcommonfixedexpenses.
d.netincomeplusinterestandtaxes.
27.
A
Easy
DelmarCorporationisconsideringtheuseofresidualincomeasa
measureoftheperformanceofitsdivisions.Whatmajordisadvantage
ofthismethodshouldthecompanyconsiderbeforedecidingto
instituteit?
a.thismethoddoesnotmakeallowancefordifferenceinthesizeof
compareddivisions.
b.opportunitiesmaybeundertakenwhichwilldecreasetheoverall
returnoninvestment.
c.theminimumrequiredrateofreturnmayeliminatedesirable
opportunitiesfromconsideration.
d.residualincomedoesnotmeasurehoweffectivelythedivision
managercontrolscosts.
28.
B
Medium
Supposeamanageristobemeasuredbyresidualincome.Whichofthe
followingwillnotresultinanincreaseintheresidualincomefigure
forthismanager,assumingotherfactorsremainconstant?
a.Anincreaseinsales.
b.Anincreaseintheminimumrequiredrateofreturn.
c.Adecreaseinexpenses.
d.Adecreaseinoperatingassets.
29.
B
Medium
TheperformanceofthemanagerofDivisionAismeasuredbyresidual
income.Whichofthefollowingwouldincreasethemanager's
performancemeasure?
a.Increaseinaverageoperatingassets.
b.Decreaseinaverageoperatingassets.
c.Increaseinminimumrequiredreturn.
d.Decreaseinnetoperatingincome.
184ManagerialAccounting,9/e
30.
C
Medium
(Appendix)Whenthesellingdivisioninaninternaltransferhas
unsatisfieddemandfromoutsidecustomersfortheproductthatis
beingtransferred,thenthelowestacceptabletransferpriceasfaras
thesellingdivisionisconcernedis:
a.variablecostofproducingaunitofproduct.
b.thefullabsorptioncostofproducingaunitofproduct.
c.themarketpricechargedtooutsidecustomers,lesscosts
savedbytransferringinternally.
d.theamountthatthepurchasingdivisionwouldhavetopayan
outsidesellertoacquireasimilarproductforitsuse.
31.
C
Easy
Asegmentofabusinessresponsibleforbothrevenuesandexpenses
wouldbecalled:
a.acostcenter.
b.aninvestmentcenter.
c.aprofitcenter.
d.residualincome.
32.
C
Easy
Whichofthefollowingarebenefitsofdecentralization?
33.
C
Medium
Considerthefollowingthreestatements:
I.Givingamanagerofadivisiongreaterdecisionmaking
controloverhis/herdivisionprovidesvitaltrainingfor
amanagerwhoisontheriseinthecompany.
II.Managersatcorporateheadquartershavegreatercontrolin
seeingthatthegoalsofthecompanyarerealized.
III.Addeddecisionmakingauthorityandresponsibilityoften
leadstoincreasedjobsatisfactionandoftenpersuadesa
managerto
putforthhis/herbestefforts.
a.OnlyIandII.
b.OnlyIIandIII.
c.OnlyIandIII.
d.OnlyI.
I.Aprofitcenterhascontroloverbothcostandrevenue.
II.Aninvestmentcenterhascontroloverinvestedfunds,
butnotovercostsandrevenue.
III.Acostcenterhasnocontroloversales
Whichstatement(s)is/arecorrect?
a.OnlyI
b.OnlyII
c.OnlyIandIII
d.OnlyIandII
ManagerialAccounting,9/e
185
34.
C
Hard
LyonsCompanyconsistsoftwodivisions,AandB.LyonsCompany
reportedacontributionmarginof$50,000forDivisionA,andhada
contributionmarginratioof30%inDivisionB,whensalesinDivision
Bwere$200,000.Netincomeforthecompanywas$25,000andtraceable
fixedexpenseswere$40,000.LyonsCompany'scommonfixedexpenses
were:
a.$85,000.
b.$70,000.
c.$45,000.
d.$40,000.
35.
B
Hard
MoreCompanyhastwodivisions,LandM.DuringJuly,the
contributionmargininDivisionLwas$60,000.Thecontributionmargin
ratioinDivisionMwas40%anditssaleswere$250,000.DivisionM's
segmentmarginwas$60,000.Thecommonfixedexpenseswere$50,000and
thecompanynetincomewas$20,000.ThesegmentmarginforDivisionL
was:
a.$0.
b.$10,000.
c.$50,000.
d.$60,000.
36.
B
Hard
DuringApril,DivisionDofCarneyCompanyhadasegmentmarginratio
of15%,avariableexpenseratioof60%ofsales,andtraceablefixed
expensesof$15,000.DivisionD'ssaleswereclosestto:
a.$100,000.
b.$60,000.
c.$33,333.
d.$22,500.
37.
D
Hard
ReardonRetailCompanyconsistsoftwostores,AandB.StoreAhad
salesof$80,000duringMarch,acontributionmarginratioof30%,and
asegmentmarginof$11,000.Thecompanyasawholehadsalesof
$200,000,acontributionmarginratioof36%,andsegmentmarginsfor
thetwostorestotaling$31,000.Ifnetincomeforthecompanywas
$15,000forthemonth,thetraceablefixedexpensesinStoreBmust
havebeen:
a.$16,000.
b.$20,000.
c.$31,000.
d.$28,000.
186ManagerialAccounting,9/e
38.
B
Hard
LeisRetailCompanyhastwoStores,MandN.StoreNhadsalesof
$180,000duringMarch,asegmentmarginof30%,andtraceablefixed
expensesof$26,000.Thecompanyasawholehadacontributionmargin
ratioof25%and$120,000intotalcontributionmargin.Basedonthis
information,totalvariableexpensesinStoreMforthemonthmust
havebeen:
a.$140,000.
b.$260,000.
c.$300,000.
d.$360,000.
39.
C
Hard
DennerCompanyhastwodivisions,AandB,thatreportedthefollowing
resultsforOctober:
DivisionADivisionB
Sales....................$90,000$150,000
Variableexpensesasa
percentageofsales....70%60%
Segmentmargin...........$2,000$23,000
Ifcommonfixedexpenseswere$31,000,totalfixedexpensesmusthave
been:
a.$31,000.
b.$62,000.
c.$93,000.
d.$52,000.
40.
C
Hard
JohnsonCompanyoperatestwoplants,PlantAandPlantB.Johnson
Companyreportedfortheyearjustendedacontributionmarginof
$50,000forPlantA.PlantBhadsalesof$200,000andacontribution
marginratioof30%.Netincomeforthecompanywas$20,000and
traceablefixedcostsforthetwoplantstotaled$50,000.Johnson
Company'scommonfixedcostsforlastyearwere:
a.$50,000.
b.$70,000.
c.$40,000.
d.$90,000.
41.
A
Hard
HatchCompanyhastwodivisions,OandE.Duringtheyearjustended,
DivisionOhadasegmentmarginof$9,000andvariablecostsequalto
70%ofsales.TraceablefixedcostsforDivisionEwere$19,000.Hatch
Companyasawholehadacontributionmarginof40%,asegmentmargin
of$25,000,andsalesof$200,000.Giventhisdata,thesalesfor
DivisionEforlastyearwere:
a.$50,000.
b.$150,000.
c.$87,500.
d.$116,667.
ManagerialAccounting,9/e
187
42.
B
Hard
DivisionBhadanROIlastyearof15%.Thedivision'sminimum
requiredrateofreturnis10%.Ifthedivision'saverageoperating
assetslastyearwere$450,000,thenthedivision'sresidualincome
forlastyearwas:
a.$67,500.
b.$22,500.
c.$37,500.
d.$45,000.
43.
A
Hard
ReedCompany'ssaleslastyeartotaled$150,000anditsreturnon
investment(ROI)was12%.Ifthecompany'sturnoverwas3,thenits
netincomefortheyearmusthavebeen:
a.$6,000.
b.$2,000.
c.$18,000.
d.itisimpossibletodeterminefromthedatagiven.
44.
C
Hard
SalesandaverageoperatingassetsforCompanyPandCompanyQare
givenbelow:
SalesAverageOperatingAssets
CompanyP....$20,000$8,000
CompanyQ....$50,000$10,000
Whatisthemarginthateachcompanywillhavetoearninorderto
generateareturnoninvestmentof20%?
a.12%and16%.
b.50%and100%.
c.8%and4%.
d.2.5%and5%.
45.
B
Hard
HoweCompanyincreaseditsROIfrom20%to25%.Netoperatingincome
andsalesremainedattheirpreviouslevelsof$40,000and$1,000,000
respectively.TheincreaseinROIwasattributedtoareductionin
operatingassetsbroughtaboutbythesaleofobsoleteinventoryat
cost(theproceedsfromthesalewereusedtoreducebankloans).By
howmuchwasinventoryreduced?
a.$8,000.
b.$40,000.
c.$10,000.
d.itisimpossibletodeterminefromthedatagiven.
46.
C
Medium
Lastyearacompanyhadstockholder'sequityof$160,000,net
operatingincomeof$16,000andsalesof$100,000.Theturnoverwas
0.5.Thereturnoninvestment(ROI)was:
a.10%.
b.9%.
c.8%.
d.7%.
188ManagerialAccounting,9/e
47.
A
Hard
Acompanyhadthefollowingresultslastyear:sales,$700,000;return
oninvestment,28%;andmargin,8%.Theaverageoperatingassetslast
yearwere:
a.$200,000.
b.$2,450,000.
c.$540,000.
d.$2,500,000.
48.
C
Medium
CableCompanyhadthefollowingresultsfortheyearjustended:
Netoperatingincome......$2,500
Turnover..................4
Returnoninvestment......20%
CableCompany'saverageoperatingassetsduringtheyearwere:
a.$50,000.
b.$200,000.
c.$12,500.
d.$10,000.
49.
D
Hard
LargoCompanyrecordedforthepastyearsalesof$750,000andaverage
operatingassetsof$375,000.WhatisthemarginthatLargoCompany
neededtoearninordertoachieveanROIof15%?
a.2.00%
b.15.00%
c.9.99%
d.7.50%
50.
D
Easy
TheNorthernDivisionoftheSmithCompanyhadaverageoperating
assetstotaling$150,000lastyear.Iftheminimumrequiredrateof
returnis12%,andiflastyear'snetoperatingincomeatNorthernwas
$20,000,thentheresidualincomeforNorthernlastyearwas:
a.$20,000.
b.$l8,000.
c.$5,000.
d.$2,000.
ManagerialAccounting,9/e
189
51.
A
Medium
(Appendix)DivisionXmakesapartthatitsellstocustomersoutside
ofthecompany.Dataconcerningthispartappearbelow:
Sellingpricetooutsidecustomers.....$75
Variablecostperunit.................$50
Totalfixedcosts......................$400,000
Capacityinunits......................25,000
DivisionYofthesamecompanywouldliketousethepartmanufactured
byDivisionXinoneofitsproducts.DivisionYcurrentlypurchasesa
similarpartmadebyanoutsidecompanyfor$70perunitandwould
substitutethepartmadebyDivisionX.DivisionYrequires5,000
unitsoftheparteachperiod.DivisionXcanalreadysellallofthe
unitsitcanproduceontheoutsidemarket.Whatshouldbethelowest
acceptabletransferpricefromtheperspectiveofDivisionX?
a.$75.
b.$66.
c.$16.
d.$50.
52.
D
Medium
(Appendix)DivisionXmakesapartthatitsellstocustomersoutside
ofthecompany.Dataconcerningthispartappearbelow:
Sellingpricetooutsidecustomers$50
Variablecostperunit...........$30
Totalfixedcosts................$400,000
Capacityinunits................25,000
DivisionYofthesamecompanywouldliketousethepartmanufactured
byDivisionXinoneofitsproducts.DivisionYcurrentlypurchasesa
similarpartmadebyanoutsidecompanyfor$49perunitandwould
substitutethepartmadebyDivisionX.DivisionYrequires5,000
unitsoftheparteachperiod.DivisionXhasampleexcesscapacityto
handleallofDivisionY'sneedswithoutanyincreaseinfixedcosts
andwithoutcuttingintooutsidesales.Accordingtothetransfer
pricingformula,whatisthelowerlimitonthetransferprice?
a.$50.
b.$49.
c.$46.
d.$30.
190ManagerialAccounting,9/e
53.
D
Hard
(Appendix)DivisionAmakesapartthatitsellstocustomersoutside
ofthecompany.Dataconcerningthispartappearbelow:
Sellingpricetooutsidecustomers....$40
Variablecostperunit................$30
Totalfixedcosts.....................$10,000
Capacityinunits.....................20,000
DivisionBofthesamecompanywouldliketousethepartmanufactured
byDivisionAinoneofitsproducts.DivisionBcurrentlypurchasesa
similarpartmadebyanoutsidecompanyfor$38perunitandwould
substitutethepartmadebyDivisionA.DivisionBrequires5,000
unitsoftheparteachperiod.DivisionAhasamplecapacityto
producetheunitsforDivisionBwithoutanyincreaseinfixedcosts
andwithoutcuttingintosalestooutsidecustomers.IfDivisionA
sellstoDivisionBratherthantooutsidecustomers,thevariable
costbeunitwouldbe$1lower.Whatshouldbethelowestacceptable
transferpricefromtheperspectiveofDivisionA?
a.$40.
b.$38.
c.$30.
d.$29.
54.
C
Hard
(Appendix)DivisionXofCharterCorporationmakesandsellsasingle
productwhichisusedbymanufacturersofforklifttrucks.Presently
itsells12,000unitsperyeartooutsidecustomersat$24perunit.
Theannualcapacityis20,000unitsandthevariablecosttomakeeach
unitis$16.DivisionYofCharterCorporationwouldliketobuy
10,000unitsayearfromDivisionXtouseinitsproducts.There
wouldbenocostsavingsfromtransferringtheunitswithinthe
companyratherthansellingthemontheoutsidemarket.Whatshouldbe
thelowestacceptabletransferpricefromtheperspectiveofDivision
X?
a.$24.00
b.$21.40
c.$17.60
d.$16.00
ManagerialAccounting,9/e
191
55.
B
Hard
(Appendix)DivisionPofTurboCorporationhasthecapacityformaking
75,000wheelsetsperyearandregularlysells60,000eachyearonthe
outsidemarket.Theregularsalespriceis$100perwheelset,andthe
variableproductioncostperunitis$65.DivisionQofTurbo
Corporationcurrentlybuys30,000wheelsets(ofthekindmadeby
DivisionP)yearlyfromanoutsidesupplieratapriceof$90per
wheelset.IfDivisionQweretobuythe30,000wheelsetsitneeds
annuallyfromDivisionPat$87perwheelset,thechangeinannual
netoperatingincomeforthecompanyasawhole,comparedtowhatit
iscurrently,wouldbe:
a.$600,000.
b.$225,000.
c.$750,000.
d.$135,000.
56.
B
Hard
(Appendix)DivisionAofHarkinCompanyhasthecapacityformaking
3,000motorspermonthandregularlysells1,950motorseachmonthto
outsidecustomersatacontributionmarginof$62permotor.Division
BofHarkinCompanywouldliketoobtain1,400motorseachmonthfrom
DivisionA.Whatshouldbethelowestacceptabletransferpricefrom
theperspectiveofDivisionA?
a.$26.57
b.$15.50
c.$35.70
d.$62.00
Reference:121
IesoCompanyhastwostores:JandK.DuringNovember,IesoCompanyreportedanet
incomeof$30,000andsalesof$450,000.ThecontributionmargininStoreJwas
$100,000,or40%ofsales.ThesegmentmargininStoreKwas$30,000,or15%of
sales.Traceablefixedexpensesare$60,000inStoreJ,and$40,000inStoreK.
57.
B
Medium
ReferTo:
121
SalesinStoreJtotaled:
a.$400,000.
b.$250,000.
c.$150,000.
d.$100,000.
58.
D
Hard
ReferTo:
121
VariableexpensesinStoreKtotaled:
a.$70,000.
b.$110,000.
c.$200,000.
d.$130,000.
192ManagerialAccounting,9/e
59.
C
Hard
ReferTo:
121
IesoCompany'stotalfixedexpensesfortheyearwere:
a.$40,000.
b.$100,000
c.$140,000.
d.$170,000.
60.
A
Hard
ReferTo:
121
ThesegmentmarginratioinStoreJwas:
a.16%.
b.24%.
c.40%.
d.60%.
Reference:122
CanonCompanyhastwosalesareas:NorthandSouth.Duringlastyear,the
contributionmarginintheNorthAreawas$50,000,or20%ofsales.Thesegment
marginintheSouthwas$15,000,or8%ofsales.Traceablefixedcostsare$15,000in
theNorthand$10,000intheSouth.Duringlastyear,thecompanyreportedtotalnet
incomeof$26,000.
61.
A
Hard
ReferTo:
122
Thetotalfixedcosts(traceableandcommon)forCanonCompanyforthe
yearwere:
a.$49,000.
b.$25,000.
c.$24,000.
d.$50,000.
62.
C
Hard
ReferTo:
122
ThevariablecostsfortheSouthAreafortheyearwere:
a.$230,000.
b.$185,000.
c.$162,500.
d.$65,000.
Reference:123
ThefollowinginformationisavailableonCompanyA:
Sales.............................$900,000
Netoperatingincome..............36,000
Stockholders'equity..............100,000
Averageoperatingassets..........180,000
Minimumrequiredrateofreturn...15%
63.
A
Medium
ReferTo:
123
CompanyA'sresidualincomeis:
a.$9,000.
b.$21,000.
c.$45,000.
d.$24,000.
ManagerialAccounting,9/e
193
64.
C
Medium
ReferTo:
123
CompanyA'sreturnoninvestment(ROI)is:
a.4%.
b.15%.
c.20%.
d.36%.
Reference:124
ThefollowingdataareavailablefortheSouthDivisionofRedrideProducts,Inc.and
thesingleproductitmakes:
Unitsellingprice...........$20
Variablecostperunit.......$12
Annualfixedcosts...........$280,000
Averageoperatingassets.....$1,500,000
65.
D
Hard
ReferTo:
124
HowmanyunitsmustSouthselleachyeartohaveanROIof16%?
a.240,000.
b.1,300,000.
c.52,000.
d.65,000.
66.
B
Hard
ReferTo:
124
IfSouthwantsaresidualincomeof$50,000andtheminimumrequired
rateofreturnis10%,theannualturnoverwillhavetobe:
a.0.32.
b.0.80.
c.1.25.
d.1.50.
Reference:125
TheAxleDivisionofLaBateCompanymakesandsellsonlyoneproduct.Annualdataon
theAxleDivision'ssingleproductfollow:
Unitsellingprice..................$50
Unitvariablecost..................$30
Totalfixedcosts...................$200,000
Averageoperatingassets............$750,000
Minimumrequiredrateofreturn.....12%
67.
D
Medium
ReferTo:
125
IfAxlesells15,000unitsperyear,theresidualincomeshouldbe:
a.$30,000.
b.$100,000.
c.$50,000.
d.$10,000.
194ManagerialAccounting,9/e
68.
C
Medium
ReferTo:
125
IfAxlesells16,000unitsperyear,thereturnoninvestmentshould
be:
a.12%.
b.15%.
c.16%.
d.18%.
69.
C
Hard
ReferTo:
125
SupposethemanagerofAxledesiresareturnoninvestmentof22%.In
ordertoachievethisgoal,Axlemustsellhowmanyunitsperyear?
a.14,500.
b.16,750.
c.18,250.
d.19,500.
70.
B
Hard
ReferTo:
125
SupposethemanagerofAxledesiresanannualresidualincomeof
$45,000.Inordertoachievethis,Axleshouldsellhowmanyunitsper
year?
a.14,500.
b.16,750.
c.18,250.
d.19,500.
Reference:126
EstesCompanyhasassembledthefollowingdataforitsdivisionsforthepastyear:
DivisionADivisionB
Averageoperatingassets...$500,000?
Sales......................?$520,000
Netoperatingincome.......$100,000$20,300
Turnover...................1.254
Margin.....................?3.9%
Minimumrequiredrate
ofreturn................14%?
Residualincome............?$6,000
71.
B
Hard
ReferTo:
126
DivisionA'ssalesare:
a.$400,000.
b.$625,000.
c.$125,000.
d.$200,000.
72.
B
Medium
ReferTo:
126
DivisionA'sresidualincomeis:
a.$20,000.
b.$30,000.
c.$35,000.
d.$45,000.
ManagerialAccounting,9/e
195
73.
D
Medium
ReferTo:
126
DivisionB'saverageoperatingassetsis:
a.$81,200.
b.$2,080,000.
c.$1,333,333.
d.$130,000.
Reference:127
TheHolmesDivisionrecordedoperatingdataasfollowsforthepastyear:
Sales..........................$200,000
Netoperatingincome...........25,000
Averageoperatingassets.......100,000
Stockholders'equity...........80,000
Residualincome................13,000
74.
C
Medium
ReferTo:
127
Forthepastyear,thereturnoninvestmentwas:
a.15.75%.
b.20.50%.
c.25.00%
d.31.25%.
75.
A
Medium
ReferTo:
127
Forthepastyear,themarginwas:
a.12.50%.
b.13.00%.
c.14.75%.
d.15.00%.
76.
D
Medium
ReferTo:
127
Forthepastyear,theturnoverwas:
a.25.
b.10.
c.4.
d.2.
77.
B
Hard
ReferTo:
127
Forthepastyear,theminimumrequiredrateofreturnwas:
a.11%.
b.12%.
c.13%.
d.14%.
196ManagerialAccounting,9/e
Reference:128
TheBailyDivisionrecordedoperatingdataasfollowsforthepasttwoyears:
Year1Year2
Sales.......................?$1,200,000
Stockholders'equity........$540,000720,000
Averageoperatingassets....$600,000?
Margin......................15%?
Returnoninvestment........22.5%18%
BailyDivision'sturnoverwasexactlythesameinbothYear1andYear2.
78.
B
Hard
ReferTo:
128
SalesinYear1amountedto:
a.$400,000.
b.$900,000.
c.$750,000.
d.$1,200,000.
79.
B
Hard
ReferTo:
128
ThenetoperatingincomeinYear1was:
a.$90,000.
b.$135,000.
c.$140,000.
d.$150,000.
80.
D
Hard
ReferTo:
128
ThemargininYear2was:
a.18.75%.
b.27.00%.
c.22.50%.
d.12.00%.
81.
C
Hard
ReferTo:
128
TheaverageoperatingassetsinYear2were:
a.$720,000.
b.$750,000.
c.$800,000.
d.$900,000.
Reference:129
ThefollowingselecteddatapertaintothebeltdivisionofAllenCorp.forlast
year:
Sales............................$500,000
Averageoperatingassets.........$200,000
Netoperatingincome.............$80,000
Turnover.........................2.5
Minimumrequiredreturn..........20%
ManagerialAccounting,9/e
197
82.
A
Medium
CPA
adapted
ReferTo:
129
Howmuchisthereturnoninvestment?
a.40%
b.16%
c.20%
d.15%
83.
C
Medium
CPA
adapted
ReferTo:
129
Howmuchistheresidualincome?
a.$100,000
b.$80,000
c.$40,000
d.$420,000
Reference:1210
ThefollowingselecteddatapertaintoBeckCo.'sBeamDivisionforlastyear:
Sales.............................$400,000
Variableexpenses.................$100,000
Traceablefixedexpenses..........$250,000
Averageoperatingassets..........$200,000
Minimumrequiredrateofreturn...20%
84.
C
Medium
CPA
adapted
ReferTo:
1210
Howmuchistheresidualincome?
a.$40,000
b.$50,000
c.$10,000
d.$80,000
85.
A
Medium
CPA
adapted
ReferTo:
1210
Howmuchisthereturnontheinvestment?
a.25%
c.20%
b.12.5%
d.40%
198ManagerialAccounting,9/e
Reference:1211
TheNorthernDivisionoftheGordonCompanyreportedthefollowingdataforlast
year:
Sales.................................$900,000
Stockholders'Equity..................$320,000
OperatingExpenses....................$700,000
AverageOperatingAssets..............$500,000
InterestExpense......................$50,000
TaxExpense...........................$60,000
MinimumRequiredRateofReturn.......15%
86.
C
Medium
ReferTo:
1211
ThereturnoninvestmentlastyearfortheNorthernDivisionwas:
a.28.125%.
b.62.5%.
c.40%.
d.18%.
87.
B
Medium
ReferTo:
1211
TheresidualincomefortheNorthernDivisionlastyearwas:
a.$90,000.
b.$125,000.
c.$48,000.
d.$135,000.
Reference:1212
HarstinCorporationhasprovidedthefollowingdata:
Sales..........................$625,000
Grossmargin...................70,000
Netoperatingincome...........50,000
Stockholders'equity...........90,000
Averageoperatingassets.......250,000
Residualincome................20,000
88.
D
Medium
ReferTo:
1212
Themarginforthepastyearwas:
a.19.2%.
b.14.4%.
c.11.2%.
d.8.0%.
89.
B
Medium
ReferTo:
1212
Thereturnoninvestmentforthepastyearwas:
a.28%.
b.20%.
c.36%.
d.8%.
ManagerialAccounting,9/e
199
90.
A
Medium
ReferTo:
1212
Theturnoverforthepastyearwas:
a.2.5.
b.6.94.
c.2.98.
d.1.4.
91.
C
Medium
ReferTo:
1212
Theminimumrequiredrateofreturnforthepastyearwas:
a.36%.
b.8%.
c.12%.
d.40%.
Reference:1213
TheMillardDivision'soperatingdataforthepasttwoyearsareprovidedbelow:
Year1Year2
Returnoninvestment......12%36%
Stockholders'equity......$800,000$500,000
Netoperatingincome......?360,000
Turnover..................?3
Margin....................??
Sales.....................3,200,000?
MillardDivision'smargininYear2was150%ofthemargininYear1.
92.
B
Hard
ReferTo:
1213
ThenetoperatingincomeforYear1was:
a.$240,000.
b.$256,000.
c.$384,000.
d.$768,000.
93.
B
Hard
ReferTo:
1213
TheturnoverforYear1was:
a.1.2.
b.1.5.
c.3.0.
d.4.0.
94.
C
Hard
ReferTo:
1213
ThesalesforYear2were:
a.$1.200,000.
b.$3,200,000.
c.$3,000,000.
d.$3,333,333.
95.
A
Hard
ReferTo:
1213
TheaverageoperatingassetsforYear2were:
a.$1,000,000.
b.$1,080,000.
c.$1,200,000.
d.$1,388,889.
200ManagerialAccounting,9/e
Reference:1214
(Appendix)DivisionAmakesapartwiththefollowingcharacteristics:
Productioncapacityinunits........15,000units
Sellingpricetooutsidecustomers..$25
Variablecostperunit..............$18
Totalfixedcosts...................$60,000
DivisionB,anotherdivisionofthesamecompany,wouldliketopurchase5,000units
oftheparteachperiodfromDivisionA.DivisionBisnowpurchasingtheseparts
fromanoutsidesupplieratapriceof$24each.
96.
A
Medium
ReferTo:
1214
SupposethatDivisionAhasampleidlecapacitytohandleallof
DivisionB'sneedswithoutanyincreaseinfixedcostsandwithout
cuttingintosalestooutsidecustomers.IfDivisionBcontinuesto
purchasepartsfromanoutsidesupplierratherthenfromDivisionA,the
companyasawholewillbe:
a.worseoffby$30,000eachperiod.
b.worseoffby$10,000eachperiod.
c.betteroffby$15,000eachperiod.
d.worseoffby$35,000eachperiod.
97.
C
Medium
ReferTo:
1214
SupposethatDivisionAisoperatingatcapacityandcansellallofits
outputtooutsidecustomersatitsusualsellingprice.IfDivisionA
sellsthepartstoDivisionBat$24perunit(DivisionBsoutside
price),thecompanyasawholewillbe:
a.betteroffby$5,000eachperiod.
b.worseoffby$15,000eachperiod,
c.worseoffby$5,000eachperiod.
d.therewillbenochangeinthestatusofthecompanyasawhole,
Reference:1215
(Appendix)DivisionAproducesapartwiththefollowingcharacteristics:
Capacityinunits.............50,000
Sellingpriceperunit........$30
Variablecostsperunit.......$18
Fixedcostsperunit..........$3
DivisionB,anotherdivisioninthecompany,wouldliketobuythispartfrom
DivisionA.DivisionBispresentlypurchasingthepartfromanoutsidesourceat
$28perunit.IfDivisionAsellstoDivisionB,$1invariablecostscanbeavoided.
ManagerialAccounting,9/e
201
98.
B
Medium
ReferTo:
1215
SupposeDivisionAiscurrentlyoperatingatcapacityandcansellall
oftheunitsisproducesontheoutsidemarketforitsusualselling
price.FromthepointofviewofDivisionA,anysalestoDivisionB
shouldbepricednolowerthan:
a.$27.
b.$29.
c.$20.
d.$28.
99.
D
Medium
ReferTo:
1215
SupposethatDivisionAhasampleidlecapacitytohandleallof
DivisionB'sneedswithoutanyincreaseinfixedcostsandwithout
cuttingintoitssalestooutsidecustomers.Fromthepointofviewof
DivisionA,anysalestoDivisionBshouldbepricednolowerthan:
a.$29.
b.$30.
c.$18.
d.$17.
Reference:1216
(Appendix)TheVegaDivisionofAceCompanymakeswheelswhichcaneitherbesoldto
outsidecustomersortransferredtotheWalshDivisionofAceCompany.Lastmonththe
WalshDivisionboughtall4,000ofitswheelsfromtheVegaDivisionfor$42each.
Thefollowingdataareavailablefromlastmonth'soperationsfortheVegaCompany:
Capacity......................................12,000wheels
Sellingpriceperwheeltooutsidecustomers..$45
Variablecostsperwheelwhensoldto
outsidecustomers.......................$30
IftheVegaDivisionsellswheelstotheWalshDivision,Vegacanavoid$2perwheel
insalescommissions.AnoutsidesupplierhasofferedtosupplywheelstotheWalsh
Divisionfor$41each.
100.
A
Medium
ReferTo:
1216
SupposethattheVegaDivisionhasampleidlecapacitysothattransfers
totheWalshDivisionwouldnotcutintoitssalestooutsidecustomers.
Whatshouldbethelowestacceptabletransferpricefromtheperspective
oftheVegaDivision?
a.$28
b.$30
c.$42
d.$45
101.
B
Medium
ReferTo:
1216
WhatisthemaximumpriceperwheelthatWalshshouldbewillingtopay
Vega?
a.$28
b.$41
c.$42
d.$45
102.
B
Hard
ReferTo:
1216
SupposethatVegacansell9,000wheelseachmonthtooutsideconsumers,
sotransferstotheWalshDivisioncutintooutsidesales.Whatshould
bethelowestacceptabletransferpricefromtheperspectiveoftheVega
Division?
a.$28.00
b.$31.75
c.$41.00
d.$42.00
202ManagerialAccounting,9/e
Reference:1217
(Appendix)ThePostDivisionoftheM.T.WoodheadCompanyproducesbasicpostswhich
canbesoldtooutsidecustomersorsoldtotheLampDivisionoftheM.T.Woodhead
Company.LastYeartheLampDivisionboughtallofits25,000postsfromPostat
$1.50each.Thefollowingdataareavailableforlastyear'sactivitiesofthePost
Division:
Capacityinunits..............300,000posts
Sellingpriceperpost
tooutsidecustomers........$1.75
Variablecostsperpost........$0.90
Fixedcosts,total.............$150,000
Thetotalfixedcostswouldbethesameforallthealternativesconsideredbelow.
103.
A
Medium
ReferTo:
1217
Supposethereisamplecapacitysothattransfersofthepoststothe
LampDivisiondonotcutintosalestooutsidecustomers.Whatisthe
lowesttransferpricethatwouldnotreducetheprofitsofthePost
Division?
a.$0.90.
b.$1.35.
c.$1.41.
d.$1.75.
104.
C
Hard
ReferTo:
1217
SupposethetransfersofpoststotheLampDivisioncutintosalesto
outsidecustomersby15,000units.Whatisthelowesttransferprice
thatwouldnotreducetheprofitsofthePostDivision?
a.$0.90.
b.$1.35.
c.$1.41.
d.$1.75.
105.
C
Hard
ReferTo:
1217
SupposethetransfersofpoststotheLampDivisioncutintosalesto
outsidecustomersby15,000units.Furthersupposethatanoutside
supplieriswillingtoprovidetheLampDivisionwithbasicpostsat
$1.45each.IftheLampDivisionhadchosentobuyallofitspostsfrom
theoutsidesupplierinsteadofthePostDivision,thechangeinnet
operatingincomeforthecompanyasawholewouldhavebeen:
a.$1,250decrease.
b.$10,250increase.
c.$1,000decrease.
d.$13,750decrease.
Essay
106.
Medium
TheWinterProductsDivisionofAmericanSportsCorporationproduces
andmarketstwoproductsforuseinthesnow:SledsandSaucers.The
followingdataweregatheredonactivitieslastmonth:
SledsSaucers
ManagerialAccounting,9/e
203
Salesinunits...................2,0009,000
Sellingpriceperunit...........$50$20
Variableproductioncostsperunit$20$5
Traceablefixedproductioncosts$12,000$33,000
Variablesellingexpensesperunit$2$1
Traceablefixedsellingexpenses$2,000$3,000
Allocateddivisionadminis
trativeexpenses...............$40,000$72,000
Required:
Prepareasegmentedincomestatementinthecontributionformatforlast
month,showingboth"Amount"and"Percent"columnsforthedivisionasa
wholeandforeachproduct.
Answer:
Segments
o
TotalCompanySledsSaucers
o
Sales........$280,000100%$100,000100%$180,000100%
Variable
expenses...98,0003544,0004454,00030
Contribution
margin...182,0006556,00056126,00070
Traceablefixed
expenses...50,0001814,0001436,00020
Segment
margin.....132,00047$42,00042%$90,00050%
Commonfixed
expenses...112,00040
NetIncome...$20,0007%
204ManagerialAccounting,9/e
107.
Medium
TheITCorporationproducesandmarketstwotypesofelectronic
calculators:Model11andModel12.Thefollowingdataweregathered
onactivitieslastmonth:
Model11Model12
Salesinunits........................5,0003,000
Sellingpriceperunit................$50$100
Variableproductioncostsperunit....$10$26
Traceablefixedproductioncosts......$100,000$150,000
Variablesellingexpensesperunit....$5$6
Traceablefixedsellingexpenses......$5,000$7,500
Allocateddivisionadministrative
expenses.............................$50,000$60,000
Required:
Prepareasegmentedincomestatementinthecontributionformatforlast
month,showingboth"Amount"and"Percent"columnsforthedivisionasa
wholeandforeachproduct.
Answer:
Segments
TotalCompanyModel11Model12
Sales$550,000100%$250,000100%$300,000100.0%
Variable
expenses....171,0003175,0003096,00032.0
Contribution
margin......$379,00069%$175,00070%$204,00068.0%
Traceablefixed
expenses....262,50048105,00042157,50052.5
Segment
margin......$116,50021%$70,00028%$46,50015.5%
Commonfixed
expenses....110,00020
NetIncome....$6,5001%
108.
Medium
FinancialdataforBeakerCompanyforlastyearappearbelow:
BeakerCompany
StatementsofFinancialPosition
BeginningEnding
BalanceBalance
Assets:
Cash................................$50,000$70,000
Accountsreceivable.................20,00025,000
Inventory...........................30,00035,000
Plantandequipment(net)...........120,000110,000
InvestmentinCedarCompany.........80,000100,000
Land(undeveloped)..................170,000170,000
Totalassets.......................$470,000$510,000
ManagerialAccounting,9/e
205
Liabilitiesandowners'equity:
Accountspayable....................$70,000$90,000
Longtermdebt......................250,000250,000
Owners'equity......................150,000170,000
Totalliabilities
andowners'equity..............$470,000$510,000
BeakerCompany
IncomeStatement
Sales.................................$414,000
Lessoperatingexpenses............351,900
Netoperatingincome...............62,100
Lessinterestandtaxes:
Interestexpense.................$30,000
Taxexpense......................10,00040,000
NetIncome.........................$22,100
Thecompanypaiddividendsof$2,100lastyear.The"Investmentin
CedarCompany"onthestatementoffinancialpositionrepresentsan
investmentinthestockofanothercompany.
Required:
a.Computethecompany'smargin,turnover,andreturnon
investment
forlastyear.
b.TheBoardofDirectorsofBeakerCompanyhavesetaminimum
requiredreturnof20%.Whatwasthecompany'sresidual income
lastyear?
Answer:
a.Operatingassetsdonotincludeinvestmentsinother
orinundevelopedland.
BeginningEnding
BalanceBalance
Cash....................$50,000$70,000
Accountsreceivable.....20,00025,000
Inventory...............30,00035,000
Plantandequipment(net)120,000110,000
Totaloperatingassets$220,000$240,000
Averageoperatingassets=($220,000+$240,000)2
=$230,000
Margin=NetoperatingincomeSales
=$62,100$414,000
=15%
Turnover=SalesAverageoperatingassets
=$414,000$230,000
=1.8
ROI=MarginXTurnover
=15%X1.8
=27%
b.Netoperatingincome...........$62,100
Minimumrequiredreturn
206ManagerialAccounting,9/e
companies
(20%X$230,000).............46,000
Residualincome................$16,100
109.
Hard
FinancialdataforBinghamCompanyforlastyearappearbelow:
BinghamCompany
StatementsofFinancialPosition
BeginningEnding
BalanceBalance
Assets:
Cash..............................$135,000$266,000
Accountsreceivable...............225,000475,000
Inventory.........................314,000394,000
Plantandequipment(net).........940,000860,000
InvestmentinCarrCompany........104,000101,000
Land(undeveloped)................198,00065,000
Totalassets.....................$1,916,000$2,161,000
Liabilitiesandowners'equity:
Accountspayable..................$88,000$119,000
Longtermdebt....................585,000665,000
Owners'equity....................1,243,0001,377,000
Totalliabilities
andowners'equity............$1,916,000$2,161,000
BinghamCompany
IncomeStatement
Sales............................$4,644,000
Lessoperatingexpenses..........4,291,000
Netoperatingincome.............353,000
Lessinterestandtaxes:
Interestexpense...............$90,000
Taxexpense....................129,000219,000
NetIncome.......................$134,000
The"InvestmentinCarrCompany"onthestatementoffinancial
positionrepresentsaninvestmentinthestockofanothercompany.
Required:
a.Computethecompany'smargin,turnover,andreturnon
investment
forlastyear.
b.TheBoardofDirectorsofBeakerCompanyhavesetaminimum
requiredreturnof15%.Whatwasthecompany'sresidual income
lastyear?
ManagerialAccounting,9/e
207
Answer:
a.Operatingassetsdonotincludeinvestmentsinother
orinundevelopedland.
companies
BeginningEnding
BalanceBalance
Cash.....................$135,000$266,000
Accountsreceivable......225,000475,000
Inventory................314,000394,000
Plantandequipment(net)940,000860,000
Totaloperatingassets$1,614,000$1,995,000
Averageoperatingassets=($1,614,000+$1,995,000)2
=$1,804,500
Margin=NetoperatingincomeSales
=$353,000$4,644,000
=7.60%
Turnover=SalesAverageoperatingassets
=$4,644,000$1,804,500
=2.57
ROI=Netoperatingincome
Averageoperatingassets
=$353,000$1,804,500
=19.56%
b.Netoperatingincome....$353,000
Minimumrequiredreturn
(15%X$1,804,500)....270,675
Residualincome.........$82,325
110.
Medium
Thefollowingdatahavebeenextractedfromtheyearendreportsof
twocompaniesCompanyXandCompanyY:
CompanyXCompanyY
Sales.........................$800,000?
Netoperatingincome..........$56,000?
Averageoperatingassets......?$125,000
Margin........................?4%
Turnover......................?6
Returnoninvestment..........14%?
208ManagerialAccounting,9/e
Required:
Fillinthemissingdataontheabovetable.
Answer:
CompanyXCompanyY
Sales............................$800,000$750,000
NetOperatingIncome.............$56,000$30,000
AverageOperatingAssets.........$400,000$125,000
Margin...........................7%4%
Turnover.........................26
ROI..............................14%24%
111.
Medium
Thefollowingdatahavebeenextractedfromtheyearendreportsof
twocompaniesCompanyXandCompanyY:
CompanyXCompanyY
Sales.........................$2,700,000?
Netoperatingincome..........$256,000?
Averageoperatingassets......?$1,725,000
Margin........................?8%
Turnover......................?2
Returnoninvestment..........16%?
Required:
Fillinthemissingdataontheabovetable.
Answer:
CompanyXCompanyY
Sales............................$2,700,000$3,450,000
NetOperatingIncome.............$256,000$276,000
AverageOperatingAssets.........$1,600,000$1,725,000
Margin...........................9.5%8.0%
Turnover.........................1.72.0
ROI..............................16%16%
ManagerialAccounting,9/e
209
112.
Hard
(Appendix)LarinoreCorporationhasaCastingsDivisionwhichdoes
castingworkofvarioustypes.Thecompany'sMachineProductsDivision
hasaskedtheCastingsDivisiontoprovideitwith20,000special
castingseachyearonacontinuingbasis.Thespecialcastingwould
require$10perunitinvariableproductioncosts.TheMachine
ProductsDivisionhasabidfromanoutsidesupplierforthecastings
of$29perunit.
Inordertohavetimeandspacetoproducethenewcasting,the
CastingsDivisionwouldhavetocutbackproductionofanothercasting
theRB4whichitpresentlyisproducing.TheRB4sellsfor$30per
unit,andrequires$12perunitinvariableproductioncosts.Boxing
andshippingcostsoftheRB4are$4perunit.Boxingandshipping
costsforthenewspecialcastingwouldbeonly$1perunit.The
companyisnowproducingandselling100,000unitsoftheRB4each
year.Productionandsalesofthiscastingwoulddropby20%ifthe
newcastingisproduced.
Required:
a.Whatistherangeoftransferpriceswithinwhichboththe
Divisions'profitswouldincreaseasaresultofagreeingto
the
transferof20,000castingsperyearfromtheCastings
Division
totheMachineProductsDivision?
b.IsitinthebestinterestsofLarinoreCorporationforthis
transfertotakeplace?Explain.
Answer:
a.FromtheperspectiveoftheCastingsDivision,profitswould
increaseasaresultofthetransferprovidingthat:
Transferprice>Variablecost+Opportunitycost
Theopportunitycostisthecontributionmarginonthelost
sales,dividedbythenumberofunitstransferred:
Opportunitycost=[($30$12$4)x20,000]/20,000=$16
Therefore,
Transferprice>($10+$1)+$16=$27
Fromtheviewpointofthepurchasingdivision,thetransfer
pricemustbelessthanthecostofbuyingtheunitsfrom
outsidesupplier.
the
Transferprice<$29
Combiningthetworequirements,wegetthefollowingrange
transferprices:
of
$27<Transferprice<$29
b.Yes,thetransfershouldtakeplace.Fromtheviewpointof
the
entirecompany,thecostoftransferringtheunits withinthe
companyis$27,butthecostofpurchasingthem
fromtheoutside
210ManagerialAccounting,9/e
supplieris$29.Therefore,thecompany's
profitsincreaseby$2
foreachofthecastingsthatisused withinthecompanyratherthan
beingsoldontheoutside market.
113.
Hard
(Appendix)GenevaCorporationhasaCastingsDivisionthatdoes
castingworkofvarioustypes.Thecompany'sMachineProductsDivision
hasaskedtheCastingsDivisiontoprovideitwith10,000special
castingseachyearonacontinuingbasis.Thespecialcastingwould
require$20perunitinvariableproductioncosts.TheMachine
ProductsDivisionhasabidfromanoutsidesupplierforthecastings
of$30perunit.
Inordertohavetimeandspacetoproducethenewcasting,the
CastingsDivisionwouldhavetocutbackproductionofanothercasting
theNW2whichitpresentlyisproducing.TheNW2sellsfor$40per
unit,andrequires$25perunitinvariableproductioncosts.Boxing
andshippingcostsoftheNW2are$4perunit.Boxingandshipping
costsforthenewspecialcastingwouldbeonly$2perunit.The
companyisnowproducingandselling100,000unitsoftheNW2each
year.Productionandsalesofthiscastingwoulddropby10%ifthe
newcastingwereproduced.
Required:
a.Whatistherangeoftransferprices,ifany,withinwhich
both
theDivisions'profitswouldincreaseasaresultof agreeingtothe
transferof10,000castingsperyearfrom
theCastingsDivisionto
theMachineProductsDivision?
b.IsitinthebestinterestsofGenevaCorporationforthis
transfertotakeplace?Explain.
Answer:
a.FromtheperspectiveoftheCastingsDivision,profitswould
increaseasaresultofthetransferprovidingthat:
Transferprice>Variablecost+Opportunitycost
Theopportunitycostisthecontributionmarginonthelost
ManagerialAccounting,9/e
211
ales,dividedbythenumberofunitstransferred:
Opportunitycost=[($40$25$4)x10,000]/10,000=$11
Therefore,
Transferprice>($20+$2)+$11=$33
Fromtheviewpointofthepurchasingdivision,thetransfer
pricemustbelessthanthecostofbuyingtheunitsfrom
outsidesupplier.
the
Transferprice<$30
Combiningthetworequirements,wefindthatnofeasible
rangeoftransferpricesexistsundercurrentconditions.
b.No,thetransfershouldnottakeplace.Fromtheviewpoint
of
theentirecompany,thecostoftransferringtheunits
withinthe
companyis$33,butthecostofpurchasingthem
fromtheoutside
supplieris$30.Therefore,thecompany's
profitsdecreaseby$3
foreachofthecastingsthatis producedwithinthecompanyrather
thanbeingpurchasedin
theoutsidemarket.
212ManagerialAccounting,9/e