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MANAGEMENT ADVISORY SERVICES RETURN ON INVESTMENT Return on Investment Computation "ase# on Operating Inco$e %& T'e ollo(ing selecte#

#ata pertain to t'e belt #i)ision o Allen Corp& or last year* Sales +,--.--A)erage operating assets +/--.--Net operating inco$e +0-.--Turno)er /&, Mini$u$ re1uire# return /-2 3o( $uc' is t'e return on in)est$ent4 5M6 a& 7-2 c& /-2 b& %82 #& %,2 AIC!A. A#apte# /& 3arstin Corporation 'as pro)i#e# t'e ollo(ing #ata* Sales Gross $argin Net operating inco$e Stoc:'ol#ers; e1uity A)erage operating assets Resi#ual inco$e T'e return on in)est$ent or t'e past year (as* 5M6 a& /02& c& =82& b& /-2& #& 02& +8/,.--9-.--,-.--<-.--/,-.--/-.--G & N <e

Responsibility Accounting & Trans er !ricing Re1uire# !eso Sales 7& T'e $anager o t'e Strong Di)ision o !o(ers Co$pany e?pects t'e ollo(ing results in /--= 5pesos in $illions6@ Sales !7<&8Variable costs 58-26 /<&98 Contribution $argin !%<&07 >i?e# costs %/&-!ro it ! 9&07 In)est$ent !lant e1uip$ent !%<&,% Aor:ing capital %7&00 !=7&=< ROI 5!9&07B!=7&=<6 //&0-2 T'e #i)ision 'as a target ROI o =-2. an# t'e $anager 'as as:e# you to #eter$ine 'o( $uc' sales )olu$e t'e #i)ision (oul# nee# to reac'& 3e states t'at t'e sales $i? is relati)ely constant so )ariable costs s'oul# be close to 8-2 o sales. i?e# cost an# plant an# e1uip$ent s'oul# re$ain constant. an# (or:ing capital 5cas'. recei)ables an# in)entories6 s'oul# )ary closely (it' sales in t'e percentage re lecte# abo)e& T'e peso sales t'at t'e #i)ision nee#s in or#er to reac' t'e =-2 ROI target is 5D6 A& !%<.0/<.-=/& C& !77.=9=.09% "& !,9.,<-.=// D& !,<.,%-.--!ol "oba#illa Dupont Model Sensiti)ity Analysis ,& I t'e operating inco$e $argin o -&= staye# t'e sa$e an# t'e operating asset turno)er o ,&increase# by %- percent. t'e ROI 5M6 a& increase by %- percent #& re$ain t'e sa$e b& #ecrease by %- percent e& increase to %&,& c& increase by %, percent 3&M 8& I t'e in)est$ent turno)er increase# by /-2 an# ROS #ecrease# by =-2. t'e ROI (oul# 5M6 a& Increase by /-2& c& Increase by 72& b& Decrease by %82& #& None o t'e abo)e& D. C & 3 <e 9& I t'e in)est$ent turno)er #ecrease# by /-2 an# ROS #ecrease# by =-2. t'e ROI (oul# 5M6 a& Increase by =-2& c& Decrease by 772& b& Decrease by /-2& #& None o t'e abo)e& D. C & 3 <e

In)est$ent =& Apple Di)ision o t'e A$erican >ruit Co& 'a# t'e ollo(ing statistics or /--/* Assets a)ailable or use +%.---.--Resi#ual inco$e %--.--Return on in)est$ent %,2 I t'e $anager o Apple Di)ision is e)aluate# base# on return on in)est$ent. 'o( $uc' (oul# s'e be (illing to pay or an in)est$ent t'at pro$ises to increase net seg$ent inco$e by +,-.---4 5M6 a& +,-.--c& +%.---.--b& +===.=== #& +,--.--"ar iel#

C3IANG DAI S3ED COCCEGE

!age % o /%

MANAGEMENT ADVISORY SERVICES 0& Co$pany C 'a# its operating asset turno)er increase# by ,-2 an# t'e operating inco$e $argin increase# by ,-2& Co$pany E 'a# its operating asset turno)er increase# by =-2 an# t'e operating inco$e $argin #ecrease# by =-2& A'at c'anges are e?pecte# or ROI o Co$pany C an# Co$pany E. respecti)ely4 5M6 !ol "oba#illa A& "& C& D& Co$pany C ,-2 increase %/,2 increase //,2 increase %/,2 increase Co$pany E <2 #ecrease <2 #ecrease No c'ange No c'ange RESIDUAL INCOME Residual Income Computation <& RE" Ser)ice Co& is a co$puter ser)ice center& >or t'e $ont' o May %<<,. RE" 'a# t'e ollo(ing statistics* Sales +7,-.--Operating inco$e /,.--Net pro it a ter ta?es 0.--Total assets ,--.--S'are'ol#ersF e1uity /--.--Cost o capital 82 "ase# on t'e abo)e in or$ation. ('ic' one o t'e ollo(ing state$ents is correct4 RE" 'as a 5M6 a& ROI o 72 c& ROI o %&82 CMA -8<, =G/b& Resi#ual inco$e o +5,.---6 #& Resi#ual inco$e o +5//.---6 Target Cost %-& Ha$es Aebb is t'e general $anager o t'e In#ustrial !ar: Di)ision. an# 'is per or$ance is $easure# using t'e resi#ual inco$e $et'o#& Aebb is re)ie(ing t'e ollo(ing orecaste# in or$ation or t'e #i)ision or ne?t year& Category A$ount 5t'ousan#s6 Aor:ing capital + %.0-Re)enue =-.--!lant an# e1uip$ent %9./-To establis' a stan#ar# o per or$ance or t'e #i)isionFs $anager using t'e resi#ual inco$e approac'. our scenarios are being consi#ere#& Scenario % assu$es an i$pute# interest c'arge o %,2 an# a target resi#ual inco$e o +/.---.---& Scenario / assu$es an i$pute# interest c'arge o %/2 an# a target resi#ual inco$e o +%.,--.---& Scenario = assu$es an i$pute# interest c'arge o %02 an# a target resi#ual inco$e o +%./,-.---& Scenario 7 assu$es an i$pute# interest c'arge o %-2 an# a target resi#ual inco$e o +/.,--.---& C3IANG DAI S3ED COCCEGE

Responsibility Accounting & Trans er !ricing A'ic' o t'e scenarios assu$es t'e lo(est $a?i$u$ cost4 5M6 a& Scenario %& c& Scenario =& b& Scenario /& #& Scenario 7&

Glei$

RETURN ON INVESMENT MINIMUM RE!UIRED RATE O" RETURN # RESIDUAL INCOME Minimum Re$uired Rate o% Return # Residual Income Return on In)est$ent %%& >ortree pro#ucts 'a)e a resi#ual net inco$e o !%&0 $illion& I t'e i$pute# interest rate is %82. co$pute t'e ROI 5M6 a& ,2 c& %,2 b& %-2 #& not liste# R!C!A %-<% %/& I Di)ision o JYI Corp& 'as t'e ollo(ing in or$ation or /--/* Assets a)ailable or Target rate o return Resi#ual inco$e A'at (as I Di)ision;s return on in)est$ent or /--/4 5M6 a& %,2 c& /,2 b& %-2 #& /-2 +%.0--.--%-2 +/9-.--"ar iel#

%=& !asta Di)ision o Ae Ma:e Italian. is e)aluate# base# on resi#ual inco$e generate#& >or /--/. t'e Di)ision generate# a resi#ual inco$e o +/.---.--- an# net inco$e o +,.---.---& T'e target rate o return or all #i)isions o Ae Ma:e Italian is /- percent& >or /--/. ('at (as t'e return on in)est$ent or !asta Di)ision4 5M6 a& 7-2 c& /-2 b& %=2 #& ==2 "ar iel# Return on Investment Minimum Re$uired Rate o% Return # Residual Income In)est$ent Cost %7& In t'e J Di)ision o S Co&. /--/ seg$ent inco$e e?cee#e# /--/ resi#ual inco$e by +%,.---& Also or /--/. return on in)est$ent e?cee#e# t'e target rate o return by %- percent& A'at (as t'e le)el o in)est$ent in t'e J Di)ision or /--/4 5M6 a& +%,.--b& +%--.--c& +%,-.--#& An ans(er can;t be #eter$ine# ro$ t'is in or$ation& "ar iel#

!age / o /%

MANAGEMENT ADVISORY SERVICES Return on Investment # Residual Income # Units Sold Kuestions %, t'ru %9 are base# on t'e ollo(ing in or$ation& G & N <e T'e A?le Di)ision o Ca"ate Co$pany $a:es an# sells only one pro#uct& Annual #ata on t'e A?le Di)ision;s single pro#uct ollo(* Enit selling price +,Enit )ariable cost +=Total i?e# costs +/--.--A)erage operating assets +9,-.--Mini$u$ re1uire# rate o return %/2 %,& I A?le sells %8.--- units per year. t'e return on in)est$ent s'oul# be* 5M6 a& %/2& c& %82& b& %,2& #& %02& %8& I A?le sells %,.--- units per year. t'e resi#ual inco$e s'oul# be* 5M6 a& +=-.---& c& +,-.---& b& +%--.---& #& +%-.---&

Responsibility Accounting & Trans er !ricing %<& Aatne Co$pany 'as t(o #i)isions. M an# N& In or$ation or eac' #i)ision is as ollo(s* Net earnings or #i)ision +8,.--Asset base or #i)ision +=--.--Target rate o return %02 Operating inco$e $argin /-2 Aeig'te# a)erage cost o capital %/2 A'at is EVA or N4 a& +=8.--c& +,7.--b& +/<.--#& +%%.--3&M /-& >a$ily Co$pany 'as t(o #i)isions. Ma an# !a& In or$ation or eac' #i)ision is as ollo(s* Ma !a Net earnings or #i)ision !/-.--!8,.--Asset base or #i)ision !,-.--!=--.--Target rate o return %,2 %02 Operating inco$e $argin %-2 /-2 Aeig'te#Ga)erage cost o capital %/2 %/2 A'at is t'e Econo$ic Value A##e# or Ma an# !a. respecti)ely4 A& !/-.---. !=8.--C& !%/.,--@ !%%.--"& !%7.---@ !/<.--D& !/-.---@ !/<.--!ol "oba#illa EVA 'ased on Operating Income a%ter Ta( EVA G Gi)en Operating Inco$e "e ore Ta? /%& McDenLie Oil 'a# +77-.--- in operating inco$e be ore interest an# ta?es in t'e last year& McDenLie is in t'e 7-2 ta? brac:et& I capital e$ploye# by McDenLie (as e1ual to +=--.---. an# t'e co$pany;s (eig'te#Ga)erage a terGta? cost o capital is %,2. ('at is McDenLie;s Econo$ic Value A##e#4 A& +%=%.--C& +%<0.--"& +%7-.--D& +/%<.--Glei$ //& Valecon Co& reporte# t'e ollo(ing in or$ation or t'e year Must en#e#* Seg$ent A Seg$ent " !reGta? operating inco$e + 7.---.--+ /.---.--Current assets 7.---.--=.---.--CongGter$ assets %8.---.--%=.---.--Current liabilities /.---.--%.---.--Seg$ent C +=.---.--7.---.--0.---.--%.,--.--!age = o /%

G & N <e

%9& Suppose t'e $anager o A?le #esires an annual resi#ual inco$e o +7,.---& In or#er to ac'ie)e t'is. A?le s'oul# sell 'o( $any units per year4 5M6 a& %7.,--& c& %0./,-& b& %8.9,-& #& %<.,--& G & N <e ECONOMIC VALUE&ADDED EVA 'ased on Operating Income %0& Di)ision A 'a# t'e ollo(ing in or$ation* Asset base in Di)ision A Net inco$e in Di)ision A Operating inco$e $argin or Di)ision A Target ROI Aeig'te#Ga)erage cost o capital A'at is EVA or Di)ision A4 a& +%/-.--b& +<8.--c& +%,.---

+0--.--+%--.--/-2 %,2 %/2 #& +7.--e& +5/-.---6 3&M

C3IANG DAI S3ED COCCEGE

MANAGEMENT ADVISORY SERVICES I t'e applicable inco$e ta? rate an# a terGta? (eig'te#Ga)erage cost o capital or eac' seg$ent are =-2 an# %-2. respecti)ely. t'e seg$ent (it' t'e 'ig'est econo$ic )alue a##e# 5EVA6 is 5M6 A& Seg$ent A& C& Seg$ent C& Glei$ "& Seg$ent "& D& Not #eter$inable ro$ t'is in or$ation& /=& Assu$e A)ionics In#ustries reporte# at yearGen# t'at operating inco$e be ore ta?es or t'e year e1uale# +/.7--.---& CongGter$ #ebt issue# by A)ionics 'as a coupon rate e1ual to 82. an# its cost o e1uity is 02& T'e boo: )alue o t'e #ebt currently e1uals its air )alue. an# t'e boo: )alue o t'e e1uity capital or A)ionics is +<--.--- less t'an its air )alue& Current assets are liste# at +/.---.--- an# longGter$ assets e1ual +<.8--.---& T'e clai$s against t'ose assets are in t'e or$ o +%.,--.--- in current liabilities an# +/./--.--- in longGter$ liabilities& T'e inco$e ta? rate or A)ionics is =-2& A'at is t'e econo$ic )alue a##e# 5EVA64 5D6 a& +9=%./7c& +%.880.98b& +<70.98#& +%.80-.--Glei$ Kuestions /7 t'ru /8 are base# on t'e ollo(ing in or$ation& 3orngren Aal#or Co$pany 'as t(o sources o un#s* longGter$ #ebt (it' a $ar:et an# boo: )alue o +%$illion issue# at an interest rate o %/2. an# e1uity capital t'at 'as a $ar:et )alue o +0 $illion 5boo: )alue o +7 $illion6& Aal#or Co$pany 'as pro it centers in t'e ollo(ing locations (it' t'e ollo(ing operating inco$es. total assets. an# total liabilities& T'e cost o e1uity capital is %/2. ('ile t'e ta? rate is /,2& Operating Inco$e Assets Current Ciabilities St& Couis + <8-.--+ 7.---.--+ /--.--Ce#ar Rapi#s +%./--.--+ 0.---.--+ 8--.--Aic'ita +/.-7-.--+%/.---.--+%./--.--/7& A'at is t'e EVA or St& Couis4 5M6 a& +/,,.97c& +=</.,7b& +=/9.78#& +9/-.--/,& A'at is t'e EVA or Ce#ar Rapi#s4 5M6 a& +%=,.,0b& +//-.--/8& A'at is t'e EVA or Aic'ita4 5M6 a& +7,-.--b& +%.,=-.--C3IANG DAI S3ED COCCEGE c& +/=7.--#& +=-,.--c& +7%7.=8#& +%.%%,.87-

Responsibility Accounting & Trans er !ricing EVA Co$putation N Gi)en Operating Inco$e a ter Ta? /9& Sa$o)ar Co$pany 'as operating inco$e a ter ta?es o +,-.---& It 'as +/--.--- o e1uity capital. ('ic' 'as an a terGta? (eig'te#Ga)erage cost o %/2& Sa$o)ar also 'as +%-.--- o current liabilities 5noninterestGbearing6 an# no longGter$ liabilities& A'at is t'e co$pany;s econo$ic )alue a##e# 5EVA6 or t'e perio#4 A& +5/7.---6 C& +/7.--"& +5/8.---6 D& +/8.--Glei$ /0& Ralp'. an in)estor. is intereste# in loaning $oney to a secure corporation& 3e al(ays bases 'is #ecision on t'e co$pany (it' t'e largest econo$ic )alue a##e# 5EVA6& Ralp' 'as narro(e# 'is c'oices #o(n to our. an# 'as collecte# t'e ollo(ing in or$ation* Operating Inco$e a ter Ta? E1uity Capital AACC Current Ciabilities Co$pany A +,-.--+/--.--%/2 +%-.--Co$pany " 8-.--%,-.--/-2 %0.--Co$pany C 7,.--//-.--%-2 =-.--Co$pany D ,,.--/,-.--%,2 ,.--"ase# on largest EVA an# assu$ing t'at none o t'e co$panies 'a)e any longGter$ liabilities. ('ic' co$pany s'oul# Ralp' in)est in4 A& Co$pany A& C& Co$pany C& "& Co$pany "& D& Co$pany D& Glei$ E$uit) Value Creation Mar*et Value Added # Total S+are+older Return Kuestions /< t'ru =% are base# on t'e ollo(ing in or$ation& Glei$ Se$ibar Co& reports net inco$e o +8=-.---& T'e in or$ation belo( or t'e year Must en#e# is also a)ailable* Hanuary % Dece$ber =% S'are'ol#ersF e1uity +7./--.--+7.70-.--S'are price +/, +=S'ares outstan#ing 7--.--7--.--Cost o e1uity %-2 %-2 Di)i#en#s per s'are +%&-/<& E1uity )alue creation is a& +8=-.--b& +770.---

c& +7/-.--#& +/%-.--!age 7 o /%

MANAGEMENT ADVISORY SERVICES =-& T'e $ar:et )alue a##e# 5MVA6 is a& +/.---.--b& +%.9/-.--=%& T'e total s'are'ol#er return is a& /72 b& /-2 c& +7--.--#& +/0-.--c& %8&892 #& 72

Responsibility Accounting & Trans er !ricing Compre+ensive Kuestions =7 t'roug' =0 are base# on t'e ollo(ing in or$ation& AIC!A %%08 IIG// to /8 Oslo Co&Fs in#ustrial p'otoG inis'ing #i)ision. R'o. incurre# t'e ollo(ing costs an# e?penses in %<</* Variable >i?e# Direct $aterials +/--.--Direct labor %,-.-->actory o)er'ea# 9-.--+7/.--General. selling an# a#$inistrati)e =-.--70.--Totals +7,-.--+<-.--During %<</. R'o pro#uce# =--.--- units o in#ustrial p'otoGprints. ('ic' (ere sol# or +/&-eac'& OsloFs in)est$ent in R'o (as +,--.--- an# +9--.--- at Hanuary %. %<</ an# Dece$ber =%. %<</. respecti)ely& Oslo nor$ally i$putes interest on in)est$ents at %,2 o a)erage in)este# capital& =7& >or t'e yearGen#e# Dece$ber =%. %<</. R'oFs return on a)erage in)est$ent (as a& %,&-2 c& 0&82 b& %-&-2 #& 5,&-26 =,& Assu$e t'at net operating inco$e (as +8-.--- an# t'at a)erage in)este# capital (as +8--.---& >or t'e year en#e# Dece$ber =%. %<</. R'oFs resi#ual inco$e 5loss6 (as a& +%,-.--c& +57,.---6 b& +8-.--#& +5=-.---6 =8& 3o( $any in#ustrial p'otoGprint units #i# R'o 'a)e to sell in %<</ to brea:Ge)en4 a& %0-.--c& <-.--b& %/-.--#& 8-.--=9& >or t'e year en#e# Dece$ber =%. %<</. R'oFs contribution $argin (as a& +/,-.--c& +%,-.--b& +%0-.--#& +8-.--=0& Assu$e t'e )ariable cost per unit (as +%&,-& "ase# on R'oFs %<</ inancial #ata. an# an esti$ate# %<<= pro#uction o =,-.--- units o in#ustrial p'otoGprints. R'oFs esti$ate# %<<= total costs an# e?penses (ill be a& +,/,.--c& +8%,.--b& +,7-.--#& +8=-.--!age , o /%

SENSITIVIT, ANAL,SIS =/& Apple Di)ision o t'e A$erican >ruit Co& 'a# t'e ollo(ing statistics or /--/* Assets a)ailable or use +%.---.--Resi#ual inco$e %--.--Return on in)est$ent %,2 I e?penses increase# by +/-.--- in Apple Di)ision. 5E6 a& return on in)est$ent (oul# #ecrease& c& t'e target rate o return (oul# #ecrease& b& resi#ual inco$e (oul# increase& #& asset turno)er (oul# #ecrease& "ar iel# ==& Di)ision A 'a# t'e ollo(ing in or$ation* Asset base in Di)ision A +0--.--Net inco$e in Di)ision A +%--.--Operating inco$e $argin or Di)ision A /-2 Target ROI %,2 Aeig'te#Ga)erage cost o capital %/2 I t'e asset base is #ecrease# by +/--.---. (it' no ot'er c'anges. t'e return on in)est$ent o Di)ision A (ill be a& %--&-2 #& 8/&,2 b& %8&92 e& /-&-2 c& 8--&-2 3&M

C3IANG DAI S3ED COCCEGE

MANAGEMENT ADVISORY SERVICES Kuestions =< t'roug' ,% are base# on t'e ollo(ing in or$ation& Seg$ent A Seg$ent " Seg$ent C Net inco$e + ,.--G G Sales 8-.--+9,-.--+%=,.--In)est$ent /7.--,--.--7,.--Net inco$e as 2 o sales G G G Turno)er o in)est$ent G G G ROI G G /-2 Mini$u$ ROIG#ollars G G G Mini$u$ ROI G 2 /-2 82 G Resi#ual inco$e G G-G +/./,=<& >or Seg$ent ". net inco$e as a percentage o sales is a& 02 c& 72 b& 8&892 #& %-2 7-& >or Seg$ent C. net inco$e as a percentage o sales is a& ,2 c& 72 b& 8&892 #& /-2 7%& >or Seg$ent C. t'e turno)er o in)est$ent is a& = c& /&, b& %&, #& 7 7/& >or Seg$ent D. t'e turno)er o in)est$ent is a& = c& /&, b& %&, #& 7 7=& >or seg$ent A. ROI is a& 82 b& /-2 77& >or seg$ent ". ROI is a& 82 b& /-&02 c& /-&02 #& 9&,2 c& /-2 #& 9&,2 Glei$ Seg$ent D + <-.--%.0--.--G G G 9&,2 +%/-.--G G 7,& >or seg$ent A. t'e $ini$u$ #ollar ROI is a& +=-.--b& +8.9,78& >or Seg$ent ". t'e $ini$u$ #ollar ROI is a& +=-.--b& +8.9,79& >or Seg$ent C. t'e $ini$u$ #ollar ROI is a& +=-.--b& +8.9,-

Responsibility Accounting & Trans er !ricing c& +7.0-#& +%/-.--c& +7.0-#& +%/-.--c& +7.0-#& +%/-.---

70& Assu$e t'at t'e $ini$u$ #ollar ROI is +8.9,- or Seg$ent C& T'e $ini$u$ percentage o ROI is a& /-2 c& %,2 b& 82 #& %-2 7<& In Seg$ent D. t'e $ini$u$ percentage o ROI is a& /-2 c& %,2 b& 82 #& %-2 ,-& In Seg$ent A. t'e resi#ual inco$e is a& +/-b& +%/.--,%& In Seg$ent D. t'e resi#ual inco$e is a& +%/.--b& +5=-.---6 c& +5=-.---6 #& +7.0-c& +58-.---6 #& +<.---

SE-MENTED INCOME STATEMENT Sales ,/& During April. Di)ision D o Carney Co$pany 'a# a seg$ent $argin ratio o %,2. a )ariable e?pense ratio o 8-2 o sales. an# traceable i?e# e?penses o +%,.---& Di)ision D;s sales (ere closest to* 5M6 a& +%--.---& c& +==.===& b& +8-.---& #& +//.,--& G & N <e

C3IANG DAI S3ED COCCEGE

!age 8 o /%

MANAGEMENT ADVISORY SERVICES Segment Margin ,=& Assu$e t'e ollo(ing in or$ation or a pro#uct line* Sales re)enue Variable $anu acturing costs Direct i?e# $anu acturing costs Variable sellingBa#$inistrati)e costs Direct i?e# sellingBa#$in& costs A'at is t'e seg$ent $argin o t'e pro#uct line4 5E6 a& +7--.--#& +/9,.--b& +=/,.--e& +/%,.--c& +=,-.---

Responsibility Accounting & Trans er !ricing Central corporate e?penses 5allocate#6 %/.--/-.--A'at is t'e total contribution to corporate pro its generate# by Di)ision A be ore allocation o central corporate e?penses4 5M6 a& +%0.--c& +=-.--b& +/-.--#& +0-.--CIA %%<= IVG/Common "i(ed Costs ,8& Cyons Co$pany consists o t(o #i)isions. A an# "& Cyons Co$pany reporte# a contribution $argin o +,-.--- or Di)ision A. an# 'a# a contribution $argin ratio o =-2 in Di)ision ". ('en sales in Di)ision " (ere +/--.---& Net inco$e or t'e co$pany (as +/,.--- an# traceable i?e# e?penses (ere +7-.---& Cyons Co$pany;s co$$on i?e# e?penses (ere* 5M6 a& +0,.---& c& +7,.---& b& +9-.---& #& +7-.---& G & N <e Compan) Net Income ,9& Re##ing Co$pany 'as t(o #i)isions (it' t'e ollo(ing seg$ent $argins or t'e current year* Nort'ern. +/--.---@ Sout'ern. +7--.---& Co$$on e?penses o t'e co$pany are +,-.---& A'at is Re##ing Co$panyFs net inco$e4 5E6 a& +%,-.--#& +8,-.--b& +,,-.--e& +=,-.--c& +8--.--3&M Compre+ensive Kuestions ,0 & ,< are base# on t'e ollo(ing in or$ation& 3&M "ar$ore Co$pany 'as t'e ollo(ing in or$ation pertaining to its t(o #i)isions or %<<,* Di)ision A Di)ision " Variable selling & a#$inistrati)e e?penses + =,.--+ 7,.--Direct i?e# $anu acturing e?penses %9.,-,-.--Sales %--.--/--.--Direct i?e# sellingBa#$in& E?penses %,.--=,.--Variable $anu acturing e?penses /-.--,-.--Co$$on e?penses are +%/.--- or %<<,& ,0& Co$$on e?penses are +%/.--- or %<<,& A'at is t'e seg$ent $argin or Di)ision "4 5E6 a& +%,,.--#& +/-.--b& +%-,.--e& +0.--c& +,,.--!age 9 o /%

+,--.--%--.--9,.--,-.--8-.---

3&M

,7& T'e #ata a)ailable or t'e current year are gi)en belo(* A'ole Co& Di)ision % Di)ision / Variable $ g& cost o goo#s sol# + 7--.--- + //-.--- + 0-.--Enallocate# costs 5e&g&. presi#entFs salary6 %--.--G G >i?e# costs controllable by Di)& Managers 5e&g&. a#)ertising. engFg super)ision costs6 <-.--,-.--7-.--Net re)enue %.---.--8--.--7--.--Variable selling an# a#$inistrati)e costs %=-.--9-.--8-.-->i?e# costs controllable by ot'ers 5e&g&. #epreciation. insurance6 %/-.--9-.--,-.--Esing t'e in or$ation presente# abo)e. t'e contribution by Di)ision % (as 5M6 a& +%<-.--c& +=%-.--b& +/8-.--#& +=0-.--CIA %%08 IVG%9 ,,& A an# " are autono$ous #i)isions o a corporation& T'ey 'a)e no beginning or en#ing in)entories. an# t'e nu$ber o units pro#uce# is e1ual to t'e nu$ber o units sol#& >ollo(ing is inancial in or$ation relating to t'e t(o #i)isions& A " Sales +%,-.--+7--.--Ot'er re)enue %-.--%,.--Direct $aterials =-.--8,.--Direct labor /-.--7-.--Variable actory o)er'ea# ,.--%,.-->i?e# actory o)er'ea# /,.--,,.--Variance S&A e?pense %,.--=-.-->i?e# S&A e?pense =,.--8-.--C3IANG DAI S3ED COCCEGE

MANAGEMENT ADVISORY SERVICES ,<& A'at is t'e net inco$e or t'e "ar$ore Co$pany4 5E6 a& +=--.--#& +=/.,-b& +%8/.,-e& +/-.,-c& +%,-.--Kuestions 8- & 8% are base# on t'e ollo(ing in or$ation& G & N <e Canon Co$pany 'as t(o sales areas* Nort' an# Sout'& During last year. t'e contribution $argin in t'e Nort' Area (as +,-.---. or /-2 o sales& T'e seg$ent $argin in t'e Sout' (as +%,.---. or 02 o sales& Traceable i?e# costs are +%,.--- in t'e Nort' an# +%-.--- in t'e Sout'& During last year. t'e co$pany reporte# total net inco$e o +/8.---& 8-& T'e )ariable costs or t'e Sout' Area or t'e year (ere* 5M6 a& +/=-.---& c& +%8/.,--& b& +%0,.---& #& +8,.---& 8%& T'e total i?e# costs 5traceable an# co$$on6 or Canon Co$pany or t'e year (ere* 5M6 a& +7<.---& c& +/7.---& b& +/,.---& #& +,-.---& Kuestions 8/ t'ru 87 are base# on t'e ollo(ing in or$ation& 3&M Nau$an Co$pany 'as t'e ollo(ing in or$ation pertaining to its t(o #i)isions or %<<,* Di)ision J Di)ision Y Variable selling & a#$inistrati)e e?penses + 9-.--+ <-.--Direct i?e# $anu acturing e?penses =,.--%--.--Sales /--.--7--.--Direct i?e# sellingBa#$in& e?penses =-.--9-.--Variable $anu acturing e?penses 7-.--%--.--Co$$on e?penses are +/7.--- or %<<,& 8/& A'at is t'e net inco$e or t'e Nau$an Co$pany4 5E6 a& +8--.--#& +8,.--b& +=/,.--e& +7%.--c& +=--.--8=& A'at is t'e seg$ent $argin or Di)ision J4 5E6 a& +<-.--#& +%8-.--b& +/,.--e& +%/,.--c& +%.--C3IANG DAI S3ED COCCEGE

Responsibility Accounting & Trans er !ricing 87& A'at is t'e seg$ent $argin or Di)ision Y4 5E6 a& +=%-.--#& +7-.--b& +/%-.--e& +%8.--c& +%%-.--Kuestions 8, t'ru 80 are base# on t'e ollo(ing in or$ation& G & N <e Ieso Co$pany 'as t(o stores* H an# D& During No)e$ber. Ieso Co$pany reporte# a net inco$e o +=-.--- an# sales o +7,-.---& T'e contribution $argin in Store H (as +%--.---. or 7-2 o sales& T'e seg$ent $argin in Store D (as +=-.---. or %,2 o sales& Traceable i?e# e?penses are +8-.--- in Store H. an# +7-.--- in Store D& 8,& Sales in Store H totale#* 5M6 a& +7--.---& b& +/,-.---& 88& Variable e?penses in Store D totale#* 5M6 a& +9-.---& b& +%%-.---& c& +%,-.---& #& +%--.---& c& +/--.---& #& +%=-.---&

89& T'e seg$ent $argin ratio in Store H (as* 5M6 a& %82& c& 7-2& b& /72& #& 8-2& 80& Ieso Co$pany;s total i?e# e?penses or t'e year (ere* 5M6 a& +7-.---& c& +%7-.---& b& +%--.--#& +%9-.---& Sensitivit) Anal)sis Kuestions 8< t'roug' 9/ are base# on t'e ollo(ing in or$ation& CIA %%<8 IIIG<9 to %-T'e seg$ente# inco$e state$ent or a retail co$pany (it' t'ree pro#uct lines is presente# belo(* Total !ro#uct !ro#uct !ro#uct Co$pany Cine % Cine / Cine = Volu$e 5in units6 /-.--/0.--,-.--Sales re)enue +/.---.--+0--.--+9--.--+,--.--Costs & e?penses* A#$inistrati)e + %0-.--+ 8-.--+ 8-.--+ 8-.--A#)ertising /7-.--<8.--07.--8-.--Co$$issions 7-.--%8.--%7.--%-.--!age 0 o /%

MANAGEMENT ADVISORY SERVICES Cost o sales <0-.--=8-.--7/-.--/--.--Rent /0-.--07.--%7-.--,8.--Salaries %%-.--,7.--=/.--/7.--Total costs & e?penses +%.0=-.--+89-.--+9,-.--+7%-.--Operating inco$e 5loss6 + %9-.--+%=-.--+5,-.---6 + <-.--T'e co$pany buys t'e goo#s in t'e t'ree pro#uct lines #irectly ro$ $anu acturers; representati)es& Eac' pro#uct line is #irecte# by a $anager ('ose salary is inclu#e# in t'e a#$inistrati)e e?penses& A#$inistrati)e e?penses are allocate# to t'e t'ree pro#uct lines e1ually because t'e a#$inistration is sprea# e)enly a$ong t'e t'ree pro#uct lines& Salaries represent pay$ents to t'e (or:ers in eac' pro#uct line an# t'ere ore are traceable costs o eac' pro#uct line& A#)ertising pro$otes t'e entire co$pany rat'er t'an t'e in#i)i#ual pro#uct lines& As a result. t'e a#)ertising is allocate# to t'e t'ree pro#uct lines in proportion to t'e sales re)enue& Co$$issions are pai# to t'e salespersons in eac' pro#uct line base# on /2 o gross sales& Rent represents t'e cost o t'e retail store an# (are'ouse un#er a lease agree$ent (it' , years re$aining& T'e pro#uct lines s'are t'e retail an# (are'ouse space. an# t'e rent is allocate# to t'e t'ree pro#uct lines base# on t'e s1uare ootage occupie# by eac' o t'e pro#uct lines& 8<& T'e seg$ente# inco$e state$ent or t'is retail co$pany #oes not acilitate per or$ance e)aluation because it #oes not #istinguis' bet(een controllable an# uncontrollable costs& T'e only costs an# e?penses controllable at t'e pro#uctGline le)el or t'is retail co$pany are 5M6 A& Co$$issions. cost o sales. an# rent& C& Co$$issions. cost o sales. an# salaries& "& A#)ertising. cost o sales. an# salaries& D& A#$inistration. a#)ertising. an# rent& 9-& T'e co$pany 'as an opportunity to pro$ote one o its pro#uct lines by $a:ing a oneGti$e +9.--- e?pen#iture& T'e co$pany can c'oose only one o t'e t'ree pro#uct lines to pro$ote& T'e incre$ental sales re)enue t'at (oul# be realiLe# ro$ t'is +9.--- pro$otion e?pen#iture in eac' o t'e pro#uct lines is esti$ate# as ollo(s* Increase in Sales Re)enue !ro#uct Cine % +%,.--!ro#uct Cine / /-.--!ro#uct Cine = %7.--In or#er to $a?i$iLe pro its. t'e pro$otion e?pen#iture s'oul# be spent on OCist AP. resulting in an increase in operating inco$e o OCist "P& 5M6 A& "& C& D& Cist A !ro#uct Cine / !ro#uct Cine / !ro#uct Cine = !ro#uct Cine = Cist " +%=.--+,.--+%.7-+%.%/C3IANG DAI S3ED COCCEGE

Responsibility Accounting & Trans er !ricing 9%& One co$pany e?ecuti)e 'as e?presse# concern about t'e operating loss t'at 'as occurre# in !ro#uct Cine / an# 'as suggeste# t'at !ro#uct Cine / be #iscontinue#& I !ro#uct Cine / is #roppe#. t'e $anager o t'e line (oul# be retaine# an# assigne# ot'er #uties (it' t'e co$pany. but t'e ot'er e$ployees (oul# not be retaine#& Manage$ent 'as in#icate# t'at t'e nature o t'e co$pany;s a#)ertising $ig't c'ange (it' t'e eli$ination o !ro#uct Cine /. but t'e total #ollar a$ount (oul# not c'ange& I !ro#uct Cine / (ere to be #roppe#. t'e operating inco$e o t'e co$pany (oul# 5M6 A& Increase by +,-.---& C& Decrease by +/=7.---& "& Decrease by +<7.---& D& Increase by +7%8.---& 9/& A custo$er. operating in an isolate# oreign $ar:et. 'as approac'e# t'e 'ea# salesperson or !ro#uct Cine % an# o ere# to purc'ase 7.--- units o a specialGor#er pro#uct o)er t'e ne?t %/ $ont's& T'is pro#uct (oul# be sol# in t'e sa$e $anner as !ro#uct Cine %;s ot'er pro#ucts e?cept t'at t'e custo$er is 'oping or a price brea:& !ro#uct Cine %;s cost to purc'ase t'is pro#uct 5cost o sales6 (oul# be +%7&9-& !ro#uct Cine % 'as e?cess capacity. $eaning t'at t'e rate or a$ount o t'e re$aining operating costs (oul# not c'ange as a conse1uence o t'e purc'ase an# sale o t'is specialGor#er pro#uct& T'e $ini$u$ selling price or t'is specialG or#er pro#uct (oul# be 5M6 A& +%,&-C& +/9&,"& +%9&=D& +=-&/S.ECIAL ORDER Operating at "ull Capacit) E ect on !ro it 9=& AMa? Di)ision o Carlyle Corporation pro#uces electric $otors. /-2 o ('ic' are sol# to "ra#ley Di)ision o Carlyle an# t'e re$ain#er to outsi#e custo$ers& Carlyle treats its #i)isions as pro it centers an# allo(s #i)ision $anagers to c'oose t'eir sources o sale an# supply& Corporate policy re1uires t'at all inter#i)isional sales an# purc'ases be recor#e# at )ariable cost as a trans er price& AMa? Di)isionFs esti$ate# sales an# stan#ar# cost #ata or t'e year en#ing Dece$ber =%. /---. base# on t'e ull capacity o %--.--- units. are as ollo(s* "ra#ley Outsi#ers Sales +<--.--+0.---.--Variable costs 5<--.---6 5=.8--.---6 >i?e# costs 5=--.---6 5%./--.---6 Gross $argin +5=--.---6 +5=./--.---6 Enit sales /-.--0-.---

!age < o /%

MANAGEMENT ADVISORY SERVICES AMa? 'as an opportunity to sell t'e abo)e /-.--- units to an outsi#e custo$er at a price o +9, per unit #uring /--- on a continuing basis& "ra#ley can purc'ase its re1uire$ents ro$ an outsi#e suppler at a price o +0, per unit& Assu$ing t'at AMa? Di)ision #esires to $a?i$iLe its gross $argin. s'oul# AMa? ta:e on t'e ne( custo$er an# #rop its sales to "ra#ley or /---. an# ('y4 a& No. because t'e gross $argin o t'e corporation as a ('ole (oul# #ecrease by +/--.---& b& Yes. because AMa? Di)isionFs gross $argin (oul# increase by +=--.---& c& Yes. because AMa? #i)isionFs gross $argin (oul# increase by +8--.---& #& No. because "ra#ley Di)isionFs gross $argin (oul# #ecrease by +0--.---& Operating /it+ E(cess Capacit) Mini$u$ !rice 97& 3ouston Di)ision o Te?acon. Inc& e?pects t'e ollo(ing result or /--7* Enits sales 9-.--Enits selling price !%Enit )ariable cost ! 7 Total i?e# costs !=--.--Total in)est$ent !,--.--T'e $ini$u$ re1uire# ROI is %,2. an# #i)isions are e)aluate# on resi#ual inco$e& A oreign custo$er 'as approac'e# 3oustonFs $anager (it' an o er to buy %-.--- units at !9 eac'& I 3ouston accepts t'e or#er. it (oul# not lose any o t'e 9-.--- units at t'e regular price& Accepting t'e or#er (oul# increase i?e# costs by !%-.--- an# in)est$ent by !7-.---& A'at is t'e $ini$u$ price t'at 3ouston coul# accept or t'e or#er an# still $aintain its e?pecte# resi#ual inco$e4 A& !,&-C&!7&9, "& !,&8D& !<&-!ol "oba#illa Ma?i$u$ Cost Enits 9,& 3ouston Di)ision o Te?acon. Inc& e?pects t'e ollo(ing result or /--7* Enits sales 9-.--Enits selling price !%Enit )ariable cost ! 7 Total i?e# costs !=--.--Total in)est$ent !,--.--T'e $ini$u$ re1uire# ROI is %,2. an# #i)isions are e)aluate# on resi#ual inco$e& A oreign custo$er 'as approac'e# 3oustonFs $anager (it' an o er to buy %-.--- units at !9 eac'& I 3ouston accepts t'e or#er. it (oul# not lose any o t'e 9-.--- units at t'e regular price& Accepting t'e or#er (oul# increase i?e# costs by !%-.--- an# in)est$ent by !7-.---& C3IANG DAI S3ED COCCEGE

Responsibility Accounting & Trans er !ricing At t'e price o !9 o ere# by oreign custo$er. ('at is t'e $a?i$u$ nu$ber o units in regular sales t'at 3ouston coul# sacri ice an# still $aintain its e?pecte# resi#ual inco$e4 A& /.=== C& /.889 "& =.=== D& =.889 !ol "oba#illa TRANS"ER .RICINTrans%er .ricing "ormula 98& T'e $anage$ent o Ha$es Corporation 'as #eci#e# to i$ple$ent a trans er pricing syste$& Ha$esF MIS #epart$ent is currently negotiating a trans er price or its ser)ices (it' t'e our pro#ucing #i)isions o t'e co$pany as (ell as t'e $ar:eting #epart$ent& C'arges (ill be assesse# base# on nu$ber o reports 5assu$e t'at all reports re1uire t'e sa$e a$ount o ti$e an# resources to pro#uce6& T'e cost to operate t'e MIS #epart$ent at its ull capacity o %.--- reports per year is bu#gete# at +7,.---& T'e user subunits e?pect to re1uest /,reports eac' t'is year& T'e cost o te$porary labor an# a##itional acilities use# to pro#uce reports beyon# capacity is bu#gete# at +70&-- per report& Ha$es coul# purc'ase t'e sa$e ser)ices ro$ an e?ternal In or$ation Ser)ices ir$ or +9-.---& A'at a$ounts s'oul# be use# as t'e ceiling an# t'e loor in #eter$ining t'e negotiate# trans er price4 a& b& c& #& >loor +=8&-+7,&8+70&-+,9&-Ceiling +,8&-+,8&-+9-&-+0/&-Kuestions 99 t'ru 0- are base# on t'e ollo(ing in or$ation& "ar iel# "igole Corp& pro#uces )arious pro#ucts use# in t'e construction in#ustry& T'e !lu$bing Di)ision pro#uces an# sells %--.--- copper ittings eac' $ont'& Rele)ant in or$ation or last $ont' ollo(s* Total sales 5all e?ternal6 +/,-.--E?penses 5all on a unit base6* Variable $anu acturing +-&,>i?e# $anu acturing &/, Variable selling &=>i?e# selling &7Variable G&A &%, >i?e# G&A &,Total +/&%TopGle)el $anagers are trying to #eter$ine 'o( a trans er price can be set on a trans er o %-.--o t'e copper ittings ro$ t'e !lu$bing Di)ision to t'e "at'roo$ !ro#ucts Di)ision&

!age %- o /%

MANAGEMENT ADVISORY SERVICES 99& A trans er price base# on )ariable cost (ill be set at QQQQQQQQQQQ per unit& a& +-&,c& +-&<, b& +-&0#& +-&9, 90& A trans er price base# on ull pro#uction cost (oul# be set at QQQQQQQQQQQ per unit& a& +-&9, c& +%&7, b& +/&%#& +%&89<& A trans er price base# on $ar:et price (oul# be set at QQQQQQQQQQQ per unit& a& +/&%c& +%&8b& +/&,#& +/&/, 0-& I t'e !lu$bing Di)ision is operate# as an autono$ous in)est$ent center an# its capacity is %--.--- ittings per $ont'. t'e perGunit trans er price is not li:ely to be belo( a& +-&9,& c& +/&%-& b& +%&8-& #& +/&,-& Operating at "ull Capacit) Mini$u$ Trans er !rice 0%& T'e 3ig' Di)ision o !ara Co$pany pro#uces a 'ig' 1uality :ite& Enit pro#uction costs 5base# on capacity pro#uction o %--.--- units per year6 ollo(* Direct $aterials ! 8Direct labor /, O)er'ea# 5/-2 )ariable6 %, Ot'er in or$ation Sales price %/Selling e?penses 5%,2 )ariable6 /T'e 3ig' Di)ision is pro#ucing an# selling at capacity& A'at is t'e $ini$u$ selling price t'at t'e #i)ision (oul# consi#er as a Rtrans er priceS to t'e Recreation Di)ision on ('ic' no )ariable perio# costs (oul# be incurre#4 5M6 a& !%/c& ! <% b& ! 00 #& !%%9 !ol "oba#illa 0/& T'e Motor Di)ision o Super Truc: Co& uses ,.--- carburetors per $ont' in its pro#uction o auto$oti)e engines& It presently buys all o t'e carburetors it nee#s ro$ t(o outsi#e suppliers at an a)erage cost o +%--& T'e Carburetor Di)ision o Super Truc: Co& $anu actures t'e e?act type o carburetor t'at t'e Motor Di)ision re1uires& T'e Carburetor Di)ision is presently C3IANG DAI S3ED COCCEGE

Responsibility Accounting & Trans er !ricing operating at its capacity o %,.--- units per $ont' an# sells all o its output to a oreign car $anu acturer at +%-8 per unit& Its cost structure 5on %,.--- units6 is* Variable pro#uction costs +9Variable selling costs %All i?e# costs %Assu$e t'at t'e Carburetor Di)ision (oul# not incur any )ariable selling costs on units t'at are trans erre# internally& A'at is t'e $ini$u$ o t'e trans er price range or a trans er bet(een t'e t(o #i)isions4 5M6 a& +<8 c& +9b& +<#& +%-8 "ar iel# 0=& Di)ision A pro#uces a part (it' t'e ollo(ing c'aracteristics* Capacity in units ,-.--Selling price per unit +=Variable costs per unit +%0 >i?e# costs per unit += Di)ision ". anot'er #i)ision in t'e co$pany. (oul# li:e to buy t'is part ro$ Di)ision A& Di)ision " is presently purc'asing t'e part ro$ an outsi#e source at +/0 per unit& I Di)ision A sells to Di)ision ". +% in )ariable costs can be a)oi#e#& Suppose Di)ision A is currently operating at capacity an# can sell all o t'e units is pro#uces on t'e outsi#e $ar:et or its usual selling price& >ro$ t'e point o )ie( o Di)ision A. any sales to Di)ision " s'oul# be price# no lo(er t'an* 5M6 a& +/9& c& +/-& b& +/<& #& +/0& G & N <e Ma?i$u$ Trans er !rice 07& T'e Motor Di)ision o Super Truc: Co& uses ,.--- carburetors per $ont' in its pro#uction o auto$oti)e engines& It presently buys all o t'e carburetors it nee#s ro$ t(o outsi#e suppliers at an a)erage cost o +%--& T'e Carburetor Di)ision o Super Truc: Co& $anu actures t'e e?act type o carburetor t'at t'e Motor Di)ision re1uires& T'e Carburetor Di)ision is presently operating at its capacity o %,.--- units per $ont' an# sells all o its output to a oreign car $anu acturer at +%-8 per unit& Its cost structure 5on %,.--- units6 is* Variable pro#uction costs +9Variable selling costs %All i?e# costs %-

!age %% o /%

MANAGEMENT ADVISORY SERVICES Assu$e t'at t'e Carburetor Di)ision (oul# not incur any )ariable selling costs on units t'at are trans erre# internally& A'at is t'e $a?i$u$ o t'e trans er price range or a trans er bet(een t'e t(o #i)isions4 5M6 a& +%-8 c& +<b& +%-#& +9"ar iel# E ect on !ro it G Ma:e 0,& Di)ision A $a:es a part (it' t'e ollo(ing c'aracteristics* !ro#uction capacity in units %,.--- units Selling price to outsi#e custo$ers +/, Variable cost per unit +%0 Total i?e# costs +8-.--Di)ision ". anot'er #i)ision o t'e sa$e co$pany. (oul# li:e to purc'ase ,.--- units o t'e part eac' perio# ro$ Di)ision A& Di)ision " is no( purc'asing t'ese parts ro$ an outsi#e supplier at a price o +/7 eac'& Suppose t'at Di)ision A is operating at capacity an# can sell all o its output to outsi#e custo$ers at its usual selling price& I Di)ision A sells t'e parts to Di)ision " at +/7 per unit 5Di)ision "Fs outsi#e price6. t'e co$pany as a ('ole (ill be* 5M6 a& better o by +,.--- eac' perio#& b& (orse o by +%,.--- eac' perio#. c& (orse o by +,.--- eac' perio#& #& t'ere (ill be no c'ange in t'e status o t'e co$pany as a ('ole& G & N <e 08& T'e Motor Di)ision o Super Truc: Co& uses ,.--- carburetors per $ont' in its pro#uction o auto$oti)e engines& It presently buys all o t'e carburetors it nee#s ro$ t(o outsi#e suppliers at an a)erage cost o +%--& T'e Carburetor Di)ision o Super Truc: Co& $anu actures t'e e?act type o carburetor t'at t'e Motor Di)ision re1uires& T'e Carburetor Di)ision is presently operating at its capacity o %,.--- units per $ont' an# sells all o its output to a oreign car $anu acturer at +%-8 per unit& Its cost structure 5on %,.--- units6 is* Variable pro#uction costs +9Variable selling costs %All i?e# costs %Assu$e t'at t'e Carburetor Di)ision (oul# not incur any )ariable selling costs on units t'at are trans erre# internally& I t'e t(o #i)isions agree to transact (it' one anot'er. corporate pro its (ill 5M6 a& #rop by +=-.--- per $ont'& b& rise by +/-.--- per $ont'& c& rise by +,-.--- per $ont'& C3IANG DAI S3ED COCCEGE

Responsibility Accounting & Trans er !ricing #& rise or all by an a$ount t'at #epen#s on t'e le)el o t'e trans er price& "ar iel#

Co$pre'ensi)e Kuestions 09 an# 00 are base# on t'e ollo(ing in or$ation& R!C!A -,0, Rosas Corporation 'as se)eral operating #i)isions& T'ree #i)isions are treate# as pro it centers an# its #i)ision $anagers are ree to c'oose t'eir sources o sale an# supply& One o its #i)isions. Gu$a$ela Di)ision. $anu actures steel containers. /-2 o ('ic' are sol# to Daisy Di)ision an# t'e balance to outsi#e custo$ers& InterG#i)isional sales an# purc'ases are recor#e# at )ariable cost as a trans er price& "ase# on a ull capacity o %,-.--- units. t'e esti$ate# sales an# stan#ar# cost #ata or Gu$a$ela Di)ision or t'e year %<0, are as ollo(s* Daisy Outsi#ers Sales ! <--.--! <.8--.--Variable costs 5<--.---6 5=.8--.---6 >i?e# costs 5/--.---6 50--.---6 Gross $argin !5/--.---6 ! ,./--.--Enit sales =-.--%/-.--Gu$a$ela 'as t'e option to sell t'e abo)e =-.--- units to an outsi#e custo$er at a price o !,per unit #uring %<0, on a continuing basis& Daisy in turn $ay purc'ase its re1uire$ents ro$ an outsi#e supplier at a price o !8- per unit& 09& Assu$ing t'at Gu$a$ela (is'es to i$pro)e its gross $argin. s'oul# Gu$a$ela accept t'e or#er o t'e ne( custo$er. an# #rop its sales to Daisy or %<0, an# ('y4 5M6 a& No. because t'e gross $argin ro$ t'e co$panyFs o)erall )ie(point (oul# #ecrease by !=--.---& b& Yes. because Gu$a$ela Di)isionFs gross $argin (oul# increase by !=--.---& c& Yes. because Gu$a$ela Di)isionFs gross $argin (oul# increase by !8--.---& #& No. because Daisy Di)isionFs gross $argin (oul# #ecrease by !<--.---& 00& Assu$e. 'o(e)er. t'at Rosa Corporation allo(s t'e #i)ision $anagers to negotiate t'e trans er price or %<0,& T'e $anagers agree# on a tentati)e trans er price o !,- per unit@ to be re#uce# base# on an e1ual s'aring o t'e a##itional gross $argin to Gu$a$ela resulting ro$ t'e sales to Daisy o =-.--- units at !,- per unit& T'e actual trans er price or %<0, (oul# be 5M6 a& !=,&,c& !7,&-b& !7-&-#& !,-&--

!age %/ o /%

MANAGEMENT ADVISORY SERVICES Kuestions 0< t'ru <% are base# on t'e ollo(ing in or$ation& CMA -8<8 =G/8 to /0 !ar:si#e. Inc& 'as se)eral #i)isions t'at operate as #ecentraliLe# pro it centers& !ar:si#eFs Entertain$ent Di)ision $anu actures )i#eo arca#e e1uip$ent using t'e pro#ucts o t(o o !ar:si#eFs ot'er #i)isions& T'e !lastics Di)ision $anu actures plastic co$ponents. one type t'at is $a#e e?clusi)ely or t'e Entertain$ent Di)ision. ('ile ot'er less co$ple? co$ponents are sol# to outsi#e $ar:ets& T'e pro#ucts o t'e Vi#eo Car#s Di)ision are sol# in a co$petiti)e $ar:et. 'o(e)er. one )i#eo car# $o#el is also use# by t'e Entertain$ent Di)ision& T'e actual costs per unit use# by t'e Entertain$ent Di)ision are presente# belo(& !lastic Co$ponents Vi#eo Car#s Direct $aterial + %&/, + /&7Direct labor /&=, =&-Variable o)er'ea# %&-%&,>i?e# o)er'ea# -&7/&/, Total cost + ,&-+ <&%, T'e !lastics Di)ision sells its co$$ercial pro#ucts at ull cost plus a /,2 $ar:up an# belie)es t'e proprietary plastic co$ponent $a#e or t'e Entertain$ent Di)ision (oul# sell or +8&/, per unit on t'e open $ar:et& T'e $ar:et price o t'e )i#eo car# use# by t'e Entertain$ent Di)ision is +%-&<0 per unit& 0<& A perGunit trans er price ro$ t'e Vi#eo Car#s Di)ision to t'e Entertain$ent Di)ision at ull cost. +<&%,. (oul# 5M6 a& Allo( e)aluation o bot' #i)isions on a co$petiti)e basis& b& Satis y t'e Vi#eo Car#s Di)isionFs pro it #esire by allo(ing reco)ery o opportunity costs& c& !ro)i#e no pro it incenti)e or t'e Vi#eo Car#s Di)ision to control or re#uce costs& #& Encourage t'e Entertain$ent Di)ision to purc'ase )i#eo car#s ro$ an outsi#e source& <-& Assu$e t'at t'e Entertain$ent Di)ision is able to purc'ase a large 1uantity o )i#eo car#s ro$ an outsi#e source at +0&9- per unit& T'e Vi#eo Car#s Di)ision 'a)ing e?cess capacity. agrees to lo(er its trans er price to +0&9- per unit& T'is action (oul# 5M6 a& Opti$iLe t'e pro it goals o t'e Entertain$ent Di)ision ('ile sub)erting t'e pro it goals o !ar:si#e. Inc& b& Allo( e)aluation o bot' #i)isions on t'e sa$e basis& c& Sub)ert t'e pro it goals o t'e Vi#eo Car#s Di)ision ('ile opti$iLing t'e pro it goals o t'e Entertain$ent Di)ision& #& Opti$iLe t'e o)erall pro it goals o !ar:si#e. Inc&

Responsibility Accounting & Trans er !ricing <%& Assu$e t'at t'e !lastic Di)ision 'as e?cess capacity an# it 'as negotiate# a trans er price o +,&8- per plastic co$ponent (it' t'e Entertain$ent Di)ision& T'is price (ill 5M6 a& Cause t'e !lastics Di)ision to re#uce t'e nu$ber o co$$ercial plastic co$ponents it $anu actures& b& Moti)ate bot' #i)isions as esti$ate# pro its are s'are#& c& Encourage t'e Entertain$ent Di)ision to see: an outsi#e source or plastic co$ponents& #& De$oti)ate t'e !lastics Di)ision causing $e#iocre per or$ance& Operating /it+ .artial E(cess Capacit) Mini$u$ Trans er !rice </& Di)ision J o C'arter Corporation $a:es an# sells a single pro#uct ('ic' is use# by $anu acturers o or: li t truc:s& !resently it sells %/.--- units per year to outsi#e custo$ers at +/7 per unit& T'e annual capacity is /-.--- units an# t'e )ariable cost to $a:e eac' unit is +%8& Di)ision Y o C'arter Corporation (oul# li:e to buy %-.--- units a year ro$ Di)ision J to use in its pro#ucts& T'ere (oul# be no cost sa)ings ro$ trans erring t'e units (it'in t'e co$pany rat'er t'an selling t'e$ on t'e outsi#e $ar:et& A'at s'oul# be t'e lo(est acceptable trans er price ro$ t'e perspecti)e o Di)ision J4 5D6 a& +/7&-c& +%9&8b& +/%&7#& +%8&-G & N <e <=& T'e !ost Di)ision o t'e M&T& Aoo#'ea# Co$pany pro#uces basic posts ('ic' can be sol# to outsi#e custo$ers or sol# to t'e Ca$p Di)ision o t'e M&T& Aoo#'ea# Co$pany& Cast Year t'e Ca$p Di)ision boug't all o its /,.--- posts ro$ !ost at +%&,- eac'& T'e ollo(ing #ata are a)ailable or last year;s acti)ities o t'e !ost Di)ision* Capacity in units =--.--- posts Selling price per post to outsi#e custo$ers +%&9, Variable costs per post +-&<>i?e# costs. total +%,-.--Suppose t'e trans ers o posts to t'e Ca$p Di)ision cut into sales to outsi#e custo$ers by %,.--- units& A'at is t'e lo(est trans er price t'at (oul# not re#uce t'e pro its o t'e !ost Di)ision4 5D6 a& +-&<-& c& +%&7%& b& +%&=,& #& +%&9,& G & N <e

C3IANG DAI S3ED COCCEGE

!age %= o /%

MANAGEMENT ADVISORY SERVICES <7& T'e Vega Di)ision o Ace Co$pany $a:es ('eels ('ic' can eit'er be sol# to outsi#e custo$ers or trans erre# to t'e Aals' Di)ision o Ace Co$pany& Cast $ont' t'e Aals' Di)ision boug't all 7.--- o its ('eels ro$ t'e Vega Di)ision or +7/ eac'& T'e ollo(ing #ata are a)ailable ro$ last $ont';s operations or t'e Vega Co$pany* Capacity %/.--- ('eels Selling price per ('eel to outsi#e custo$ers +7, Variable costs per ('eel ('en sol# to outsi#e custo$ers +=I t'e Vega Di)ision sells ('eels to t'e Aals' Di)ision. Vega can a)oi# +/ per ('eel in sales co$$issions& An outsi#e supplier 'as o ere# to supply ('eels to t'e Aals' Di)ision or +7% eac'& Suppose t'at Vega can sell <.--- ('eels eac' $ont' to outsi#e consu$ers. so trans ers to t'e Aals' Di)ision cut into outsi#e sales& A'at s'oul# be t'e lo(est acceptable trans er price ro$ t'e perspecti)e o t'e Vega Di)ision4 5VD6 a& +/0&-c& +7%&-b& +=%&9, #& +7/&-G & N <e E ect on !ro it G Ma:e <,& Di)ision ! o Turbo Corporation 'as t'e capacity or $a:ing 9,.--- ('eel sets per year an# regularly sells 8-.--- eac' year on t'e outsi#e $ar:et& T'e regular sales price is +%-- per ('eel set. an# t'e )ariable pro#uction cost per unit is +8,& Di)ision K o Turbo Corporation currently buys /-.--- ('eel sets 5o t'e :in# $a#e by Di)ision !6 yearly ro$ an outsi#e supplier at a price o +<- per ('eel set& I Di)ision K (ere to buy t'e =-.--- ('eel sets it nee#s annually ro$ Di)ision ! at +09 per ('eel set. t'e c'ange in annual net operating inco$e or t'e co$pany as a ('ole. co$pare# to ('at it is currently. (oul# be* 5D6 a& +//,.---& c& +,--.---& b& +=/,.--#& +9,.---& G & N a#apte# E ect on !ro it G "uy <8& T'e !ost Di)ision o t'e M&T& Aoo#'ea# Co$pany pro#uces basic posts ('ic' can be sol# to outsi#e custo$ers or sol# to t'e Ca$p Di)ision o t'e M&T& Aoo#'ea# Co$pany& Cast Year t'e Ca$p Di)ision boug't all o its /,.--- posts ro$ !ost at +%&,- eac'& T'e ollo(ing #ata are a)ailable or last year;s acti)ities o t'e !ost Di)ision* Capacity in units =--.--- posts Selling price per post to outsi#e custo$ers +%&9, Variable costs per post +-&<>i?e# costs. total +%,-.--Suppose t'e trans ers o posts to t'e Ca$p Di)ision cut into sales to outsi#e custo$ers by %,.--- units& >urt'er suppose t'at an outsi#e supplier is (illing to pro)i#e t'e Ca$p Di)ision C3IANG DAI S3ED COCCEGE

Responsibility Accounting & Trans er !ricing (it' basic posts at +%&7, eac'& I t'e Ca$p Di)ision 'a# c'osen to buy all o its posts ro$ t'e outsi#e supplier instea# o t'e !ost Di)ision. t'e c'ange in net operating inco$e or t'e co$pany as a ('ole (oul# 'a)e been* 5D6 a& +%./,- #ecrease& c& +%.--- #ecrease& b& +%-./,- increase& #& +%=.9,- #ecrease& G & N <e Operating at Idle Capacit) Mini$u$ Trans er !rice <9& Di)ision A $a:es a part t'at it sells to custo$ers outsi#e o t'e co$pany& Data concerning t'is part appear belo(* Selling price to outsi#e custo$ers +7Variable cost per unit +=Total i?e# costs +%-.--Capacity in units /-.--Di)ision " o t'e sa$e co$pany (oul# li:e to use t'e part $anu acture# by Di)ision A in one o its pro#ucts& Di)ision " currently purc'ases a si$ilar part $a#e by an outsi#e co$pany or +=0 per unit an# (oul# substitute t'e part $a#e by Di)ision A& Di)ision " re1uires ,.--- units o t'e part eac' perio#& Di)ision A 'as a$ple capacity to pro#uce t'e units or Di)ision " (it'out any increase in i?e# costs an# (it'out cutting into sales to outsi#e custo$ers& I Di)ision A sells to Di)ision " rat'er t'an to outsi#e custo$ers. t'e )ariable cost be unit (oul# be +% lo(er& A'at s'oul# be t'e lo(est acceptable trans er price ro$ t'e perspecti)e o Di)ision A4 5M6 a& +7-& c& +=-& b& +=0& #& +/<& G & N <e <0& Di)ision A pro#uces a part (it' t'e ollo(ing c'aracteristics* Capacity in units ,-.--Selling price per unit +=Variable costs per unit +%0 >i?e# costs per unit += Di)ision ". anot'er #i)ision in t'e co$pany. (oul# li:e to buy t'is part ro$ Di)ision A& Di)ision " is presently purc'asing t'e part ro$ an outsi#e source at +/0 per unit& I Di)ision A sells to Di)ision ". +% in )ariable costs can be a)oi#e#& Suppose t'at Di)ision A 'as a$ple i#le capacity to 'an#le all o Di)ision ";s nee#s (it'out any increase in i?e# costs an# (it'out cutting into its sales to outsi#e custo$ers& >ro$ t'e point o )ie( o Di)ision A. any sales to Di)ision " s'oul# be price# no lo(er t'an* 5M6 a& +/<& c& +%0& b& +=-& #& +%9& G & N <e !age %7 o /%

MANAGEMENT ADVISORY SERVICES Ma?i$u$ Trans er !rice <<& Cline Co$pany 'a# t'e ollo(ing 'istorical accounting #ata per unit* Direct $aterials +/Direct labor %Variable $anu acturing o)er'ea# , >i?e# $anu acturing o)er'ea# 0 Variable selling e?penses %, >i?e# selling e?penses = T'e units are nor$ally trans erre# internally ro$ Di)ision J to Di)ision Y& T'e units also $ay be sol# e?ternally or +9- per unit& T'e $ini$u$ pro it le)el accepte# by t'e co$pany is a $ar:up o =- percent& T'ere (ere no beginning or en#ing in)entories& I t'e negotiate# price is use#. Di)ision JFs trans er price s'oul# be a& a $a?i$u$ o +9-&-#& a $ini$u$ o +7-&-b& a $ini$u$ o +,%&-e& a $ini$u$ o +7=&--& c& a $a?i$u$ o +88&=3&M Mini$u$ & Ma?i$u$ Trans er !rice Kuestions %-- & %-% are base# on t'e ollo(ing in or$ation& G & N <e T'e Vega Di)ision o Ace Co$pany $a:es ('eels ('ic' can eit'er be sol# to outsi#e custo$ers or trans erre# to t'e Aals' Di)ision o Ace Co$pany& Cast $ont' t'e Aals' Di)ision boug't all 7.--- o its ('eels ro$ t'e Vega Di)ision or +7/ eac'& T'e ollo(ing #ata are a)ailable ro$ last $ont';s operations or t'e Vega Co$pany* Capacity Selling price per ('eel to outsi#e custo$ers Variable costs per ('eel ('en sol# to outsi#e custo$ers %/.--- ('eels +7, +=-

Responsibility Accounting & Trans er !ricing %-%&A'at is t'e $a?i$u$ price per ('eel t'at Aals' s'oul# be (illing to pay Vega4 5M6 a& +/0 c& +7/ b& +7% #& +7, G & N <e Opti$al Trans er !rice %-/&Di)ision I o a co$pany pro#uces a co$ponent t'at it currently sells to outsi#e custo$ers or +/- per unit& At its current le)el o pro#uction. ('ic' is 8-2 o capacity. Di)ision I;s i?e# cost o pro#ucing t'is co$ponent is +, per unit an# its )ariable cost is +%/ per unit& Di)ision Y o t'e sa$e co$pany (oul# li:e to purc'ase t'is co$ponent ro$ Di)ision I or +%-& Di)ision I 'as enoug' e?cess capacity to ill Di)ision Y;s re1uire$ents& T'e $anagers o bot' #i)isions are co$pensate# base# upon reporte# pro its& A'ic' o t'e ollo(ing trans er prices (ill $a?i$iLe total co$pany pro its an# be $ost e1uitable to t'e $anagers o Di)ision Y an# Di)ision I4 5M6 A& +%/ per unit& C& +/- per unit& "& +%0 per unit& D& +// per unit& CIA -,</ IVG%< %-=&Nita CorpFs Depart$ent % pro#uce# co$ponent C t'at is use# by OIM as a :ey part& !ro#uction an# sales #ata or co$ponent C is as ollo(s* Selling price per unit Variable cost per unit >i?e# cost per unit 5base# on %-.--- annual capacity6 !%-=8 /7

I t'e Vega Di)ision sells ('eels to t'e Aals' Di)ision. Vega can a)oi# +/ per ('eel in sales co$$issions& An outsi#e supplier 'as o ere# to supply ('eels to t'e Aals' Di)ision or +7% eac'& %--&Suppose t'at t'e Vega Di)ision 'as a$ple i#le capacity so t'at trans ers to t'e Aals' Di)ision (oul# not cut into its sales to outsi#e custo$ers& A'at s'oul# be t'e lo(est acceptable trans er price ro$ t'e perspecti)e o t'e Vega Di)ision4 5M6 a& +/0 c& +7/ b& +=#& +7,

Nita Corp&Fs Depart$ent II is intro#ucing a ne( pro#uct t'at (ill use co$ponent C& An outsi#e supplier 'as 1uote# Depart$ent II a price o !<8 per unit& T'is represents t'e usual !%-price less a 1uantity #iscount #ue to t'e large nu$ber o Depart$ent IIFs re1uire$ents& T'e Co$pany 'as trans er price or$ula o * Trans er price T Variable cost per unit U Cost contribution $argin per unit on outsi#e sales& Depart$ent I 'as enoug' e?cess capacity to 'an#le all o Depart$ent IIFs nee#s& >or t'e o)erall interest o t'e co$pany. Depart$ent I s'oul# 5M6 a& Sell to Depart$ent II at t'e sa$e 1uote# price o !<8 per unit& b& Sell to Depart$ent II at $ini$u$ price o !8- per unit& c& Not sell to Depart$ent II since it (ill lose !7 per unit& #& Sell to Depart$ent II at !%-- per unit& R!C!A %-<8

C3IANG DAI S3ED COCCEGE

!age %, o /%

MANAGEMENT ADVISORY SERVICES %-7&A co$pany 'as t(o #i)isions. A an# ". eac' operate# as a pro it center& A c'arges " +=, per unit or eac' unit trans erre# to "& Ot'er #ata ollo(s* AFs )ariable cost per unit AFs i?e# costs AFs annual sales to " AFs sales to outsi#ers +=%-.--,.--- units ,-.--- units

Responsibility Accounting & Trans er !ricing %-9&Di)ision A $a:es a part (it' t'e ollo(ing c'aracteristics* !ro#uction capacity in units Selling price to outsi#e custo$ers Variable cost per unit Total i?e# costs %,.--- units +/, +%0 +8-.---

A is planning to raise its trans er price to +,- per unit. Di)ision " can purc'ase units at +7eac' ro$ outsi#ers. but #oing so (oul# i#le AFs acilities no( co$$itte# to pro#ucing units or "& Di)ision A cannot increase its sales to outsi#ers& >ro$ t'e perspecti)e o t'e co$pany as a ('ole. ro$ ('o$ s'oul# Di)ision " ac1uire t'e units. assu$ing "Fs $ar:et is una ecte#4 5M6 a& Outsi#e )en#ors& b& Di)ision A. but only at t'e )ariable cost per unit& c& Di)ision A. but only until i?e# costs are co)ere#. t'en ro$ outsi#e )en#ors& #& Di)ision A. #espite t'e increase# trans er price& CIA %%0= IVG, E ect on !ro it Kuestions %-, & %-8 are base# on t'e ollo(ing in or$ation& C & 3 %-e AlcatraL Di)ision o JYI Corp& sells 0-.--- units o part J to t'e outsi#e $ar:et& !art J sells or +7-. 'as a )ariable cost o +//. an# a i?e# cost per unit o +%-& AlcatraL 'as a capacity to pro#uce %--.--- units per perio#& Capone Di)ision currently purc'ases %-.--- units o part J ro$ AlcatraL or +7-& Capone 'as been approac'e# by an outsi#e supplier (illing to supply t'e parts or +=8& %-,&A'at is t'e e ect on JYI;s o)erall pro it i AlcatraL RE>ESES t'e outsi#e price an# Capone #eci#es to buy outsi#e4 5M6 a& no c'ange c& +0-.--- #ecrease in JYI pro its b& +%7-.--- #ecrease in JYI pro its #& +7-.--- increase in JYI pro its %-8&A'at is t'e e ect on JYI;s o)erall pro it i AlcatraL ACCE!TS t'e outsi#e price an# Capone continues to buy insi#e4 5M6 a& no c'ange c& +0-.--- #ecrease in JYI pro its b& +%7-.--- #ecrease in JYI pro its #& +7-.--- increase in JYI pro its

Di)ision ". anot'er #i)ision o t'e sa$e co$pany. (oul# li:e to purc'ase ,.--- units o t'e part eac' perio# ro$ Di)ision A& Di)ision " is no( purc'asing t'ese parts ro$ an outsi#e supplier at a price o +/7 eac'& Suppose t'at Di)ision A 'as a$ple i#le capacity to 'an#le all o Di)ision ";s nee#s (it'out any increase in i?e# costs an# (it'out cutting into sales to outsi#e custo$ers& I Di)ision " continues to purc'ase parts ro$ an outsi#e supplier rat'er t'en ro$ Di)ision A. t'e co$pany as a ('ole (ill be* 5M6 G & N <e a& (orse o by +=-.--- eac' perio#& c& better o by +%,.--- eac' perio#& b& (orse o by +%-.--- eac' perio#& #& (orse o by +=,.--- eac' perio#& International Trans%er .ricing %-0&3ancoc: Manu acturing 'as one plant locate# in Italy an# anot'er plant locate# in t'e E&S& T'e Italian plant $anu actures a co$ponent use# in a inis'e# pro#uct $anu acture# at t'e E&S& plant& Currently. t'e Italian plant is operating at 9, percent capacity& In Italy t'e inco$e ta? rate is =/ percent@ in t'e E&S& t'e corporate inco$e ta? rate is =, percent& T'e $ar:et price o t'e co$ponent is +%/- an# t'e Italian plantFs costs to $anu acture t'e co$ponent are as ollo(s* Direct $aterials Direct labor Variable o)er'ea# >i?e# o)er'ea# A'ic' trans er price (oul# be in t'e best interest o t'e o)erall corporation4 a& +8c& +9, b& +,#& +%/+=/%%, 3&M

C3IANG DAI S3ED COCCEGE

!age %8 o /%

MANAGEMENT ADVISORY SERVICES %-<&!aci ic Co$pany 'as t'ree plants* one locate# in Malaysia. one in In#ia an# anot'er plant locate# in t'e !'ilippines& "ot' plants $anu actures a co$ponent use# in a inis'e# pro#uct $anu acture# in t'e !'ilippine plant& Currently. bot' plants are operating at 9-2 capacity& In Malaysia t'e inco$e ta? rate is 7/2 ('ile in In#ia t'e ta? rate is =,2@ in t'e !'ilippines. t'e corporate inco$e ta? rate is 7-2& T'e $ar:et price o t'e co$ponent. in peso e1ui)alent. is !%-- an# t'e oreign plantFs costs to $anu acture t'e co$ponent are as ollo(s* Direct $aterials Direct labor Variable o)er'ea# >i?e# o)er'ea# A'ic' trans er price (oul# be in t'e best interest o t'e o)erall corporation4 !ol "oba#illa A& "& C& Malaysia !=, ! =, !%-In#ia !=, !%-!%-!%/, /, D& !%-! =,

Responsibility Accounting & Trans er !ricing %%%&A'at is t'e $a?i$u$ trans er price t'at t'e E&S& #i)ision (oul# be (illing to pay4 a& +=, c& +8b& +,, #& +%-%%/&A'ic' trans er price (oul# be in t'e best interest o t'e o)erall corporation4 a& +=, c& +8b& +,, #& +%-Kuestions %%= t'ru %%, are base# on t'e ollo(ing in or$ation& 3&M 3a$pton Manu acturing 'as one plant locate# in "elgiu$ an# anot'er plant locate# in t'e E&S& T'e "elgiu$ plant $anu actures a co$ponent use# in a inis'e# pro#uct $anu acture# at t'e E&S& plant& Currently. t'e "elgiu$ plant is operating at 9- percent capacity& In "elgiu$ t'e inco$e ta? rate is =- percent@ in t'e E&S& t'e corporate inco$e ta? rate is =, percent& T'e $ar:et price o t'e co$ponent is +%7- an# t'e "elgiu$ plantFs costs to $anu acture t'e co$ponent are as ollo(s* Direct $aterials Direct labor Variable o)er'ea# >i?e# o)er'ea# +%, /, 8 /0

Kuestions %%- t'ru %%/ are base# on t'e ollo(ing in or$ation& 3&M 3ano)er Manu acturing 'as one plant locate# in "elgiu$ an# anot'er plant locate# in t'e E&S& T'e "elgiu$ plant $anu actures a co$ponent use# in a inis'e# pro#uct $anu acture# at t'e E&S& plant& Currently. t'e "elgiu$ plant is operating at 9- percent capacity& In "elgiu$ t'e inco$e ta? rate is 7/ percent@ in t'e E&S& t'e corporate inco$e ta? rate is =, percent& T'e $ar:et price o t'e co$ponent is +%-- an# t'e "elgiu$ plantFs costs to $anu acture t'e co$ponent are as ollo(s* Direct $aterials Direct labor Variable o)er'ea# >i?e# o)er'ea# +%/, /,

%%=&A'at is t'e $ini$u$ trans er price t'at t'e "elgiu$ #i)ision (oul# be (illing to accept4 a& +%7c& +80 b& +97 #& +78 %%7&A'at is t'e $a?i$u$ trans er price t'at t'e E&S& #i)ision (oul# be (illing to pay4 a& +%7c& +80 b& +97 #& +78 %%,&A'ic' trans er price (oul# be in t'e best interest o t'e o)erall corporation4 a& +%7c& +80 b& +97 #& +78

%%-&A'at is t'e $ini$u$ trans er price t'at t'e "elgiu$ #i)ision (oul# be (illing to accept4 a& +=, c& +8b& +,, #& +%--

C3IANG DAI S3ED COCCEGE

!age %9 o /%

MANAGEMENT ADVISORY SERVICES Compre+ensive Kuestions %%8 t'roug' %%0 are base# on t'e ollo(ing in or$ation& CMA %/<- =G/% to /= A#ler In#ustries is a )ertically integrate# ir$ (it' se)eral #i)isions t'at operate as #ecentraliLe# pro it centers& A#ler;s Syste$s Di)ision $anu actures scienti ic instru$ents an# uses t'e pro#ucts o t(o o A#ler;s ot'er #i)isions& T'e "oar# Di)ision $anu actures printe# circuit boar#s 5!C"s6& One !C" $o#el is $a#e e?clusi)ely or t'e Syste$s Di)ision using proprietary #esigns. ('ereas less co$ple? $o#els are sol# in outsi#e $ar:ets& T'e pro#ucts o t'e Transistor Di)ision are sol# in a (ellG#e)elope# co$petiti)e $ar:et@ 'o(e)er. one transistor $o#el is also use# by t'e Syste$s Di)ision& T'e costs per unit o t'e pro#ucts use# by t'e Syste$s Di)ision are as ollo(s* !C" Transistor Direct $aterials +/&,+ &0Direct labor 7&,%&-Variable o)er'ea# /&-&,>i?e# o)er'ea# &0&9, Total cost +<&0+=&-, T'e "oar# Di)ision sells its co$$ercial pro#ucts at ull cost plus a /,2 $ar:up an# belie)es t'e proprietary boar# $a#e or t'e Syste$s Di)ision (oul# sell or +%/&/, per unit on t'e open $ar:et& T'e $ar:et price o t'e transistor use# by t'e Syste$s Di)ision is +=&9- per unit& %%8&A per unit trans er price ro$ t'e Transistor Di)ision to t'e Syste$s Di)ision at ull cost. +=&-,. (oul# A& Allo( e)aluation o bot' #i)isions on a co$petiti)e basis& "& Satis y t'e Transistor Di)ision;s pro it #esire by allo(ing reco)ery o opportunity costs& C& De$oti)ate t'e Syste$s Di)ision an# cause $e#iocre per or$ance& D& !ro)i#e no pro it incenti)e or t'e Transistor Di)ision to control or re#uce costs& %%9&Assu$e t'e Syste$s Di)ision is able to purc'ase a large 1uantity o transistors ro$ an outsi#e source at +/&<- per unit& T'e Transistor Di)ision. 'a)ing e?cess capacity. agrees to lo(er its trans er price to +/&<- per unit& T'is action (oul# A& Opti$iLe t'e pro it goals o t'e Syste$s Di)ision ('ile sub)erting t'e pro it goals o A#ler In#ustries& "& Allo( e)aluation o bot' #i)isions on t'e sa$e basis& C& Sub)ert t'e pro it goals o t'e Transistor Di)ision ('ile opti$iLing t'e pro it goals o t'e Syste$s Di)ision& D& Opti$iLe t'e o)erall pro it goals o A#ler In#ustries& C3IANG DAI S3ED COCCEGE

Responsibility Accounting & Trans er !ricing %%0&T'e "oar# an# Syste$s Di)isions 'a)e negotiate# a trans er price o +%%&-- per printe# circuit boar#& T'is price (ill A& Cause t'e "oar# Di)ision to re#uce t'e nu$ber o co$$ercial printe# circuit boar#s it $anu actures& "& Moti)ate bot' #i)isions as esti$ate# pro its are s'are#& C& Encourage t'e Syste$s Di)ision to see: an outsi#e source or printe# circuit boar#s& D& De$oti)ate t'e "oar# Di)ision causing $e#iocre per or$ance& Kuestions %%< t'roug' %/= are base# on t'e ollo(ing in or$ation& "ar iel# O ice !ro#ucts Inc& $anu actures an# sells )arious 'ig'Gtec' o ice auto$ation pro#ucts& T(o #i)isions o O ice !ro#ucts Inc& are t'e Co$puter C'ip Di)ision an# t'e Co$puter Di)ision& T'e Co$puter C'ip Di)ision $anu actures one pro#uct. a Vsuper c'ip.V t'at can be use# by bot' t'e Co$puter Di)ision an# ot'er e?ternal custo$ers& T'e ollo(ing in or$ation is a)ailable on t'is $ont';s operations in t'e Co$puter C'ip Di)ision* Selling price per c'ip Variable costs per c'ip >i?e# pro#uction costs >i?e# SG&A costs Mont'ly capacity E?ternal sales Internal sales +,+/+8-.--+<-.--%-.--- c'ips 8.--- c'ips - c'ips

!resently. t'e Co$puter Di)ision purc'ases no c'ips ro$ t'e Co$puter C'ips Di)ision. but instea# pays +7, to an e?ternal supplier or t'e 7.--- c'ips it nee#s eac' $ont'& %%<&Assu$e t'at ne?t $ont';s costs an# le)els o operations in t'e Co$puter an# Co$puter C'ip Di)isions are si$ilar to t'is $ont'& A'at is t'e $ini$u$ o t'e trans er price range or a possible trans er o t'e super c'ip ro$ one #i)ision to t'e ot'er4 a& +,c& +/b& +7, #& +=, %/-&Assu$e t'at ne?t $ont';s costs an# le)els o operations in t'e Co$puter an# Co$puter C'ip Di)isions are si$ilar to t'is $ont'& A'at is t'e $a?i$u$ o t'e trans er price range or a possible trans er o t'e c'ip ro$ one #i)ision to t'e ot'er4 a& +,c& +=, b& +7, #& +=!age %0 o /%

MANAGEMENT ADVISORY SERVICES %/%&T(o possible trans er prices 5 or 7.--- units6 are un#er consi#eration by t'e t(o #i)isions* +=, an# +7-& Corporate pro its (oul# be QQQQQQQ i +=, is selecte# as t'e trans er price rat'er t'an +7-& a& +/-.--- larger c& +/-.--- s$aller b& +7-.--- larger #& t'e sa$e %//&I a trans er bet(een t'e t(o #i)isions is arrange# ne?t perio# at a price 5on 7.--- units o super c'ips6 o +7-. total pro its in t'e Co$puter C'ip #i)ision (ill a& rise by +/-.--- co$pare# to t'e prior perio#& b& #rop by +7-.--- co$pare# to t'e prior perio#& c& #rop by +/-.--- co$pare# to t'e prior perio#& #& rise by +0-.--- co$pare# to t'e prior perio#& %/=&Assu$e. or t'is 1uestion only. t'at t'e Co$puter C'ip Di)ision is selling all t'at it can pro#uce to e?ternal buyers or +,- per unit& 3o( (oul# o)erall corporate pro its be a ecte# i it sells 7.--- units to t'e Co$puter Di)ision at +7,4 5Assu$e t'at t'e Co$puter Di)ision can purc'ase t'e super c'ip ro$ an outsi#e supplier or +7,&6 a& no e ect c& +/-.--- #ecrease b& +/-.--- increase #& +<-.--- increase Kuestions %/7 t'ru %/8 are base# on t'e ollo(ing in or$ation& "ar iel# T'e Motor Di)ision o Super Truc: Co& uses ,.--- carburetors per $ont' in its pro#uction o auto$oti)e engines& It presently buys all o t'e carburetors it nee#s ro$ t(o outsi#e suppliers at an a)erage cost o +%--& T'e Carburetor Di)ision o Super Truc: Co& $anu actures t'e e?act type o carburetor t'at t'e Motor Di)ision re1uires& T'e Carburetor Di)ision is presently operating at its capacity o %,.--- units per $ont' an# sells all o its output to a oreign car $anu acturer at +%-8 per unit& Its cost structure 5on %,.--- units6 is* Variable pro#uction costs Variable selling costs All i?e# costs +9%%-

Responsibility Accounting & Trans er !ricing %/,&A'at is t'e $ini$u$ o t'e trans er price range or a trans er bet(een t'e t(o #i)isions4 a& +<8 c& +9b& +<#& +%-8 %/8&I t'e t(o #i)isions agree to transact (it' one anot'er. corporate pro its (ill a& #rop by +=-.--- per $ont'& b& rise by +/-.--- per $ont'& c& rise by +,-.--- per $ont'& #& rise or all by an a$ount t'at #epen#s on t'e le)el o t'e trans er price& Kuestions %/9 t'roug' %== are base# on t'e ollo(ing in or$ation& Glei$ The information was presented as part of Question 6 on Part 4 of the December 1981 CMA E amination! !ortCo !ro#ucts is a #i)isionaliLe# urniture $anu acturer& T'e #i)isions are autono$ous seg$ents. (it' eac' #i)ision being responsible or its o(n sales. costs o operations. (or:ing capital $anage$ent. an# e1uip$ent ac1uisition& Eac' #i)ision ser)es a #i erent $ar:et in t'e urniture in#ustry& "ecause t'e $ar:ets an# pro#ucts o t'e #i)isions are so #i erent. t'ere 'a)e ne)er been any trans ers bet(een #i)isions& T'e Co$$ercial Di)ision $anu actures e1uip$ent an# urniture t'at are purc'ase# by t'e restaurant in#ustry& T'e #i)ision plans to intro#uce a ne( line o counter an# c'air units t'at eature a cus'ione# seat or t'e counter c'airs& Ho'n Dline. t'e #i)ision $anager. 'as #iscusse# t'e $anu acturing o t'e cus'ione# seat (it' Russ >legel or a price or %--Gunit lots o t'e cus'ione# seat& T'e ollo(ing con)ersation too: place about t'e price to be c'arge# or t'e cus'ione# seats* >legel* RHo'n. (e can $a:e t'e necessary $o#i ications to t'e cus'ione# seat easily& T'e ra( $aterials use# in your seat are slig'tly #i erent an# s'oul# cost about %-2 $ore t'an t'ose use# in our #elu?e o ice stool& 3o(e)er. t'e labor ti$e s'oul# be t'e sa$e because t'e seat abrication operation basically is t'e sa$e& I (oul# price t'e seat at our regular rate N ull cost plus =-2 $ar:up&S Dline* RT'is is 'ig'er t'an I e?pecte#& Russ. I (as t'in:ing t'at a goo# price (oul# be your )ariable $anu acturing costs& A ter all. your capacity costs (ill be incurre# regar#less o t'e Mob&S >legel* RHo'n. IF$ at capacity& "y $a:ing t'e cus'ion seats or you. IFll 'a)e to cut $y pro#uction o #elu?e o ice stools& O course. I can increase $y pro#uction o econo$y o ice stools& T'e labor ti$e ree# by not 'a)ing to abricate t'e ra$e or asse$ble t'e #elu?e stool can be s'i te# to t'e ra$e abrication an# asse$bly o t'e econo$y o ice stool& >ortunately. I can s(itc' $y labor orce bet(een t'ese t(o $o#els o stools (it'out any loss o e iciency& As you :no(. o)erti$e is !age %< o /%

Assu$e t'at t'e Carburetor Di)ision (oul# not incur any )ariable selling costs on units t'at are trans erre# internally& %/7&A'at is t'e $a?i$u$ o t'e trans er price range or a trans er bet(een t'e t(o #i)isions4 a& +%-8 c& +<b& +%-#& +9C3IANG DAI S3ED COCCEGE

MANAGEMENT ADVISORY SERVICES not a easible alternati)e in our co$$unity& IF# li:e to sell it to you at )ariable cost. but I 'a)e e?cess #e$an# or bot' pro#ucts& I #onFt $in# c'anging $y pro#uct $i? to t'e econo$y $o#el i I get a goo# return on t'e seats I $a:e or you& 3ere are $y stan#ar# costs or t'e t(o stools an# a sc'e#ule o $y $anu acturing o)er'ea#&S Dline* RI guess I see your point. Russ. but I #onFt (ant to price $ysel out o t'e $ar:et& Maybe (e s'oul# tal: to Corporate to see i t'ey can gi)e us any gui#ance&S O ice Di)ision Stan#ar# Costs an# !rices Delu?e O ice Stool Econo$y O Ra( $aterials >ra$ing + 0&%, Cus'ione# seat !a##ing /&7Vinyl 7&-Mol#e# seat 5purc'ase#6 Direct labor >ra$e abrication 5&,?+9&,-BDC36 =&9, 5&,?+9&,-BDC36 Cus'ion abrication =&9, 5&,?+9&,-BDC36 Asse$blyW 5&,?+9&,-BDC36 =&9, 5&=?+9&,-BDC36 Manu acturing O)er'ea# 5%&,DC3?+%/&8-BDC36 %<&/- 5&0DC3?+%/&0-BDC36 Total stan#ar# cost +7,&-Selling price 5=-2 $ar:up6 +,0&," Attachin# seats to frames and attachin# rubber feet! O ice Di)ision Manu acturing O)er'ea# "u#get Nature Variable N at current $ar:et prices Variable Non)ariable Ese )aries (it' acti)ity@ rates are i?e# Non)ariable N lig't is i?e# regar#less o pro#uction ('ile 'eatBaircon#itioning )aries (it' uel c'arges C3IANG DAI S3ED COCCEGE O)er'ea# Ite$ Supplies In#irect labor Super)ision !o(er 3eat an# lig't A$ount + 7/-.--=9,.--/,-.--%0-.--%7-.--ice Stool + <&98 G G 8&-=&9, G /&/, %-&/7 +=/&-+7%&8!roperty ta?es an# insurance ta?es Depreciation E$ployee bene its

Responsibility Accounting & Trans er !ricing Non)ariable N any c'ange in a$ountsBrates is in#epen#ent o pro#uction >i?e# #ollar total /-2 o super)ision. #irect an# in#irect labor Total o)er'ea# Capacity in DC3 O)er'ea# rateBDC3 %/9&A'at a$ount o e$ployee bene it is associate# (it' #irect labor costs4 5E6 a& +89,.--c& +7,-.--b& +9,.--#& +,--.--%/0&A'at is t'e )ariable $anu acturing o)er'ea# rate4 5E6 a& +9&0-B'r& c& +,&%9B'r& b& +%%&/,B'r& #& +,&--B'r& %/<&A'at is t'e trans er price per %--Gunit lot base# on )ariable $anu acturing costs to pro#uce t'e $o#i ie# cus'ione# seat4 5E6 a& +%.=/< c& +90< b& +%.08< #& +%.<08 %=-&A'at is t'e i?e# $anu acturing o)er'ea# rate4 5E6 a& +9&0-B'r& c& +,&%9B'r& b& +%%&/,B'r& #& +,&--B'r& %=%&3o( $any econo$y o ice stools can be pro#uce# (it' t'e labor 'ours currently use# to $a:e %-- #elu?e stools4 5E6 a& %09 c& %-b& %/, #& %,%=/&A'en co$puting t'e opportunity cost or t'e #elu?e o ice stool. ('at is t'e contribution $argin per unit pro#uce#4 5E6 a& +/,&/c& +7,&-b& +%,&07 #& +==&=%==&A'at is t'e opportunity cost o t'e O ice Di)ision i %/, econo$y stools can be $a#e in t'e ti$e re1uire# or %-- #elu?e stools4 5E6 a& +90< c& +%.=/< b& +%.08< #& +,7!age /- o /% /--.--%.9--.--,9,.--+=.07-.--=--.--+%/&0-

MANAGEMENT ADVISORY SERVICES Ans/er 0e) %& A /& " =& " 7& " ,& A 8& " 9& C 0& " <& " %-& A ,%& ,/& ,=& ,7& ,,& ,8& ,9& ,0& ,<& 8-& " " E A C C " D E C " " A D " A A D " A

Responsibility Accounting & Trans er !ricing

%%& %/& %=& %7& %,& %8& %9& %0& %<& /-& 8%& 8/& 8=& 87& 8,& 88& 89& 80& 8<& 9-& %%%& %%/& %%=& %%7& %%,& %%8& %%9& %%0& %%<& %/-&

D C D C C D " D " " A E " D " D A C C D D A D A A D D " C "

/%& //& /=& /7& /,& /8& /9& /0& /<& =-& 9%& 9/& 9=& 97& 9,& 98& 99& 90& 9<& 0-&

D C " " A C D " D " C A C " A " C A " D D D C " A C C D A A

=%& =/& ==& =7& =,& =8& =9& =0& =<& 7-& 0%& 0/& 0=& 07& 0,& 08& 09& 00& 0<& <-&

A A " " D A C C C " D A " " C " C " C D

7%& 7/& 7=& 77& 7,& 78& 79& 70& 7<& ,-&

A " C A C A " C D A

<%& " </& C <=& C <7& " <,& " <8& C <9& D <0& D <<& A %--& A

%-%& %-/& %-=& %-7& %-,& %-8& %-9& %-0& %-<& %%-&

%/%& %//& %/=& %/7& %/,& %/8& %/9& %/0& %/<& %=-&

%=%& " %=/& A %==& D

C3IANG DAI S3ED COCCEGE

!age /% o /%