MANAGEMENT ADVISORY SERVICES
Responsibility Accounting & Transer !ricing
%ase on Operating Inco$e '( T)e ollo*ing selecte ata pertain to t)e belt i#ision o Allen Corp( or last year+ Sales ,-../... A#erage operating a ssets ,0../... Net operating inco$e ,1./... Turno#er 0(Mini$u$ re2uire return 0.3 4o* $uc) is t)e return on in#est$ent5 6M7 a( 8.3 c( 0.3 b( '93 ( '-3 AIC!A/ Aapte Aapte 0( 4arstin Corporation )as pro#ie t)e ollo*ing ata+ Sales Gross $argin Net operating inco$e Stoc;)olers< e2uity A#erage operating a ssets Resiual inco$e T)e return on in#est$ent or t)e past year *as+ 6M7 a( 013( c( >93( b( 0.3( ( 13(
,90-/... :./... -./... =./... 0-./... 0./... G & N =e
In#est$ent >( Apple Di#ision o t)e A$erican A$erican ?ruit Co( )a t)e ollo*ing statistics or 0..0+ Assets a#ailable or use ,'/.../... Resiual inco$e '../... Return on in#est$ent ' -3 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 ,-./...5 6M7 a( ,-./... c( ,'/.../... b( ,>>>/>>> ( ,-../... %ariel
C4IANG AI S4E COEGE
Re2uire !eso Sales 8( T)e $anager $anager o t)e Strong Di#isio Di#isionn o !o*ers Co$pany Co$pany e@pects e@pects t)e ollo*ing ollo*ing results in 0..> 6pesos in $illions7 Sales !8=(9. Variable costs 69.37 0 = (: 9 Contribution $argin !'=(18 ?i@e costs ' 0 (. . !roit ! : (1 8 In#est$ent !lant e2uip$ent !'=(-' Bor;ing capital ' 8 (1 1 !>8(>= RO ROI 6!:(18!>8(>=7 00(1.3 T)e i#ision )as a target ROI o >.3/ an t)e $anager )as as;e you to eter$ine )o* $uc) sales #olu$e t)e i#ision i#ision *oul nee to reac)( 4e states t)at t)e sales $i@ is relati#ely constant so #ariable costs s)oul be close to 9.3 o sales/ i@e cost an plant an e2uip$ent s)oul re$ain constant/ an *or;ing capital 6cas)/ recei#ables an in#entories7 s)oul #ary closely *it) sales in t)e percentage relecte abo#e( T)e peso sales t)at t)e i#ision nees in orer to reac) t)e >.3 ROI target is 6D7 A( !'=/10=/.>0( C( !88/>:>/1:' %( !-:/-=./>00 D( !-=/-'./... !ol %obailla Sensiti#ity Analysis -( I t)e operating operating inco$e inco$e $argin o .(> .(> staye t)e sa$e sa$e an t)e operating operating asset asset turno#er o o -(. increase by '. percent/ t)e ROI 6M7 a( increase by '. percent ( re$ain t)e sa$e b( ecrease by '. percent e( increase to '(-( c( increa increase se by by '- perc percent ent 4&M 9( I t)e in#est$ent in#est$ent turno#er turno#er increase increase by 0.3 an ROS ecrease ecrease by >.3/ t)e ROI *oul *oul 6M7 a( Increase by 0.3( c( Increase by 83( b( Decrease by '93( ( None o t)e abo#e( D/ & 4 =e :( I t)e in#est$ent in#est$ent turno#er turno#er ecrease by 0.3 an an ROS ecrease ecrease by >.3/ t)e ROI *oul *oul 6M7 a( Increase by >.3( c( Decrease by 883( b( Decrease by 0.3( ( None o t)e abo#e( D/ & 4 =e
!age ' o 0'
MANAGEMENT ADVISORY SERVICES 1( Co$pany Co$pany )a its operating operating asset asset turno#er turno#er increase increase by -.3 an t)e operating operating inco$e inco$e $argin increase by -.3( Co$pany " )a its operating asset turno#er increase by >.3 an t)e operating inco$e inco$e $argin ecrease ecrease by >.3( B)at c)anges are e@pecte e@pecte or ROI o Co$pany an Co$pany "/ respecti#ely5 6M7 !ol %obailla A( %( C( D( Co$pany -.3 increase '0-3 increase 00-3 increase '0-3 increase Co$pany " =3 ecrease =3 ecrease No c)ange No c)ange
=( RE% Ser#ice Ser#ice Co( Co( is a co$pute co$puterr ser#ice ser#ice center( center( ?or t)e $ont) $ont) o May '==-/ '==-/ RE% )a t)e ollo*ing statistics+ Sales ,8-./... Operating inco$e 0-/... Net proit ater ta@es 1/... Total assets -../... S)are)olersF e2uity 0../... Cost o capital 93 %ase on t)e abo#e inor$ation/ *)ic) one o t)e ollo*ing state$ents is correct5 RE% )as a 6M7 a( ROI o 83 c( ROI o '(93 CMA .9=- >0. b( Resiual inco$e o ,6-/...7 ( Resiual inco$e o ,600/...7
10.
James Webb is the the general general manager manager of the Industrial Industrial Park Division, Division, and his performance performance is measured using using the residual income income method. Webb is reviewing the following forecasted information for the division for net !ear. Category A$ount 6t)ousans7 Bor;ing capital , '/1.. Re#enue >./... !lant an e2uip$ent ':/0.. To establis) s) a stanar o peror$ance or t)e i#isionFs $anager using t)e resiual inco$e approac)/ our scenarios scenarios are being consiere( Scenario ' assu$es an i$pute interest c)arge o '-3 an a target resiual inco$e inco$e o ,0/.../...( Scenario 0 assu$es an i$pute interest c)arge c)arge o '03 an a target resiual resiual inco$e o ,'/-../...( Scenario > assu$es an i$pute interest interest c)arge o '13 an a target resiual inco$e inco$e o ,'/0-./...( Scenario 8 assu$es an i$pute interest c)arge o '.3 an a target resiual inco$e o ,0/-../...(
C4IANG AI S4E COEGE
Responsibility Accounting & Transer !ricing B)ic) o t)e scenarios assu$es t)e lo*est $a@i$u$ cost5 6M7 a( Scenario '( c( Scenario >( b( Scenario 0( ( Scenario 8(
Glei$
Return on In#est$ent ''( ?ortree proucts proucts )a#e a resiual net inc inco$e o$e o !'(1 $illion( $illion( I t)e i$pute interest interest rate is '93/ co$pute t)e ROI 6M7 a( - 3 c( '-3 b( '. '.3 ( no not liste R!C!A '.=' '0( Di#ision Di#ision o JY Corp( )as t)e ollo*ing inor$atio inor$ationn or 0..0+ Assets a#ailable or Target rate o return Resiual inco$e B)at *as Di#ision
,'/1../... '.3 ,0:./... %ariel
'>( !asta Di#ision Di#ision o Be Ma;e Italian/ is e#aluate e#aluate base on resiual inco$e inco$e generate( ?or 0..0/ t)e Di#ision generate a resiual inco$e o ,0/.../... an net inco$e o ,-/.../...( T)e target rate o return or all i#isions o Be Ma;e Italian is 0. percent( ?or 0..0/ *)at *as t)e return on in#est$ent or !asta Di#ision5 6M7 a( 8 .3 c( 0.3 b( ' >3 ( >>3 %ariel In#est$ent Cost '8( In t)e J Di#ision o S Co(/ 0..0 seg$ent inco$e inco$e e@ceee 0..0 resiual inco$e inco$e by ,'-/...( Also or 0..0/ return on in#est$ent e@ceee t)e target rate o return by '. percent( B)at *as t)e le#el o in#est$ent in t)e J Di#ision or 0..05 6M7 a( , ''-/ .. ... b( , '. '.. /. /.. . c( , ''-. /. /.. . ( An ans*er can
MANAGEMENT ADVISORY SERVICES
Responsibility Accounting & Transer !ricing
Huestions '- t)ru ': are base on t)e ollo*ing inor$ation( G & N =e T)e A@le Di#ision o a%ate Co$pany $a;es an sells only one prouct( Annual ata on t)e A@le Di#ision. Total i@e costs ,0../... A#erage operating assets ,:-./... Mini$u$ re2uire rate o return '03 '-( I A@le sells '9/... units per year/ t)e return on in#est$ent s)oul be+ 6M7 a( '03( c( '93( b( '-3( ( '13( '9( I A@le sells '-/... units per year/ t)e resiual inco$e s)oul be+ 6M7 a( ,>./...( c( ,-./...( b( ,'../...( ( ,'./...(
G & N =e
':( Suppose t)e $anager o A@le esires an annual resiual inco$e o ,8-/...( In orer to ac)ie#e t)is/ A@le s)oul sell )o* $any units per year5 6M7 a( '8/-..( c( '1/0-.( b( '9/:-.( ( '=/-..( G & N =e
'1( Di#ision A )a t)e ollo*ing inor$ation+ Asset base in Di#ision A Net inco$e in Di#ision A Operating inco$e $argin or Di#ision A Target ROI Beig)tea#erage cost o capital B)at is EVA or Di#ision A5 a( ,'0./... b( ,=9/... c ( , '- /. ..
C4IANG AI S4E COEGE
,1../... ,'../... 0.3 '-3 '03 ( ,8/... e( ,60./...7 4&M
'=( Batne Co$pany )as t*o i#isions/ M an N( Inor$ation or eac) i#ision is as ollo*s+ Net earnings or i#ision ,9-/... Asset base or i#ision ,>../... Target rate o return '13 Operating inco$e $argin 0.3 Beig)te a#erage cost o capital '03 B)at is EVA or N5 a( , >9/... c( ,-8/... b( ,0=/... ( ,''/... 4&M 0.( ?a$ily Co$pany )as t*o i#isions/ Ma an !a( Inor$ation or eac) i#ision is as ollo*s+ Ma !a Net earnings or i#ision !0./... !9-/... Asset base or i#ision !-./... !>../... Target rate o return '-3 '13 Operating inco$e $argin '.3 0.3 Beig)tea#erage cost o capital '03 '03 B)at is t)e Econo$ic Value Ae or Ma an !a/ respecti#ely5 A( !0./.../ !>9/... C( !'0/-.. !''/... %( !'8/... !0=/... D( !0./... !0=/... !ol %obailla EVA Gi#en Operating Inco $e %eore Ta@ 0'( McenKie Oil )a ,88./... in operating inco$e beore interest an ta@es in t)e last year( McenKie is in t)e 8.3 ta@ brac;et( I capital e$ploye by McenKie *as e2ual to ,>../.../ an t)e co$pany'/... C( ,'=1/... %( ,'8./... D( ,0'=/... Glei$ 00( Valecon Co( reporte t)e ollo*ing inor$ation or t)e year Lust ene+ Seg$ent A Seg$ent % !reta@ operating inco$e , 8/.../... , 0/.../... Current assets 8/.../... >/.../... ongter$ assets '9/.../... '>/.../... Current liabilities 0/.../... '/.../...
Seg$ent C ,>/.../... 8/.../... 1/.../... '/-../...
!age > o 0'
MANAGEMENT ADVISORY SERVICES
Responsibility Accounting & Transer !ricing
I t)e applicable inco$e ta@ rate an aterta@ *eig)tea#erage cost o capital or eac) seg$ent are >.3 an '.3/ respecti#ely/ t)e seg$ent *it) t)e )ig)est econo$ic #alue ae 6EVA7 is 6M7 A( Seg$ent A( C( Seg$ent C( Glei$ %( Seg$ent %( D( Not eter$inable ro$ t)is inor$ation( 0>( Assu$e A#ionics Inustries reporte at yearen t)at operating inco$e beore ta@es or t)e year e2uale ,0/8../...( ongter$ ebt issue by A#ionics )as a coupon rate e2ual to 93/ an its cost o e2uity is 13( T)e boo; #alue o t)e ebt currently e2uals its air #alue/ an t)e boo; #alue o t)e e2uity capital or A#ionics is ,=../... less t)an its air #alue( Current assets are liste at ,0/.../... an longter$ assets e2ual ,=/9../...( T)e clai$s against t)ose assets are in t)e or$ o ,'/-../... in current liabilities an ,0/0../... in longter$ liabilities( T)e inco$e ta@ rate or A#ionics is >.3( B)at is t)e econo$ic #alue ae 6EVA75 6D7 a( ,:>'/08. c( ,'/991/:9. b( ,=81/:9. ( ,'/91./... Glei$ Huestions 08 t)ru 09 are base on t)e ollo*ing inor$ation( 4orngren Waldorf Company has two sources of funds: long-term debt with a market and book value of $10 million issued at an interest rate of 12! and e"uity capital that has a market value of $# million book value of $% million&' Waldorf Company has profit centers in the following locations with the following operating incomes! total assets! and total liabilities' (he cost of e"uity capital is 12! while the ta) rate is 2*' Operating Inco$e Assets Current iabilities St( ouis , =9./... , 8/.../... , 0../... Cear Rapis ,'/0../... , 1/.../... , 9../... Bic)ita ,0/.8./... ,'0/.../... ,'/0../... 08( B)at is t)e EVA or St( ouis5 6M7 a( ,0--/:8. c( ,>=0/-8. b( ,>0:/89. ( ,:0./... 0-( B)at is t)e EVA or Cear Rapis5 6M7 a( ,'>-/-1. b( ,00./...
c( ,0>8/... ( ,>.-/...
09( B)at is t)e EVA or Bic)ita5 6M7 a( ,8-./...
c(
C4IANG AI S4E COEGE
,8'8/>9.
b( ,'/->./...
( ,'/''-/98.
EVA Co$putation Gi#en Operating Inco$e ater Ta@ 0:( Sa$o#ar Co$pany )as operating inco$e ater ta@es o ,-./...( It )as ,0../... o e2uity capital/ *)ic) )as an aterta@ *eig)tea#erage cost o '03( Sa$o#ar also )as ,'./... o current liabilities 6noninterestbearing7 an no longter$ liabilities( B)at is t)e co$pany./... Co$pany D --/... 0-./... '-3 -/... %ase on largest EVA an assu$ing t)at none o t)e co$panies )a#e any longter$ liabilities/ *)ic) co$pany s)oul Ralp) in#est in5 A( Co$pany A( C( Co$pany C( %( Co$pany %( D( Co$pany D( Glei$ Huestions 0= t)ru >' are base on t)e ollo*ing inor$ation( Glei$ Se$ibar Co( reports net inco$e o ,9>./...( T)e inor$ation belo* or t)e year Lust ene is also a#ailable+ anuary ' Dece$ber >' S)are)olersF e2uity ,8/0../... ,8/81./... S)are price ,0,>. S)ares outstaning 8../... 8../... Cost o e2uity '.3 '.3 Di#iens per s)are ,'(.. 0=( E2uity #alue creation is a( ,9>./... b( ,881/...
c( ,80./... ( ,0'./... !age 8 o 0'
MANAGEMENT ADVISORY SERVICES
Responsibility Accounting & Transer !ricing >.( T)e $ar;et #alue ae 6MVA7 is a( ,0/.../... b( ,'/:0./...
c( ,8../... ( ,01./...
>'( T)e total s)are)oler return is a( 083 b( 0.3
c( '9(9:3 ( 83
>0( Apple Di#ision o t)e A$erican ?ruit Co( )a t)e ollo*ing statistics or 0..0+ Assets a#ailable or u se ,'/.../... Resiual inco$e '../... Return on in#est$ent '-3 I e@penses increase by ,0./... in Apple Di#ision/ 6E7 a( return on in #est$ent *oul ecrease( c( t)e target rate o return *oul ecrease( b ( r es i ua l i nc o$e * ou l i nc re as e( ( a ss et t ur no #e r * ou l ec re as e( % ar i el >>( Di#ision A )a t)e ollo*ing inor$ation+ Asset base in Di#ision A ,1../... Net inco$e in Di#ision A ,'../... Operating inco$e $argin or Di#ision A 0.3 Target ROI '-3 Beig)tea#erage cost o capital '03 I t)e asset base is ecrease by ,0../.../ *it) no ot)er c)anges/ t)e return on in#est$ent o Di#ision A *ill be a( '..(.3 ( 90(-3 b( '9(:3 e( 0.(.3 c ( 9 .. (. 3 4&M
C4IANG AI S4E COEGE
!age - o 0'
MANAGEMENT ADVISORY SERVICES
Responsibility Accounting & Transer !ricing
Huestions >8 t)roug) >1 are base on t)e ollo*ing inor$ation( AIC!A ''19 II00 to 09 Oslo Co(Fs inustrial p)otoinis)ing i#ision/ R)o/ incurre t)e ollo*ing costs an e@penses in '==0+ Variable ?i@e Direct $aterials ,0../... Direct labor '-./... ?actory o#er)ea :./... ,80/... General/ selling an a$inistrati#e >./... 81/... Totals ,8-./... ,=./...
Huestions >= t)roug) -' are base on t)e ollo*ing inor$ation( Seg$ent A Seg$ent % Seg$ent C Net inco$e , -/... Sales 9./... ,:-./... ,'>-/... In#est$ent 08/... -../... 8-/... Net inco$e as 3 o sales Turno#er o in#est$ent ROI 0.3 Mini$u$ ROIollars Mini$u$ ROI 3 0.3 93 Resiual inco$e . ,0/0-.
During '==0/ R)o prouce >../... units o inustrial p)otoprints/ *)ic) *ere sol or ,0(.. eac)( OsloFs in#est$ent in R)o *as ,-../... an ,:../... at anuary '/ '==0 an Dece$ber >'/ '==0/ respecti#ely( Oslo nor$ally i$putes interest on in#est$ents at '-3 o a#erage in#este capital(
>=( ?or Seg$ent %/ net inco$e as a percentage o sales is a( 13 c( 83 b( 9(9:3 ( '.3
>8( ?or t)e yearene Dece$ber >'/ '==0/ R)oFs return on a#erage in#est$ent *as a( '-(.3 c( 1(93 b( '.(.3 ( 6-(.37
8.( ?or Seg$ent C/ net inco$e as a percentage o sales is a( -3 c( 83 b( 9(9:3 ( 0.3
>-( Assu$e t)at net operatin g inco$e *as ,9./... an t)at a#erage in#este capit al *as ,9../...( ?or t)e year ene Dece$ber >'/ '==0/ R)oFs resiual inco$e 6loss7 *as a( ,'-./... c( ,68-/...7 b( ,9./... ( ,6>./...7
8'( ?or Seg$ent C/ t)e turno#er o in#est$ent is a( > c( 0(b( '(( 8
>9( 4o* $any inustrial p)otoprint units i R)o )a#e to sell in '==0 to brea;e#en5 a( '1./... c( = ./... b( '0./... ( 9./... >:( ?or t)e year ene Dece$ber >'/ '==0/ R)oFs contribution $argin *as a( ,0-./... c( ,'-./... b( ,'1./... ( ,9./... >1( Assu$e t)e #ariable cost per unit *as ,'(-.( %ase on R)oFs '==0 inancial ata/ an an esti$ate '==> prouction o >-./... units o inustrial p)otoprints/ R)oFs esti$ate '==> total costs an e@penses *ill be a( ,-0-/... c( ,9'-/... b( ,-8./... ( ,9>./... C4IANG AI S4E COEGE
Glei$ Seg$ent D , =./... '/1../... :(-3 ,'0./...
80( ?or Seg$ent D/ t)e turno#er o in#est$ent is a( > c( 0(b( '(( 8 8>( ?or seg$ent A/ ROI is a( 93 b( 0.3
c( 0.(13 ( :(-3
88( ?or seg$ent %/ ROI is a( 93 b( 0.(13
c( 0.3 ( :(-3
!age 9 o 0'
MANAGEMENT ADVISORY SERVICES
Responsibility Accounting & Transer !ricing
8-( ?or seg$ent A/ t)e $ini$u$ ollar ROI is a( ,>./... b( ,9/:-.
c( , 8/1.. ( ,'0./...
89( ?or Seg$ent %/ t)e $ini$u$ ollar ROI is a( ,>./... b( ,9/:-.
c( , 8/1.. ( ,'0./...
8:( ?or Seg$ent C/ t)e $ini$u$ ollar ROI is a( ,>./... b( ,9/:-.
c( , 8/1.. ( ,'0./...
81( Assu$e t)at t)e $ini$u$ ollar ROI is ,9/:-. or Seg$ent C( T)e $ini$u$ percentage o ROI is a( 0.3 c( '-3 b( 93 ( '.3 8=( In Seg$ent D/ t)e $ini$u$ percentage o ROI is a( 0.3 c( '-3 b( 93 ( '.3 -.( In Seg$ent A/ t)e resiual inco$e is a( ,0.. b( ,'0/...
c( ,6>./...7 ( ,8/1..
-'( In Seg$ent D/ t)e resiual inco$e is a( ,'0/... b( ,6>./...7
c( ,69./...7 ( ,=/...
-0( During April/ Di#ision D o Carney Co$pany )a a seg$ent $argin ratio o '-3/ a #ariable e@pense ratio o 9.3 o sales/ an traceable i@e e@penses o ,'-/...( Di#ision D>/>>>( b( ,9./...( ( ,00/-..( G & N =e
C4IANG AI S4E COEGE
->( Assu$e t)e ollo*ing inor$ation or a prouct line+ Sales re#enue Variable $anuacturing costs Direct i@e $anuacturing costs Variable sellinga$inistrati#e costs Direct i@e sellinga$in( costs B)at is t)e seg$ent $argin o t)e prouct line5 6E7 a( ,8../... ( ,0:-/... b( ,>0-/... e( ,0'-/... c( ,>-./...
,-../... '../... :-/... -./... 9./...
4&M
-8( T)e ata a#ailable or t)e current year are gi#en belo*+ B) ole Co( Di#isio n ' Di#ision 0 Variable $g( cost o goos sol , 8 ../... , 00./... , 1 ./... "nallocate costs 6e(g(/ presientFs salary7 '../... ?i@e costs controllable by Di#( Managers 6e(g(/ a#ertising/ engFg super#ision costs7 =./... -./... 8./... Net re#enue '/.../... 9../... 8../... Variable selling an a$inistrati#e costs '>./... :./... 9./... ?i@e costs controllable by ot)ers 6e(g(/ epreciation/ insurance7 '0./... :./... -./... "sing t)e inor$ation presente abo#e/ t)e contribution by Di#ision ' *as 6M7 a( ,'=./... c( ,>'./... b( ,09./... ( ,>1./... CIA ''19 IV': --( A an % are autono$ous i#isions o a corporation( T)ey )a#e no beginning or enin g in#entories/ an t)e nu$ber o units prouce is e2ual to t)e nu$ber o units sol( ?ollo*ing is inancial inor$ation relating to t)e t*o i#isions( A % Sales ,'-./... ,8../... Ot)er re#enue './... '-/... Direct $aterials >./... 9-/... Direct labor 0./... 8./... Variable actory o#er)ea -/... '-/... ?i@e actory o#er)ea 0-/... --/... Variance S&A e@pense '-/... >./... ?i@e S&A e@pense >-/... 9./... !age : o 0'
MANAGEMENT ADVISORY SERVICES Central corporate e@penses 6allocate7 '0/... 0./... B)at is t)e total contribution to corporate proits generate by Di#ision A beore allocation o central corporate e@penses5 6M7 a( , '1/... c( ,>./... b( , 0./... ( , 1./... CIA ''=> IV0. -9( yons Co$pany consists o t*o i#isions/ A an %( yons Co$pany reporte a contribution $argin o ,-./... or Di#ision A/ an )a a contribution $argin ratio o >.3 in Di#ision %/ *)en sales in Di#ision % *ere ,0../...( Net inco$e or t)e co$pany *as ,0-/... an traceable i@e e@penses *ere ,8./...( yons Co$pany-./... c ( , 9. ./ .. . 4&M Huestions -1 & -= are base on t)e ollo*ing inor$ation( 4&M %ar$ore Co$pany )as t)e ollo*ing inor$ation pertaining to its t*o i#isions or '==-+ Di#ision A Di#ision % Variable selling & a$inistrati#e e@penses , >-/... , 8-/... Direct i@e $anuacturing e@penses ':/-.. -./... Sales '../... 0../... Direct i@e sellinga$in( E@penses '-/... >-/... Variable $anuacturing e@penses 0./... -./... Co$$on e@penses are ,'0/... or '==-( -1( Co$$on e@penses are ,'0/... or '==-( B)at is t)e seg$ent $argin or Di#ision %5 6E7 a( ,'--/... ( ,0./... b( ,'.-/... e( ,1/... c( ,- -/. .. C4IANG AI S4E COEGE
Responsibility Accounting & Transer !ricing -=( B)at is t)e net inco$e or t)e %ar$ore Co$pany5 6E7 a( ,>../... ( ,>0/-.. b( ,'90/-.. e( ,0./-.. c ( , '- ./ .. . Huestions 9. & 9' are base on t)e ollo*ing inor$ation( G & N =e Canon Co$pany )as t*o sales areas+ Nort) an Sout)( During last year/ t)e contribution $argin in t)e Nort) Area *as ,-./.../ or 0.3 o sales( T)e seg$ent $argin in t)e Sout) *as ,'-/.../ or 13 o sales( Traceable i@e costs are ,'-/... in t)e Nort) an ,'./... in t)e Sout)( During last year/ t)e co$pany reporte total net inco$e o ,09/...( 9.( T)e #ariable costs or t)e Sout) Area or t)e year *ere+ 6M7 a( ,0>./...( c( ,'90/-..( b( ,'1-/...( ( ,9-/...( 9'( T)e total i@e costs 6traceable an co$$on7 or Canon Co$pany or t)e year *ere+ 6M7 a( ,8=/...( c( ,08/...( b( ,0-/...( ( ,-./...( Huestions 90 t)ru 98 are base on t)e ollo*ing inor$ation( 4&M Nau$an Co$pany )as t)e ollo*ing inor$ation pertaining to its t*o i#isions or '==-+ Di#ision J Di#ision Y Variable selling & a$inistrati#e e@penses , :./... , =./... Direct i@e $anuacturing e@penses >-/... '../... Sales 0../... 8../... Direct i@e sellinga$in( e@penses >./... :./... Variable $anuacturing e@penses 8./... '../... Co$$on e@penses are ,08/... or '==-( 90( B)at is t)e net inco$e or t)e Nau$an Co$pany5 6E7 a( ,9../... ( ,9-/... b( ,>0-/... e( ,8'/... c ( , >. ./ .. . 9>( B)at is t)e seg$ent $argin or Di#ision J5 6E7 a( ,=./... ( ,'9./... b( ,0-/... e( ,'0-/... c( ,'/... !age 1 o 0'
MANAGEMENT ADVISORY SERVICES
Responsibility Accounting & Transer !ricing
98( B)at is t)e seg$ent $argin or Di#ision Y5 6E7 a( ,>'./... ( ,8./... b( ,0'./... e( ,'9/... c ( , ''. /. .. Huestions 9- t)ru 91 are base on t)e ollo*ing inor$ation( G & N =e Ieso Co$pany )as t*o stores+ an ( During No#e$ber/ Ieso Co$pany reporte a net inco$e o ,>./... an sales o ,8-./...( T)e contribution $argin in Store *as ,'../.../ or 8.3 o sales( T)e seg$ent $argin in Store *as ,>./.../ or '-3 o sales( Traceable i@e e@penses are ,9./... in Store / an ,8./... in Store ( 9-( Sales in Store totale+ 6M7 a( ,8../...( b( ,0-./...(
c( ,'-./...( ( ,'../...(
99( Variable e@penses in Store totale+ 6M7 a( ,:./...( b( ,''./...(
c( ,0../...( ( ,'>./...(
9:( T)e seg$ent $argin ratio in Store *as+ 6M7 a( '93( c( 8.3( b( 083( ( 9.3( 91( Ieso Co$pany Volu$e 6in units7 0./... 01/... -./... Sales re#enue ,0/.../... ,1../... ,:../... ,-../... Costs & e@penses+ A$inistrati#e , '1./... , 9./... , 9./... , 9./... A#ertising 08./... =9/... 18/... 9./... Co$$issions 8./... '9/... '8/... './... C4IANG AI S4E COEGE
Cost o sales =1./... >9./... 80./... 0../... Rent 01./... 18/... '8./... -9/... Salaries ''./... -8/... >0/... 08/... Total costs & e@penses ,'/1>./... ,9:./... ,:-./... ,8'./... Operating inco$e 6loss7 , ':./... ,'>./... ,6-./...7 , =./... T)e co$pany buys t)e goos in t)e t)ree prouct lines irectly ro$ $anuacturers< representati#es( Eac) prouct line is irecte by a $anager *)ose salary is inclue in t)e a$inistrati#e e@penses( A$inistrati#e e@penses are allocate to t)e t)ree prouct lines e2ually because t)e a$inistration is sprea e#enly a$ong t)e t)ree prouct lines( Salaries represent pay$ents to t)e *or;ers in eac) prouct line an t)ereore are traceable costs o eac) prouct line( A#ertising pro$otes t)e entire co$pany rat)er t)an t)e ini#iual prouct lines( As a result/ t)e a#ertis ing is allocate to t)e t)ree prouct lines in proportio n to t)e sales re#enue( Co$$issions are pai to t)e salespersons in eac) prouct line base on 03 o gross sales( Rent represents t)e cost o t)e retail store an *are)ouse uner a lease agree$ent *it) - years re$aining( T)e prouct lines s)are t)e retail an *are)ouse space/ an t)e rent is allocate to t)e t)ree prouct lines base on t)e s2uare ootage occupie by eac) o t)e prouct lines( 9=( T)e seg$ente inco$e state$ent or t)is retail co$pany oes not acilitate peror$ance e#aluation because it oes not istinguis) bet*een controllable an uncontrollable costs( T)e only costs an e@penses controllable at t)e prouctline le#el or t)is retail co$pany are 6M7 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$inistration/ a#ertising/ an rent( :.( T)e co$pany )as an opportunity to pro$ote one o its prouct lines by $a;ing a oneti$e ,:/... e@peniture( T)e co$pany can c)oose only one o t)e t)ree prouct lines to pro$ote( T)e incre$ental sales re#enue t)at *oul be realiKe ro$ t)is ,:/... pro$otion e@peniture in eac) o t)e prouct lines is esti$ate as ollo*s+ Increase in Sales Re#enue !rouct ine ' ,'-/... !rouct ine 0 0./... !rouct ine > '8/... In orer to $a@i$iKe proits/ t)e pro$otion e@peniture s)oul be spent on ist AP/ resulting in an increase in operating inco$e o ist %P( 6M7 A( %( C( D( ist A !rouct ine 0 !rouct ine 0 !rouct ine > !rouct ine > ist % ,'>/... ,-/... ,'/8.. ,'/'0. !age = o 0'
MANAGEMENT ADVISORY SERVICES :'( One co$pany e@ecuti#e )as e@presse concern about t)e operating loss t)at )as occurre in !rouct ine 0 an )as suggeste t)at !rouct ine 0 be iscontinue( I !rouct ine 0 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 inicate t)at t)e nature o t)e co$pany8/. ..( %( Decrease by ,=8/...( D( Increase by ,8'9/...( :0( A custo$er/ operating in an isolate oreign $ar;et/ )as approac)e t)e )ea salesperson or !rouct ine ' an oere to purc)ase 8/... units o a specialorer prouct o#er t)e ne@t '0 $ont)s( T)is prouct *oul be sol in t)e sa$e $anner as !rouct ine '. D( ,>.(0.
Eect on !roit :>( ALa@ Di#ision o Carly le Corporatio n prouces electric $otors/ 0.3 o *)ic) are sol to %raley Di#ision o Carlyle an t)e re$ainer to outsie custo$ers( Carlyle treats its i#isions as proit centers an allo*s i#ision $anagers to c)oose t)eir sources o sale an supply( Corporate policy re2uires t)at all interi#isional sales an purc)ases be recore at #ariable cost as a transer price( ALa@ Di#isionFs esti$ate sales an stanar cost ata or t)e year ening Dece$ber >'/ 0.../ base on t)e ull capacity o '../... units/ are as ollo*s+ %raley Outsiers Sales ,=../... ,1/.../... Variable costs 6=../...7 6>/9../...7 ?i@e costs 6>../...7 6'/0../...7 Gross $argin ,6>../...7 ,6>/0../...7 "nit sales 0./... 1./...
C4IANG AI S4E COEGE
Responsibility Accounting & Transer !ricing ALa@ )as an opp ortunity to sell t)e abo#e 0. /... units to a n outsie custo $er at a price o ,:per unit uring 0... on a continuing basis( %raley can purc)ase its re2uire$ents ro$ an outsie suppler at a price o ,1- per unit( Assu$ing t)at ALa@ Di#ision esir es to $a@i$iKe its gross $argin/ s)oul ALa@ ta;e o n t)e ne* custo$er an rop its sales to %raley or 0.../ an *)y5 a( No/ because t)e gross $argin o t)e corporation as a *)ole *oul ecrease by ,0../...( b( Yes/ because ALa@ Di#isionFs gross $argin *oul increase by ,>../...( c( Yes/ because ALa@ i#isionFs gross $argin *oul increase by ,9../...( ( No/ because %raley Di#isionFs gross $argin *oul ecrease by ,1../...( Mini$u$ !rice :8( 4ouston Di#ision o Te@acon/ Inc( e@pects t)e ollo*ing result or 0..8+ "nits sales :./... "nits selling price !'. "nit #ariable cost ! 8 Total i@e costs !>../... Total in#est$ent !-../... T)e $ini$u$ re2uire ROI is '-3/ an i#isions are e#aluate on resiual inco$e( A oreign custo$er )as approac)e 4oustonFs $anager *it) an oer to buy './... units at !: eac)( I 4ouston accepts t)e orer/ it *oul not lose any o t)e :./... units at t)e regular price( Accepting t)e orer *oul increase i@e costs by !'./... an in#est$ent by !8./...( B)at is t)e $ini$u$ price t)at 4ouston coul accept or t)e orer an still $aintain its e@pecte resiual inco$e5 A( !-(.. C(!8(:%( !-(9. D( !=(.. !ol %obailla Ma@i$u$ ost "nits :-( 4ouston Di#ision o Te@acon/ Inc( e@pects t)e ollo*ing result or 0..8+ "nits sales :./... "nits selling price !'. "nit #ariable cost ! 8 Total i@e costs !>../... Total in#est$ent !-../... T)e $ini$u$ re2uire ROI is '-3/ an i#isions are e#aluate on resiual inco$e( A oreign custo$er )as approac)e 4oustonFs $anager *it) an oer to buy './... units at !: eac)( I 4ouston accepts t)e orer/ it *oul not lose any o t)e :./... units at t)e regular price( Accepting t)e orer *oul increase i@e costs by !'./... an in#est$ent by !8./...( !age '. o 0'
MANAGEMENT ADVISORY SERVICES At t)e price o !: oere by oreign custo$er/ *)at is t)e $a@i$u$ nu$ber o units in r egular sales t)at 4ouston coul sacriice an still $aintain its e@pecte resiual inco$e5 A( 0/>>> C( 0/99: %( >/>>> D( >/99: !ol %obailla
Responsibility Accounting & Transer !ricing ::( A transer price base on #ariable cost *ill be set at QQQQQQQQQQQ per unit( a( ,.(-. c( ,.(=b( ,.(1. ( ,.(::1( A transer price base on ull prouction cost *oul be set at QQQQQQQQQQQ per unit( a( ,.(:c( ,'(8b( ,0('. ( ,'(9.
:9( T)e $anage$ent o a$es Corporation )as ecie to i$ple$ent a transer pricing syste$( a$esF MIS epart$ent is currently negotiating a transer price or its ser#ices *it) t)e our proucing i#isions o t)e co$pany as *ell as t)e $ar;eting epart$ent( C)arges *ill be assesse base on nu$ber o reports 6assu$e t)at all reports re2uire t)e sa$e a$ount o ti$e an resources to prouce7( T)e cost to operate t)e MIS epart$ent at its ull capacity o '/... reports per year is bugete at ,8-/...( T)e user subunits e@pect to re2uest 0-. reports eac) t)is year( T)e cost o te$porary labor an aitional acilities use to prouce reports beyon capacity is bugete at ,81(.. per report( a$es coul purc)ase t)e sa$e ser#ices ro$ an e@ternal Inor$ation Ser#ices ir$ or ,:./...( B)at a$ounts s)oul be use as t)e ceiling an t)e loor in eter$ining t)e negotiate transer price5 a( b( c( ( ?loor ,>9(.. ,8-(9. ,81(.. ,-:(.. Ceiling ,-9(.. ,-9(.. ,:.(.. ,10(.. Huestions :: t)ru 1. are base on t)e ollo*ing inor$ation( %ariel %igole Corp( prouces #arious proucts use in t)e construction inustry( T)e !lu$bing Di#ision prouces an sells '../... copper ittings eac) $ont)( Rele#ant inor$ation or last $ont) ollo*s+ Total sales 6all e@ternal7 ,0-./... E@penses 6all on a unit base7+ Variable $anuacturing ,.(-. ?i@e $anuacturing (0Variable selling (>. ?i@e selling (8. Variable G&A ('?i@e G&A (-. Total ,0('. Tople#el $anagers are trying to eter$ine )o* a transer price can be set on a transer o './... o t)e copper ittings ro$ t)e !lu$bing Di#ision to t)e %at)roo$ !roucts Di#ision(
C4IANG AI S4E COEGE
:=( A transer price base on $ar;et price *oul be set at QQQQQQQQQQQ per unit( a( ,0('. c( ,'(9. b( ,0(-. ( ,0(01.( I t)e !lu$bing Di#ision is operate as an autono$ous in#est$ent center an its capacity is '../... ittings per $ont)/ t)e perunit transer price is not li;ely to be belo* a( ,.(:-( c( ,0('.( b( ,'(9.( ( ,0(-.( Mini$u$ Transer !rice 1'( T)e 4ig) Di#ision o !ara Co$pany prouces a )ig) 2uality ;ite( "nit prouction costs 6base on capacity prouction o '../... units per year7 ollo*+ Direct $aterials ! 9. Direct labor 0O#er)ea 60.3 #ariable7 'Ot)er inor$ation Sales price '0. Selling e@penses 6'-3 #ariable7 0. T)e 4ig) Di#ision is proucing an selling at capacity( B)at is t)e $ini$u$ selling price t)at t)e i#ision *oul consier as a transer price to t)e Recreation Di#ision on *)ic) no #ariable perio costs *oul be incurre5 6M7 a( !'0. c( ! =' b( ! 11 ( !'': !ol %obailla 10( T)e Motor Di#ision o Super Truc; Co( uses -/... carburetors per $ont) in its prouction o auto$oti#e engines( It presently buys all o t)e carburetors it nees ro$ t*o outsie suppliers at an a#erage cost o ,'..( T)e Carburetor Di#ision o Super Truc; Co( $anuactures t)e e@act type o carburetor t)at t)e Motor Di#ision re2uires( T)e Carburetor Di#ision is presently !age '' o 0'
MANAGEMENT ADVISORY SERVICES operating at its capacity o '-/... units per $ont) an sells all o its output to a oreign car $anuacturer at ,'.9 per unit( Its cost structure 6on '-/... units7 is+ Variable prouction costs ,:. Variable selling costs '. All i@e costs '. Assu$e t)at t)e Carbu retor Di#ision *oul n ot incur any #ariable selling costs on units t)at are transerre internally( B)at is t)e $ini$u$ o t)e transer price range or a transer bet*een t)e t*o i#isions5 6M7 a( ,=9 c( ,:. b( ,=. ( ,'.9 %ariel 1>( Di#ision A prouces a part *it) t)e ollo*ing c)aracteristics+ Capacity in units -./... Selling price per unit ,>. Variable costs per unit ,'1 ?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 outsie source at ,01 per unit( I Di#ision A sells to Di#ision %/ ,' in #ariable costs can be a#oie( Suppose Di#ision A is currently operating at capacity an can sell all o t)e units is prouces on t)e outsie $ar;et or its usual selling price( ?ro$ t)e point o #ie* o Di#ision A/ any sales to Di#ision % s)oul be price no lo*er t)an+ 6M7 a( ,0:( c( ,0.( b( ,0=( ( ,01( G & N =e Ma@i$u$ Transer !rice 18( T)e Motor Di#ision o Super Truc; Co( uses -/... carburetors per $ont) in its prouction o auto$oti#e engines( It presently buys all o t)e carburetors it nees ro$ t*o outsie suppliers at an a#erage cost o ,'..( T)e Carburetor Di#ision o Super Truc; Co( $anuactures t)e e@act type o carburetor t)at t)e Motor Di#ision re2uires( 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 $anuacturer at ,'.9 per unit( Its cost structure 6on '-/... units7 is+ Variable prouction costs ,:. Variable selling costs '. All i@e costs '.
C4IANG AI S4E COEGE
Responsibility Accounting & Transer !ricing Assu$e t)at t)e Carbur etor Di#ision *oul no t incur any #ariable selling costs on units t) at are transerre internally( B)at is t)e $a@i$u$ o t)e transer price range or a transer bet*een t)e t*o i#isions5 6M7 a( ,'.9 c( ,=. b( , '.. ( ,:. %ariel Eect on !roit Ma;e 1-( Di#ision A $a;es a part *it) t)e ollo*ing c)aracteristics+ !rouction capacity in units '-/... units Selling price to outsie custo$ers ,0Variable cost per unit ,'1 Total i@e costs ,9./... 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 outsie supplier at a price o ,08 eac)( Suppose t)at Di#ision A is operating at capacity an can sell all o its output to outsie custo$ers at its usual selling price( I Di#ision A sells t)e parts to Di#ision % at ,08 per unit 6Di#ision %Fs outsie price7/ t)e co$pany as a *)ole *ill be+ 6M7 a( better o by ,-/... eac) perio( b( *orse o by ,'-/... eac) perio/ c( *orse o by ,-/... eac) perio( ( t) er e *ill be no c) ang e in t) e stat us o t )e co$pan y as a *) ole( G &N =e 19( T)e Motor Di#ision o Super Truc; Co( uses -/... carburetors per $ont) in its prouction o auto$oti#e engines( It presently buys all o t)e carburetors it nees ro$ t*o outsie suppliers at an a#erage cost o ,'..( T)e Carburetor Di#ision o Super Truc; Co( $anuactures t)e e@act type o carburetor t)at t)e Motor Di#ision re2uires( 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 $anuacturer at ,'.9 per unit( Its cost structure 6on '-/... units7 is+ Variable prouction costs ,:. Variable selling costs '. All i@e costs '. Assu$e t)at t)e Carbur etor Di#ision *oul no t incur any #ariable selling costs on units t) at are transerre internally( I t)e t*o i#isions agree to transact *it) one anot)er/ corporate proits *ill 6M7 a( rop by ,>./... per $ont)( b( rise by ,0./... per $ont)( c( rise by ,-./... per $ont)( !age '0 o 0'
MANAGEMENT ADVISORY SERVICES ( rise or all by an a$ount t)at epens on t)e le#el o t)e transer price(
Responsibility Accounting & Transer !ricing %ariel
Co$pre)ensi#e Huestions 1: an 11 are base on t)e ollo*ing inor$ation( R!C!A .-1Rosas Corporation )as se#eral operating i#isions( T)ree i#isions are treate as proit centers an its i#ision $anagers are ree to c)oose t)eir sources o sale an supply( On e o its i#isions/ Gu$a$ela Di#ision/ $anuactures steel containers/ 0.3 o *)ic) are sol to Daisy Di#ision an t)e balance to outsie custo$ers( Interi#isional sales an purc)ases are recore at #ariable cost as a transer price( %ase on a ull capacity o '-./... units/ t)e esti$ate sales an stanar cost ata or Gu$a$ela Di#ision or t)e year '=1- are as ollo*s+ Daisy Outsiers Sales ! =../... ! =/9../... Variable costs 6=../...7 6>/9../...7 ?i@e costs 60../...7 61../...7 Gross $argin !60../...7 ! -/0../... "nit sales >./... '0./... Gu$a$ela )as t)e option to sell t)e abo#e >./... units to an outsie custo$er at a price o !-. per unit uring '=1- on a continuing basis( Daisy in turn $ay purc)ase its re2uire$ents ro$ an outsie supplier at a price o !9. per unit( 1:( Assu$ing t)at Gu$a$ela *is)es to i$pro#e its gross $argin/ s)oul Gu$a$ela accept t)e orer o t)e ne* custo$er/ an rop its sales to Daisy or '=1- an *)y5 6M7 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 !9../...( ( No/ because Daisy Di#isionFs gross $argin *oul ecrease by !=../...( 11( Assu$e/ )o*e#er/ t)at Rosa Corporation allo*s t)e i#ision $anagers to negotiate t)e transer price or '=1-( T)e $anagers agree on a tentati#e transer price o !-. per unit to be reuce base on an e2ual s)aring o t)e aitional gross $argin to Gu$a$ela resulting ro$ t)e sales to Daisy o >./... units at !-. per unit( T)e actual transer price or '=1*oul be 6M7 a( !>-(-. c( !8-(.. b( !8.(.. ( !-.(..
C4IANG AI S4E COEGE
Huestions 1= t)ru =' are base on t)e ollo*ing inor$ation( CMA .9=9 >09 to 01 !ar;sie/ Inc( )as se#eral i#isions t)at operate as ecentraliKe proit centers( !ar;sieFs Entertain$ent Di#ision $anuactures #ieo arcae e2uip$ent using t)e proucts o t*o o !ar;sieFs ot)er i#isions( T)e !lastics Di#ision $anuactures plastic co$ponents/ one type t)at is $ae e@clusi#ely or t)e Entertain$ent Di#ision/ *)ile ot)er less co$ple@ co$ponents are sol to outsie $ar;ets( T)e proucts o t)e Vieo Cars Di#ision are sol in a co$petiti#e $ar;et/ )o*e#er/ one #ieo car $oel is also use by t)e Entertain$ent Di#ision( T)e actual costs per unit use by t)e Entertain$ent Di#ision are presente belo*( !lastic Co$ponents Vieo Cars Direct $aterial , '(0, 0(8. Direct labor 0(>>(.. Variable o#er)ea '(.. '(-. ?i@e o#er)ea .(8. 0(0Total cost , -(.. , =('T)e !lastics Di#ision sells its co$$ercial proucts at ull cost plus a 0-3 $ar;up an belie#es t)e proprietary plastic co$ponent $ae or t)e Entertain$ent Di#ision *oul sell or ,9(0- per unit on t)e open $ar;et( T)e $ar;et price o t)e #ieo car use by t)e Entertain$ent Di#ision is ,'.(=1 per unit( 1=( A perunit transer price ro$ t)e Vieo Cars Di#ision to t)e Entertain$ent Di#ision at ull cost/ ,=('-/ *oul 6M7 a( Allo* e#aluation o bot) i#isions on a co$petiti#e basis( b( Satisy t)e Vieo Cars Di#isionFs proit esire by allo*ing reco#ery o opportunity costs( c( !ro#ie no proit incenti#e or t)e Vieo Cars Di#ision to control or reuce costs( ( Encourage t)e Entertain$ent Di#ision to purc)ase #ieo cars ro$ an outsie source( =.( Assu$e t)at t)e Entertain$ent Di#ision is able to purc)ase a large 2uantity o #ieo cars ro$ an outsie source at ,1(:. per unit( T)e Vieo Cars Di#ision )a#ing e@cess capacity/ agrees to lo*er its transer price to ,1(:. per unit( T)is action *oul 6M7 a( Opti$iKe t)e proit goals o t)e Entertain$ent Di#ision *)ile sub#erting t)e proit goals o !ar;sie/ Inc( b( Allo* e#aluation o bot) i#isions on t)e sa$e basis( c( Sub#ert t)e proit goals o t)e Vieo Cars Di#ision *)ile opti$iKing t)e proit goals o t)e Entertain$ent Di#ision( ( Opti$iKe t)e o#erall proit goals o !ar;sie/ Inc(
!age '> o 0'
MANAGEMENT ADVISORY SERVICES ='( Assu$e t)at t)e !lastic Di#ision )as e@cess capacity an it )as negotiate a transer price o ,-(9. per plastic co$ponent *it) t)e Entertain$ent Di#ision( T)is price *ill 6M7 a( Cause t)e !lastics Di#ision to reuce t)e nu$ber o co$$ercial plastic co$ponents it $anuactures( b( Moti#ate bot) i#isions as esti$ate proits are s)are( c( Encourage t)e Entertain$ent Di#ision to see; an outsie source or plastic co$ponents( ( De$oti#ate t)e !lastics Di#ision causing $eiocre peror$ance( Mini$u$ Transer !rice =0( Di#ision J o C)arter Corporation $a;es an sells a single prouct *)ic) is use by $anuacturers o or; lit truc;s( !resently it sells '0/... units per year to outsie custo$ers at ,08 per unit( T)e annual capacity is 0./... units an t)e #ariable cost to $a;e eac) unit is ,'9( Di#ision Y o C)arter Corporation *oul li;e to buy './... units a year ro$ Di#ision J to use in its proucts( T)ere *oul be no cost sa#ings ro$ transerring t)e units *it)in t)e co$pany rat)er t)an selling t)e$ on t)e outsie $ar;et( B)at s)oul be t)e lo*est acceptable transer price ro$ t)e perspecti#e o Di#ision J5 6D7 a( ,08(.. c( ,':(9. b( ,0'(8. ( ,'9(.. G & N =e =>( T)e !ost Di#ision o t)e M(T( Boo)ea Co$pany prouces basic posts *)ic) can be sol to outsie custo$ers or sol to t)e a$p Di#ision o t)e M(T( Boo)ea Co$pany( ast Year t)e a$p Di#ision boug)t all o its 0-/... posts ro$ !ost at ,'(-. eac)( T)e ollo*ing ata are a#ailable or last year../... posts Selling price per post to outsie custo$ers ,'(:Variable costs per post ,.(=. ?i@e costs/ total ,'-./... Suppose t)e transers o posts to t)e a$p Di#ision cut into sales to outsie custo$ers by '-/... units( B)at is t)e lo*est transer price t)at *oul not reuce t)e proits o t)e !ost Di#ision5 6D7 a( ,.(=.( c( ,'(8'( b( ,'(>-( ( ,'(:-( G & N =e
C4IANG AI S4E COEGE
Responsibility Accounting & Transer !ricing =8( T)e Vega Di#ision o Ace Co$pany $a;es *)eels *)ic) can eit)er be sol to outsie custo$ers or transerre to t)e Bals) Di#ision o Ace Co$pany( ast $ont) t)e Bals) Di#ision boug)t all 8/... o its *)eels ro$ t)e Vega Di#ision or ,80 eac)( T)e ollo*ing ata are a#ailable ro$ last $ont). I t)e Vega Di#ision sells *)eels to t)e Bals) Di#ision/ Vega can a#oi ,0 per *)eel in sales co$$issions( An outsie supplier )as oere to supply *)eels to t)e Bals) Di#ision or ,8' eac)( Suppose t)at Vega can sell =/... *)eels eac) $ont) to outsie consu$ers/ so transers to t)e Bals) Di#ision cut into outsie sales( B)at s)oul be t)e lo*est acceptable transer price ro$ t)e perspecti#e o t)e Vega Di#ision5 6VD7 a( ,01(.. c( ,8'(.. b( ,>'(:( ,80(.. G & N =e Eect on !roit Ma;e =-( Di#ision ! o Turbo Corporation )as t)e capacity or $a;ing :-/... *)eel sets per year an regularly sells 9./... eac) year on t)e outsie $ar;et( T)e regular sales price is ,'.. per *)eel set/ an t)e #ariable prouction cost per unit is ,9-( Di#ision H o Turbo Corporation currently buys 0./... *)eel sets 6o t)e ;in $ae by Di#ision !7 yearly ro$ an outsie supplier at a price o ,=. per *)eel set( I Di#ision H *ere to buy t)e >./... *)eel sets it nees annually ro$ Di#ision ! at ,1: 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+ 6D7 a( ,00-/...( c( ,-../...( b( ,>0-/... ( ,:-/...( G & N aapte Eect on !roit %uy =9( T)e !ost Di#ision o t)e M(T( Boo)ea Co$pany prouces basic posts *)ic) can be sol to outsie custo$ers or sol to t)e a$p Di#ision o t)e M(T( Boo)ea Co$pany( ast Year t)e a$p Di#ision boug)t all o its 0-/... posts ro$ !ost at ,'(-. eac)( T)e ollo*ing ata are a#ailable or last year../... posts Selling price per post to outsie custo$ers ,'(:Variable costs per post ,.(=. ?i@e costs/ total ,'-./... Suppose t)e transers o posts to t)e a$p Di#ision cut into sales to outsie custo$ers by '-/... units( ?urt)er suppose t)at an outsie supplier is *illing to pro#ie t)e a$p Di#ision !age '8 o 0'
MANAGEMENT ADVISORY SERVICES *it) basic posts at ,'(8- eac)( I t)e a$p Di#ision )a c)osen to buy all o its posts ro$ t)e outsie 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+ 6D7 a( ,'/0-. ecrease( c( , '/... ecrease( b( ,'./0-. increase( ( ,'>/:-. ecrease( G & N =e Mini$u$ Transer !rice =:( Di#ision A $a;es a part t)at it sells to custo$ers outsie o t)e co$pany( Data concerning t)is part appear belo*+ Selling price to outsie custo$ers ,8. Variable cost per unit ,>. Total i@e costs ,'./... Capacity in units 0./... Di#ision % o t)e sa$e co$pany *oul li;e to use t)e part $anuacture by Di#ision A in one o its proucts( Di#ision % currently purc)ases a si$ilar part $ae by an outsie co$pany or ,>1 per unit an *oul substitute t)e part $ae by Di#ision A( Di#ision % re2uires -/... units o t)e part eac) perio( Di#ision A )as a$ple capacity to prouce t)e units or Di#ision % *it)out any increase in i@e costs an *it)out cutting into sales to outsie custo$ers( I Di#ision A sells to Di#ision % rat)er t)an to outsie custo$ers/ t)e #ariable cost be unit *oul be ,' lo*er( B)at s)oul be t)e lo*est acceptable transer price ro$ t)e perspecti#e o Di#ision A5 6M7 a( ,8.( c( ,>.( b( ,>1( ( ,0=( G & N =e =1( Di#ision A prouces a part *it) t)e ollo*ing c)aracteristics+ Capacity in units -./... Selling price per unit ,>. Variable costs per unit ,'1 ?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 outsie source at ,01 per unit( I Di#ision A sells to Di#ision %/ ,' in #ariable costs can be a#oie( Suppose t)at Di#ision A )as a$ple ile capacity to )anle all o Di#ision %.( ( ,':( G & N =e C4IANG AI S4E COEGE
Responsibility Accounting & Transer !ricing Ma@i$u$ Transer !rice ==( Cline Co$pany )a t)e ollo*ing )istorical accounting ata per unit+ Direct $aterials ,0. Direct labor '. Variable $anuacturing o#er)ea ?i@e $anuacturing o#er)ea 1 Variable selling e@penses '?i@e selling e@penses > T)e units are nor$ally transerre internally ro$ Di#ision J to Di#ision Y( T)e units also $ay be sol e@ternally or ,:. per unit( T)e $ini$u$ proit le#el accepte by t)e co$pany is a $ar;up o >. percent( T)ere *ere no beginning or ening in#entories( I t)e negotiate price is use/ Di#ision JFs transer price s)oul be a( a $a@i$u$ o ,:.(.. ( a $ini$u$ o ,8.(.. b( a $ini$u$ o ,-'(.. e( a $ini$u$ o ,8>(..( c( a $a@i$u$ o ,99(>. 4&M Mini$u$ & Ma@i$u$ Transer !rice Huestions '.. & '.' are base on t)e ollo*ing inor$ation( G & N =e T)e Vega Di#ision o Ace Co$pany $a;es *)eels *)ic) can eit)er be sol to outsie custo$ers or transerre to t)e Bals) Di#ision o Ace Co$pany( ast $ont) t)e Bals) Di#ision boug)t all 8/... o its *)eels ro$ t)e Vega Di#ision or ,80 eac)( T)e ollo*ing ata are a#ailable ro$ last $ont)
'0/... *)eels ,8,>.
I t)e Vega Di#ision sells *)eels to t)e Bals) Di#ision/ Vega can a#oi ,0 per *)eel in sales co$$issions( An outsie supplier )as oere to supply *)eels to t)e Bals) Di#ision or ,8' eac)( '..(Suppose t)at t)e Vega Di#ision )as a$ple ile capacity so t)at transers to t)e Bals) Di#ision *oul not cut into its sales to outsie custo$ers( B)at s)oul be t)e lo*est acceptable transer price ro$ t)e perspecti#e o t)e Vega Di#ision5 6M7 a( ,01 c( ,80 b( ,>. ( ,8-
!age '- o 0'
MANAGEMENT ADVISORY SERVICES
Responsibility Accounting & Transer !ricing
'.'(B)at is t)e $a@i$u$ price per *)eel t)at Bals) s)oul be *illing to pay Vega5 6M7 a( ,01 c( ,80 b( ,8' ( ,8G & N =e Opti$al Transer !rice '.0(Di#ision o a co$pany prouces a co$ponent t)at it currently sells to outsie custo$ers or ,0. per unit( At its current le#el o prouction/ *)ic) is 9.3 o capacity/ Di#ision
!'.. >9 08
Nita Corp(Fs Depart$ent II is introucing a ne* prouct t)at *ill use co$ponent C( An outsie supplier )as 2uote Depart$ent II a price o !=9 per unit( T)is represents t)e usual !'.. price less a 2uantity iscount ue to t)e large nu$ber o Depart$ent IIFs re2uire$ents( T)e Co$pany )as transer price or$ula o+ Transer price Variable cost per unit U ost contribution $argin per unit on outsie sales( Depart$ent I )as enoug) e@cess capacity to )anle all o Depart$ent IIFs nees( ?or t)e o#erall interest o t)e co$pany/ Depart$ent I s)oul 6M7 a( Sell to Depart$ent II at t)e sa$e 2uote price o !=9 per unit( b( Sell to Depart$ent II at $ini$u$ price o !9. per unit( c( Not sell to Depart$ent II since it *ill lose !8 per unit( ( Sell to Depart$ent II at !'.. per unit( R!C!A '.=9
C4IANG AI S4E COEGE
'.8(A co$pany )as t*o i#isions/ A an %/ eac) operate as a proit ce nter( A c)arges % ,>- per unit or eac) unit transerre to %( Ot)er ata ollo*s+ AFs #ariable cost per unit AFs i@e costs AFs annual sales to % AFs sales to outsiers
,>. './... -/... units -./... units
A is planning to raise it s tran ser p rice to ,-. per unit/ D i#ision % can purc)ase units at , 8. eac) ro$ outsiers/ but oing so *oul ile AFs acilities no* co$$itte to proucing units or %( Di#ision A cannot increase its sales to outsiers( ?ro$ t)e perspecti#e o t)e co$pany as a *)ole/ ro$ *)o$ s)oul Di#ision % ac2uire t)e units/ assu$ing %Fs $ar;et is unaecte5 6M7 a( Outsie #enors( 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$ outsie #enors( ( Di#ision A/ espite t)e increase transer price( CIA ''1> IVEect on !roit Huestions '.- & '.9 are base on t)e ollo*ing inor$ation( & 4 '.e AlcatraK Di#ision o JY Corp( sells 1./ ... un its o part J to t) e outsi e $ar;et( !art J sells o r ,8./ )as a #ariable cost o ,00/ an a i@e cost per unit o ,'.( AlcatraK )as a capacity to prouce '../... units per perio( Capone Di#ision currently purc)ases './... units o part J ro$ AlcatraK or ,8.( Capone )as been approac)e by an outsie supplier *illing to supply t)e parts or ,>9( '.-(B)at is t)e eect on JY
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MANAGEMENT ADVISORY SERVICES
Responsibility Accounting & Transer !ricing
'.:(Di#ision A $a;es a part *it) t)e ollo*ing c)aracteristics+ !rouction capacity in units Selling price to outsie custo$ers Variable cost per unit Total i@e costs
'-/... units ,0,'1 ,9./...
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 outsie supplier at a price o ,08 eac)( Suppose t)at Di#ision A )as a$ple ile capacity to )anle all o Di#ision %./... eac) perio( c( better o by ,'-/... eac) perio( b( *orse o by ,'./... eac) perio( ( *orse o by ,>-/... eac) perio( '.1(4ancoc; Manuacturing )as one plant locate in Italy an anot)er plant locate in t)e "(S( T)e Italian plant $anuactures a co$ponent use in a inis)e prouct $anuacture at t)e "(S( plant( Currently/ t)e Italian plant is operating at :- percent capacity( In Italy t)e inco$e ta@ rate is >0 percent in t)e "(S( t)e corporate inco$e ta@ rate is >- percent( T)e $ar;et price o t)e co$ponent is ,'0. an t)e Italian plantFs costs to $anuacture t)e co$ponent are as ollo*s+ Direct $aterials Direct labor Variable o#er)ea ?i@e o#er)ea B)ic) transer price *oul be in t)e best interest o t)e o#erall corporation5 a( ,9. c( ,:b( ,-. ( ,'0.
C4IANG AI S4E COEGE
,>. 0. '. '4&M
'.=(!aciic Co$pany )as t)ree plants+ one locate in Malaysia/ one in Inia an anot)er plant locate in t)e !)ilippines( %ot) plants $anuactures a co$ponent use in a inis)e prouct $anuacture in t)e !)ilippine plant( Currently/ bot) plants are operating at :.3 capacity( In Malaysia t)e inco$e ta@ rate is 803 *)ile in Inia t)e ta@ rate is >-3 in t)e !)ilippines/ t)e corporate inco$e ta@ rate is 8.3( T)e $ar;et price o t)e co$ponent/ in peso e2ui#alent/ is !'.. an t)e oreign plantFs costs to $anuacture t)e co$ponent are as ollo*s+ Direct $aterials Direct labor Variable o#er)ea ?i@e o#er)ea B)ic) transer price *oul be in t)e best interest o t)e o#erall corporation5 !ol %obailla A( %( C( Malaysia !>! >!'.. Inia !>!'.. !'..
!'. 0. 0-
D( !'.. ! >-
Huestions ''. t)ru ''0 are base on t)e ollo*ing inor$ation( 4&M 4ano#er Manuacturing )as one plant locate in %elgiu$ an anot)er plant locate in t)e "(S( T)e %elgiu$ plant $anuactures a co$ponent use in a inis)e prouct $anuacture at t)e "(S( plant( Currently/ t)e %elgiu$ plant is operating at :. percent capacity( In %elgiu$ t)e inco$e ta@ rate is 80 percent in t)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 $anuacture t)e co$ponent are as ollo*s+ Direct $aterials Direct labor Variable o#er)ea ?i@e o#er)ea
,'. 0. 0-
''.(B)at is t)e $ini$u$ transer price t)at t)e %elgiu$ i#ision *oul be *illing to accept5 a( ,>c( ,9. b( ,-( ,'..
!age ': o 0'
MANAGEMENT ADVISORY SERVICES
Responsibility Accounting & Transer !ricing
'''(B)at is t)e $a@i$u$ transer price t) at t)e "(S( i#ision *oul be *illing to pay5 a( ,>c( ,9. b( ,-( ,'.. ''0(B)ic) transer price *oul be in t)e best interest o t)e o#erall corporation5 a( ,>c( ,9. b( ,-( ,'.. Huestions ''> t)ru ''- are base on t)e ollo*ing inor$ation( 4&M 4a$pton Manuacturing )as one plant locate in %elgiu$ an anot)er plant locate in t)e "(S( T)e %elgiu$ plant $anuactures a co$ponent use in a inis)e prouct $anuacture at t)e "(S( plant( Currently/ t)e %elgiu$ plant is operating at :. percent capacity( In %elgiu$ t)e inco$e ta@ rate is >. percent in t)e "(S( t)e corporate inco$e ta@ rate is >- percent( T)e $ar;et price o t)e co$ponent is ,'8. an t)e %elgiu$ plantFs costs to $anuacture t)e co$ponent are as ollo*s+ Direct $aterials Direct labor Variable o#er)ea ?i@e o#er)ea
,'09 01
''>(B)at is t)e $ini$u$ transer price t)at t)e %elgiu$ i#ision *oul be *illing to accept5 a( ,'8. c( ,91 b( ,:8 ( ,89 ''8(B)at is t)e $a@i$u$ transer price t)at t)e "(S( i#ision *oul be *illing to pay5 a( ,'8. c( ,91 b( ,:8 ( ,89 ''-(B)ic) transer price *oul be in t)e best interest o t)e o#erall corporation5 a( ,'8. c( ,91 b( ,:8 ( ,89
C4IANG AI S4E COEGE
Huestio ns ''9 t)roug) ''1 are base on t)e oll o*ing in or$atio n( CMA '0=. >0' to 0> Aler Inustries is a #ertically integrate ir$ *it) se#eral i#isions t)at o perate as ecentraliKe proit centers( Aler(.T)e %oar Di#ision sells its co$$ercial proucts at ull cost plus a 0-3 $ar;up an belie#es t)e proprietary boar $ae or t)e Syste$s Di#ision *oul sell or ,'0(0- 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 ,>(:. per unit( ''9(A per unit transer price ro$ t)e Transistor Di#ision to t)e Syste$s Di#ision at ull cost/ ,>(.-/ *oul A( Allo* e#aluation o bo t) i#isions on a co$pe titi#e basis( %( Satisy t)e Transistor Di#ision
MANAGEMENT ADVISORY SERVICES
Responsibility Accounting & Transer !ricing
''1(T)e %oar an Syste$s Di#isions )a#e negotiate a transer price o ,''(.. per printe circuit boar( T)is price *ill A( Cause t)e %oar Di#ision to reuce t)e nu$ber o co$$ercial printe circuit boars it $anuactures( %( Moti#ate bot) i#isions as esti$ate proits are s)are( C( Encourage t)e Syste$s Di#ision to see; an outsie source or printe circuit boars( D( De$oti#ate t)e %oar Di#ision causing $eiocre peror$ance( Huestions ''= t)roug) '0> are base on t)e ollo*ing inor$ation( %ariel Oice !roucts Inc( $anuactures an sells #arious )ig)tec) oice auto$ation proucts( T*o i#isions o Oice !roucts 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 $anuactures one prouct/ a super c)ip/ t)at can be use by bot) t)e Co$puter Di#ision an ot)er e@ternal custo$ers( T)e ollo*ing inor$ation is a#ailable on t)is $ont)
,-. ,0. ,9./... ,=./... './... c)ips 9/... 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 ,8- to an e@ternal supplier or t)e 8/... c)ips it nees eac) $ont)( ''=(Assu$e t)at ne@t $ont)'0.(Assu$e t)at ne@t $ont)b( ,8( ,>. C4IANG AI S4E COEGE
'0'(T*o possible transer prices 6or 8/... units7 are uner consieration by t)e t*o i#isions+ ,>an ,8.( Corporate proits *oul be QQQQQQQ i ,>- is selecte as t)e transer price rat)er t)an ,8.( a( ,0./... larger c( ,0./... s$aller b( ,8./... larger ( t)e sa$e '00(I a transer bet*een t)e t*o i#isions is arrange ne@t perio at a price 6on 8/... units o super c)ips7 o ,8./ total proits in t)e Co$puter C)ip i#ision *ill a( rise by ,0./... co$pare to t)e prior perio( b( rop by ,8./... co$pare to t)e prior perio( c( rop by ,0./... co$pare to t)e prior perio( ( rise by ,1./... co$pare to t)e prior perio( '0>(Assu$e/ or t)is 2uestion only/ t)at t)e Co$puter C)ip Di#ision is selling all t)at it can prouce to e@ternal buyers or ,-. per unit( 4o* *oul o#erall corporate proits be aecte i it sells 8/... units to t)e Co$puter Di#ision at ,8-5 6Assu$e t)at t)e Co$puter Di#ision can purc)ase t)e super c)ip ro$ an outsie supplier or ,8-(7 a( no eect c( ,0./... ecrease b( ,0./... increase ( ,=./... increase Huestions '08 t)ru '09 are base on t)e ollo*ing inor$ation( %ariel T)e Motor Di#ision o Super Truc; Co( uses -/... carburetors per $ont) in its prouction o auto$oti#e engines( It presently buys all o t)e carburetors it nees ro$ t*o outsie suppliers at an a#erage cost o ,'..( T)e Carburetor Di#ision o Super Truc; Co( $anuactures t)e e@act type o carburetor t)at t)e Motor Di#ision re2uires( 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 $anuacturer at ,'.9 per unit( Its cost structure 6on '-/... units7 is+ Variable prouction costs Variable 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 transerre internally( '08(B)at is t)e $a@i$u$ o t)e transer price range or a transer bet*een t)e t*o i#isions5 a( ,'.9 c( ,=. b( ,'.. ( ,:. !age '= o 0'
MANAGEMENT ADVISORY SERVICES '0-(B)at is t)e $ini$u$ o t)e transer price range or a transer bet*een t)e t*o i#isions5 a( ,=9 c( ,:. b( ,=. ( ,'.9 '09(I t)e t*o i#isions agree to transact *it) one anot)er/ corporate proits *ill a( rop by ,>./... per $ont)( b( rise by ,0./... per $ont)( c( rise by ,-./... per $ont)( ( rise or all by an a$ount t)at epens on t)e le#el o t)e transer price( Huestions '0: t)roug) '>> are base on t)e ollo*ing inor$ation( Glei$ T)e inor$ation *as presente& as part o Huestion 9 on !art 8 o t)e Dece$ber '=1' CMA E@a$ination( !ortCo !roucts is a i#isionaliKe urniture $anuacturer( 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 e2uip$ent ac2uisition( Eac) i#ision ser#es a ierent $ar;et in t)e urniture inustry( %ecause t)e $ar;ets an proucts o t)e i#isions are so ierent/ t)ere )a#e ne#er been any transers bet*een i#isions( T)e Co$$ercial Di#ision $anuactures e2uip$ent an urniture t)at are purc)ase by t)e restaurant inustry( T)e i#ision plans to introuce a ne* line o counter an c)air units t)at eature a cus)ione seat or t)e counter c)airs( o)n line/ t)e i#ision $anager/ )as iscusse t)e $anuacturing o t)e cus)ione seat *it) Russ ?legel or a price or '..unit 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+ o)n/ *e can $a;e t)e necessary $oiications to t)e cus)ione seat easily( T)e ra* $aterials use in your seat are slig)tly ierent an s)oul cost about '.3 $ore t)an t)ose use in our elu@e oice stool( 4o*e#er/ t)e labor ti$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 ull cost plus >.3 $ar;up( line+ T)is is )ig)er t)an I e@pecte( Russ/ I *as t)in;ing t)at a goo price *oul be your #ariable $anuacturing costs( Ater all/ your capacity costs *ill be incurre regarless o t)e Lob( ?legel+ o)n/ IF$ at capacity( %y $a;ing t)e cus)ion seats or you/ IFll )a#e to cut $y prouction o elu@e oice stools( O course/ I can increase $y prouction o econo$y oice stools( T)e labor ti$e ree by not )a#ing to abricate t)e ra$e or asse$ble t)e elu@e stool can be s)ite to t)e ra$e abrication an asse$bly o t)e econo$y oice stool( ?ortunately/ I can s*itc) $y labor orce bet*een t)ese t*o $oels o stools *it)out any loss o eiciency( As you ;no*/ o#erti$e is C4IANG AI S4E COEGE
Responsibility Accounting & Transer !ricing 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) proucts( I onFt $in c)anging $y prouct $i@ to t)e econo$y $oel i I get a goo return on t)e seats I $a;e or you( 4ere are $y stanar costs or t)e t*o stools an a sc)eule o $y $anuacturing o#er)ea( line+ I guess I see your point/ Russ/ but I onFt *ant to price $ysel out o t)e $ar;et( Maybe *e s)oul tal; to Corporate to see i t)ey can gi#e us any guiance( Oice Di#ision Stanar Costs an !rices Delu@e Oice Stool Econo$y Oice Stool Ra* $aterials ?ra$ing , 1(', =(:9 Cus)ione seat !aing 0(8. Vinyl 8(.. Mole seat 6purc)ase7 9(.. Direct labor ?ra$e abrication 6(-@,:(-.D47 >(:6(-@,:(-.D47 >(:Cus)ion abrication >(: 6(-@,:(-.D47 Asse$blyW 6(-@,:(-.D47 >(:6(>@,:(-.D47 0(0Manuacturing O#er)ea 6 '(-D4@,'0(9.D47 '=(0. 6(1D4@,'0(1.D47 '.(08 Total stanar cost ,8-(.. ,>0(.. Selling price 6>.3 $ar;up7 ,-1(-. ,8'(9. W Attac)ing seats to ra$es an& attac)ing rubber eet( Oice Di#ision Manuacturing O#er)ea %uget O#er)ea Ite$ Supplies Inirect labor Super#ision !o*er 4eat an li g)t
Nature Variable at current $ar;et prices Variable Non#ariable "se #aries *it) acti#ity rates are i@e Non#ariable lig )t is i@e regarless o prouction *)ile )eatairconitioning #aries *it) uel c)arges
A$ount , 80./... >:-/... 0-./... '1./... '8./... !age 0. o 0'
MANAGEMENT ADVISORY SERVICES !roperty ta@es an insurance ta@es Depreciation E$ploye e be neit s
Non#ariable any c)ange in a$ountsrates is 0../... inepenent o prouction ?i@e ollar total '/:../... 0. 3 o sup er# is ion/ ir ect an in irect lab or - :- /.. . Total o#er)ea ,>/18./... Capacity in D4 >../... O#er)ea rateD4 ,'0(1. '0:(B)at a$ount o e$ployee beneit is associate *it) irect labor costs5 6E7 a( ,9:-/... c( ,8-./... b( ,:-/... ( ,-../... '01(B)at is t)e #ariable $anuacturing o#er)ea rate5 6E7 a( ,:(1.)r( c( ,-(':)r( b( ,''(0-)r( ( ,-(..)r( '0=(B)at is t)e transer price per '..unit lot base on #ariable $anuacturing costs to prouce t)e $oiie cus)ione seat5 6E7 a( ,'/>0= c( ,:1= b( ,'/19= ( ,'/=19 '>.(B)at is t)e i@e $anuacturing o#er)ea rate5 6E7 a( ,:(1.)r( c( ,-(':)r( b( ,''(0-)r( ( ,-(..)r( '>'(4o* $any econo$y oice stools can be prouce *it) t)e labor )ours currently use to $a;e '.. elu@e stools5 6E7 a( '1: c( '.. b( '0( '-. '>0(B)en co$puting t)e opportunity cost or t)e elu@e oice stool/ *)at is t)e contribution $argin per unit prouce5 6E7 a( ,0-(0. c( ,8-(.. b( ,'-(18 ( ,>>(>. '>>(B)at is t)e opportunity cost o t)e Oice Di#ision i '0- econo$y stools can be $ae in t)e ti$e re2uire or '.. elu@e stools5 6E7 a( ,:1= c( ,'/>0= b( ,'/19= ( ,-8. C4IANG AI S4E COEGE
Responsibility Accounting & Transer !ricing "nswer #e! '( A 0( % >( % 8( % -( A 9( % :( C 1( % =( % '.( A
''( '0( '>( '8( '-( '9( ':( '1( '=( 0.(
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A A % % D A C C C %
8'( 80( 8>( 88( 8-( 89( 8:( 81( 8=( -.(
-'( -0( ->( -8( --( -9( -:( -1( -=( 9.(
9'( 90( 9>( 98( 9-( 99( 9:( 91( 9=( :.(
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1'( 10( 1>( 18( 1-( 19( 1:( 11( 1=( =.(
D A % % C % C % C D
='( % =0( C =>( C =8( % =-( % =9( C =:( D =1( D ==( A '..( A
% % E A C C % D E C
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