MANAGEMENT ADVISORY SERVICES
Responsibility Accounting & Transer !ricing
RETURN ON INVESTMENT Return on Investment Computation "ase# on Operating Inco$e % T'e ollo(ing selecte# selecte# #ata pertain to t'e belt #i)ision o Allen Corp or last year* year* Sales +,--.--A)erage operating assets +/--.--Net operating inco$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 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
In)est$ent = Apple Di)ision o t'e A$erican A$erican >ruit Co 'a# t'e ollo(ing statistics or or /--/* Assets a)ailable or use +%.---.--Resi#ual inco$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 +===.=== # +,--.--"ariel#
C3IANG AI S3E COEGE
Re1uire# !eso Sales 7 T'e $anager $anager o t'e Strong Di)ision Di)ision o !o(ers !o(ers Co$pany Co$pany e?pects t'e ollo(ing ollo(ing results ts in /--= 5pesos in $illions6@ Sales !7<8Variable costs 58-26 /<98 Contribution $argin !%<07 >i?e# costs %/-!roit ! 907 In)est$ent !lant e1uip$ent !%<,% or:ing capital %700 !=7=< ROI 5!907B!=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 )olu$e t'e #i)ision (oul# (oul# nee# to reac' reac' 3e states t'at t'e sales $i? is relati)ely relati)ely constant so )ariable costs s'oul# be close to 8-2 o sales. i?e# cost an# plant an# e1uip$ent s'oul# re$ain constant. an# (or:ing capital 5cas'. recei)ables an# in)entories6 s'oul# )ary closely (it' sales in t'e percentage relecte# abo)e T'e peso sales t'at t'e #i)ision nee#s in or#er to reac' t'e =-2 ROI target is 5D6 A !%<.0/<.-=/ C !77.=9=.09% " !,9.,<-.=// D !,<.,%-.--!ol "oba#illa Dupont Model Sensiti)ity Analysis , I t'e operating operating inco$e inco$e $argin o -= staye# t'e sa$e an# an# t'e operating operating asset turno)er 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 increa increase se by by %, percen percentt 3&M 8 I t'e in)est$ent in)est$ent turno)er increase# increase# by /-2 /-2 an# ROS 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. & 3
!age % o /%
MANAGEMENT ADVISORY SERVICES 0 Co$pany Co$pany 'a# its operating operating asset turno)er turno)er increase# increase# by ,-2 an# t'e operating operating inco$e inco$e $argin increase# by ,-2 Co$pany 'a# its operating asset turno)er turno)er increase# by =-2 an# t'e operating operating inco$e $argin $argin #ecrease# #ecrease# by =-2 'at c'anges c'anges are e?pecte# or ROI o Co$pany an# Co$pany . respecti)ely4 5M6 !ol "oba#illa A " C D Co$pany ,-2 in increase %/,2 in increase //,2 in increase %/,2 in increase Co$pany <2 #ecrease <2 #ecrease No c'ange No c'ange RESIDUAL INCOME Residual Income Computation Computation < RE" Ser)ice Ser)ice Co is a co$pu co$puter ter ser)ice ser)ice center center >or t'e $ont' $ont' o o May %<<,. %<<,. RE" 'a# 'a# t'e ollo(ing statistics* Sales +7,-.--Operating inco$e /,.--Net proit ater ta?es 0.--Total assets ,--.--S'are'ol#ersF e1uity /--.--Cost o capital 82 "ase# on t'e abo)e inor$ation. inor$ation. ('ic' one o t'e ollo(ing ollo(ing state$ents is correct4 RE" 'as a 5M6 a ROI o 72 c ROI o %82 CMA -8<, =/b Resi#ual in inco$e o o +5 +5,.---6 # Resi#ual in inco$e o o +5 +5//.---6 Target Cost %- Ha$es ebb is t'e general $anager o t'e In#ustrial !ar: Di)ision. an# 'is peror$ance is $easure# using t'e resi#ual inco$e $et'o# $et'o# ebb is re)ie(ing t'e ollo(ing orecaste# inor$ation or t'e #i)ision or ne?t year Category A$ount 5t'ousan#s6 or:ing capital + %.0-Re)enue =-.--!lant an# e1uip$ent %9./-To establis' a stan#ar# o peror$ance or t'e #i)isionFs $anager using t'e resi#ual inco$e approac'. our scenarios are being being consi#ere# Scenario % assu$es an i$pute# 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$pute# i$pute# interest interest c'arge o %02 an# a target resi#ual resi#ual inco$e o +%./,-.+%./,-.--- -- Scenario Scenario 7 assu$es an i$pute# interest c'arge o %-2 an# a target resi#ual inco$e o +/.,--.--- C3IANG AI S3E COEGE
Responsibility Accounting & Transer !ricing '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 >ortree pro#ucts pro#ucts 'a)e a resi#ual net inco$e inco$e o !%0 $illion $illion I t'e i$pute# interest interest rate is %82. co$pute t'e ROI 5M6 a ,2 c %,2 b %%-2 # no not liste# R!C!A %-<% %/ Di)ision o JY Corp Corp 'as t'e ollo(ing inor$ation or /--/* /--/* Assets a)ailable or Target rate o return Resi#ual inco$e 'at (as Di)ision;s return on in)est$ent or /--/4 5M6 a %,2 c /,2 b %-2 # /-2
+%.0--.--%-2 +/9-.---
"ariel#
%= !asta Di)ision on o e Ma:e Italian. is e)aluate# e)aluate# base# on resi#ual resi#ual inco$e generate# generate# >or /--/. t'e Di)ision generate# a resi#ual inco$e o +/.---.--- an# net inco$e o +,.---.--- T'e target rate o return or all #i)isions o e Ma:e Italian is /- percent >or /--/. ('at (as t'e return on in)est$ent or !asta Di)ision4 5M6 a 7-2 c /-2 b %=2 # ==2 "ariel# 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# e?cee#e# /--/ resi#ual inco$e by by +%,.--- Also or /--/. return on in)est$ent e?cee#e# t'e target rate o return by %- percent 'at (as t'e le)el o in)est$ent in t'e J Di)ision or /--/4 /--/4 5M6 a + %, %,. ---b + %%-- ..-- c + %, %,- ..-- # An ans(er can;t be #eter$ine# ro$ t'is inor$ation "ariel#
!age / o /%
MANAGEMENT ADVISORY SERVICES
Responsibility Accounting & Transer !ricing
Return on Investment # Residual Income # Units Sold Kuestions %, t'ru %9 are base# on t'e ollo(ing inor$ation G & N
%< atne 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 +8,.--Asset base or #i)ision +=--.--Target rate o return %02 Operating inco$e $argin /-2 eig'te# a)erage cost o capital %/2 'at is EVA or N4 a + =8.--c +,7.--b +/<.--# +%%.--3&M
%, I A?le sells %8.--- units per year. t'e return on in)est$ent s'oul# be* 5M6 a %/2 c %82 b %,2 # %02
/- >a$ily Co$pany 'as t(o #i)isions. Ma an# !a Inor$ation or eac' #i)ision is as ollo(s* Ma !a Net earnings or #i)ision !/-.--!8,.--Asset base or #i)ision !,-.--!=--.--Target rate o return %,2 %02 Operating inco$e $argin %-2 /-2 eig'te#a)erage cost o capital %/2 %/2 'at is t'e Econo$ic Value A##e# or Ma an# !a. respecti)ely4 A !/-.---. !=8.--C !%/.,--@ !%%.--" !%7.---@ !/<.--D !/-.---@ !/<.--!ol "oba#illa
%8 I A?le sells %,.--- units per year. t'e resi#ual inco$e s'oul# be* 5M6 a +=-.--- c +,-.--- b +%--.--- # +%-.---
G & N
%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( $any units per year4 5M6 a %7.,-- c %0./,- b %8.9,- # %<.,-- G & N
C3IANG AI S3E COEGE
+0--.--+%--.--/-2 %,2 %/2 # +7.--e +5/-.---6 3&M
EVA 'ased on Operating Income a%ter Ta( EVA Gi)en Operating Inco$e "eore Ta? /% McenLie Oil 'a# +77-.--- in operating inco$e beore interest an# ta?es in t'e last year McenLie is in t'e 7-2 ta? brac:et I capital e$ploye# by McenLie (as e1ual to +=--.---. an# t'e co$pany;s (eig'te#a)erage aterta? cost o capital is %,2. ('at is McenLie;s Econo$ic Value A##e#4 A +%=%.--C +%<0.--" +%7-.--D +/%<.--Glei$ // Valecon Co reporte# t'e ollo(ing inor$ation or t'e year ust en#e#* Seg$ent A Seg$ent " !reta? operating inco$e + 7.---.--+ /.---.--Current assets 7.---.--=.---.--ongter$ assets %8.---.--%=.---.--Current liabilities /.---.--%.---.---
Seg$ent C +=.---.--7.---.--0.---.--%.,--.---
!age = o /%
MANAGEMENT ADVISORY SERVICES
Responsibility Accounting & Transer !ricing
I t'e applicable inco$e ta? rate an# aterta? (eig'te#a)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 inor$ation /= Assu$e A)ionics In#ustries reporte# at yearen# t'at operating inco$e beore ta?es or t'e year e1uale# +/.7--.--- ongter$ #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# longter$ assets e1ual +<.8--.--- T'e clai$s against t'ose assets are in t'e or$ o +%.,--.--- in current liabilities an# +/./--.--- in longter$ liabilities T'e inco$e ta? rate or A)ionics is =-2 'at is t'e econo$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 inor$ation 3orngren al#or Co$pany 'as t(o sources o un#s* longter$ #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 $illion6 al#or Co$pany 'as proit 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 iabilities St ouis + <8-.--+ 7.---.--+ /--.--Ce#ar Rapi#s +%./--.--+ 0.---.--+ 8--.--ic'ita +/.-7-.--+%/.---.--+%./--.--/7 'at is t'e EVA or St ouis4 5M6 a +/,,.97c +=
c #
+/=7.--+=-,.---
/8 'at is t'e EVA or ic'ita4 5M6 a +7,-.--b +%.,=-.---
c #
+7%7.=8+%.%%,.87-
C3IANG AI S3E COEGE
EVA Co$putation Gi)en Operating Inco$e ater Ta? /9 Sa$o)ar Co$pany 'as operating inco$e ater ta?es o +,-.--- It 'as +/--.--- o e1uity capital. ('ic' 'as an aterta? (eig'te#a)erage cost o %/2 Sa$o)ar also 'as +%-.--- o current liabilities 5noninterestbearing6 an# no longter$ liabilities '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$ic )alue a##e# 5EVA6 Ralp' 'as narro(e# 'is c'oices #o(n to our. an# 'as collecte# t'e ollo(ing inor$ation* Operating Inco$e ater Ta? E1uity Capital ACC Current iabilities Co$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$panies 'a)e any longter$ 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$uit) Value Creation Mar*et Value Added # Total S+are+older Return Kuestions /< t'ru =% are base# on t'e ollo(ing inor$ation Glei$ Se$ibar Co reports net inco$e o +8=-.--- T'e inor$ation belo( or t'e year ust en#e# is also a)ailable* Hanuary % Dece$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
Responsibility Accounting & Transer !ricing
=- T'e $ar:et )alue a##e# 5MVA6 is a +/.---.--b +%.9/-.---
c #
+7--.--+/0-.---
=% T'e total s'are'ol#er return is a /72 b /-2
c #
%8892 72
SENSITIVIT, ANAL,SIS =/ Apple Di)ision o t'e A$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 "ariel# == Di)ision A 'a# t'e ollo(ing inor$ation* Asset base in Di)ision A +0--.--Net inco$e in Di)ision A +%--.--Operating inco$e $argin or Di)ision A /-2 Target ROI %,2 eig'te#a)erage cost o capital %/2 I t'e asset base is #ecrease# by +/--.---. (it' no ot'er c'anges. t'e return on in)est$ent o Di)ision A (ill be a %---2 # 8/,2 b %892 e /--2 c 8- - -2 3&M
Compre+ensive Kuestions =7 t'roug' =0 are base# on t'e ollo(ing inor$ation AIC!A %%08 II// to /8 Oslo CoFs in#ustrial p'otoinis'ing #i)ision. R'o. incurre# t'e ollo(ing costs an# e?penses in %<i?e# Direct $aterials +/--.--Direct labor %,-.-->actory o)er'ea# 9-.--+7/.--General. selling an# a#$inistrati)e =-.--70.--Totals +7,-.--+<-.--During %<or t'e yearen#e# Dece$ber =%. %<or t'e year en#e# Dece$ber =%. %<or t'e year en#e# Dece$ber =%. %<
C3IANG AI S3E COEGE
!age , o /%
MANAGEMENT ADVISORY SERVICES
Responsibility Accounting & Transer !ricing
Kuestions =< t'roug' ,% are base# on t'e ollo(ing inor$ation Seg$ent A Seg$ent " Seg$ent C Net inco$e + ,.-- Sales 8-.--+9,-.--+%=,.--In)est$ent /7.--,--.--7,.--Net inco$e as 2 o sales Turno)er o in)est$ent ROI /-2 Mini$u$ ROI#ollars Mini$u$ ROI 2 /-2 82 Resi#ual inco$e - +/./,=< >or Seg$ent ". net inco$e as a percentage o sales is a 02 c 72 b 8892 # %-2 7- >or Seg$ent C. net inco$e as a percentage o sales is a ,2 c 72 b 8892 # /-2
Glei$ Seg$ent D + <-.--%.0--.-- 9,2 +%/-.--
7, >or seg$ent A. t'e $ini$u$ #ollar ROI is a +=-.--b +8.9,-
c +7.0-# +%/-.---
78 >or Seg$ent ". t'e $ini$u$ #ollar ROI is a +=-.--b +8.9,-
c +7.0-# +%/-.---
79 >or Seg$ent C. t'e $ini$u$ #ollar ROI is a +=-.--b +8.9,-
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
7% >or Seg$ent C. t'e turno)er o in)est$ent is a = c b %, #
/, 7
,- In Seg$ent A. t'e resi#ual inco$e is a +/-b +%/.---
c +5=-.---6 # +7.0--
7/ >or Seg$ent D. t'e turno)er o in)est$ent is a = c b %, #
/, 7
,% In Seg$ent D. t'e resi#ual inco$e is a +%/.--b +5=-.---6
c +58-.---6 # +<.---
7= >or seg$ent A. ROI is a 82 b /-2
c #
/-02 9,2
77 >or seg$ent ". ROI is a 82 b /-02
c #
/-2 9,2
SE-MENTED INCOME STATEMENT Sales ,/ During April. Di)ision D o Carney Co$pany 'a# a seg$ent $argin ratio o %,2. a )ariable e?pense ratio o 8-2 o sales. an# traceable i?e# e?penses o +%,.--- Di)ision D;s sales (ere closest to* 5M6 a +%--.--- c +==.=== b +8-.--- # +//.,-- G & N
C3IANG AI S3E COEGE
!age 8 o /%
MANAGEMENT ADVISORY SERVICES Segment Margin ,= Assu$e t'e ollo(ing inor$ation or a pro#uct line* Sales re)enue Variable $anuacturing costs Direct i?e# $anuacturing costs Variable sellingBa#$inistrati)e costs Direct i?e# sellingBa#$in costs 'at is t'e seg$ent $argin o t'e pro#uct line4 5E6 a +7--.--# +/9,.--b +=/,.--e +/%,.--c +=,-.---
Responsibility Accounting & Transer !ricing
+,--.--%--.--9,.--,-.--8-.---
3&M
,7 T'e #ata a)ailable or t'e current year are gi)en belo(* 'ol e C o D i) is ion % D i) is ion / Variable $g cost o goo#s sol# + 7--.--- + //-.--+ 0-.--nallocate# costs 5eg. presi#entFs salary6 %--.-- >i?e# costs controllable by Di) Managers 5eg. a#)er tising. engFg super) ision cos ts6 <-.--,-.--7-.--Net re)enue %.---.--8--.--7--.--Var iable selling an# a#$inistr ati)e cost s %=-. --9-.--8-.-->i?e# costs controllable by ot'ers 5eg. #epreciation. insurance6 %/-.--9-.--,-.--sing t'e inor$ation presente# abo)e. t'e contribution by Di)ision % (as 5M6 a +%<-.--c +=%-.--b +/8-.--# +=0-.--CIA %%08 IV%9 ,, A an# " are autono$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 inor$ation relating to t'e t(o #i)isions A " Sales +%,-.--+7--.--Ot'er re)enue %-.--%,.--Direct $aterials =-.--8,.--Direct labor /-.--7-.--Variable actory o)er'ea# ,.--%,.-->i?e# actory o)er'ea# /,.--,,.--Variance S&A e?pense %,.--=-.-->i?e# S&A e?pense =,.--8-.--C3IANG AI S3E COEGE
Central corporate e?penses 5allocate#6 %/.--/-.--'at is t'e total contribution to corporate proits generate# by Di)ision A beore allocation o central corporate e?penses4 5M6 a + %0.--c +=-.--b + /-.--# +0-.--CIA %%<= IV/Common "i(ed Costs ,8 yons Co$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 $argin ratio o =-2 in Di)ision ". ('en sales in Di)ision " (ere +/--.--- Net inco$e or t'e co$pany (as +/,.--- an# traceable i?e# e?penses (ere +7-.--- yons Co$pany;s co$$on i?e# e?penses (ere* 5M6 a +0,.--- c +7,.--- b +9-.--- # +7-.--- G & N
MANAGEMENT ADVISORY SERVICES
Responsibility Accounting & Transer !ricing
,< 'at is t'e net inco$e or t'e "ar$ore Co$pany4 5E6 a +=--.--# +=/.,-b +%8/.,-e +/-.,-c +% ,-. ---
87 'at is t'e seg$ent $argin or Di)ision Y4 5E6 a +=%-.--# b +/%-.--e c + %%- .-- -
Kuestions 8- & 8% are base# on t'e ollo(ing inor$ation G & N
Kuestions 8, t'ru 80 are base# on t'e ollo(ing inor$ation G & N
8- T'e )ariable costs or t'e Sout' Area or t'e year (ere* 5M6 a +/=-.--- c +%8/.,-- b +%0,.--- # +8,.---
8, Sales in Store H totale#* 5M6 a +7--.--- b +/,-.---
c #
+%,-.--- +%--.---
8% T'e total i?e# costs 5traceable an# co$$on6 or Canon Co$pany or t'e year (ere* 5M6 a +7<.--- c +/7.--- b +/,.--- # +,-.---
88 Variable e?penses in Store totale#* 5M6 a +9-.--- b +%%-.---
c #
+/--.--- +%=-.---
Kuestions 8/ t'ru 87 are base# on t'e ollo(ing inor$ation 3&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 + 9-.--+ <-.--Direct i?e# $anuacturing e?penses =,.--%--.--Sales /--.--7--.--Direct i?e# sellingBa#$in e?penses =-.--9-.--Variable $anuacturing e?penses 7-.--%--.--Co$$on e?penses are +/7.--- or %<<,
89 T'e seg$ent $argin ratio in Store H (as* 5M6 a %82 c b /72 #
8/ 'at is t'e net inco$e or t'e Nau$an Co$pany4 5E6 a +8--.--# +8,.--b +=/,.--e +7%.--c += --. --8= 'at is t'e seg$ent $argin or Di)ision J4 5E6 a +<-.--# b +/,.--e c +%.--C3IANG AI S3E COEGE
+%8-.--+%/,.---
+7-.--+%8.---
7-2 8-2
80 Ieso Co$pany;s total i?e# e?penses or t'e year (ere* 5M6 a +7-.--- c +%7-.--- b +%--.--# +%9-.--- Sensitivit) Anal)sis Kuestions 8< t'roug' 9/ are base# on t'e ollo(ing inor$ation CIA %%<8 III<9 to %-T'e seg$ente# inco$e state$ent or a retail co$pany (it' t'ree pro#uct lines is presente# belo(* Total !ro#uct !ro#uct !ro#uct Co$pany ine % ine / ine = Volu$e 5in units6 /-.--/0.--,-.--Sales re)enue +/.---.--+0--.--+9--.--+,--.--Costs & e?penses* A#$inistrati)e + %0-.--+ 8-.--+ 8-.--+ 8-.--A#)ertising /7-.--<8.--07.--8-.--Co$$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%-.--Oper ating 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$ $anuacturers; 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'ereore 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$$issions are pai# to t'e salespersons in eac' pro#uct line base# on /2 o gross sales Rent represents t'e cost o t'e retail store an# (are'ouse un#er a lease agree$ent (it' , years re$aining T'e pro#uct lines s'are t'e retail an# (are'ouse space. an# t'e rent is allocate# to t'e t'ree pro#uct lines base# on t'e s1uare ootage occupie# by eac' o t'e pro#uct lines 8< T'e seg$ente# inco$e state$ent or t'is retail co$pany #oes not acilitate peror$ance e)aluation because it #oes not #istinguis' bet(een controllable an# uncontrollable costs T'e only costs an# e?penses controllable at t'e pro#uctline le)el or t'is retail co$pany are 5M6 A Co$$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 oneti$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 ine % +%,.--!ro#uct ine / /-.--!ro#uct ine = %7.--In or#er to $a?i$iLe proits. t'e pro$otion e?pen#iture s'oul# be spent on ist AP. resulting in an increase in operating inco$e o ist "P 5M6 A " C D ist A !ro#uct ine / !ro#uct ine / !ro#uct ine = !ro#uct ine = ist " +%=.--+,.--+%.7-+%.%/-
C3IANG AI S3E COEGE
Responsibility Accounting & Transer !ricing 9% One co$pany e?ecuti)e 'as e?presse# concern about t'e operating loss t'at 'as occurre# in !ro#uct ine / an# 'as suggeste# t'at !ro#uct ine / be #iscontinue# I !ro#uct ine / 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 ine /. but t'e total #ollar a$ount (oul# not c'ange I !ro#uct ine / (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 ine % an# oere# to purc'ase 7.--- units o a specialor#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 ine %;s ot'er pro#ucts e?cept t'at t'e custo$er is 'oping or a price brea: !ro#uct ine %;s cost to purc'ase t'is pro#uct 5cost o sales6 (oul# be +%79- !ro#uct ine % '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 specialor#er pro#uct T'e $ini$u$ selling price or t'is special or#er pro#uct (oul# be 5M6 A +%,-C +/9," +%9=D +=-/S.ECIAL ORDER Operating at "ull Capacit) Eect on !roit 9= Aa? 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 proit 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 transer price Aa? 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 nit sales /-.--0-.---
!age < o /%
MANAGEMENT ADVISORY SERVICES Aa? '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 Aa? Di)ision #esires to $a?i$iLe its gross $argin. s'oul# Aa? 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 Aa? Di)isionFs gross $argin (oul# increase by +=--.--- c Yes. because Aa? #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* nits sales 9-.--nits selling price !%nit )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 oer 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-.--- '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!79, " !,8D !<-!ol "oba#illa Ma?i$u$ ost nits 9, 3ouston Di)ision o Te?acon. Inc e?pects t'e ollo(ing result or /--7* nits sales 9-.--nits selling price !%nit )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 oer 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 AI S3E COEGE
Responsibility Accounting & Transer !ricing At t'e price o !9 oere# by oreign custo$er. ('at is t'e $a?i$u$ nu$ber o units in regular sales t'at 3ouston coul# sacriice 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 transer pricing syste$ Ha$esF MIS #epart$ent is currently negotiating a transer 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 Inor$ation Ser)ices ir$ or +9-.--- 'at a$ounts s'oul# be use# as t'e ceiling an# t'e loor in #eter$ining t'e negotiate# transer 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 inor$ation "ariel# "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 inor$ation or last $ont' ollo(s* Total sales 5all e?ternal6 +/,-.--E?penses 5all on a unit base6* Variable $anuacturing +-,>i?e# $anuacturing /, Variable selling =>i?e# selling 7Variable G&A %, >i?e# G&A , Total +/%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$ !ro#ucts Di)ision
!age %- o /%
MANAGEMENT ADVISORY SERVICES 99 A transer price base# on )ariable cost (ill be set at QQQQQQQQQQQ per unit a +-,c +-<, b +-0# +-9, 90 A transer price base# on ull pro#uction cost (oul# be set at QQQQQQQQQQQ per unit a +-9, c +%7, b +/%# +%89< A transer 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 perunit transer price is not li:ely to be belo( a +-9, c +/%- b +%8- # +/,- Operating at "ull Capacit) Mini$u$ Transer !rice 0% T'e 3ig' Di)ision o !ara Co$pany pro#uces a 'ig' 1uality :ite nit 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 inor$ation Sales price %/Selling e?penses 5%,2 )ariable6 /T'e 3ig' Di)ision is pro#ucing an# selling at capacity 'at is t'e $ini$u$ selling price t'at t'e #i)ision (oul# consi#er as a transer price 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 $anuactures t'e e?act type o carburetor t'at t'e Motor Di)ision re1uires T'e Carburetor Di)ision is presently C3IANG AI S3E COEGE
Responsibility Accounting & Transer !ricing operating at its capacity o %,.--- units per $ont' an# sells all o its output to a oreign car $anuacturer 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 transerre# internally 'at is t'e $ini$u$ o t'e transer price range or a transer bet(een t'e t(o #i)isions4 5M6 a +<8 c +9b +<# +%-8 "ariel# 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
!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 transerre# internally 'at is t'e $a?i$u$ o t'e transer price range or a transer bet(een t'e t(o #i)isions4 5M6 a +%-8 c +
Responsibility Accounting & Transer !ricing # rise or all by an a$ount t'at #epen#s on t'e le)el o t'e transer price
"ariel#
Co$pre'ensi)e Kuestions 09 an# 00 are base# on t'e ollo(ing inor$ation R!C!A -,0, Rosas 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 One o its #i)isions. Gu$a$ela Di)ision. $anuactures steel containers. /-2 o ('ic' are sol# to Daisy Di)ision an# t'e balance to outsi#e custo$ers Inter#i)isional sales an# purc'ases are recor#e# at )ariable cost as a transer 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 ! ,./--.--nit 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 transer price or %<0, T'e $anagers agree# on a tentati)e transer 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 transer 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 inor$ation CMA -8<8 =/8 to /0 !ar:si#e. Inc 'as se)eral #i)isions t'at operate as #ecentraliLe# proit centers !ar:si#eFs Entertain$ent Di)ision $anuactures )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 $anuactures 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 perunit transer 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 Satisy t'e Vi#eo Car#s Di)isionFs proit #esire by allo(ing reco)ery o opportunity costs c !ro)i#e no proit 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 +09- per unit T'e Vi#eo Car#s Di)ision 'a)ing e?cess capacity. agrees to lo(er its transer price to +09- per unit T'is action (oul# 5M6 a Opti$iLe t'e proit goals o t'e Entertain$ent Di)ision ('ile sub)erting t'e proit goals o !ar:si#e. Inc b Allo( e)aluation o bot' #i)isions on t'e sa$e basis c Sub)ert t'e proit goals o t'e Vi#eo Car#s Di)ision ('ile opti$iLing t'e proit goals o t'e Entertain$ent Di)ision # Opti$iLe t'e o)erall proit goals o !ar:si#e. Inc
C3IANG AI S3E COEGE
Responsibility Accounting & Transer !ricing <% Assu$e t'at t'e !lastic Di)ision 'as e?cess capacity an# it 'as negotiate# a transer price o +,8- per plastic co$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$$ercial plastic co$ponents it $anuactures b Moti)ate bot' #i)isions as esti$ate# proits are s'are# c Encourage t'e Entertain$ent Di)ision to see: an outsi#e source or plastic co$ponents # De$oti)ate t'e !lastics Di)ision causing $e#iocre peror$ance Operating /it+ .artial E(cess Capacit) Mini$u$ Transer !rice i?e# costs. total +%,-.--Suppose t'e transers o posts to t'e a$p Di)ision cut into sales to outsi#e custo$ers by %,.--- units 'at is t'e lo(est transer price t'at (oul# not re#uce t'e proits o t'e !ost Di)ision4 5D6 a +-<- c +%7% b +%=, # +%9, G & N
!age %= o /%
MANAGEMENT ADVISORY SERVICES <7 T'e Vega Di)ision o Ace Co$pany $a:es ('eels ('ic' can eit'er be sol# to outsi#e custo$ers or transerre# to t'e als' Di)ision o Ace Co$pany ast $ont' t'e als' Di)ision boug't all 7.--- o its ('eels ro$ t'e Vega Di)ision or +7/ eac' T'e ollo(ing #ata are a)ailable ro$ last $ont';s operations or t'e Vega Co$pany* Capacity %/.--- ('eels Selling price per ('eel to outsi#e custo$ers +7, Variable costs per ('eel ('en sol# to outsi#e custo$ers +=I t'e Vega Di)ision sells ('eels to t'e als' Di)ision. Vega can a)oi# +/ per ('eel in sales co$$issions An outsi#e supplier 'as oere# to supply ('eels to t'e als' Di)ision or +7% eac' Suppose t'at Vega can sell <.--- ('eels eac' $ont' to outsi#e consu$ers. so transers to t'e als' Di)ision cut into outsi#e sales 'at s'oul# be t'e lo(est acceptable transer price ro$ t'e perspecti)e o t'e Vega Di)ision4 5VD6 a +/0-c +7%-b +=%9, # +7/-G & N i?e# costs. total +%,-.--Suppose t'e transers o posts to t'e a$p Di)ision cut into sales to outsi#e custo$ers by %,.--- units >urt'er suppose t'at an outsi#e supplier is (illing to pro)i#e t'e a$p Di)ision C3IANG AI S3E COEGE
Responsibility Accounting & Transer !ricing (it' basic posts at +%7, eac' I t'e a$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 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
MANAGEMENT ADVISORY SERVICES
Responsibility Accounting & Transer !ricing
Ma?i$u$ Transer !rice << Cline Co$pany 'a# t'e ollo(ing 'istorical accounting #ata per unit* Direct $aterials +/Direct labor %Variable $anuacturing o)er'ea# , >i?e# $anuacturing o)er'ea# 0 Variable selling e?penses %, >i?e# selling e?penses = T'e units are nor$ally transerre# internally ro$ Di)ision J to Di)ision Y T'e units also $ay be sol# e?ternally or +9- 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 en#ing in)entories I t'e negotiate# price is use#. Di)ision JFs transer 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
%-%'at is t'e $a?i$u$ price per ('eel t'at als' s'oul# be (illing to pay Vega4 5M6 a +/0 c +7/ b +7% # +7, G & N
Mini$u$ & Ma?i$u$ Transer !rice Kuestions %-- & %-% are base# on t'e ollo(ing inor$ation G & N
%-=Nita CorpFs Depart$ent % pro#uce# co$ponent C t'at is use# by OM as a :ey part !ro#uction an# sales #ata or co$ponent C is as ollo(s*
Capacity Selling price per ('eel to outsi#e custo$ers Variable costs per ('eel ('en sol# to outsi#e custo$ers
%/.--- ('eels +7, +=-
I t'e Vega Di)ision sells ('eels to t'e als' Di)ision. Vega can a)oi# +/ per ('eel in sales co$$issions An outsi#e supplier 'as oere# to supply ('eels to t'e als' Di)ision or +7% eac' %--Suppose t'at t'e Vega Di)ision 'as a$ple i#le capacity so t'at transers to t'e als' Di)ision (oul# not cut into its sales to outsi#e custo$ers 'at s'oul# be t'e lo(est acceptable transer price ro$ t'e perspecti)e o t'e Vega Di)ision4 5M6 a +/0 c +7/ b +=# +7,
C3IANG AI S3E COEGE
Opti$al Transer !rice %-/Di)ision 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 ;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 or +%- Di)ision '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# proits 'ic' o t'e ollo(ing transer prices (ill $a?i$iLe total co$pany proits an# be $ost e1uitable to t'e $anagers o Di)ision Y an# Di)ision 4 5M6 A +%/ per unit C +/- per unit " +%0 per unit D +// per unit CIA -,
Selling price per unit Variable cost per unit >i?e# cost per unit 5base# on %-.--- annual capacity6
!%-=8 /7
Nita CorpFs 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 transer price or$ula o* Transer price Variable cost per unit U ost 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
!age %, o /%
MANAGEMENT ADVISORY SERVICES
Responsibility Accounting & Transer !ricing
%-7A co$pany 'as t(o #i)isions. A an# ". eac' operate# as a proit center 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 outsi#ers
+=%-.--,.--- units ,-.--- units
A is planning to raise its transer 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 $ar:et is unaecte#4 5M6 a Outsi# e )en#ors b Di)ision A. but only at t'e )ariable cost per unit c Di)ision A. but only until i?e# costs are co)ere#. t'en ro$ outsi#e )en#ors # Di)ision A. #espite t'e increase# transer price CIA %%0= IV, Eect on !roit Kuestions %-, & %-8 are base# on t'e ollo(ing inor$ation & 3 %-e AlcatraL Di)ision o JY 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 %-,'at is t'e eect on JY;s o)erall proit i AlcatraL RE>SES t'e outsi#e price an# Capone #eci#es to buy outsi#e4 5M6 a no c'ange c +0-.--- #ecrease in JY proits b +%7-.--- #ecrease in JY proits # +7-.--- increase in JY proits %-8'at is t'e eect on JY;s o)erall proit 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 JY proits b +%7-.--- #ecrease in JY proits # +7-.--- increase in JY proits
C3IANG AI S3E COEGE
%-9Di)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-.---
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$pany as a ('ole (ill be* 5M6 G & N i?e# o)er'ea# 'ic' transer price (oul# be in t'e best interest o t'e o)erall corporation4 a +8c +9, b +,# +%/-
+=/%%,
3&M
!age %8 o /%
MANAGEMENT ADVISORY SERVICES
Responsibility Accounting & Transer !ricing
%-<!aciic Co$pany 'as t'ree plants* one locate# in Malaysia. one in In#ia an# anot'er plant locate# in t'e !'ilippines "ot' plants $anuactures a co$ponent use# in a inis'e# pro#uct $anuacture# in t'e !'ilippine plant Currently. bot' plants are operating at 9-2 capacity In Malaysia t'e inco$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 $anuacture t'e co$ponent are as ollo(s* Direct $aterials Direct labor Variable o)er'ea# >i?e# o)er'ea# 'ic' transer price (oul# be in t'e best interest o t'e o)erall corporation4 !ol "oba#illa A " C Malaysia !=, ! =, !%-In#ia !=, !%-!%--
!%/, /,
D !%-! =,
Kuestions %%- t'ru %%/ are base# on t'e ollo(ing inor$ation 3&M 3ano)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# pro#uct $anuacture# at t'e S plant Currently. t'e "elgiu$ plant is operating at 9- percent capacity In "elgiu$ t'e inco$e ta? rate is 7/ percent@ in t'e S t'e corporate inco$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#
+%/, /,
%%%'at is t'e $a?i$u$ transer price t'at t'e S #i)ision (oul# be (illing to pay4 a +=, c +8b +,, # +%-%%/'ic' transer 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 inor$ation 3&M 3a$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# pro#uct $anuacture# at t'e S plant Currently. t'e "elgiu$ plant is operating at 9- percent capacity In "elgiu$ t'e inco$e ta? rate is =- percent@ in t'e S t'e corporate inco$e ta? r ate is =, percent T'e $ar:et price o t'e co$ponent is +%7- 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#
+%, /, 8 /0
%%='at is t'e $ini$u$ transer price t'at t'e "elgiu$ #i)ision (oul# be (illing to accept4 a +%7c +80 b +97 # +78 %%7'at is t'e $a?i$u$ transer price t'at t'e S #i)ision (oul# be (illing to pay4 a +%7c +80 b +97 # +78 %%,'ic' transer price (oul# be in t'e best interest o t 'e o)erall corporation4 a +%7c +80 b +97 # +78
%%-'at is t'e $ini$u$ transer price t'at t'e "elgiu$ #i)ision (oul# be (illing to accept4 a +=, c +8b +,, # +%--
C3IANG AI S3E COEGE
!age %9 o /%
MANAGEMENT ADVISORY SERVICES Compre+ensive Kuestions %%8 t'roug' %%0 are base# on t'e ollo(ing inor$ation CMA %/<- =/% to /= A#ler In#ustries is a )ertically integrate# ir$ (it' se)eral #i)isions t'at operate as #ecentraliLe# proit centers A#ler;s Syste$s Di)ision $anuactures scientiic instru$ents an# uses t'e pro#ucts o t(o o A#ler;s ot'er #i)isions T'e "oar# Di)ision $anuactures 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 $ar:ets T'e pro#ucts o t'e Transistor Di)ision are sol# in a (ell#e)elope# co$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# 09, Total cost +<0+=-, T'e "oar# Di)ision sells its co$$ercial pro#ucts at ull cost plus a /,2 $ar:up an# belie)es t'e proprietary boar# $a#e or t'e Syste$s Di)ision (oul# sell or +%//, per unit on t'e open $ar:et T'e $ar:et price o t'e transistor use# by t'e Syste$s Di)ision is +=9- per unit %%8A per unit transer price ro$ t'e Transistor Di)ision to t'e Syste$s Di)ision at ull cost. +=-,. (oul# A Allo( e)aluation o bot' #i)isions on a co$petiti)e basis " Satisy t'e Transistor Di)ision;s proit #esire by allo(ing reco)ery o opportunity costs C De$oti)ate t'e Syste$s Di)ision an# cause $e#iocre peror$ance D !ro)i#e no proit incenti)e or t'e Transistor Di)ision to control or re#uce costs %%9Assu$e t'e Syste$s Di)ision is able to purc'ase a large 1uantity o transistors ro$ an outsi#e source at +/<- per unit T'e Transistor Di)ision. 'a)ing e?cess capacity. agrees to lo(er its transer price to +/<- per unit T'is action (oul# A Opti$iLe t'e proit goals o t'e Syste$s Di)ision ('ile sub)erting t'e proit goals o A#ler In#ustries " Allo( e)aluation o bot' #i)isions on t'e sa$e basis C Sub)ert t'e proit goals o t'e Transistor Di)ision ('ile opti$iLing t'e proit goals o t'e Syste$s Di)ision D Opti$iLe t'e o)erall proit goals o A#ler In#ustries C3IANG AI S3E COEGE
Responsibility Accounting & Transer !ricing %%0T'e "oar# an# Syste$s Di)isions 'a)e negotiate# a transer price o +%%-- per printe# circuit boar# T'is price (ill A Cause t'e "oar# Di)ision to re#uce t'e nu$ber o co$$ercial printe# circuit boar#s it $anuactures " Moti)ate bot' #i)isions as esti$ate# proits are s'are# C Encourage t'e Syste$s Di)ision to see: an outsi#e source or printe# circuit boar#s D De$oti)ate t'e "oar# Di)ision causing $e#iocre peror$ance Kuestions %%< t'roug' %/= are base# on t'e ollo(ing inor$ation "ariel# Oice !ro#ucts Inc $anuactures an# sells )arious 'ig'tec' oice auto$ation pro#ucts T(o #i)isions o Oice !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 $anuactures one pro#uct. a super c'ip. t'at can be use# by bot' t'e Co$puter Di)ision an# ot'er e?ternal custo$ers T'e ollo(ing inor$ation is a)ailable on t'is $ont';s operations in t'e Co$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' 'at is t'e $ini$u$ o t'e transer price range or a possible transer 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' 'at is t'e $a?i$u$ o t'e transer price range or a possible transer o t'e c'ip ro$ one #i)ision to t'e ot'er4 a +,c +=, b +7, # +=!age %0 o /%
MANAGEMENT ADVISORY SERVICES
Responsibility Accounting & Transer !ricing
%/%T(o possible transer prices 5or 7.--- units6 are un#er consi#eration by t'e t(o #i)isions* +=, an# +7- Corporate proits (oul# be QQQQQQQ i +=, is selecte# as t'e transer price rat'er t'an +7- a +/-.--- larger c +/-.--- s$aller b +7-.--- larger # t'e sa$e %//I a transer 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 proits 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$puter C'ip Di)ision is selling all t'at it can pro#uce to e?ternal buyers or +,- per unit 3o( (oul# o)erall corporate proits be aecte# i it sells 7.--- units to t'e Co$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 eect c +/-.--- #ecrease b +/-.--- increase # +<-.--- increase Kuestions %/7 t'ru %/8 are base# on t'e ollo(ing inor$ation "ariel# T'e Motor Di)ision o Super Truc: Co uses ,.--- carburetors per $ont' in its pro#uction o auto$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 $anuactures 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 $anuacturer at +%-8 per unit Its cost structure 5on %,.--- units6 is* Variable pro#uction costs Variable selling costs All i?e# costs
+9%%-
Assu$e t'at t'e Carburetor Di)ision (oul# not incur any )ariable selling costs on units t'at are transerre# internally %/7'at is t'e $a?i$u$ o t'e transer price range or a transer bet(een t'e t(o #i)isions4 a +%-8 c +
%/,'at is t'e $ini$u$ o t'e transer price range or a transer bet(een t'e t(o #i)isions4 a +<8 c +9b +<# +%-8 %/8I t'e t(o #i)isions agree to transact (it' one anot'er. corporate proits (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 transer price Kuestions %/9 t'roug' %== are base# on t'e ollo(ing inor$ation Glei$ The information was presented as part of Question 6 on Part 4 of the December 1981 CMA Eamination! !ortCo !ro#ucts is a #i)isionaliLe# 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# e1uip$ent ac1uisition Eac' #i)ision ser)es a #ierent $ar:et in t'e urniture in#ustry "ecause t'e $ar:ets an# pro#ucts o t'e #i)isions are so #ierent. t'ere 'a)e ne)er been any transers bet(een #i)isions T'e Co$$ercial Di)ision $anuactures e1uip$ent an# urniture t'at are purc'ase# by t'e restaurant in#ustry T'e #i)ision plans to intro#uce a ne( line o counter an# c'air units t'at eature a cus'ione# seat or t'e counter c'airs Ho'n line. t'e #i)ision $anager. 'as #iscusse# t'e $anuacturing o t'e cus'ione# seat (it' Russ >legel or a price or %--unit lots o t'e cus'ione# seat T'e ollo(ing con)ersation too: place about t'e price to be c'arge# or t'e cus'ione# seats* >legel* Ho'n. (e can $a:e t'e necessary $o#iications to t'e cus'ione# seat easily T'e ra( $aterials use# in your seat are slig'tly #ierent an# s'oul# cost about %-2 $ore t'an t'ose use# in our #elu?e oice stool 3o(e)er. t'e labor ti$e s'oul# be t'e sa$e because t'e seat abrication operation basically is t'e sa$e I (oul# price t'e seat at our regular rate ull cost plus =-2 $ar:up line* T'is is 'ig'er t'an I e?pecte# Russ. I (as t'in:ing t'at a goo# price (oul# be your )ariable $anuacturing costs Ater all. your capacity costs (ill be incurre# regar#less o t'e ob >legel* Ho'n. IF$ at capacity "y $a:ing t'e cus'ion seats or you. IFll 'a)e to cut $y pro#uction o #elu?e oice stools O course. I can increase $y pro#uction o econo$y oice stools T'e labor ti$e ree# by not 'a)ing to abricate t'e ra$e or asse$ble t'e #elu?e stool can be s'ite# to t'e ra$e abrication an# asse$bly o t'e econo$y oice stool >ortunately. I can s(itc' $y labor orce bet(een t'ese t(o $o#els o stools (it'out any loss o eiciency As you :no(. o)erti$e is !age %< o /%
MANAGEMENT ADVISORY SERVICES
Responsibility Accounting & Transer !ricing
not a easible alternati)e in our co$$unity IF# li:e to sell it to you at )ariable cost. but I 'a)e e?cess #e$an# or bot' 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 $anuacturing o)er'ea# line* I guess I see your point. Russ. but I #onFt (ant to price $ysel out o t'e $ar:et Maybe (e s'oul# tal: to Corporate to see i t'ey can gi)e us any gui#ance Oice Di)ision Stan#ar# Costs an# !rices Delu?e Oice Stool Econo$y Oice Stool Ra( $aterials >ra$ing + 0%, + <98 Cus'ione# seat !a##ing /7 Vinyl 7- Mol#e# seat 5purc'ase#6 8-Direct labor >ra$e abrication 5,?+9,-BD36 =9, 5,?+9,-BD36 =9, Cus'ion abrication =9, 5,?+9,-BD36 Asse$blyW 5,?+9,-BD36 =9, 5=?+9,-BD36 //, Manuacturing O)er'ea# 5%,D3?+%/8-BD36 %</- 50D3?+%/0-BD36 %-/7 Total stan#ar# cost +7,-+=/-Selling price 5=-2 $ar:up6 +,0,+7%8" Attachin# seats to frames and attachin# rubber feet! Oice Di)ision Manuacturing O)er'ea# "u#get O)er'ea# Ite$ Supplies In#irect labor Super)ision !o(er 3eat an# lig't
Nature Variable at current $ar:et prices Variable Non)ariable se )aries (it' acti)ity@ rates are i?e# Non)ariable lig't is i?e# regar#less o pro#uction ('ile 'eatBaircon#itioning )aries (it' uel c'arges C3IANG AI S3E COEGE
A$ount + 7/-.--=9,.--/,-.--%0-.--%7-.---
!roperty ta?es an# insurance ta?es Depreciation E$ pl oy ee b ene i ts
Non)ariable any c'ange in a$ountsBrates is in#epen#ent o pro#uction >i?e# #ollar total / -2 o s uper )i si on . #i re ct an# i n#i re ct l abor Total o)er'ea# Capacity in D3 O)er'ea# rateBD3 %/9'at a$ount o e$ployee beneit is associate# (it' #irect labor costs4 5E6 a +89,.--c +7,-.--b +9,.--# +,--.---
/--.--%.9--.--,9 ,. --+=.07-.--=--.--+%/0-
%/0'at is t'e )ariable $anuacturing o)er'ea# rate4 5E6 a +90-B'r c +,%9B'r b +%%/,B'r # +,--B'r %/<'at is t'e transer price per %--unit lot base# on )ariable $anuacturing costs to pro#uce t'e $o#iie# cus'ione# seat4 5E6 a +%.=/< c +90< b +%.08< # +%.<08 %=-'at is t'e i?e# $anuacturing o)er'ea# rate4 5E6 a +90-B'r c +,%9B'r b +%%/,B'r # +,--B'r %=%3o( $any econo$y oice stools can be pro#uce# (it' t 'e labor 'ours currently use# to $a:e %-- #elu?e stools4 5E6 a %09 c %-b %/, # %,%=/'en co$puting t'e opportunity cost or t'e #elu?e oice stool. ('at is t'e contribution $argin per unit pro#uce#4 5E6 a +/,/c +7,-b +%,07 # +===%=='at is t'e opportunity cost o t'e Oice Di)ision i %/, econo$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 /%
MANAGEMENT ADVISORY SERVICES
Responsibility Accounting & Transer !ricing
Ans/er 0e) % A / " = " 7 " , A 8 " 9 C 0 " < " %- A
%% %/ %= %7 %, %8 %9 %0 %< /-
D C D C C D " D " "
/% // /= /7 /, /8 /9 /0 /< =-
D C " " A C D " D "
=% =/ == =7 =, =8 =9 =0 =< 7-
A A " " D A C C C "
7% 7/ 7= 77 7, 78 79 70 7< ,-
,% ,/ ,= ,7 ,, ,8 ,9 ,0 ,< 8-
8% 8/ 8= 87 8, 88 89 80 8< 9-
A E " D " D A C C D
9% 9/ 9= 97 9, 98 99 90 9< 0-
C A C " A " C A " D
0% 0/ 0= 07 0, 08 09 00 0< <-
D A " " C " C " C D
<% "
%-% %-/ %-= %-7 %-, %-8 %-9 %-0 %-< %%-
" " E A C C " D E C " " A D " A A D " A
%%% %%/ %%= %%7 %%, %%8 %%9 %%0 %%< %/-
D A D A A D D " C "
C3IANG AI S3E COEGE
%/% %// %/= %/7 %/, %/8 %/9 %/0 %/< %=-
D D C " A C C D A A
A " C A C A " C D A
%=% " %=/ A %== D
!age /% o /%
