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Exam 11: Responsibility Accounting Systems

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Question 1

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Division Delta of Golvin Corporation makes and sells a single product which is used by manufacturers of fork lift trucks. Presently it sells 9,000 units per year to outside customers at $57 per unit. The annual capacity is 10,000 units and the variable cost to make each unit is $32. Division Echo of Golvin Corporation would like to buy 2,000 units a year from Division Delta to use in its products. There would be no cost savings from transferring the units within the company rather than selling them on the outside market. What should be the lowest acceptable transfer price from the perspective of Division Delta?

A) $57.00 per unit
B) $19.50 per unit
C) $44.50 per unit
D) $32.00 per unit

E) B) and C)
F) A) and D)

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Question 2

Multiple Choice

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Minar Incorporated reported the following results from last year's operations: At the beginning of this year, the company has a $900,000 investment opportunity with the following characteristics: If the company pursues the investment opportunity and otherwise performs the same as last year, the combined return on investment for the entire company will be closest to:

A) 14.4%
B) 2.7%
C) 11.7%
D) 18.8%

E) B) and C)
F) A) and D)

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Question 3

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Gauani Products, Incorporated, has a Detector Division that manufactures and sells a number of products, including a standard detector. Data concerning that detector appear below: The company has a Commercial Security Division that could use this detector in one of its products. The Commercial Security Division is currently purchasing 5,000 of these detectors per year from an overseas supplier at a cost of $65 per detector. Required: a. Assume that the Detector Division has enough idle capacity to handle all of the Commercial Security Division's needs. What is the acceptable range, if any, for the transfer price between the two divisions? b. Assume that the Detector Division is selling all of the detectors it can produce to outside customers. What is the acceptable range, if any, for the transfer price between the two divisions?

Edith Carolina is president of the Deed Corporation. The company is decentralized, and leaves investment decisions up to the discretion of the division managers. Michael Sanders, manager of the Cosmetics Division, has had a return on investment of 14% for his division for the past three years and expects the division to have the same return in the coming year. Sanders has the opportunity to invest in a new line of cosmetics which is expected to have a return on investment of 12%. The company's minimum required rate of return is 8%.Suppose Deed Corporation evaluates managerial performance using return on investment. Edith Carolina, as president of the company, may view the opportunity for taking on the cosmetics line differently from Michael Sanders, manager of the Cosmetics Division. What action would each of them prefer with respect to the decision of whether to take on the new cosmetics line?

Wollan Corporation has two operating divisions-an East Division and a West Division. The company's Logistics Department services both divisions. The variable costs of the Logistics Department are budgeted at $29 per shipment. The Logistics Department's fixed costs are budgeted at $383,900 for the year. The fixed costs of the Logistics Department are determined based on peak-period demand. At the end of the year, actual Logistics Department variable costs totaled $218,136 and fixed costs totaled $408,000. The East Division had a total of 2,670 shipments and the West Division had a total of 4,650 shipments for the year. How much Logistics Department cost should be allocated to the West Division at the end of the year?

Wetherald Products, Incorporated, has a Pump Division that manufactures and sells a number of products, including a standard pump that could be used by another division in the company, the Pool Products Division, in one of its products. Data concerning that pump appear below: The Pool Products Division is currently purchasing 5,200 of these pumps per year from an overseas supplier at a cost of $86 per pump.Assume that the Pump Division is selling all of the pumps it can produce to outside customers. What should be the minimum acceptable transfer price for the pumps from the standpoint of the Pump Division?

Division C makes a part that it sells to customers outside of the company. Data concerning this part appear below: Division D of the same company would like to use the part manufactured by Division C in one of its products. Division D currently purchases a similar part made by an outside company for $79 per unit and would substitute the part made by Division C. Division D requires 1,000 units of the part each period. Division C has ample excess capacity to handle all of Division D's needs without any increase in fixed costs and without cutting into outside sales. What is the lowest acceptable transfer price from the standpoint of the selling division?

Ulrich Company has a Castings Division which does casting work of various types. The company's Machine Products Division has asked the Castings Division to provide it with 20,000 special castings each year on a continuing basis. The special casting would require $12 per unit in variable production costs.In order to have time and space to produce the new casting, the Castings Division would have to cut back production of another casting - the RB4 which it presently is producing. The RB4 sells for $40 per unit, and requires $18 per unit in variable production costs. Boxing and shipping costs of the RB4 are $6 per unit. Boxing and shipping costs for the new special casting would be only $1 per unit, thereby saving the company $5 per unit in cost. The company is now producing and selling 100,000 units of the RB4 each year. Production and sales of this casting would drop by 25 percent if the new casting is produced. Some $240,000 in fixed production costs in the Castings Division are now being covered by the RB4 casting; 25 percent of these costs would have to be covered by the new casting if it is produced and sold to the Machine Products Division. Required: According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division? Show all computations.

Fyodor Corporation has a Parts Division that does work for other Divisions in the company as well as for outside customers. The company's Machine Division has asked the Parts Division to provide it with 8,000 special parts each year. The special parts would require $19.00 per unit in variable production costs.The Machine Division has a bid from an outside supplier for the special parts at $27.00 per unit. In order to have time and space to produce the special part, the Parts Division would have to cut back production of another part-the QR4 that it presently is producing. The QR4 sells for $34.00 per unit, and requires $18.00 per unit in variable production costs. Packaging and shipping costs of the QR4 are $2.00 per unit. Packaging and shipping costs for the new special part would be only $0.50 per unit. The Parts Division is now producing and selling 40,000 units of the QR4 each year. Production and sales of the QR4 would drop by 5% if the new special part is produced for the Machine Division.Required:a. What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 8,000 special parts per year from the Parts Division to the Machine Division?b. Is it in the best interests of Fyodor Corporation for this transfer to take place? Explain.

Mannerman Products, Incorporated, operates an electric power plant which provides all electrical power for the company's Machining and Fabrication departments. Information on kilowatt-hours (kwh) of power usage in these departments for May follow: The costs of the electric power plant are all fixed. Budgeted fixed costs for May totaled $60,000 and are determined by peak-period requirements. Actual fixed costs for the month totaled $65,000. The Machining Department requires 60% of the peak-period capacity and the Fabrication Department requires 40%.For performance evaluation purposes, how much of the electric power plant's fixed costs should be charged to the Fabrication department at the end of the month for purposes of evaluating performance?

Shrewsbury Incorporated reported the following results from last year's operations: At the beginning of this year, the company has a $800,000 investment opportunity with the following characteristics: The company's minimum required rate of return is 14%.Last year's residual income was closest to:

Ebbs Products, Incorporated, has a Motor Division that manufactures and sells a number of products, including a standard motor. Data concerning that motor appear below: The Automotive Division of Ebbs Products, Inc needs 9,000 special heavy-duty motors per year. The Motor Division's variable cost to manufacture and ship this special motor would be $46 per unit. Because these special motors require more manufacturing resources than the standard motor, the Motor Division would have to reduce its production and sales of standard motors to outside customers from 86,000 units per year to 72,500 units per year.What is the total contribution margin on sales to outside customers that the Motor Division would give up if it were to make the special motors for the Automotive Division?

Ganus Products, Incorporated, has a Relay Division that manufactures and sells a number of products, including a standard relay that could be used by another division in the company, the Electronics Division, in one of its products. Data concerning that relay appear below: The Electronics Division is currently purchasing 7,000 of these relays per year from an overseas supplier at a cost of $59 per relay.Assume that the Relay Division is selling all of the relays it can produce to outside customers. Does there exist a transfer price that would make both the Relay and Electronics Division financially better off than if the Electronics Division were to continue buying its relays from the outside supplier?

Robichau Incorporated reported the following results from last year's operations: At the beginning of this year, the company has a $900,000 investment opportunity with the following characteristics: The company's minimum required rate of return is 20%.The Return on investment for this year's investment opportunity considered alone is closest to:

Leslie Company operates a cafeteria for the benefit of its employees. The company subsidizes the cafeteria heavily by allowing employees to purchase meals at greatly reduced prices. Budgeted and actual costs in the cafeteria for the year just ended are as follows: *Unrecovered cost after deducting amounts received from employees.Costs of the cafeteria are charged to producing departments on the basis of the number of employees in these departments. Fixed costs are charged on the basis of the percentage of peak-period requirements. Data concerning the company's producing departments follows: Required: a. Compute the dollar amount of variable and fixed costs that should be charged to each of the producing departments at the end of the year for purposes of evaluating performance.b. Identify the amount, if any, of actual costs that should not be charged to the operating departments.

For performance evaluation purposes, the fixed costs of a service department should be charged to operating departments using:

Bonilla Incorporated has a $700,000 investment opportunity with the following characteristics: The turnover for the investment opportunity is closest to:

Whenever the selling division must give up outside sales in order to sell internally, it has an opportunity cost that should be considered in setting the transfer price.

If a company contains a number of investment centers of differing sizes, return on investment (ROI) should be used rather than residual income to rank the financial performance of the divisions.

Since sales dollars represents "ability to pay," it is superior to most other bases used for allocating or charging service department costs.