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Exam 19: Strategic Performance Measurement: Investment Centers and Transfer Pricing

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Question 41

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Pacific Mill consists of two operating divisions, a Cutting division and the Assembly division. The Cutting division prepares cords of timber at its sawmills, while the Assembly division prepares the cut cords of lumber into board-feet of finished wood (which is sold to various furniture manufacturers). During the most recent year the Cutting division prepared 60,000 cords of wood at a cost of $1,320,000. All of this lumber was transferred to the Assembly division, where incremental costs of $12 per cord were added. Pacific Mill sold the 600,000 board-feet of finished wood for $5,000,000. Required: 1. What would the operating income for each of the two divisions be if the transfer price from Cutting to Assembly was set at the cord cost of $22 per cord? (Show calculations.) 2. What would the operating income for each of the two divisions be if the transfer price is set at $18 per cord? (Show calculations.) 3. Since Cutting transfers all of its output internally (to Assembly), does the manager of Cutting care what price is selected? Why? Should Cutting be treated as a cost center under the circumstances (rather than a profit center or investment center)? Explain.

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1. *$22/cord ...

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Question 42

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Accounting records from Division A, Alpha Manufacturing Company indicate the following: Required: 1. Compute the return on sales (ROS) for Division A. 2. Compute the asset turnover (AT) for Division A. 3. Compute return on investment (ROI) for this division, using answers to parts (1) and (2). 4. Compute residual income (RI) for Division A. 5. Describe how Alpha Manufacturing would determine whether or not to invest in any particular project in the future.

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1. ROS = $169,...

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Question 43

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T-shirts R Us Inc. operates two divisions that each manufactures t-shirts for universities. Each division has its own manufacturing facility. The historical-cost accounting system reports the following data for 2013. T-shirts R Us Inc. estimates the useful life of each manufacturing facility to be 15 years. The company uses straight line depreciation, with a depreciation charge of $70,000 per year for each division and no salvage value at the end of 15 years. The manufacturing facility is the only long-lived asset of either division. Current assets are $300,000 in each division. At the end of 2013 the Atlantic Coast Division is 4 years old and the Big 10 Division is 6 years old. An index of construction costs, replacement cost, and liquidation values for manufacturing facilities for production of t-shirts for the 7-year period that T-shirts R Us Inc. has been operating is as follows: Required: Round answers to 2 decimal places where appropriate. 1. Compute return on investment (ROI) for each division using net book value (NBV). Interpret the results. 2. Compute return on investment (ROI) for each division, incorporating current-cost estimates as follows, using: (a) Gross book values (GBV) under historical cost; (b) GBV at historical cost restated to current cost using the index of construction costs; (c) NBV of long-lived assets restated at current cost using the index of construction costs (the facility was constructed the year before the first year of use); (d) Current replacement cost; and (e) Current liquidation value. 3. Which of the measures calculated in (2) above would you choose for (a) performance evaluation of each division manager, and (b) deciding which division is most profitable for the overall firm. What are the strategic advantages and disadvantages to the firm of each measure for both (a) and (b)?

ROI, though widely used, is subject to which one of the following limitations?

All of the following are listed as possible transfer pricing methods except:

Return on investment (ROI) , residual income (RI) , and Economic Value Added (EVA) all have in common which one of the following characteristics?

Assume that an organization's weighted-average cost of capital (minimum rate of return) is 8% and that Division A currently has a 12% return on investment (ROI) . The manager of Department A, who is evaluated on the basis of divisional ROI, would most likely accept an investment that is expected to return:

Chering Division's asset turnover (AT) is calculated to be:

When investments in facilities are shared by different subunits in a firm, allocation of cost of these common facilities to sharing units should be determined by:

Brown's Mill has two operating units, each of which is considered an investment center for evaluation purposes. The Cutting Division of the mill prepares timber at its sawmills. Afterwards, the Assembly Division prepares the cut lumber into finished wood, to be sold to furniture manufacturers. During the most recent year, the Cutting Division produced 120,000 cords of wood, at a total cost of $1,320,000. The entire output was transferred to the Assembly Division, where additional costs of $6 per cord were incurred. The 1,200,000 board-feet of finished wood were then sold in the open market for $5,000,000. Required: 1. Determine the operating income for each division if the transfer price from the Cutting Division to the Assembly Division is set at cost, $11 per cord. 2. Determine the operating income for each division if the transfer price is set at $9 per cord. 3. Since the Cutting Division sells all of its output internally, does the manager care about what price is charged? Why? Should the Cutting Division in this case be considered a cost center or a(n) profit/investment center?

Determination of the useful life of an asset and choice of a depreciation method will affect all of the following except:

Meridian Investments has three divisions (A, B, C) organized for performance-evaluation purposes as investment centers. Each division's required rate of return for purposes of calculating residual income (RI) is 15%. Budgeted operating results for 2013 for each of the three divisions are as follows: The company is planning an expansion, which will require each division to increase its investments by $25,000,000 and its income by $4,500,000. Required: 1. Compute the current ROI for each division. 2. Compute the current residual income (RI) for each division. 3. Rank the divisions according to their current ROIs and residual incomes. 4. Determine the effects after adding the new project to each division's ROI and residual income (RI). 5. Assuming the managers are evaluated on either ROI or residual income (RI), which divisions are pleased with the expansion and which ones are unhappy? Explain briefly.

One approach to measuring the short-term financial performance of a business unit considered an investment center is return on investment (ROI) . ROI is expressed as operating income of the investment center

Residual income (RI) may be a better measure for performance evaluation of an investment center manager than return on investment (ROI) because:

Division A, which is operating at capacity, produces a component that it currently sells in a competitive market for $25 per unit. At the current level of production, the fixed cost of producing this component is $8 per unit and the variable cost is $10 per unit. Division B would like to purchase this component from Division A. The price that Division A should charge Division Y for this component is:

Division A's return on investment (ROI) is:

Which of the following specifications for calculating EVA is correct?

All of the following are true of cost-based transfer prices except:

Since residual income (RI) is not a percentage, it is not useful for:

Which one of the following statements pertaining to the return on investment (ROI) as a performance measure is incorrect?