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Exam 19: Strategic Performance Measurement: Investment Centers

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Question 51

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The historical cost of an asset less its accumulated depreciation is:

A) Net book value (NBV) .
B) Return on equity (ROE) .
C) Return on investment (ROI) .
D) A rough measure of current replacement cost of the asset.
E) An estimate of liquidation value of the asset.

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Question 52

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As noted in the text,the use of market price can be used to set the transfer price associated with interdivisional transfers of goods and services. Required: 1.What are the primary advantages of using market price as the transfer price? 2.What are the primary disadvantages of using market price as the transfer price?

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Feedback: 1.Primary Advantages a.The us...

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Question 53

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Max Ltd.produces kitchen tools,and operates several divisions as investment centers.Division M produces a product that it sells to other companies for $16 per unit.It is currently operating at its full capacity of 45,000 units per year.Variable manufacturing cost is $9 per unit,and variable marketing cost is $3 per unit.The company wishes to create a new division,Division N,to produce an innovative new tool that requires the use of Division B's product (or one very similar).Division N will produce 30,000 units.Currently,Division N can purchase a product equivalent to Division M's from Company X for $15 per unit.However,Max Ltd.is considering transferring the necessary product from Division M. Required: 1.Assume the transfer price is $12 per unit.How would this affect the purchasing costs of Division N? How would this affect the profits of Division M? How would this affect Max Ltd.as a whole? 2.What if the transfer price was $13 per unit?

The greatest advantage of using a negotiated transfer price is:

The primary limitation of a full-cost based transfer pricing system is that:

A primary goal of transfer pricing is to:

This question pertains to factors affecting the setting of transfer prices in an international setting. Required: What are the primary factors affecting the setting of transfer prices between divisions of a company that operate in different countries.

A primary limitation of ROI as a performance-evaluation metric for investment centers is that ROI:

Selected data from Chering Division's accounting records revealed the following: If the minimum rate of return (i.e. ,cost of capital) was 13%,Chering Division's residual income (RI) would calculate to be:

Which one of the following transfer pricing alternatives is based on determining an appropriate markup,where the markup is based on gross profits of unrelated firms selling similar products?

The return on investment (ROI) ratio measures:

All of the following represent a way of calculating ROI (return on investment) except:

When the Bronx Company formed three divisions a year ago,the president told the division managers an annual bonus would be given to the most profitable division.The bonus would be based on either the return on investment or residual income of the division.Investment is to be measured using gross book value (GBV)or net book value (NBV).The following data are available:

The following results pertain to an investment center. How much is the return on investment (ROI) for this business unit?

The two approaches for estimating EVA $\rarr$ are:

Edwards Inc.manufactures electronics.It consists of several divisions operating investment centers.Division A desires to purchase materials from Division B at a price of $85 per unit.Division B can produce 25,000 units at full capacity,and is currently operating at 90% capacity with a variable cost of $80 per unit.Division B currently sells only to outside customers who pay $115 per unit.Division A pays an outside company $110 per unit.If purchased from Division B,B's variable costs would be $10 less because it saves on marketing expenses.Division A requires 10,000 units. Required: How would Division B selling to Division A affect Division A's purchasing costs? How would intercompany sales affect Division B? What solution would be best for Edwards Inc. ,assuming Division B has the ability to operate at full capacity?

Ellie Jackson is upset by the new transfer pricing system recently implemented at Monson Company.As manager of the first of three sequential production departments,she can't see the value of a transfer pricing system for her department."We can't sell what we produce to any outside buyer.And we're never pushed for capacity,so I don't think transfer pricing will do anything but make my life more complicated." You are Ellie's boss. Required: Explain how transfer pricing can help her evaluate her department's operations and allow you to more effectively evaluate Ellie's management abilities.

The primary limitation of using Economic Value Added (EVA $\rarr$ ) to evaluate the financial performance of investment centers is:

Consider the following data for three divisions of a company,X,Y,and Z: The return on investment (ROI) for Division X is:

In contrast to residual income (RI) ,economic value added (EVA $\rarr$ ) uses: