MANAGEMENT ADVISORY SERVICES Responsibility Accounting & Transfer Pricing

RETURN ON INVESTMENT Required Peso Sales

Return on Investment Computation 4. The manager of the Strong Division of Powers Company expects the following results in 2003
Based on Operating Income (pesos in millions);
1. The following selected data pertain to the belt division of Allen Corp. for last year: Sales P49.60
Sales $500,000 Variable costs (60%) 29.76
Average operating assets $200,000 Contribution margin P19.84
Net operating income $80,000 Fixed costs 12.00
Turnover 2.5 Profit P 7.84
Minimum required return 20% Investment
How much is the return on investment? (M) Plant equipment P19.51
a. 40% c. 20% Working capital 14.88 P34.39
b. 16% d. 15% AICPA, Adapted ROI (P7.84/P34.39) 22.80%
The division has a target ROI of 30%, and the manager has asked you to determine how much
2. Harstin Corporation has provided the following data: sales volume the division would need to reach. He states that the sales mix is relatively
Sales $625,000 constant so variable costs should be close to 60% of sales, fixed cost and plant and equipment
Gross margin 70,000 should remain constant, and working capital (cash, receivables and inventories) should vary
Net operating income 50,000 closely with sales in the percentage reflected above.
Stockholders' equity 90,000 The peso sales that the division needs in order to reach the 30% ROI target is (D)
Average operating assets 250,000 A. P19,829,032. C. P44,373,871
Residual income 20,000 B. P57,590,322 D. P59,510,000 Pol Bobadilla
The return on investment for the past year was: (M)
a. 28%. c. 36%. Dupont Model
b. 20%. d. 8%. G & N 9e Sensitivity Analysis
5. If the operating income margin of 0.3 stayed the same and the operating asset turnover of 5.0
Investment increased by 10 percent, the ROI (M)
3. Apple Division of the American Fruit Co. had the following statistics for 2002: a. increase by 10 percent d. remain the same
Assets available for use $1,000,000 b. decrease by 10 percent e. increase to 1.5.
Residual income 100,000 c. increase by 15 percent H&M
Return on investment 15%
If the manager of Apple Division is evaluated based on return on investment, how much would 6. If the investment turnover increased by 20% and ROS decreased by 30%, the ROI would (M)
she be willing to pay for an investment that promises to increase net segment income by a. Increase by 20%. c. Increase by 4%.
$50,000? (M) b. Decrease by 16%. d. None of the above. D, L & H 9e
a. $50,000 c. $1,000,000
b. $333,333 d. $500,000 Barfield 7. If the investment turnover decreased by 20% and ROS decreased by 30%, the ROI would (M)
a. Increase by 30%. c. Decrease by 44%.
b. Decrease by 20%. d. None of the above. D, L & H 9e

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8. Company L had its operating asset turnover increased by 50% and the operating income Which of the scenarios assumes the lowest maximum cost? (M)
margin increased by 50%. Company U had its operating asset turnover increased by 30% and a. Scenario 1. c. Scenario 3.
the operating income margin decreased by 30%. What changes are expected for ROI of b. Scenario 2. d. Scenario 4. Gleim
Company L and Company U, respectively? (M)
Pol Bobadilla A. B. C. D. RETURN ON INVESMENT, MINIMUM REQUIRED RATE OF RETURN & RESIDUAL INCOME
Company L 50% increase 125% increase 225% increase 125% increase Minimum Required Rate of Return & Residual Income
Company U 9% decrease 9% decrease No change No change Return on Investment
11. Fortree products have a residual net income of P1.8 million. If the imputed interest rate is
RESIDUAL INCOME 16%, compute the ROI (M)
Residual Income Computation a. 5% c. 15%
9. REB Service Co. is a computer service center. For the month of May 1995, REB had the b. 10% d. not listed RPCPA 1091
following statistics:
Sales $450,000 12. Z Division of XYZ Corp. has the following information for 2002:
Operating income 25,000 Assets available for $1,800,000
Net profit after taxes 8,000 Target rate of return 10%
Total assets 500,000 Residual income $270,000
Shareholders’ equity 200,000 What was Z Division's return on investment for 2002? (M)
Cost of capital 6% a. 15% c. 25%
Based on the above information, which one of the following statements is correct? REB has a b. 10% d. 20% Barfield
(M)
a. ROI of 4% c. ROI of 1.6% CMA 0695 3-20 13. Pasta Division of We Make Italian, is evaluated based on residual income generated. For
b. Residual income of $(5,000) d. Residual income of $(22,000) 2002, the Division generated a residual income of $2,000,000 and net income of $5,000,000.
The target rate of return for all divisions of We Make Italian is 20 percent. For 2002, what was
Target Cost the return on investment for Pasta Division? (M)
10. James Webb is the general manager of the Industrial Park Division, and a. 40% c. 20%
b. 13% d. 33% Barfield
his performance is measured using the residual income method. Webb is
reviewing the following forecasted information for the division for next year. Return on Investment, Minimum Required Rate of Return & Residual Income
Category Amount (thousands) Investment Cost
Working capital $ 1,800 14. In the X Division of S Co., 2002 segment income exceeded 2002 residual income by $15,000.
Revenue 30,000 Also for 2002, return on investment exceeded the target rate of return by 10 percent. What
Plant and equipment 17,200 was the level of investment in the X Division for 2002? (M)
To establish a standard of performance for the division’s manager using the residual income a. $15,000
approach, four scenarios are being considered. Scenario 1 assumes an imputed interest b. $100,000
charge of 15% and a target residual income of $2,000,000. Scenario 2 assumes an imputed c. $150,000
interest charge of 12% and a target residual income of $1,500,000. Scenario 3 assumes an d. An answer can't be determined from this information. Barfield
imputed interest charge of 18% and a target residual income of $1,250,000. Scenario 4
assumes an imputed interest charge of 10% and a target residual income of $2,500,000.

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Return on Investment & Residual Income & Units Sold 19. Watne Company has two divisions, M and N. Information for each division is as follows:
Questions 15 thru 17 are based on the following information. G & N 9e Net earnings for division $65,000
The Axle Division of LaBate Company makes and sells only one product. Annual data on the Axle Asset base for division $300,000
Division's single product follow: Target rate of return 18%
Unit selling price $50 Operating income margin 20%
Unit variable cost $30 Weighted average cost of capital 12%
Total fixed costs $200,000 What is EVA for N?
Average operating assets $750,000 a. $36,000 c. $54,000
Minimum required rate of return 12% b. $29,000 d. $11,000 H&M

15. If Axle sells 16,000 units per year, the return on investment should be: (M) 20. Family Company has two divisions, Ma and Pa. Information for each division is as follows:
a. 12%. c. 16%. Ma Pa
b. 15%. d. 18%. Net earnings for division P20,000 P65,000
Asset base for division P50,000 P300,000
16. If Axle sells 15,000 units per year, the residual income should be: (M) Target rate of return 15% 18%
a. $30,000. c. $50,000. Operating income margin 10% 20%
b. $100,000. d. $10,000. G & N 9e Weighted-average cost of capital 12% 12%
What is the Economic Value Added for Ma and Pa, respectively?
17. Suppose the manager of Axle desires an annual residual income of $45,000. In order to A. P20,000, P36,000 C. P12,500; P11,000
achieve this, Axle should sell how many units per year? (M) B. P14,000; P29,000 D. P20,000; P29,000 Pol Bobadilla
a. 14,500. c. 18,250.
b. 16,750. d. 19,500. G & N 9e EVA Based on Operating Income after Tax
EVA - Given Operating Income Before Tax
ECONOMIC VALUE-ADDED 21. McKenzie Oil had $440,000 in operating income before interest and taxes in the last year.
EVA Based on Operating Income McKenzie is in the 40% tax bracket. If capital employed by McKenzie was equal to $300,000,
18. Division A had the following information: and the company's weighted-average after-tax cost of capital is 15%, what is McKenzie's
Asset base in Division A $800,000 Economic Value Added?
Net income in Division A $100,000 A. $131,000 C. $198,000
Operating income margin for Division A 20% B. $140,000 D. $219,000 Gleim
Target ROI 15%
Weighted-average cost of capital 12% 22. Valecon Co. reported the following information for the year just ended:
What is EVA for Division A? Segment A Segment B Segment C
a. $120,000 d. $4,000
Pre-tax operating income $ 4,000,000 $ 2,000,000 $3,000,000
b. $96,000 e. $(20,000)
Current assets 4,000,000 3,000,000 4,000,000
c. $15,000 H&M
Long-term assets 16,000,000 13,000,000 8,000,000
Current liabilities 2,000,000 1,000,000 1,500,000

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If the applicable income tax rate and after-tax weighted-average cost of capital for each b. $1,530,000 d. $1,115,640
segment are 30% and 10%, respectively, the segment with the highest economic value added
(EVA) is (M) EVA Computation – Given Operating Income after Tax
A. Segment A. C. Segment C. Gleim 27. Samovar Company has operating income after taxes of $50,000. It has $200,000 of equity
B. Segment B. D. Not determinable from this information. capital, which has an after-tax weighted-average cost of 12%. Samovar also has $10,000 of
current liabilities (noninterest-bearing) and no long-term liabilities. What is the company's
23. Assume Avionics Industries reported at year-end that operating income before taxes for the economic value added (EVA) for the period?
year equaled $2,400,000. Long-term debt issued by Avionics has a coupon rate equal to 6%, A. $(24,000) C. $24,000
and its cost of equity is 8%. The book value of the debt currently equals its fair value, and the B. $(26,000) D. $26,000 Gleim
book value of the equity capital for Avionics is $900,000 less than its fair value. Current assets
are listed at $2,000,000 and long-term assets equal $9,600,000. The claims against those 28. Ralph, an investor, is interested in loaning money to a secure corporation. He always bases
assets are in the form of $1,500,000 in current liabilities and $2,200,000 in long-term liabilities. his decision on the company with the largest economic value added (EVA). Ralph has
The income tax rate for Avionics is 30%. What is the economic value added (EVA)? (D) narrowed his choices down to four, and has collected the following information:
a. $731,240 c. $1,668,760 Operating
b. $948,760 d. $1,680,000 Gleim Income after Tax Equity Capital WACC Current Liabilities
Company A $50,000 $200,000 12% $10,000
Questions 24 thru 26 are based on the following information. Horngren Company B 60,000 150,000 20% 18,000
Waldorf Company has two sources of funds: long-term debt with a market Company C 45,000 220,000 10% 30,000
and book value of $10 million issued at an interest rate of 12%, and Company D 55,000 250,000 15% 5,000
equity capital that has a market value of $8 million (book value of $4 Based on largest EVA and assuming that none of the companies have any long-term liabilities,
million). Waldorf Company has profit centers in the following locations which company should Ralph invest in?
with the following operating incomes, total assets, and total liabilities. The A. Company A. C. Company C.
cost of equity capital is 12%, while the tax rate is 25%. B. Company B. D. Company D. Gleim
Operating Income Assets Current Liabilities
St. Louis $ 960,000 $ 4,000,000 $ 200,000 Equity Value Creation, Market Value Added & Total Shareholder Return
Cedar Rapids $1,200,000 $ 8,000,000 $ 600,000 Questions 29 thru 31 are based on the following information. Gleim
Wichita $2,040,000 $12,000,000 $1,200,000 Semibar Co. reports net income of $630,000. The information below or the year just ended is also
available:
24. What is the EVA for St. Louis? (M)
a. $255,740 c. $392,540 January 1 December 31
b. $327,460 d. $720,000 Shareholders’ equity $4,200,000 $4,480,000
Share price $25 $30
25. What is the EVA for Cedar Rapids? (M) Shares outstanding 400,000 400,000
a. $135,580 c. $234,000 Cost of equity 10% 10%
b. $220,000 d. $305,000 Dividends per share $1.00

26. What is the EVA for Wichita? (M) 29. Equity value creation is
a. $450,000 c. $414,360 a. $630,000 c. $420,000
b. $448,000 d. $210,000
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30. The market value added (MVA) is

a. $2,000,000 c. $400,000
b. $1,720,000 d. $280,000

31. The total shareholder return is

a. 24% c. 16.67%
b. 20% d. 4%

SENSITIVITY ANALYSIS
32. Apple Division of the American Fruit Co. had the following statistics for 2002:
Assets available for use $1,000,000
Residual income 100,000
Return on investment 15%
If expenses increased by $20,000 in Apple Division, (E)
a. return on investment would decrease. c. the target rate of return would decrease.
b. residual income would increase. d. asset turnover would decrease. Barfield

33. Division A had the following information:

Asset base in Division A $800,000
Net income in Division A $100,000
Operating income margin for Division A 20%
Target ROI 15%
Weighted-average cost of capital 12%
If the asset base is decreased by $200,000, with no other changes, the return on investment of
Division A will be
a. 100.0% d. 62.5%
b. 16.7% e. 20.0%
c. 600.0% H&M

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Comprehensive Questions 39 through 51 are based on the following information. Gleim

Questions 34 through 38 are based on the following information. AICPA 1186 II-22 to 26 Segment A Segment B Segment C Segment D
Oslo Co.’s industrial photo-finishing division, Rho, incurred the following costs and expenses in Net income $ 5,000 - - $ 90,000
1992: Sales 60,000 $750,000 $135,000 1,800,000
Variable Fixed Investment 24,000 500,000 45,000 -
Direct materials $200,000 Net income as % of sales - - - -
Direct labor 150,000 Turnover of investment - - - -
Factory overhead 70,000 $42,000 ROI - - 20% 7.5%
General, selling and administrative 30,000 48,000 Minimum ROI-dollars - - - $120,000
Totals $450,000 $90,000 Minimum ROI - % 20% 6% - -
Residual income - -0- $2,250 -
During 1992, Rho produced 300,000 units of industrial photo-prints, which were sold for $2.00
each. Oslo’s investment in Rho was $500,000 and $700,000 at January 1, 1992 and December 39. For Segment B, net income as a percentage of sales is
31, 1992, respectively. Oslo normally imputes interest on investments at 15% of average invested a. 8% c. 4%
capital. b. 6.67% d. 10%

34. For the year-ended December 31, 1992, Rho’s return on average investment was 40. For Segment C, net income as a percentage of sales is
a. 15.0% c. 8.6% a. 5% c. 4%
b. 10.0% d. (5.0%) b. 6.67% d. 20%

35. Assume that net operating income was $60,000 and that average invested capital was 41. For Segment C, the turnover of investment is
$600,000. For the year ended December 31, 1992, Rho’s residual income (loss) was a. 3 c. 2.5
a. $150,000 c. $(45,000) b. 1.5 d. 4
b. $60,000 d. $(30,000)
42. For Segment D, the turnover of investment is
36. How many industrial photo-print units did Rho have to sell in 1992 to break-even? a. 3 c. 2.5
a. 180,000 c. 90,000 b. 1.5 d. 4
b. 120,000 d. 60,000
43. For segment A, ROI is
37. For the year ended December 31, 1992, Rho’s contribution margin was a. 6% c. 20.8%
a. $250,000 c. $150,000 b. 20% d. 7.5%
b. $180,000 d. $60,000
44. For segment B, ROI is
38. Assume the variable cost per unit was $1.50. Based on Rho’s 1992 financial data, and an a. 6% c. 20%
estimated 1993 production of 350,000 units of industrial photo-prints, Rho’s estimated 1993 b. 20.8% d. 7.5%
total costs and expenses will be
a. $525,000 c. $615,000
b. $540,000 d. $630,000
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45. For segment A, the minimum dollar ROI is Segment Margin

a. $30,000 c. $4,800 53. Assume the following information for a product line:
b. $6,750 d. $120,000 Sales revenue $500,000
Variable manufacturing costs 100,000
46. For Segment B, the minimum dollar ROI is Direct fixed manufacturing costs 75,000
a. $30,000 c. $4,800 Variable selling/administrative costs 50,000
b. $6,750 d. $120,000 Direct fixed selling/admin. costs 60,000
What is the segment margin of the product line? (E)
47. For Segment C, the minimum dollar ROI is a. $400,000 d. $275,000
a. $30,000 c. $4,800 b. $325,000 e. $215,000
b. $6,750 d. $120,000 c. $350,000 H&M

48. Assume that the minimum dollar ROI is $6,750 for Segment C. The minimum percentage of 54. The data available for the current year are given below:
ROI is Whole Co. Division 1 Division 2
a. 20% c. 15% Variable mfg. cost of goods sold $ 400,000 $ 220,000 $ 80,000
b. 6% d. 10% Unallocated costs (e.g., president’s salary) 100,000 - -
Fixed costs controllable by Div. Managers
49. In Segment D, the minimum percentage of ROI is (e.g., advertising, eng’g supervision costs) 90,000 50,000 40,000
a. 20% c. 15% Net revenue 1,000,000 600,000 400,000
b. 6% d. 10% Variable selling and administrative costs 130,000 70,000 60,000
Fixed costs controllable by others (e.g.,
50. In Segment A, the residual income is depreciation, insurance) 120,000 70,000 50,000
a. $200 c. $(30,000) Using the information presented above, the contribution by Division 1 was (M)
b. $12,000 d. $4,800 a. $190,000 c. $310,000
b. $260,000 d. $380,000 CIA 1186 IV-17
51. In Segment D, the residual income is
a. $12,000 c. $(60,000) 55. A and B are autonomous divisions of a corporation. They have no beginning or ending
b. $(30,000) d. $9,000 inventories, and the number of units produced is equal to the number of units sold. Following
is financial information relating to the two divisions.
SEGMENTED INCOME STATEMENT A B
Sales
Sales $150,000 $400,000
52. During April, Division D of Carney Company had a segment margin ratio of 15%, a variable
Other revenue 10,000 15,000
expense ratio of 60% of sales, and traceable fixed expenses of $15,000. Division D's sales
Direct materials 30,000 65,000
were closest to: (M)
Direct labor 20,000 40,000
a. $100,000. c. $33,333.
Variable factory overhead 5,000 15,000
b. $60,000. d. $22,500. G & N 9e
Fixed factory overhead 25,000 55,000
Variance S&A expense 15,000 30,000
Fixed S&A expense 35,000 60,000
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Central corporate expenses (allocated) 12,000 20,000 59. What is the net income for the Barmore Company? (E)
What is the total contribution to corporate profits generated by Division A before allocation of a. $300,000 d. $32,500
central corporate expenses? (M) b. $162,500 e. $20,500
a. $18,000 c. $30,000 c. $150,000
b. $20,000 d. $80,000 CIA 1193 IV-20
Questions 60 & 61 are based on the following information. G & N 9e
Common Fixed Costs Canon Company has two sales areas: North and South. During last year, the contribution margin in
56. Lyons Company consists of two divisions, A and B. Lyons Company reported a contribution the North Area was $50,000, or 20% of sales. The segment margin in the South was $15,000, or
margin of $50,000 for Division A, and had a contribution margin ratio of 30% in Division B, 8% of sales. Traceable fixed costs are $15,000 in the North and $10,000 in the South. During last
when sales in Division B were $200,000. Net income for the company was $25,000 and year, the company reported total net income of $26,000.
traceable fixed expenses were $40,000. Lyons Company's common fixed expenses were: (M)
a. $85,000. c. $45,000. 60. The variable costs for the South Area for the year were: (M)
b. $70,000. d. $40,000. G & N 9e a. $230,000. c. $162,500.
b. $185,000. d. $65,000.
Company Net Income
57. Redding Company has two divisions with the following segment margins for the current year: 61. The total fixed costs (traceable and common) for Canon Company for the year were: (M)
Northern, $200,000; Southern, $400,000. Common expenses of the company are $50,000. a. $49,000. c. $24,000.
What is Redding Company’s net income? (E) b. $25,000. d. $50,000.
a. $150,000 d. $650,000
b. $550,000 e. $350,000 Questions 62 thru 64 are based on the following information. H&M
c. $600,000 H&M Nauman Company has the following information pertaining to its two divisions for 1995:
Division X Division Y
Comprehensive Variable selling & administrative expenses $ 70,000 $ 90,000
Questions 58 & 59 are based on the following information. H&M Direct fixed manufacturing expenses 35,000 100,000
Barmore Company has the following information pertaining to its two divisions for 1995: Sales 200,000 400,000
Division A Division B Direct fixed selling/admin. expenses 30,000 70,000
Variable selling & administrative expenses $ 35,000 $ 45,000 Variable manufacturing expenses 40,000 100,000
Direct fixed manufacturing expenses 17,500 50,000 Common expenses are $24,000 for 1995.
Sales 100,000 200,000
Direct fixed selling/admin. Expenses 15,000 35,000 62. What is the net income for the Nauman Company? (E)
Variable manufacturing expenses 20,000 50,000 a. $600,000 d. $65,000
Common expenses are $12,000 for 1995. b. $325,000 e. $41,000
c. $300,000
58. Common expenses are $12,000 for 1995. What is the segment margin for Division B? (E)
a. $155,000 d. $20,000 63. What is the segment margin for Division X? (E)
b. $105,000 e. $8,000 a. $90,000 d. $160,000
c. $55,000 b. $25,000 e. $125,000
c. $1,000
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64. What is the segment margin for Division Y? (E) Cost of sales 980,000 360,000 420,000 200,000
a. $310,000 d. $40,000 Rent 280,000 84,000 140,000 56,000
b. $210,000 e. $16,000 Salaries 110,000 54,000 32,000 24,000
c. $110,000 Total costs & expenses $1,830,000 $670,000 $750,000 $410,000
Operating income (loss) $ 170,000 $130,000 $(50,000) $ 90,000
Questions 65 thru 68 are based on the following information. G & N 9e The company buys the goods in the three product lines directly from manufacturers'
Ieso Company has two stores: J and K. During November, Ieso Company reported a net income representatives. Each product line is directed by a manager whose salary is included in the
of $30,000 and sales of $450,000. The contribution margin in Store J was $100,000, or 40% of administrative expenses. Administrative expenses are allocated to the three product lines equally
sales. The segment margin in Store K was $30,000, or 15% of sales. Traceable fixed expenses are because the administration is spread evenly among the three product lines. Salaries represent
$60,000 in Store J, and $40,000 in Store K. payments to the workers in each product line and therefore are traceable costs of each product
line. Advertising promotes the entire company rather than the individual product lines. As a result,
65. Sales in Store J totaled: (M) the advertising is allocated to the three product lines in proportion to the sales revenue.
a. $400,000. c. $150,000. Commissions are paid to the salespersons in each product line based on 2% of gross sales. Rent
b. $250,000. d. $100,000. represents the cost of the retail store and warehouse under a lease agreement with 5 years
remaining. The product lines share the retail and warehouse space, and the rent is allocated to the
66. Variable expenses in Store K totaled: (M) three product lines based on the square footage occupied by each of the product lines.
a. $70,000. c. $200,000.
b. $110,000. d. $130,000. 69. The segmented income statement for this retail company does not facilitate performance
evaluation because it does not distinguish between controllable and uncontrollable costs. The
67. The segment margin ratio in Store J was: (M) only costs and expenses controllable at the product-line level for this retail company are (M)
a. 16%. c. 40%. A. Commissions, cost of sales, and rent. C. Commissions, cost of sales, and salaries.
b. 24%. d. 60%. B. Advertising, cost of sales, and salaries. D. Administration, advertising, and rent.

68. Ieso Company's total fixed expenses for the year were: (M) 70. The company has an opportunity to promote one of its product lines by making a one-time
a. $40,000. c. $140,000. $7,000 expenditure. The company can choose only one of the three product lines to promote.
b. $100,000 d. $170,000. The incremental sales revenue that would be realized from this $7,000 promotion expenditure
in each of the product lines is estimated as follows:
Sensitivity Analysis Increase in Sales Revenue
Questions 69 through 72 are based on the following information. CIA 1196 III-97 to 100 Product Line 1 $15,000
The segmented income statement for a retail company with three product lines is presented below: Product Line 2 20,000
Total Product Product Product Product Line 3 14,000
Company Line 1 Line 2 Line 3 In order to maximize profits, the promotion expenditure should be spent on <List A>, resulting
Volume (in units) 20,000 28,000 50,000 in an increase in operating income of <List B>. (M)
Sales revenue $2,000,000 $800,000 $700,000 $500,000 A. B. C. D.
Costs & expenses:
List A Product Line 2 Product Line 2 Product Line 3 Product Line 3
Administrative $ 180,000 $ 60,000 $ 60,000 $ 60,000
List B $13,000 $5,000 $1,400 $1,120
Advertising 240,000 96,000 84,000 60,000
Commissions 40,000 16,000 14,000 10,000
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71. One company executive has expressed concern about the operating loss that has occurred in
Product Line 2 and has suggested that Product Line 2 be discontinued. If Product Line 2 is
dropped, the manager of the line would be retained and assigned other duties with the
company, but the other employees would not be retained. Management has indicated that the
nature of the company's advertising might change with the elimination of Product Line 2, but
the total dollar amount would not change. If Product Line 2 were to be dropped, the operating
income of the company would (M)
A. Increase by $50,000. C. Decrease by $234,000.
B. Decrease by $94,000. D. Increase by $416,000.
Ajax has an opportunity to sell the above 20,000 units to an outside customer at a price of $75
per unit during 2000 on a continuing basis. Bradley can purchase its requirements from an
outside suppler at a price of $85 per unit.
Assuming that Ajax Division desires to maximize its gross margin, should Ajax take on the new
customer and drop its sales to Bradley for 2000, and why?
a. No, because the gross margin of the corporation as a whole would decrease by $200,000.
b. Yes, because Ajax Division’s gross margin would increase by $300,000.
c. Yes, because Ajax division’s gross margin would increase by $600,000.
d. No, because Bradley Division’s gross margin would decrease by $800,000.

72. A customer, operating in an isolated foreign market, has approached the head salesperson for Operating with Excess Capacity
Product Line 1 and offered to purchase 4,000 units of a special-order product over the next 12 Minimum Price
months. This product would be sold in the same manner as Product Line 1's other products 74. Houston Division of Texacon, Inc. expects the following result for 2004:
except that the customer is hoping for a price break. Product Line 1's cost to purchase this Units sales 70,000
product (cost of sales) would be $14.70. Product Line 1 has excess capacity, meaning that the Units selling price P10
rate or amount of the remaining operating costs would not change as a consequence of the Unit variable cost P 4
purchase and sale of this special-order product. The minimum selling price for this special- Total fixed costs P300,000
order product would be (M) Total investment P500,000
A. $15.00 C. $27.50 The minimum required ROI is 15%, and divisions are evaluated on residual income. A foreign
B. $17.30 D. $30.20 customer has approached Houston’s manager with an offer to buy 10,000 units at P7 each. If
Houston accepts the order, it would not lose any of the 70,000 units at the regular price.
SPECIAL ORDER Accepting the order would increase fixed costs by P10,000 and investment by P40,000.
Operating at Full Capacity What is the minimum price that Houston could accept for the order and still maintain its
Effect on Profit expected residual income?
73. Ajax Division of Carlyle Corporation produces electric motors, 20% of which are sold to A. P5.00 C.P4.75
Bradley Division of Carlyle and the remainder to outside customers. Carlyle treats its divisions B. P5.60 D. P9.00 Pol Bobadilla
as profit centers and allows division managers to choose their sources of sale and supply.
Corporate policy requires that all interdivisional sales and purchases be recorded at variable Maximum Lost Units
cost as a transfer price. Ajax Division’s estimated sales and standard cost data for the year 75. Houston Division of Texacon, Inc. expects the following result for 2004:
ending December 31, 2000, based on the full capacity of 100,000 units, are as follows: Units sales 70,000
Bradley Outsiders Units selling price P10
Sales $900,000 $8,000,000 Unit variable cost P 4
Variable costs (900,000) (3,600,000) Total fixed costs P300,000
Fixed costs (300,000) (1,200,000) Total investment P500,000
Gross margin $(300,000) $(3,200,000) The minimum required ROI is 15%, and divisions are evaluated on residual income. A foreign
Unit sales 20,000 80,000 customer has approached Houston’s manager with an offer to buy 10,000 units at P7 each. If
Houston accepts the order, it would not lose any of the 70,000 units at the regular price.
Accepting the order would increase fixed costs by P10,000 and investment by P40,000.
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At the price of P7 offered by foreign customer, what is the maximum number of units in regular 77. A transfer price based on variable cost will be set at ___________ per unit.
sales that Houston could sacrifice and still maintain its expected residual income? a. $0.50 c. $0.95
A. 2,333 C. 2,667 b. $0.80 d. $0.75
B. 3,333 D. 3,667 Pol Bobadilla
78. A transfer price based on full production cost would be set at ___________ per unit.
TRANSFER PRICING a. $0.75 c. $1.45
Transfer Pricing Formula b. $2.10 d. $1.60
76. The management of James Corporation has decided to implement a transfer pricing system.
James’ MIS department is currently negotiating a transfer price for its services with the four 79. A transfer price based on market price would be set at ___________ per unit.
producing divisions of the company as well as the marketing department. Charges will be a. $2.10 c. $1.60
assessed based on number of reports (assume that all reports require the same amount of b. $2.50 d. $2.25
time and resources to produce). The cost to operate the MIS department at its full capacity of
1,000 reports per year is budgeted at $45,000. The user subunits expect to request 250 80. If the Plumbing Division is operated as an autonomous investment center and its capacity is
reports each this year. The cost of temporary labor and additional facilities used to produce 100,000 fittings per month, the per-unit transfer price is not likely to be below
reports beyond capacity is budgeted at $48.00 per report. James could purchase the same a. $0.75. c. $2.10.
services from an external Information Services firm for $70,000. What amounts should be b. $1.60. d. $2.50.
used as the ceiling and the floor in determining the negotiated transfer price?
a. b. c. d. Operating at Full Capacity
Floor $36.00 $45.60 $48.00 $57.00 Minimum Transfer Price
Ceiling $56.00 $56.00 $70.00 $82.00 81. The High Division of Para Company produces a high quality kite. Unit production costs (based
on capacity production of 100,000 units per year) follow:
Questions 77 thru 80 are based on the following information. Barfield Direct materials P 60
Bigole Corp. produces various products used in the construction industry. The Plumbing Division Direct labor 25
produces and sells 100,000 copper fittings each month. Relevant information for last month follows: Overhead (20% variable) 15
Total sales (all external) $250,000 Other information
Expenses (all on a unit base): Sales price 120
Variable manufacturing $0.50 Selling expenses (15% variable) 20
Fixed manufacturing .25 The High Division is producing and selling at capacity.
Variable selling .30 What is the minimum selling price that the division would consider as a “transfer price” to the
Fixed selling .40 Recreation Division on which no variable period costs would be incurred? (M)
Variable G&A .15 a. P120 c. P 91
Fixed G&A .50 b. P 88 d. P117 Pol Bobadilla
Total $2.10
Top-level managers are trying to determine how a transfer price can be set on a transfer of 10,000 82. The Motor Division of Super Truck Co. uses 5,000 carburetors per month in its production of
of the copper fittings from the Plumbing Division to the Bathroom Products Division. automotive engines. It presently buys all of the carburetors it needs from two outside suppliers
at an average cost of $100. The Carburetor Division of Super Truck Co. manufactures the
exact type of carburetor that the Motor Division requires. The Carburetor Division is presently

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operating at its capacity of 15,000 units per month and sells all of its output to a foreign car Assume that the Carburetor Division would not incur any variable selling costs on units that are
manufacturer at $106 per unit. Its cost structure (on 15,000 units) is: transferred internally. What is the maximum of the transfer price range for a transfer between
Variable production costs $70 the two divisions? (M)
Variable selling costs 10 a. $106 c. $90
All fixed costs 10 b. $100 d. $70 Barfield
Assume that the Carburetor Division would not incur any variable selling costs on units that are
transferred internally. What is the minimum of the transfer price range for a transfer between Effect on Profit - Make
the two divisions? (M) 85. Division A makes a part with the following characteristics:
a. $96 c. $70 Production capacity in units 15,000 units
b. $90 d. $106 Barfield Selling price to outside customers $25
Variable cost per unit $18
83. Division A produces a part with the following characteristics: Total fixed costs $60,000
Capacity in units 50,000 Division B, another division of the same company, would like to purchase 5,000 units of the
Selling price per unit $30 part each period from Division A. Division B is now purchasing these parts from an outside
Variable costs per unit $18 supplier at a price of $24 each.
Fixed costs per unit $3 Suppose that Division A is operating at capacity and can sell all of its output to outside
Division B, another division in the company, would like to buy this part from Division A. customers at its usual selling price. If Division A sells the parts to Division B at $24 per unit
Division B is presently purchasing the part from an outside source at $28 per unit. If Division A (Division B’s outside price), the company as a whole will be: (M)
sells to Division B, $1 in variable costs can be avoided. a. better off by $5,000 each period.
Suppose Division A is currently operating at capacity and can sell all of the units is produces b. worse off by $15,000 each period,
on the outside market for its usual selling price. From the point of view of Division A, any sales c. worse off by $5,000 each period.
to Division B should be priced no lower than: (M) d. there will be no change in the status of the company as a whole. G & N 9e
a. $27. c. $20.
b. $29. d. $28. G & N 9e 86. The Motor Division of Super Truck Co. uses 5,000 carburetors per month in its production of
automotive engines. It presently buys all of the carburetors it needs from two outside suppliers
Maximum Transfer Price at an average cost of $100. The Carburetor Division of Super Truck Co. manufactures the
84. The Motor Division of Super Truck Co. uses 5,000 carburetors per month in its production of exact type of carburetor that the Motor Division requires. The Carburetor Division is presently
automotive engines. It presently buys all of the carburetors it needs from two outside suppliers operating at its capacity of 15,000 units per month and sells all of its output to a foreign car
at an average cost of $100. The Carburetor Division of Super Truck Co. manufactures the manufacturer at $106 per unit. Its cost structure (on 15,000 units) is:
exact type of carburetor that the Motor Division requires. The Carburetor Division is presently Variable production costs $70
operating at its capacity of 15,000 units per month and sells all of its output to a foreign car Variable selling costs 10
manufacturer at $106 per unit. Its cost structure (on 15,000 units) is: All fixed costs 10
Variable production costs $70 Assume that the Carburetor Division would not incur any variable selling costs on units that are
Variable selling costs 10 transferred internally.
All fixed costs 10 If the two divisions agree to transact with one another, corporate profits will (M)
a. drop by $30,000 per month.
b. rise by $20,000 per month.
c. rise by $50,000 per month.
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d. rise or fall by an amount that depends on the level of the transfer price. Barfield Questions 89 thru 91 are based on the following information. CMA 0696 3-26 to 28
Parkside, Inc. has several divisions that operate as decentralized profit centers. Parkside’s
Comprehensive Entertainment Division manufactures video arcade equipment using the products of two of
Questions 87 and 88 are based on the following information. RPCPA 0585 Parkside’s other divisions. The Plastics Division manufactures plastic components, one type that is
Rosas Corporation has several operating divisions. Three divisions are treated as profit centers made exclusively for the Entertainment Division, while other less complex components are sold to
and its division managers are free to choose their sources of sale and supply. One of its divisions, outside markets. The products of the Video Cards Division are sold in a competitive market,
Gumamela Division, manufactures steel containers, 20% of which are sold to Daisy Division and however, one video card model is also used by the Entertainment Division. The actual costs per
the balance to outside customers. Inter-divisional sales and purchases are recorded at variable unit used by the Entertainment Division are presented below.
cost as a transfer price. Based on a full capacity of 150,000 units, the estimated sales and Plastic Components Video Cards
standard cost data for Gumamela Division for the year 1985 are as follows: Direct material $ 1.25 $ 2.40
Daisy Outsiders Direct labor 2.35 3.00
Sales P 900,000 P 9,600,000 Variable overhead 1.00 1.50
Variable costs (900,000) (3,600,000) Fixed overhead 0.40 2.25
Fixed costs (200,000) (800,000) Total cost $ 5.00 $ 9.15
Gross margin P(200,000) P 5,200,000
Unit sales 30,000 120,000 The Plastics Division sells its commercial products at full cost plus a 25% markup and believes the
Gumamela has the option to sell the above 30,000 units to an outside customer at a price of P50 proprietary plastic component made for the Entertainment Division would sell for $6.25 per unit on
per unit during 1985 on a continuing basis. Daisy in turn may purchase its requirements from an the open market. The market price of the video card used by the Entertainment Division is $10.98
outside supplier at a price of P60 per unit. per unit.
87. Assuming that Gumamela wishes to improve its gross margin, should Gumamela accept the
order of the new customer, and drop its sales to Daisy for 1985 and why? (M) 89. A per-unit transfer price from the Video Cards Division to the Entertainment Division at full
a. No, because the gross margin from the company’s overall viewpoint would decrease by cost, $9.15, would (M)
P300,000. a. Allow evaluation of both divisions on a competitive basis.
b. Yes, because Gumamela Division’s gross margin would increase by P300,000. b. Satisfy the Video Cards Division’s profit desire by allowing recovery of opportunity costs.
c. Yes, because Gumamela Division’s gross margin would increase by P600,000. c. Provide no profit incentive for the Video Cards Division to control or reduce costs.
d. No, because Daisy Division’s gross margin would decrease by P900,000. d. Encourage the Entertainment Division to purchase video cards from an outside source.

88. Assume, however, that Rosa Corporation allows the division managers to negotiate the 90. Assume that the Entertainment Division is able to purchase a large quantity of video cards
transfer price for 1985. The managers agreed on a tentative transfer price of P50 per unit; to from an outside source at $8.70 per unit. The Video Cards Division having excess capacity,
be reduced based on an equal sharing of the additional gross margin to Gumamela resulting agrees to lower its transfer price to $8.70 per unit. This action would (M)
from the sales to Daisy of 30,000 units at P50 per unit. The actual transfer price for 1985 a. Optimize the profit goals of the Entertainment Division while subverting the profit goals of
would be (M) Parkside, Inc.
a. P35.50 c. P45.00 b. Allow evaluation of both divisions on the same basis.
b. P40.00 d. P50.00 c. Subvert the profit goals of the Video Cards Division while optimizing the profit goals of the
Entertainment Division.
d. Optimize the overall profit goals of Parkside, Inc.

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91. Assume that the Plastic Division has excess capacity and it has negotiated a transfer price of 94. The Vega Division of Ace Company makes wheels which can either be sold to outside
$5.60 per plastic component with the Entertainment Division. This price will (M) customers or transferred to the Walsh Division of Ace Company. Last month the Walsh
a. Cause the Plastics Division to reduce the number of commercial plastic components it Division bought all 4,000 of its wheels from the Vega Division for $42 each. The following data
manufactures. are available from last month's operations for the Vega Company:
b. Motivate both divisions as estimated profits are shared. Capacity 12,000 wheels
c. Encourage the Entertainment Division to seek an outside source for plastic components. Selling price per wheel to outside customers $45
d. Demotivate the Plastics Division causing mediocre performance. Variable costs per wheel when sold to outside customers $30
If the Vega Division sells wheels to the Walsh Division, Vega can avoid $2 per wheel in sales
Operating with Partial Excess Capacity commissions. An outside supplier has offered to supply wheels to the Walsh Division for $41
Minimum Transfer Price each.
92. Division X of Charter Corporation makes and sells a single product which is used by Suppose that Vega can sell 9,000 wheels each month to outside consumers, so transfers to
manufacturers of fork lift trucks. Presently it sells 12,000 units per year to outside customers the Walsh Division cut into outside sales. What should be the lowest acceptable transfer price
at $24 per unit. The annual capacity is 20,000 units and the variable cost to make each unit is from the perspective of the Vega Division? (VD)
$16. Division Y of Charter Corporation would like to buy 10,000 units a year from Division X to a. $28.00 c. $41.00
use in its products. There would be no cost savings from transferring the units within the b. $31.75 d. $42.00 G & N 9e
company rather than selling them on the outside market. What should be the lowest
acceptable transfer price from the perspective of Division X? (D) Effect on Profit - Make
a. $24.00 c. $17.60 95. Division P of Turbo Corporation has the capacity for making 75,000 wheel sets per year and
b. $21.40 d. $16.00 G & N 9e regularly sells 60,000 each year on the outside market. The regular sales price is $100 per
wheel set, and the variable production cost per unit is $65. Division Q of Turbo Corporation
93. The Post Division of the M.T. Woodhead Company produces basic posts which can be sold to currently buys 20,000 wheel sets (of the kind made by Division P) yearly from an outside
outside customers or sold to the Lamp Division of the M.T. Woodhead Company. Last Year supplier at a price of $90 per wheel set. If Division Q were to buy the 30,000 wheel sets it
the Lamp Division bought all of its 25,000 posts from Post at $1.50 each. The following data needs annually from Division P at $87 per wheel set, the change in annual net operating
are available for last year's activities of the Post Division: income for the company as a whole, compared to what it is currently, would be: (D)
Capacity in units 300,000 posts a. $225,000. c. $500,000.
Selling price per post to outside customers $1.75 b. $325,000 d. $75,000. G & N adapted
Variable costs per post $0.90
Fixed costs, total $150,000 Effect on Profit - Buy
Suppose the transfers of posts to the Lamp Division cut into sales to outside customers by 96. The Post Division of the M.T. Woodhead Company produces basic posts which can be sold to
15,000 units. What is the lowest transfer price that would not reduce the profits of the Post outside customers or sold to the Lamp Division of the M.T. Woodhead Company. Last Year
Division? (D) the Lamp Division bought all of its 25,000 posts from Post at $1.50 each. The following data
a. $0.90. c. $1.41. are available for last year's activities of the Post Division:
b. $1.35. d. $1.75. G & N 9e Capacity in units 300,000 posts
Selling price per post to outside customers $1.75
Variable costs per post $0.90
Fixed costs, total $150,000
Suppose the transfers of posts to the Lamp Division cut into sales to outside customers by
15,000 units. Further suppose that an outside supplier is willing to provide the Lamp Division
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with basic posts at $1.45 each. If the Lamp Division had chosen to buy all of its posts from the Maximum Transfer Price
outside supplier instead of the Post Division, the change in net operating income for the 99. Cline Company had the following historical accounting data per unit:
company as a whole would have been: (D) Direct materials $20
a. $1,250 decrease. c. $1,000 decrease. Direct labor 10
b. $10,250 increase. d. $13,750 decrease. G & N 9e Variable manufacturing overhead 5
Fixed manufacturing overhead 8
Operating at Idle Capacity Variable selling expenses 15
Minimum Transfer Price Fixed selling expenses 3
97. Division A makes a part that it sells to customers outside of the company. Data concerning this The units are normally transferred internally from Division X to Division Y. The units also may
part appear below: be sold externally for $70 per unit. The minimum profit level accepted by the company is a
Selling price to outside customers $40 markup of 30 percent. There were no beginning or ending inventories.
Variable cost per unit $30 If the negotiated price is used, Division X’s transfer price should be
Total fixed costs $10,000 a. a maximum of $70.00 d. a minimum of $40.00
Capacity in units 20,000 b. a minimum of $51.00 e. a minimum of $43.00.
Division B of the same company would like to use the part manufactured by Division A in one c. a maximum of $66.30 H&M
of its products. Division B currently purchases a similar part made by an outside company for
$38 per unit and would substitute the part made by Division A. Division B requires 5,000 units Minimum & Maximum Transfer Price
of the part each period. Division A has ample capacity to produce the units for Division B Questions 100 & 101 are based on the following information. G & N 9e
without any increase in fixed costs and without cutting into sales to outside customers. If The Vega Division of Ace Company makes wheels which can either be sold to outside customers
Division A sells to Division B rather than to outside customers, the variable cost be unit would or transferred to the Walsh Division of Ace Company. Last month the Walsh Division bought all
be $1 lower. What should be the lowest acceptable transfer price from the perspective of 4,000 of its wheels from the Vega Division for $42 each. The following data are available from last
Division A? (M) month's operations for the Vega Company:
a. $40. c. $30.
b. $38. d. $29. G & N 9e Capacity 12,000 wheels
Selling price per wheel to outside customers $45
98. Division A produces a part with the following characteristics: Variable costs per wheel when sold to outside customers $30
Capacity in units 50,000
Selling price per unit $30 If the Vega Division sells wheels to the Walsh Division, Vega can avoid $2 per wheel in sales
Variable costs per unit $18 commissions. An outside supplier has offered to supply wheels to the Walsh Division for $41 each.
Fixed costs per unit $3
Division B, another division in the company, would like to buy this part from Division A. 100.Suppose that the Vega Division has ample idle capacity so that transfers to the Walsh Division
Division B is presently purchasing the part from an outside source at $28 per unit. If Division A would not cut into its sales to outside customers. What should be the lowest acceptable
sells to Division B, $1 in variable costs can be avoided. transfer price from the perspective of the Vega Division? (M)
Suppose that Division A has ample idle capacity to handle all of Division B's needs without any a. $28 c. $42
increase in fixed costs and without cutting into its sales to outside customers. From the point of b. $30 d. $45
view of Division A, any sales to Division B should be priced no lower than: (M)
a. $29. c. $18.
b. $30. d. $17. G & N 9e
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101.What is the maximum price per wheel that Walsh should be willing to pay Vega? (M) 104.A company has two divisions, A and B, each operated as a profit center. A charges B $35 per
a. $28 c. $42 unit for each unit transferred to B. Other data follows:
b. $41 d. $45 G & N 9e
A’s variable cost per unit $30
Optimal Transfer Price A’s fixed costs 10,000
102.Division Z of a company produces a component that it currently sells to outside customers for A’s annual sales to B 5,000 units
$20 per unit. At its current level of production, which is 60% of capacity, Division Z's fixed cost A’s sales to outsiders 50,000 units
of producing this component is $5 per unit and its variable cost is $12 per unit. Division Y of
the same company would like to purchase this component from Division Z for $10. Division Z A is planning to raise its transfer price to $50 per unit, Division B can purchase units at $40
has enough excess capacity to fill Division Y's requirements. The managers of both divisions each from outsiders, but doing so would idle A’s facilities now committed to producing units for
are compensated based upon reported profits. Which of the following transfer prices will B. Division A cannot increase its sales to outsiders. From the perspective of the company as
maximize total company profits and be most equitable to the managers of Division Y and a whole, from whom should Division B acquire the units, assuming B’s market is unaffected?
Division Z? (M) (M)
A. $12 per unit. C. $20 per unit. a. Outside vendors.
B. $18 per unit. D. $22 per unit. CIA 0592 IV-19 b. Division A, but only at the variable cost per unit.
c. Division A, but only until fixed costs are covered, then from outside vendors.
103.Nita Corp’s Department 1 produced component C that is used by OZM as a key part. d. Division A, despite the increased transfer price. CIA 1183 IV-5
Production and sales data for component C is as follows:
Effect on Profit
Selling price per unit P100 Questions 105 & 106 are based on the following information. L & H 10e
Variable cost per unit 36 Alcatraz Division of XYZ Corp. sells 80,000 units of part X to the outside market. Part X sells for
Fixed cost per unit (based on 10,000 annual capacity) 24 $40, has a variable cost of $22, and a fixed cost per unit of $10. Alcatraz has a capacity to produce
100,000 units per period. Capone Division currently purchases 10,000 units of part X from Alcatraz
Nita Corp.’s Department II is introducing a new product that will use component C. An outside for $40. Capone has been approached by an outside supplier willing to supply the parts for $36.
supplier has quoted Department II a price of P96 per unit. This represents the usual P100
price less a quantity discount due to the large number of Department II’s requirements. 105.What is the effect on XYZ's overall profit if Alcatraz REFUSES the outside price and Capone
The Company has transfer price formula of: Transfer price = Variable cost per unit + Lost decides to buy outside? (M)
contribution margin per unit on outside sales. a. no change c. $80,000 decrease in XYZ profits
Department I has enough excess capacity to handle all of Department II’s needs. For the b. $140,000 decrease in XYZ profits d. $40,000 increase in XYZ profits
overall interest of the company, Department I should (M)
a. Sell to Department II at the same quoted price of P96 per unit. 106.What is the effect on XYZ's overall profit if Alcatraz ACCEPTS the outside price and Capone
b. Sell to Department II at minimum price of P60 per unit. continues to buy inside? (M)
c. Not sell to Department II since it will lose P4 per unit. a. no change c. $80,000 decrease in XYZ profits
d. Sell to Department II at P100 per unit. RPCPA 1096 b. $140,000 decrease in XYZ profits d. $40,000 increase in XYZ profits

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107.Division A makes a part with the following characteristics: 109.Pacific Company has three plants: one located in Malaysia, one in India and another plant
located in the Philippines. Both plants manufactures a component used in a finished product
Production capacity in units 15,000 units manufactured in the Philippine plant. Currently, both plants are operating at 70% capacity. In
Selling price to outside customers $25 Malaysia the income tax rate is 42% while in India the tax rate is 35%; in the Philippines, the
Variable cost per unit $18 corporate income tax rate is 40%.
Total fixed costs $60,000
The market price of the component, in peso equivalent, is P100 and the foreign plant’s costs to
Division B, another division of the same company, would like to purchase 5,000 units of the manufacture the component are as follows:
part each period from Division A. Division B is now purchasing these parts from an outside
supplier at a price of $24 each. Direct materials P10
Direct labor 20
Suppose that Division A has ample idle capacity to handle all of Division B's needs without any Variable overhead 5
increase in fixed costs and without cutting into sales to outside customers. If Division B Fixed overhead 25
continues to purchase parts from an outside supplier rather then from Division A, the company
as a whole will be: (M) G & N 9e Which transfer price would be in the best interest of the overall corporation?
a. worse off by $30,000 each period. c. better off by $15,000 each period. Pol Bobadilla A. B. C. D.
b. worse off by $10,000 each period. d. worse off by $35,000 each period. Malaysia P35 P 35 P100 P100
India P35 P100 P100 P 35
International Transfer Pricing
108.Hancock Manufacturing has one plant located in Italy and another plant located in the U.S. Questions 110 thru 112 are based on the following information. H&M
The Italian plant manufactures a component used in a finished product manufactured at the Hanover Manufacturing has one plant located in Belgium and another plant located in the U.S. The
U.S. plant. Currently, the Italian plant is operating at 75 percent capacity. In Italy the income Belgium plant manufactures a component used in a finished product manufactured at the U.S.
tax rate is 32 percent; in the U.S. the corporate income tax rate is 35 percent. plant. Currently, the Belgium plant is operating at 70 percent capacity. In Belgium the income tax
rate is 42 percent; in the U.S. the corporate income tax rate is 35 percent.
The market price of the component is $120 and the Italian plant’s costs to manufacture the
component are as follows: The market price of the component is $100 and the Belgium plant’s costs to manufacture the
component are as follows:
Direct materials $30
Direct labor 20 Direct materials $10
Variable overhead 10 Direct labor 20
Fixed overhead 15 Variable overhead 5
Which transfer price would be in the best interest of the overall corporation? Fixed overhead 25
a. $60 c. $75
b. $50 d. $120 H&M 110.What is the minimum transfer price that the Belgium division would be willing to accept?
a. $35 c. $60
b. $55 d. $100

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111.What is the maximum transfer price that the U.S. division would be willing to pay? Comprehensive
a. $35 c. $60 Questions 116 through 118 are based on the following information. CMA 1290 3-21 to 23
b. $55 d. $100 Adler Industries is a vertically integrated firm with several divisions that operate as decentralized
profit centers. Adler's Systems Division manufactures scientific instruments and uses the products
112.Which transfer price would be in the best interest of the overall corporation? of two of Adler's other divisions. The Board Division manufactures printed circuit boards (PCBs).
a. $35 c. $60 One PCB model is made exclusively for the Systems Division using proprietary designs, whereas
b. $55 d. $100 less complex models are sold in outside markets. The products of the Transistor Division are sold
in a well-developed competitive market; however, one transistor model is also used by the Systems
Questions 113 thru 115 are based on the following information. H&M Division.
Hampton Manufacturing has one plant located in Belgium and another plant located in the U.S. The
Belgium plant manufactures a component used in a finished product manufactured at the U.S. The costs per unit of the products used by the Systems Division are as follows:
plant. Currently, the Belgium plant is operating at 70 percent capacity. In Belgium the income tax PCB Transistor
rate is 30 percent; in the U.S. the corporate income tax rate is 35 percent. Direct materials $2.50 $ .80
Direct labor 4.50 1.00
The market price of the component is $140 and the Belgium plant’s costs to manufacture the Variable overhead 2.00 .50
component are as follows: Fixed overhead .80 .75
Total cost $9.80 $3.05
Direct materials $15
Direct labor 25 The Board Division sells its commercial products at full cost plus a 25% markup and believes the
Variable overhead 6 proprietary board made for the Systems Division would sell for $12.25 per unit on the open market.
Fixed overhead 28 The market price of the transistor used by the Systems Division is $3.70 per unit.
113.What is the minimum transfer price that the Belgium division would be willing to accept? 116.A per unit transfer price from the Transistor Division to the Systems Division at full cost, $3.05,
a. $140 c. $68 would
b. $74 d. $46 A. Allow evaluation of both divisions on a competitive basis.
B. Satisfy the Transistor Division's profit desire by allowing recovery of opportunity costs.
114.What is the maximum transfer price that the U.S. division would be willing to pay? C. Demotivate the Systems Division and cause mediocre performance.
a. $140 c. $68 D. Provide no profit incentive for the Transistor Division to control or reduce costs.
b. $74 d. $46
117.Assume the Systems Division is able to purchase a large quantity of transistors from an
115.Which transfer price would be in the best interest of the overall corporation? outside source at $2.90 per unit. The Transistor Division, having excess capacity, agrees to
a. $140 c. $68 lower its transfer price to $2.90 per unit. This action would
b. $74 d. $46 A. Optimize the profit goals of the Systems Division while subverting the profit goals of Adler
Industries.
B. Allow evaluation of both divisions on the same basis.
C. Subvert the profit goals of the Transistor Division while optimizing the profit goals of the
Systems Division.
D. Optimize the overall profit goals of Adler Industries.
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118.The Board and Systems Divisions have negotiated a transfer price of $11.00 per printed circuit 121.Two possible transfer prices (for 4,000 units) are under consideration by the two divisions: $35
board. This price will and $40. Corporate profits would be _______ if $35 is selected as the transfer price rather
A. Cause the Board Division to reduce the number of commercial printed circuit boards it than $40.
manufactures. a. $20,000 larger c. $20,000 smaller
B. Motivate both divisions as estimated profits are shared. b. $40,000 larger d. the same
C. Encourage the Systems Division to seek an outside source for printed circuit boards.
D. Demotivate the Board Division causing mediocre performance. 122.If a transfer between the two divisions is arranged next period at a price (on 4,000 units of
super chips) of $40, total profits in the Computer Chip division will
Questions 119 through 123 are based on the following information. Barfield a. rise by $20,000 compared to the prior period.
Office Products Inc. manufactures and sells various high-tech office automation products. Two b. drop by $40,000 compared to the prior period.
divisions of Office Products Inc. are the Computer Chip Division and the Computer Division. The c. drop by $20,000 compared to the prior period.
Computer Chip Division manufactures one product, a "super chip," that can be used by both the d. rise by $80,000 compared to the prior period.
Computer Division and other external customers. The following information is available on this
month's operations in the Computer Chip Division: 123.Assume, for this question only, that the Computer Chip Division is selling all that it can produce
to external buyers for $50 per unit. How would overall corporate profits be affected if it sells
Selling price per chip $50 4,000 units to the Computer Division at $45? (Assume that the Computer Division can
Variable costs per chip $20 purchase the super chip from an outside supplier for $45.)
Fixed production costs $60,000 a. no effect c. $20,000 decrease
Fixed SG&A costs $90,000 b. $20,000 increase d. $90,000 increase
Monthly capacity 10,000 chips
External sales 6,000 chips Questions 124 thru 126 are based on the following information. Barfield
Internal sales 0 chips The Motor Division of Super Truck Co. uses 5,000 carburetors per month in its production of
automotive engines. It presently buys all of the carburetors it needs from two outside suppliers at
Presently, the Computer Division purchases no chips from the Computer Chips Division, but an average cost of $100. The Carburetor Division of Super Truck Co. manufactures the exact type
instead pays $45 to an external supplier for the 4,000 chips it needs each month. of carburetor that the Motor Division requires. The Carburetor Division is presently operating at its
capacity of 15,000 units per month and sells all of its output to a foreign car manufacturer at $106
119.Assume that next month's costs and levels of operations in the Computer and Computer Chip per unit. Its cost structure (on 15,000 units) is:
Divisions are similar to this month. What is the minimum of the transfer price range for a
possible transfer of the super chip from one division to the other? Variable production costs $70
a. $50 c. $20 Variable selling costs 10
b. $45 d. $35 All fixed costs 10

120.Assume that next month's costs and levels of operations in the Computer and Computer Chip Assume that the Carburetor Division would not incur any variable selling costs on units that are
Divisions are similar to this month. What is the maximum of the transfer price range for a transferred internally.
possible transfer of the chip from one division to the other?
a. $50 c. $35 124.What is the maximum of the transfer price range for a transfer between the two divisions?
b. $45 d. $30 a. $106 c. $90
b. $100 d. $70
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125.What is the minimum of the transfer price range for a transfer between the two divisions? not a feasible alternative in our community. I’d like to sell it to you at variable cost, but I have
a. $96 c. $70 excess demand for both products. I don’t mind changing my product mix to the economy model if I
b. $90 d. $106 get a good return on the seats I make for you. Here are my standard costs for the two stools and a
schedule of my manufacturing overhead.”
126.If the two divisions agree to transact with one another, corporate profits will
a. drop by $30,000 per month. Kline: “I guess I see your point, Russ, but I don’t want to price myself out of the market. Maybe we
b. rise by $20,000 per month. should talk to Corporate to see if they can give us any guidance.”
c. rise by $50,000 per month. Office Division
d. rise or fall by an amount that depends on the level of the transfer price. Standard Costs and Prices

Questions 127 through 133 are based on the following information. Gleim Deluxe Office Stool Economy Office Stool
The information was presented as part of Question 6 on Part 4 of the December 1981 CMA Raw materials
Examination. Framing $ 8.15 $ 9.76
PortCo Products is a divisionalized furniture manufacturer. The divisions are autonomous Cushioned seat
segments, with each division being responsible for its own sales, costs of operations, working Padding 2.40 -
capital management, and equipment acquisition. Each division serves a different market in the Vinyl 4.00 -
furniture industry. Because the markets and products of the divisions are so different, there have Molded seat (purchased) 6.00
never been any transfers between divisions. Direct labor
Frame fabrication (.5x$7.50/DLH) 3.75 (.5x$7.50/DLH) 3.75
The Commercial Division manufactures equipment and furniture that are purchased by the Cushion fabrication 3.75 -
restaurant industry. The division plans to introduce a new line of counter and chair units that (.5x$7.50/DLH)
feature a cushioned seat for the counter chairs. John Kline, the division manager, has discussed Assembly* (.5x$7.50/DLH) 3.75 (.3x$7.50/DLH) 2.25
the manufacturing of the cushioned seat with Russ Flegel for a price for 100-unit lots of the Manufacturing
cushioned seat. The following conversation took place about the price to be charged for the Overhead (1.5DLHx$12.60/DLH) 19.20 (.8DLHx$12.80/DLH) 10.24
cushioned seats: Total standard cost $45.00 $32.00
Selling price (30% markup) $58.50 $41.60
Flegel: “John, we can make the necessary modifications to the cushioned seat easily. The raw * Attaching seats to frames and attaching rubber feet.
materials used in your seat are slightly different and should cost about 10% more than those used
in our deluxe office stool. However, the labor time should be the same because the seat Office Division
fabrication operation basically is the same. I would price the seat at our regular rate – full cost plus Manufacturing Overhead Budget
30% markup.”
Kline: “This is higher than I expected. Russ, I was thinking that a good price would be your Overhead Item Nature Amount
variable manufacturing costs. After all, your capacity costs will be incurred regardless of the job.” Supplies Variable – at current market prices $ 420,000
Flegel: “John, I’m at capacity. By making the cushion seats for you, I’ll have to cut my production Indirect labor Variable 375,000
of deluxe office stools. Of course, I can increase my production of economy office stools. The Supervision Nonvariable 250,000
labor time freed by not having to fabricate the frame or assemble the deluxe stool can be shifted to Power Use varies with activity; rates are fixed 180,000
the frame fabrication and assembly of the economy office stool. Fortunately, I can switch my labor Heat and light Nonvariable – light is fixed regardless of production 140,000
force between these two models of stools without any loss of efficiency. As you know, overtime is while heat/airconditioning varies with fuel charges
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Property taxes and Nonvariable – any change in amounts/rates is 200,000 Answer Key
insurance taxes independent of production 1. A 11. D 21. D 31. A 41. A
Depreciation Fixed dollar total 1,700,000 2. B 12. C 22. C 32. A 42. B
Employee benefits 20% of supervision, direct and indirect labor 575,000 3. B 13. D 23. B 33. B 43. C
Total overhead $3,840,000 4. B 14. C 24. B 34. B 44. A
Capacity in DLH 300,000 5. A 15. C 25. A 35. D 45. C
Overhead rate/DLH $12.80 6. B 16. D 26. C 36. A 46. A
127.What amount of employee benefit is associated with direct labor costs? (E) 7. C 17. B 27. D 37. C 47. B
a. $675,000 c. $450,000 8. B 18. D 28. B 38. C 48. C
b. $75,000 d. $500,000 9. B 19. B 29. D 39. C 49. D
10. A 20. B 30. B 40. B 50. A
128.What is the variable manufacturing overhead rate? (E)
a. $7.80/hr. c. $5.17/hr. 51. B 61. A 71. C 81. D 91. B
b. $11.25/hr. d. $5.00/hr. 52. B 62. E 72. A 82. A 92. C
53. E 63. B 73. C 83. B 93. C
129.What is the transfer price per 100-unit lot based on variable manufacturing costs to produce 54. A 64. D 74. B 84. B 94. B
the modified cushioned seat? (E) 55. C 65. B 75. A 85. C 95. B
a. $1,329 c. $789 56. C 66. D 76. B 86. B 96. C
b. $1,869 d. $1,986 57. B 67. A 77. C 87. C 97. D
58. D 68. C 78. A 88. B 98. D
130.What is the fixed manufacturing overhead rate? (E)
59. E 69. C 79. B 89. C 99. A
a. $7.80/hr. c. $5.17/hr.
60. C 70. D 80. D 90. D 100. A
b. $11.25/hr. d. $5.00/hr.

131.How many economy office stools can be produced with the labor hours currently used to make 101. B 111. D 121. D 131. B
100 deluxe stools? (E) 102. B 112. A 122. D 132. A
a. 187 c. 100 103. A 113. D 123. C 133. D
b. 125 d. 150 104. D 114. A 124. B
105. B 115. A 125. A
132.When computing the opportunity cost for the deluxe office stool, what is the contribution 106. A 116. D 126. C
margin per unit produced? (E) 107. A 117. D 127. C
a. $25.20 c. $45.00 108. D 118. B 128. D
b. $15.84 d. $33.30 109. B 119. C 129. A
110. A 120. B 130. A
133.What is the opportunity cost of the Office Division if 125 economy stools can be made in the
time required for 100 deluxe stools? (E)
a. $789 c. $1,329
b. $1,869 d. $540
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