Responsibility and Transfer Pricing Solving

1. ABC Company, a merchandising company, is considering a P 1,000,000 upgrade to its retail

and warehousing facilities that will allow the company to handle more products and attract
ore customers. ABC anticipates that sales will increase by P 500,000 and operating income
will increase by P 200,000 per year. If ABC Company has a minimum required return on
investment of 15%, what would be the residual income resulting from upgrade?
Answer: P50,000 [$200,000 � ($1,000,000 � 15%)]
2. The following data are presented to you for the performance evaluation of one of the
investment centers:
Investment center's total assets P 640,000
Investment center's total liabilities 60,000
Investment center's after-tax operating profit 90,000
Weighted average cost of capital 12%
Minimum required ROI 14%
What is the economic value added?
Answer: P 20,400

3. The information pertains to BALA Co. for the year ended December 31, 2019:
Sales P 600,000
Net income 100,000
Capital Investment 400,000
Which of the following equations should be used to compute Bala’s return on investment?
Answer: (6/4) X (1/6) = ROI

4. Division A sells goods internally to Division B of the same company. The prevailing external price
of Division A's product is P 100 per unit plus transportation costs of P 20 per unit to transport the
goods to Division B. Division A produces each unit for P 60 per unit. If the market-based transfer
pricing is to be used, the transfer price must be set at
Answer: P 120

5. Division A of XYZ Company is currently operating at full capacity of 10,000 units. It sells all its
production in a perfectly competitive market for P 200 per unit. Its variable cost is P 150 per unit,
while total fixed cost amounts to P 100,000. The minimum transfer price charged to Division B for
each unit of product transferred should be
Answer: P 200

6. The Davao division sells goods internally to the Cebu division of the same company. The quoted
external price in industry publications from a supplier near Davao is P 200 per ton plus
transportation. It costs P 20 per ton to transport the goods to Cebu. Davao's actual market cost per
ton to buy the direct materials to make the transferred product is P 10. Actual per ton direct labor is
P 50. Other actual costs of storage and handling are P 40. The company president selects P 220
transfer price. This is an example of
Answer: Market-based transfer pricing

7. ABC’s Companys income statement for profit center A for August includes
Contribution margin P 84,000
Manager’s salary 24,000
Depreciation of admin building 9,600
Allocated corporate expenses 6,000
The profit center’s managers most likely able to control which of the following?
Answer: P 84,000
8. Segment X generated sales revenue of P 250,000 and variable operating expenses of P 112,500.
Its controllable fixed expenses were P 25,000. It was assigned 40% of P 125,000 of fixed cost
controlled by others. The common fixed costs were P 16,000. What was Segment X’s controllable
segment profit margin?
Answer: P 112, 500

9. The third Division of SET Company produces high quality products based on a capacity of
100,000 units per year. Production details per unit are as follows:
Direct Materials P 140
Direct Labor 60
Variable Overhead 6
Fixed Overhead 30
Each product can be sold for P 280 each incurring a variable selling expense of P 40 per unit sold.
The third Division is currently producing and selling at capacity. What is the minimum selling price
that the Division would consider as " transfer price" to the other divisions on which no variable period
costs would be incurred?
Answer: P 240

10. You were asked to determine the proper transfer price between two divisions. The following data
were presented to you:
Supplying Division
Market price of unit to be transferred P 70
Variable Manufacturing cost of unit to be transferred 30
Receiving Division
Number of units needed 1,000 units
Assume that the supplying division has excess capacity, what is the proper transfer price following
the general rule of setting transfer prices?
Answer: P 30

11. Division X of CORN Company is currently operating at 80% capacity. IT produces a single
product and sells all its production to outside customers for P 100 per unit. Variable costs are P 30
per unit and fixed costs is P 10 per unit at the current production level. Division Y, which currently
buys the same product from an outside supplier for P 70 each would like to buy the product from
Division X. What is the minimum transfer price that Division Y is willing to pay for the product if it will
be purchased internally?
Answer: P 30

12. TAZ Company had the following information pertaining to 2017:

Sales 2,000,000
Profit 240,000
Asset turnover 2.5 times
The desired minimum rate of return is 20%. For the current year, XYZ Inc. reported sales of P
1,320,000 and an asset turnover of 4. The rate of return on average assets was 25%. The
company’s operating income for the year was
Answer: P 82,500

13. Division X of CORN Company is currently operating at 80% capacity. IT produces a single
product and sells all its production to outside customers for P 100 per unit. Variable costs are P 30
per unit and fixed costs is P 10 per unit at the current production level. Division Y, which currently
buys the same product from an outside supplier for P 70 each would like to buy the product from
Division X. What is the maximum transfer price that Division Y is willing to pay for the product if it will
be purchased internally?
Answer: P 70
14. The Davao Division of CEL Company is treated as an investment center for performance
measurement purposes. Selected financial information of such division for the last year is given
below:
Net Sales P 460,000
Cost of Goods Sold 305,000
Selling and administrative expenses 105,000
Average working capital 70,000
Average non-current assets 130,000
The desired rate of return from investments of this division was set at 12%. What was the division’s
return on investment last year
Answer: 25%

15. Division A of a company produces a component that it currently sells to outside customers for P
20 per unit. At its current level of production, which is 50% of capacity, the Division A's fixed cost of
producing this component is P 5 per unit and its variable cost is P 12 per unit. Division B of the same
company would like to purchase this component from Division A for P 10. Division A has enough
excess capacity to fill Division B's requirements. The managers of both divisions are compensated
based upon reported profits. Which of the following transfer prices will maximize total company
profits and be most equitable to the managers of Division A and Division B?
Answer: P 18 per unit