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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
Based on Operating Income 2003 (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? Plant equipment P19.51
(M) Working capital 14.88 P34.39
a. 40 c. 20 ROI (P7.84/P34.39) 22.80
b. 16 d. 15 AICPA, Adapted
2. The division has a target ROI of 30 , and the manager has asked you to determine
how much sales volume the division would need to reach. He states that the sales
Harstin Corporation has provided the following data:
mix is relatively constant so variable costs should be close to 60 of sales, fixed cost and
Sales $625,000
plant and equipment should remain constant, and working capital (cash, receivables and
Gross margin 70,000
inventories) should vary closely with sales in the percentage reflected above.
Net operating income 50,000
The peso sales that the division needs in order to reach the 30 ROI
Stockholders' equity 90,000
target is (D) A. P19,829,032. C. P44,373,871
Average operating assets 250,000
The return on investment for the past year was: (M) B. P57,590,322 D. P59,510,000 Pol Bobadilla
a. 28 . c. 36 .
b. 20 . d. 8 . G&N Dupont Model
9e Sensitivity Analysis
5. If the operating income margin of 0.3 stayed the same and the operating asset turnover of
Investment 5.0 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 6. If the investment turnover increased by 20 and ROS decreased by 30 , the ROI would (M)
would she be willing to pay for an investment that promises to increase net segment a. Increase by 20 . c. Increase by 4 .
income by b. Decrease by 16 . d. None of the above. D, L & H 9e
$50,000? (M)
a. $50,000 c. $1,000,000 7. If the investment turnover decreased by 20 and ROS decreased by 30 , the ROI would (M)
b. $333,333 d. $500,000 Barfield 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 Which of the scenarios assumes the lowest maximum cost? (M)
income margin increased by 50 . Company U had its operating asset turnover a. Scenario 1. c. Scenario 3.
increased by 30 and the operating income margin decreased by 30 . What changes b. Scenario 2. d. Scenario 4. Gleim
are expected for ROI of 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
RESIDUAL INCOME is
Residual Income Computation 16 , compute the ROI (M)
9. REB Service Co. is a computer service center. For the month of May 1995, REB had a. 5 c. 15
the following statistics: b. 10 d. not listed RPCPA
Sales $450,000
Operating income 25,000 12. Z Division of XYZ Corp. has the following information for 2002:
Net profit after taxes 8,000 Assets available for $1,800,000
Total assets 500,000 Target rate of return 10
Shareholders’ equity 200,000 Residual income $270,000
Cost of capital 6 What was Z Division's return on investment for 2002?
Based on the above information, which one of the following statements is correct? REB has (M) a. 15 c.
a (M) 25
a. ROI of 4 c. ROI of 1.6 CMA 0695 3- b. 10 d. 20 Barfield
b. Residual income of $(5,000) d. Residual income of $(22,000)
13. Pasta Division of We Make Italian, is evaluated based on residual income generated.
Target Cost For 2002, the Division generated a residual income of $2,000,000 and net income of
10. James Webb is the general manager of the Industrial Park Division, and his $5,000,000. The target rate of return for all divisions of We Make Italian is 20 percent.
performance is measured using the residual income method. Webb is reviewing the For 2002, what was the return on investment for Pasta Division? (M)
following forecasted information for the division for next year. a. 40 c. 20
Category Amount (thousands) b. 13 d. 33 Barfi
Working capital $ 1,800
Revenue 30,000 Return on Investment, Minimum Required Rate of Return & Residual Income
Plant and equipment 17,200 To Investment Cost
establish a standard of performance for the division’s manager using the residual income 14. In the X Division of S Co., 2002 segment income exceeded 2002 residual income by
approach, four scenarios are being considered. Scenario 1 assumes an imputed $15,000. Also for 2002, return on investment exceeded the target rate of return by 10
interest charge of 15 and a target residual income of $2,000,000. Scenario 2 assumes percent. What was the level of investment in the X Division for 2002? (M)
an imputed interest charge of 12 and a target residual income of $1,500,000. a. $15,000
Scenario 3 assumes an imputed interest charge of 18 and a target b. $100,000
residual income of $1,250,000. Scenario 4 assumes an imputed interest charge of 10 c. $150,000
and a target residual income of $2,500,000. d. An answer can't be determined from this information. Barfield
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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
Questions 15 thru 17 are based on the following information. G & N follows: Net earnings for division $65,000
9e The Axle Division of LaBate Company makes and sells only one product. Annual data on the Asset base for division $300,000
Axle 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: 20. Family Company has two divisions, Ma and Pa. Information for each division is as
(M) a. 12 . c. 16 . follows:
b. 15 . d. 18 . Ma Pa
Net earnings for division P20,000 P65,000
16. If Axle sells 15,000 units per year, the residual income should be: Asset base for division P50,000 P300,000
(M) a. $30,000. c.
Target rate of return 15 18
$50,000.
Operating income margin 10 20
b. $100,000. d. $10,000. G&N
Weighted-average cost of capital 12 12
9e
What is the Economic Value Added for Ma and Pa, respectively?
A. P20,000, P36,000 C. P12,500; P11,000
17. Suppose the manager of Axle desires an annual residual income of $45,000. In order
B. P14,000; P29,000 D. P20,000; P29,000 Pol Bobadilla
to achieve this, Axle should sell how many units per year? (M)
a. 14,500. c. 18,250.
b. 16,750. d. 19,500. G&N EVA Based on Operating Income after Tax
9e EVA - Given Operating Income Before Tax
21. McKenzie Oil had $440,000 in operating income before interest and taxes in the last
ECONOMIC VALUE-ADDED year. McKenzie is in the 40 tax bracket. If capital employed by McKenzie was equal to
EVA Based on Operating Income $300,000, and the company's weighted-average after-tax cost of capital is 15 , what is
18. Division A had the following information: McKenzie's Economic Value Added?
Asset base in Division A $800,000 A. $131,000 C. $198,000
Net income in Division A $100,000 B. $140,000 D. $219,000 Gleim
Operating income margin for Division A 20
Target ROI 15 22. Valecon Co. reported the following information for the year just ended:
Weighted-average cost of capital 12 Segment A Segment B Segment C
What is EVA for Division A? Pre-tax operating income $ 4,000,000 $ 2,000,000 $3,000,000
a. $120,000 d. $4,000 Current assets 4,000,000 3,000,000 4,000,000
b. $96,000 e. $(20,000) Long-term assets 16,000,000 13,000,000 8,000,000
c. $15,000 H& 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 b. $1,530,000 d. $1,115,640
each segment are 30 and 10 , respectively, the segment with the highest economic
value added (EVA) is (M)
A. Segment A. C. Segment C. Gleim
B. Segment B. D. Not determinable from this information.

23. Assume Avionics Industries reported at year-end that operating income before taxes for the
year equaled $2,400,000. Long-term debt issued by Avionics has a coupon rate equal
to 6 , and its cost of equity is 8 . The book value of the debt currently equals its fair
value, and the 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 assets are in the form of $1,500,000 in current liabilities and
$2,200,000 in long-term liabilities. The income tax rate for Avionics is 30 . What is the
economic value added (EVA)? (D)
a. $731,240 c. $1,668,760
b. $948,760 d. $1,680,000 Gleim

Questions 24 thru 26 are based on the following information. Horngren

Waldorf Company has two sources of funds: long-term debt with a market and book value of
$10 million issued at an interest rate of 12 , and equity capital that has a market value of
$8 million (book value of $4 million). Waldorf Company has profit centers in the following
locations with the following operating incomes, total assets, and total liabilities. The cost of
equity capital
is 12 , while the tax rate is 25 .
Operating Income Assets Current Liabilities
St. Louis $ 960,000 $ 4,000,000 $ 200,000
Cedar Rapids $1,200,000 $ 8,000,000 $ 600,000
Wichita $2,040,000 $12,000,000 $1,200,000
24. What is the EVA for St. Louis? (M)
a. $255,740 c. $392,540
b. $327,460 d. $720,000

25. What is the EVA for Cedar Rapids?

(M) a. $135,580 c. $234,000
b. $220,000 d. $305,000

26. What is the EVA for Wichita?

(M) a. $450,000 c. $414,360

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EVA Computation – Given Operating Income after Tax
27. Samovar Company has operating income after taxes of $50,000. It has $200,000 of
equity 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 economic value added (EVA) for the period?
A. $(24,000) C. $24,000
B. $(26,000) D. $26,000 Gleim

28. Ralph, an investor, is interested in loaning money to a secure corporation. He always

bases his decision on the company with the largest economic value added (EVA).
Ralph has narrowed his choices down to four, and has collected the following
information:
Operating
Income after Tax Equity Capital WACC Current Liabilities
Company A $50,000 $200,000 12 $10,000
Company B 60,000 150,000 20 18,000
Company C 45,000 220,000 10 30,000
Company D 55,000 250,000 15 5,000
Based on largest EVA and assuming that none of the companies have any long-term
liabilities, which company should Ralph invest in?
A. Company A. C. Company C.
B. Company B. D. Company D. Gleim

Equity Value Creation, Market Value Added & Total Shareholder Return
Questions 29 thru 31 are based on the following information.

Gleim Semibar Co. reports net income of $630,000. The information below or the year just
ended is also available:
January 1 December 31
Shareholders’ equity $4,200,000 $4,480,000
Share price $25 $30
Shares outstanding 400,000 400,000
Cost of equity 10 10
Dividends per share $1.00

29. Equity value creation is

a. $630,000 c.
b. $448,000 d. $210,000
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30. The market value added (MVA) is Comprehensive

a. $2,000,000 c. $400,000 Questions 34 through 38 are based on the following information. AICPA 1186 II-22 to
b. $1,720,000 d. $280,000 26 Oslo Co.’s industrial photo-finishing division, Rho, incurred the following costs and expenses
in 1992:
31. The total shareholder return is
Variable Fixed
a. 24 c. 16.67
Direct materials $200,000
b. 20 d. 4
Direct labor 150,000
Factory overhead 70,000 $42,000
SENSITIVITY ANALYSIS
General, selling and administrative 30,000 48,000
32. Apple Division of the American Fruit Co. had the following statistics for 2002:
Assets available for use $1,000,000 Totals $450,000 $90,000
Residual income 100,000
Return on investment 15 During 1992, Rho produced 300,000 units of industrial photo-prints, which were sold for
If expenses increased by $20,000 in Apple Division, (E) $2.00 each. Oslo’s investment in Rho was $500,000 and $700,000 at January 1, 1992 and
a. return on investment would decrease. c. the target rate of return would December 31, 1992, respectively. Oslo normally imputes interest on investments at 15 of
decrease. average invested capital.
b. residual income would increase. d. asset turnover would decrease. Barfield
34. For the year-ended December 31, 1992, Rho’s return on average investment
33. Division A had the following information: was a. 15.0 c. 8.6
Asset base in Division A $800,000 b. 10.0 d. (5.0 )
Net income in Division A $100,000
Operating income margin for Division A 20 35. Assume that net operating income was $60,000 and that average invested capital was
Target ROI 15 $600,000. For the year ended December 31, 1992, Rho’s residual income (loss)
Weighted-average cost of capital 12 was a. $150,000 c. $(45,000)
If the asset base is decreased by $200,000, with no other changes, the return on b. $60,000 d. $(30,000)
investment of Division A will be
a. 100.0 d. 62.5 36. How many industrial photo-print units did Rho have to sell in 1992 to break-
b. 16.7 e. 20.0 even? a. 180,000 c.
c. 600.0 H& 90,000
M b. 120,000 d. 60,000

37. For the year ended December 31, 1992, Rho’s contribution margin
was a. $250,000 c.
$150,000
b. $180,000 d. $60,000

38. Assume the variable cost per unit was $1.50. Based on Rho’s 1992 financial data, and
an estimated 1993 production of 350,000 units of industrial photo-prints, Rho’s estimated
1993 total costs and expenses will be
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a. $525,000 c. $615,000 b. $540,000 d. $630,000

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Questions 39 through 51 are based on the following information. Gleim 45. For segment A, the minimum dollar ROI
Segment A Segment B Segment C Segment D is a.$30,000 c. $4,800
Net income $ 5,000 - - $ 90,000 b. $6,750 d. $120,000
Sales 60,000 $750,000 $135,000 1,800,000
Investment 24,000 500,000 45,000 - 46. For Segment B, the minimum dollar ROI
Net income as of sales - - - - is a.$30,000 c. $4,800
Turnover of investment - - - - b. $6,750 d. $120,000
ROI - - 20 7.5
Minimum ROI-dollars - - - $120,000 47. For Segment C, the minimum dollar ROI
Minimum ROI - 20 6 - is a.$30,000 c. $4,800
- b. $6,750 d. $120,000
Residual income - -0- $2,250 -
48. Assume that the minimum dollar ROI is $6,750 for Segment C. The minimum percentage of
39. For Segment B, net income as a percentage of sales is ROI is
a. 8 c. 4 a. 20 c. 15
b. 6.67 d. 10 b. 6 d. 10

40. For Segment C, net income as a percentage of sales is 49. In Segment D, the minimum percentage of ROI is
a. 5 c. 4 a. 20 c. 15
b. 6.67 d. 20 b. 6 d. 10

41. For Segment C, the turnover of investment 50. In Segment A, the residual income is
is c. 2.5 a. $200 c. $(30,000)
a. 3 b. $12,000 d. $4,800
b. 1.5 d. 4
51. In Segment D, the residual income
42. For Segment D, the turnover of investment is a.$12,000 c. $(60,000)
is c. 2.5 b. $(30,000) d. $9,000
a. 3
b. 1.5 d. 4 SEGMENTED INCOME STATEMENT
Sales
43. For segment A, ROI is 52.During April, Division D of Carney Company had a segment margin ratio of 15 , a
a. 6 c. 20.8 variable expense ratio of 60 of sales, and traceable fixed expenses of $15,000.
b. 20 d. 7.5 Division D's sales were closest to: (M)
a. $100,000. c. $33,333.
44. For segment B, ROI is b. $60,000. d. $22,500. G & N 9e
a. 6 c. 20
b. 20.8 d. 7.5

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Segment Margin Central corporate expenses (allocated) 12,000 20,000

53. Assume the following information for a product line: What is the total contribution to corporate profits generated by Division A before allocation
Sales revenue $500,000
of central corporate expenses? (M)
Variable manufacturing costs 100,000
a. $18,000 c. $30,000
Direct fixed manufacturing costs 75,000
b. $20,000 d. $80,000 CIA 1193 IV-20
Variable selling/administrative costs 50,000
Direct fixed selling/admin. costs 60,000 Common Fixed Costs
What is the segment margin of the product line? (E)
56.Lyons Company consists of two divisions, A and B. Lyons Company reported a contribution
a. $400,000 d. $275,000
margin of $50,000 for Division A, and had a contribution margin ratio of 30 in Division
b. $325,000 e. $215,000
B, when sales in Division B were $200,000. Net income for the company was $25,000
c. $350,000 H&M
and traceable fixed expenses were $40,000. Lyons Company's common fixed expenses
were: (M) a. $85,000. c.$45,000.
54. The data available for the current year are given below: b. $70,000. d. $40,000. G & N 9e
Whole Co. Division 1 Division 2
Variable mfg. cost of goods sold $ 400,000 $ 220,000 $ 80,000 Company Net Income
Unallocated costs (e.g., president’s 100,000 - - 57. Redding Company has two divisions with the following segment margins for the current
salary) year: Northern, $200,000; Southern, $400,000. Common expenses of the company are
Fixed costs controllable by Div. Managers $50,000. What is Redding Company’s net income? (E)
(e.g., advertising, eng’g supervision costs) 90,000 50,000 40,000 a. $150,000 d. $650,000
Net revenue 1,000,000 600,000 400,000 b. $550,000 e. $350,000
Variable selling and administrative 130,000 70,000 60,000 c. $600,000 H&M
costs
Usin Fixed costs controllable by others (e.g., Comprehensive
depreciation, insurance)
a. $190,000 c. 120,000
$310,000 70,000 50,000 Questions 58 & 59 are based on the following information. H&
b. $260,000 d. $380,000 CIA 1186 IV- M Barmore Company has the following information pertaining to its two divisions for 1995:
17 Division A Division B
Variable selling & administrative expenses $ 35,000 $ 45,000
55. A and B are autonomous divisions of a corporation. They have no beginning or ending Direct fixed manufacturing expenses 17,500 50,000
inventories, and the number of units produced is equal to the number of units sold. Sales 100,000 200,000
Following is financial information relating to the two divisions. Direct fixed selling/admin. Expenses 15,000 35,000
A B Variable manufacturing expenses 20,000 50,000
Sales $150,000 $400,000 Common expenses are $12,000 for 1995.
Other revenue 10,000 15,000
Direct materials 30,000 65,000 58. Common expenses are $12,000 for 1995. What is the segment margin for Division B?
Direct labor 20,000 40,000 (E) a. $155,000 d. $20,000
Variable factory overhead 5,000 15,000 b. $105,000 e. $8,000
Fixed factory overhead 25,000 55,000 c. $55,000
Variance S&A expense 15,000 30,000
Fixed
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59. What is the net income for the Barmore Company? (E) 64. What is the segment margin for Division Y? (E)
a. $300,000 d. $32,500 a. $310,000 d. $40,000
b. $162,500 e. $20,500 b. $210,000 e. $16,000
c. $150,000 c. $110,000
Questions 60 & 61 are based on the following information. G & N Questions 65 thru 68 are based on the following information. G & N
9e Canon Company has two sales areas: North and South. During last year, the contribution 9e Ieso Company has two stores: J and K. During November, Ieso Company reported a net
margin in the North Area was $50,000, or 20 of sales. The segment margin in the South income of $30,000 and sales of $450,000. The contribution margin in Store J was
was $15,000, or $100,000, or 40 of sales. The segment margin in Store K was $30,000, or 15 of sales.
8 of sales. Traceable fixed costs are $15,000 in the North and $10,000 in the South. Traceable fixed expenses are
During last year, the company reported total net income of $26,000. $60,000 in Store J, and $40,000 in Store K.
60. The variable costs for the South Area for the year were: 65. Sales in Store J totaled: (M)
(M) a. $230,000. a. $400,000. c. $150,000.
c. $162,500. b. $250,000. d. $100,000.
b. $185,000. d. $65,000.
66. Variable expenses in Store K totaled: (M)
61. The total fixed costs (traceable and common) for Canon Company for the year were: a. $70,000. c. $200,000.
(M) a. $49,000. c. $24,000. b. $110,000. d. $130,000.
b. $25,000. d. $50,000.
67. The segment margin ratio in Store J was: (M)
Questions 62 thru 64 are based on the following information. H& a. 16 . c. 40 .
M Nauman Company has the following information pertaining to its two divisions for 1995: b. 24 . d. 60 .
Division X Division Y
Variable selling & administrative expenses $ 70,000 $ 90,000 68. Ieso Company's total fixed expenses for the year were: (M)
Direct fixed manufacturing expenses 35,000 100,000
Sales 200,000 400,000 a. $40,000. c. $140,000.
Direct fixed selling/admin. expenses 30,000 70,000 b. $100,000 d. $170,000.
Variable manufacturing expenses 40,000 100,000
Common expenses are $24,000 for 1995. Sensitivity Analysis
Questions 69 through 72 are based on the following information. CIA 1196 III-97 to
62. What is the net income for the Nauman Company? (E) 100 The segmented income statement for a retail company with three product lines is
presented below:
a. $600,000 d. $65,000 Total Product Product Product
b. $325,000 e. $41,000 Company Line 1 Line 2 Line 3
c. $300,000 Volume (in units) 20,000 28,000 50,000
Sales revenue $2,000,000 $800,000 $700,000 $500,000
63. What is the segment margin for Division X? (E) Costs & expenses:
a. $90,000
CHIANG KAI SHEK d. $160,000 Administrative $ 180,000 $ 60,000 $ 60,000 $ 60,000
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b. $25,000 e. $125,000 Advertising 240,000 96,000 84,000 60,000
c. $1,000 Commissions 40,000 16,000 14,000 10,000
 MANAGEMENT ADVISORY Responsibility Accounting & Transfer
Cost of sales 980,000 360,000 420,000 200,000 A. B. C. D.
Rent 280,000 84,000 140,000 56,000 List A Product Line 2 Product Line 2 Product Line 3 Product Line 3
Salaries 110,000 54,000 32,000 24,000 List B $13,000 $5,000 $1,400 $1,120
Total costs & expenses $1,830,000 $670,000 $750,000 $410,000
Operating income (loss) $ 170,000 $130,000 $(50,000) $ 90,000
The company buys the goods in the three product lines directly from manufacturers'
representatives. Each product line is directed by a manager whose salary is included in
the administrative expenses. Administrative expenses are allocated to the three product lines
equally because the administration is spread evenly among the three product lines. Salaries
represent 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, the advertising is allocated to the three product lines in proportion to the sales
revenue. Commissions are paid to the salespersons in each product line based on 2 of
gross sales. Rent 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 three product lines based on the square footage occupied by
each of the product lines.

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 only costs and expenses controllable at the product-line level for
this retail company are (M)
A. Commissions, cost of sales, and rent. C. Commissions, cost of sales, and salaries.
B. Advertising, cost of sales, and salaries. D. Administration, advertising, and rent.

70. The company has an opportunity to promote one of its product lines by making a one-
time
$7,000 expenditure. The company can choose only one of the three product lines to
promote. The incremental sales revenue that would be realized from this $7,000 promotion
expenditure in each of the product lines is estimated as follows:
Increase in Sales Revenue
Product Line 1 $15,000
Product Line 2 20,000
Product Line 3 14,000
In order to maximize profits, the promotion expenditure should be spent on <List A>,
resulting
in an increase in operating income of <List B>. (M)
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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.
72. A customer, operating in an isolated foreign market, has approached the head
salesperson for Product Line 1 and offered to purchase 4,000 units of a special-order
product over the next 12 months. This product would be sold in the same manner as
Product Line 1's other products except that the customer is hoping for a price break.
Product Line 1's cost to purchase this product (cost of sales) would be $14.70. Product
Responsibility Accounting & Transfer
Line 1 has excess capacity, meaning that the rate or amount of the remaining operating
costs would not change as a consequence of the purchase and sale of this special-
order product. The minimum selling price for this special- order product would be (M)
A. $15.00 C. $27.50
B. $17.30 D. $30.20
SPECIAL ORDER
Operating at Full Capacity
Effect on Profit
73. Ajax Division of Carlyle Corporation produces electric motors, 20 of which are sold to
Bradley Division of Carlyle and the remainder to outside customers. Carlyle treats its
divisions 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 cost as a transfer price. Ajax Division’s estimated sales and
standard cost data for the year ending December 31, 2000, based on the full capacity
of 100,000 units, are as follows:

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MANAGEMENT ADVISORY Responsibility Accounting & Transfer
Bradley Outsiders
Sales $900,000 $8,000,000
Variable costs (900,000) (3,600,000)
Fixed costs (300,000) (1,200,000)
Gross margin $(300,000) $(3,200,000)
Unit sales 20,000 80,000

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Ajax has an opportunity to sell the above 20,000 units to an outside customer at a price of P7 each. If Houston accepts the order, it would not lose any of the 70,000 units at the
$75 per unit during 2000 on a continuing basis. Bradley can purchase its requirements regular price. Accepting the order would increase fixed costs by P10,000 and
from an outside suppler at a price of $85 per unit. investment by P40,000.
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.

Operating with Excess Capacity

Minimum Price
74. Houston Division of Texacon, Inc. expects the following result for 2004:
Units sales 70,000
Units selling price P10
Unit variable cost P4
Total fixed costs P300,000
Total investment P500,000
The minimum required ROI is 15 , and divisions are evaluated on residual income. A
foreign 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.
What is the minimum price that Houston could accept for the order and still maintain
its expected residual income?
A. P5.00 C.P4.75
B. P5.60 D. P9.00 Pol Bobadilla

Maximum Lost Units

75. Houston Division of Texacon, Inc. expects the following result for 2004:
Units sales 70,000
Units selling price P10
Unit variable cost P4
Total fixed costs P300,000
Total investment P500,000
The minimum required ROI is 15 , and divisions are evaluated on residual income. A
foreign customer has approached Houston’s manager with an offer to buy 10,000 units at

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 MANAGEMENT ADVISORY Responsibility Accounting & Transfer

At the price of P7 offered by foreign customer, what is the maximum number of units in 10,000 of the copper fittings from the Plumbing Division to the Bathroom Products
regular sales that Houston could sacrifice and still maintain its expected residual Division.
income?
A. 2,333 C. 2,667
B. 3,333 D. 3,667 Pol
Bobadilla

TRANSFER PRICING
Transfer Pricing Formula
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 producing divisions of the company as well as the marketing
department. Charges will be assessed based on number of reports (assume that all
reports require the same amount of 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 reports each this year. The cost
of temporary labor and additional facilities used to produce reports beyond capacity is
budgeted at $48.00 per report. James could purchase the same services from an
external Information Services firm for $70,000. What amounts should be
used as the ceiling and the floor in determining the negotiated transfer price?
a. b. c. d. Floor
$36.00 $45.60 $48.00 $57.00
Ceiling $56.00 $56.00 $70.00 $82.00

Questions 77 thru 80 are based on the following information.

Barfield Bigole
Corp. produces various products used in the construction industry. The Plumbing Division
produces and sells 100,000 copper fittings each month. Relevant information for last month
follows: Total sales (all external) $250,000
Expenses (all on a unit base):
Variable manufacturing $0.50
Fixed manufacturing .25
Variable selling .30
Fixed selling .40
Variable G&A .15
Fixed G&A .50
Total $2.10
Top-level managers are trying to determine how a transfer price can be set on a transfer of
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 MANAGEMENT ADVISORY Responsibility Accounting & Transfer

77. A transfer price based on variable cost will be set at per suppliers at an average cost of $100. The Carburetor Division of Super Truck Co.
unit. a. $0.50 c. manufactures the exact type of carburetor that the Motor Division requires. The Carburetor
$0.95 Division is presently
b. $0.80 d. $0.75

78. A transfer price based on full production cost would be set at per
unit. a. $0.75 c.
$1.45
b. $2.10 d. $1.60

79. A transfer price based on market price would be set at per

unit. a. $2.10 c.
$1.60
b. $2.50 d. $2.25

80. If the Plumbing Division is operated as an autonomous investment center and its capacity
is 100,000 fittings per month, the per-unit transfer price is not likely to be below
a. $0.75. c. $2.10.
b. $1.60. d. $2.50.

Operating at Full Capacity

Minimum Transfer Price
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:
Direct materials P 60
Direct labor 25
Overhead (20 variable) 15
Other information
Sales price 120
Selling expenses (15 variable) 20
The High Division is producing and selling at capacity.
What is the minimum selling price that the division would consider as a “transfer price”
to the Recreation Division on which no variable period costs would be incurred? (M)
a. P120 c. P 91
b. P 88 d. P117 Pol Bobadilla

82. 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

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 MANAGEMENT ADVISORY Responsibility Accounting & Transfer
operating at its capacity of 15,000 units per month and sells all of its output to a foreign
car manufacturer at $106 per unit. Its cost structure (on 15,000 units) is:
Variable production costs $70
Variable selling costs 10
All fixed costs 10
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 the two divisions? (M)
a. $96 c. $70
b. $90 d. $106
Barfield

83. Division A produces a part with the following characteristics:

Capacity in units 50,000
Selling price per unit $30
Variable costs per unit $18
Fixed costs per unit $3
Division B, another division in the company, would like to buy this part from Division
A. Division B is presently purchasing the part from an outside source at $28 per unit. If
Division A sells to Division B, $1 in variable costs can be avoided.
Suppose Division A is currently operating at capacity and can sell all of the units is
produces on the outside market for its usual selling price. From the point of view of
Division A, any sales to Division B should be priced no lower than: (M)
a. $27. c. $20.
b. $29. d. $28. G & N
9e

Maximum Transfer Price

84. 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 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 operating at its capacity of 15,000 units per
month and sells all of its output to a foreign car manufacturer at $106 per unit. Its
cost structure (on 15,000 units) is:
Variable production costs $70
Variable selling costs 10
All fixed costs 10

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Assume that the Carburetor Division would not incur any variable selling costs on units that b. rise by $20,000 per month.
are transferred internally. What is the maximum of the transfer price range for a transfer c. rise by $50,000 per month.
between the two divisions? (M)
a. $106 c. $90
b. $100 d. $70 Barfield

Effect on Profit - Make

85. Division A makes a part with the following characteristics:
Production capacity in units 15,000 units
Selling price to outside customers $25
Variable cost per unit $18
Total fixed costs $60,000
Division B, another division of the same company, would like to purchase 5,000 units
of the part each period from Division A. Division B is now purchasing these parts from
an outside supplier at a price of $24 each.
Suppose that Division A is operating at capacity and can sell all of its output to outside
customers at its usual selling price. If Division A sells the parts to Division B at $24 per
unit (Division B’s outside price), the company as a whole will be: (M)
a. better off by $5,000 each period.
b. worse off by $15,000 each period,
c. worse off by $5,000 each period.
d. there will be no change in the status of the company as a whole. 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 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 operating at its capacity of 15,000 units per month and
sells all of its output to a foreign car manufacturer at $106 per unit. Its cost structure
(on 15,000 units) is:
Variable production costs $70
Variable selling costs 10
All fixed costs 10
Assume that the Carburetor Division would not incur any variable selling costs on units that
are transferred internally.
If the two divisions agree to transact with one another, corporate profits will (M)
a. drop by $30,000 per month.

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 MANAGEMENT ADVISORY Responsibility Accounting & Transfer
d. rise or fall by an amount that depends on the level of the transfer price.

Barfield

Comprehensive
Questions 87 and 88 are based on the following information. RPCPA
0585 Rosas Corporation has several operating divisions. Three divisions are treated as profit
centers and its division managers are free to choose their sources of sale and supply. One of
its divisions, Gumamela Division, manufactures steel containers, 20 of which are sold to
Daisy Division and the balance to outside customers. Inter-divisional sales and purchases
are recorded at variable cost as a transfer price. Based on a full capacity of 150,000
units, the estimated sales and standard cost data for Gumamela Division for the year 1985
are as follows:
Daisy Outsiders
Sales P 900,000 P 9,600,000
Variable costs (900,000) (3,600,000)
Fixed costs (200,000) (800,000)
Gross margin P(200,000) P 5,200,000
Unit sales 30,000 120,000
Gumamela has the option to sell the above 30,000 units to an outside customer at a
price of P50 per unit during 1985 on a continuing basis. Daisy in turn may purchase its
requirements from an outside supplier at a price of P60 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)
a. No, because the gross margin from the company’s overall viewpoint would decrease
by P300,000.
b. Yes, because Gumamela Division’s gross margin would increase by P300,000.
c. Yes, because Gumamela Division’s gross margin would increase by P600,000.
d. No, because Daisy Division’s gross margin would decrease by P900,000.

88. Assume, however, that Rosa Corporation allows the division managers to negotiate
the transfer price for 1985. The managers agreed on a tentative transfer price of
P50 per unit; to be reduced based on an equal sharing of the additional gross margin to
Gumamela resulting from the sales to Daisy of 30,000 units at P50 per unit. The
actual transfer price for 1985 would be (M)
a. P35.50 c. P45.00
b. P40.00 d. P50.00

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Questions 89 thru 91 are based on the following information. CMA 0696 3-26 to 91. Assume that the Plastic Division has excess capacity and it has negotiated a transfer
28 Parkside, Inc. has several divisions that operate as decentralized profit centers. price of
Parkside’s Entertainment Division manufactures video arcade equipment using the $5.60 per plastic component with the Entertainment Division. This price will (M)
products of two of Parkside’s other divisions. The Plastics Division manufactures plastic a. Cause the Plastics Division to reduce the number of commercial plastic
components, one type that is made exclusively for the Entertainment Division, while other less components it manufactures.
complex components are sold to outside markets. The products of the Video Cards Division b. Motivate both divisions as estimated profits are shared.
are sold in a competitive market, however, one video card model is also used by the c. Encourage the Entertainment Division to seek an outside source for plastic components.
Entertainment Division. The actual costs per unit used by the Entertainment Division are d. Demotivate the Plastics Division causing mediocre performance.
presented below.
Plastic Components Video Cards Operating with Partial Excess Capacity
Direct material $ 1.25 $ 2.40 Minimum Transfer Price
Direct labor 2.35 3.00 92. Division X of Charter Corporation makes and sells a single product which is used by
Variable overhead 1.00 1.50 manufacturers of fork lift trucks. Presently it sells 12,000 units per year to outside
Fixed overhead 0.40 2.25 customers at $24 per unit. The annual capacity is 20,000 units and the variable cost to
Total cost $ 5.00 $ 9.15 make each unit is
$16. Division Y of Charter Corporation would like to buy 10,000 units a year from Division
The Plastics Division sells its commercial products at full cost plus a 25 markup and believes X to use in its products. There would be no cost savings from transferring the units
the proprietary plastic component made for the Entertainment Division would sell for $6.25 per within the company rather than selling them on the outside market. What should be
unit on the open market. The market price of the video card used by the Entertainment Division the lowest acceptable transfer price from the perspective of Division X? (D)
is $10.98 per unit. a. $24.00 c. $17.60
b. $21.40 d. $16.00 G & N 9e
89. A per-unit transfer price from the Video Cards Division to the Entertainment Division at
full cost, $9.15, would (M) 93. The Post Division of the M.T. Woodhead Company produces basic posts which can be sold
a. Allow evaluation of both divisions on a competitive basis. to outside customers or sold to the Lamp Division of the M.T. Woodhead Company.
b. Satisfy the Video Cards Division’s profit desire by allowing recovery of opportunity Last Year the Lamp Division bought all of its 25,000 posts from Post at $1.50 each.
costs. The following data are available for last year's activities of the Post Division:
c. Provide no profit incentive for the Video Cards Division to control or reduce costs. Capacity in units 300,000 posts
d. Encourage the Entertainment Division to purchase video cards from an outside source. Selling price per post to outside customers $1.75
Variable costs per post $0.90
90. Assume that the Entertainment Division is able to purchase a large quantity of video Fixed costs, total $150,000
cards from an outside source at $8.70 per unit. The Video Cards Division having excess Suppose the transfers of posts to the Lamp Division cut into sales to outside
capacity, agrees to lower its transfer price to $8.70 per unit. This action would (M) customers by 15,000 units. What is the lowest transfer price that would not reduce the
a. Optimize the profit goals of the Entertainment Division while subverting the profit goals profits of the Post Division? (D)
of Parkside, Inc. a. $0.90. c. $1.41.
b. Allow evaluation of both divisions on the same basis. b. $1.35. d. $1.75. G & N 9e
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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 MANAGEMENT ADVISORY Responsibility Accounting & Transfer

94. The Vega Division of Ace Company makes wheels which can either be sold to outside Fixed costs, total $150,000
customers or transferred to the Walsh Division of Ace Company. Last month the Suppose the transfers of posts to the Lamp Division cut into sales to outside customers
Walsh Division bought all 4,000 of its wheels from the Vega Division for $42 each. The by 15,000 units. Further suppose that an outside supplier is willing to provide the Lamp
following data are available from last month's operations for the Vega Company: Division
Capacity 12,000 wheels
Selling price per wheel to outside customers $45
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 commissions. An outside supplier has offered to supply wheels to the Walsh
Division for $41 each.
Suppose that Vega can sell 9,000 wheels each month to outside consumers, so transfers
to the Walsh Division cut into outside sales. What should be the lowest acceptable transfer
price from the perspective of the Vega Division? (VD)
a. $28.00 c. $41.00
b. $31.75 d. $42.00 G & N
9e

Effect on Profit - Make

95. Division P of Turbo Corporation has the capacity for making 75,000 wheel sets per year
and 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 currently buys 20,000 wheel sets (of the kind made by Division P)
yearly from an outside supplier at a price of $90 per wheel set. If Division Q were to
buy the 30,000 wheel sets it needs annually from Division P at $87 per wheel set, the
change in annual net operating income for the company as a whole, compared to
what it is currently, would be: (D)
a. $225,000. c. $500,000.
b. $325,000 d. $75,000. G & N
adapted

Effect on Profit - Buy

96. The Post Division of the M.T. Woodhead Company produces basic posts which can be sold
to outside customers or sold to the Lamp Division of the M.T. Woodhead Company.
Last Year the Lamp Division bought all of its 25,000 posts from Post at $1.50 each.
The following data are available for last year's activities of the Post Division:
Capacity in units 300,000 posts
Selling price per post to outside customers $1.75
Variable costs per post $0.90

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 MANAGEMENT ADVISORY Responsibility Accounting & Transfer
with basic posts at $1.45 each. If the Lamp Division had chosen to buy all of its lower than: (M)
posts from the outside supplier instead of the Post Division, the change in net a. $29. c. $18.
operating income for the company as a whole would have been: (D) b. $30. d. $17. G & N 9e
a. $1,250 decrease. c. $1,000 decrease.
b. $10,250 increase. d. $13,750 decrease. G & N
9e

Operating at Idle Capacity

Minimum Transfer Price
97. Division A makes a part that it sells to customers outside of the company. Data
concerning this part appear below:
Selling price to outside customers $40
Variable cost per unit $30
Total fixed costs $10,000
Capacity in units 20,000
Division B of the same company would like to use the part manufactured by Division
A in one 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 of the part each period. Division A has ample capacity to produce the units for
Division B without any increase in fixed costs and without cutting into sales to
outside customers. If Division A sells to Division B rather than to outside customers, the
variable cost be unit would be $1 lower. What should be the lowest acceptable
transfer price from the perspective of Division A? (M)
a. $40. c. $30.
b. $38. d. $29. G & N
9e

98. Division A produces a part with the following characteristics:

Capacity in units 50,000
Selling price per unit $30
Variable costs per unit $18
Fixed costs per unit $3
Division B, another division in the company, would like to buy this part from Division
A. Division B is presently purchasing the part from an outside source at $28 per unit. If
Division A sells to Division B, $1 in variable costs can be avoided.
Suppose that Division A has ample idle capacity to handle all of Division B's needs
without any increase in fixed costs and without cutting into its sales to outside customers.
From the point of view of Division A, any sales to Division B should be priced no
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Maximum Transfer Price 101. What is the maximum price per wheel that Walsh should be willing to pay
99. Cline Company had the following historical accounting data per unit: Vega? (M) a. $28 c. $42
Direct materials $20 b. $41 d. $45 G & N 9e
Direct labor 10
Variable manufacturing overhead 5 Optimal Transfer Price
Fixed manufacturing overhead 8 102. Division Z of a company produces a component that it currently sells to outside
Variable selling expenses 15 customers for
Fixed selling expenses 3 $20 per unit. At its current level of production, which is 60 of capacity, Division Z's
The units are normally transferred internally from Division X to Division Y. The units also fixed cost of producing this component is $5 per unit and its variable cost is $12 per
may be sold externally for $70 per unit. The minimum profit level accepted by the unit. Division Y of the same company would like to purchase this component from Division
company is a markup of 30 percent. There were no beginning or ending inventories. Z for $10. Division Z has enough excess capacity to fill Division Y's requirements. The
If the negotiated price is used, Division X’s transfer price should be managers of both divisions are compensated based upon reported profits. Which of the
a. a maximum of $70.00 d. a minimum of $40.00 following transfer prices will maximize total company profits and be most equitable to
b. a minimum of $51.00 e. a minimum of $43.00. the managers of Division Y and Division Z? (M)
c. a maximum of $66.30 H& A. $12 per unit. C. $20 per unit.
M B. $18 per unit. D. $22 per unit. CIA 0592 IV-19
Minimum & Maximum Transfer Price 103. Nita Corp’s Department 1 produced component C that is used by OZM as a key part.
Questions 100 & 101 are based on the following information. G & N Production and sales data for component C is as follows:
9e The Vega Division of Ace Company makes wheels which can either be sold to outside
customers or transferred to the Walsh Division of Ace Company. Last month the Walsh Selling price per unit P100
Division bought all 4,000 of its wheels from the Vega Division for $42 each. The following data Variable cost per unit 36
are available from last month's operations for the Vega Company: Fixed cost per unit (based on 10,000 annual capacity) 24
Capacity 12,000 wheels Nita Corp.’s Department II is introducing a new product that will use component C. An
Selling price per wheel to outside customers $45 outside supplier has quoted Department II a price of P96 per unit. This represents the
Variable costs per wheel when sold to outside customers $30 usual P100 price less a quantity discount due to the large number of Department II’s
requirements.
If the Vega Division sells wheels to the Walsh Division, Vega can avoid $2 per wheel in The Company has transfer price formula of: Transfer price = Variable cost per unit +
sales commissions. An outside supplier has offered to supply wheels to the Walsh Division for Lost contribution margin per unit on outside sales.
$41 each. Department I has enough excess capacity to handle all of Department II’s needs. For
the overall interest of the company, Department I should (M)
100. Suppose that the Vega Division has ample idle capacity so that transfers to the Walsh a. Sell to Department II at the same quoted price of P96 per unit.
Division would not cut into its sales to outside customers. What should be the lowest b. Sell to Department II at minimum price of P60 per unit.
acceptable transfer price from the perspective of the Vega Division? (M) c. Not sell to Department II since it will lose P4 per unit.
a. $28 c. $42 d. Sell to Department II at P100 per unit. RPCPA 1096
b. $30 d. $45

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 MANAGEMENT ADVISORY Responsibility Accounting & Transfer
104.A company has two divisions, A and B, each operated as a profit A charges B $35 per 107.Division A makes a part with the following characteristics:
center.
unit for each unit transferred to B. Other data follows:
Production capacity in units 15,000 units
A’s variable cost per unit $30 Selling price to outside customers $25
A’s fixed costs 10,000 Variable cost per unit $18
A’s annual sales to B 5,000 units Total fixed costs $60,000
A’s sales to outsiders 50,000 units
b. $140,000 decrease in XYZ profits d. $40,000 increase in XYZ profits
A is planning to raise its transfer price to $50 per unit, Division B can purchase units at
$40 each from outsiders, but doing so would idle A’s facilities now committed to producing
units for
B. Division A cannot increase its sales to outsiders. From the perspective of the company
as a whole, from whom should Division B acquire the units, assuming B’s market is
unaffected? (M)
a. Outside vendors.
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.
d. Division A, despite the increased transfer price. CIA 1183 IV-
5

Effect on Profit
Questions 105 & 106 are based on the following information. L & H
10e Alcatraz Division of XYZ Corp. sells 80,000 units of part X to the outside market. Part
X sells for
$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 for $40. Capone has been approached by an outside supplier willing to
supply the parts for $36.

105. What is the effect on XYZ's overall profit if Alcatraz REFUSES the outside price and
Capone decides to buy outside? (M)
a. no change c. $80,000 decrease in XYZ profits
b. $140,000 decrease in XYZ profits d. $40,000 increase in XYZ profits

106. What is the effect on XYZ's overall profit if Alcatraz ACCEPTS the outside price and
Capone continues to buy inside? (M)
a. no change c. $80,000 decrease in XYZ profits

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Division B, another division of the same company, would like to purchase 5,000
units of the part each period from Division A. Division B is now purchasing these
parts from an outside supplier at a price of $24 each.

Suppose that Division A has ample idle capacity to handle all of Division B's needs
without any increase in fixed costs and without cutting into sales to outside
customers. If Division B continues to purchase parts from an outside supplier rather
then from Division A, the company as a whole will be: (M) G&N
9e
a. worse off by $30,000 each period. c. better off by $15,000 each period.
b. worse off by $10,000 each period. d. worse off by $35,000 each period.

International Transfer Pricing

108. Hancock Manufacturing has one plant located in Italy and another plant located in
the U.S. The Italian plant manufactures a component used in a finished product
manufactured at the
U.S. plant. Currently, the Italian plant is operating at 75 percent capacity. In Italy the
income tax rate is 32 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:

Direct materials $30

Direct labor 20
Variable overhead 10
Fixed overhead 15
Which transfer price would be in the best interest of the overall
corporation? a. $60 c. $75
b. $50 d. $120 H&
M

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109. Pacific Company has three plants: one located in Malaysia, one in India and another 111. What is the maximum transfer price that the U.S. division would be willing
plant located in the Philippines. Both plants manufactures a component used in a finished to pay? a. $35 c. $60
product manufactured in the Philippine plant. Currently, both plants are operating at 70 b. $55 d. $100
capacity. In Malaysia the income tax rate is 42 while in India the tax rate is 35 ; in the
Philippines, the corporate income tax rate is 40 . 112. Which transfer price would be in the best interest of the overall
corporation? a. $35 c. $60
The market price of the component, in peso equivalent, is P100 and the foreign plant’s costs b. $55 d. $100
to manufacture the component are as follows:
Questions 113 thru 115 are based on the following information. H &
Direct materials P10 M Hampton Manufacturing has one plant located in Belgium and another plant located in the
Direct labor 20
U.S. The Belgium plant manufactures a component used in a finished product
Variable overhead 5
manufactured at the U.S. plant. Currently, the Belgium plant is operating at 70 percent
Fixed overhead 25
capacity. In Belgium the income tax rate is 30 percent; in the U.S. the corporate income tax
rate is 35 percent.
Which transfer price would be in the best interest of the overall corporation?
Pol Bobadilla A. B. C. D. The market price of the component is $140 and the Belgium plant’s costs to manufacture
Malaysia P35 P 35 P100 P100 the component are as follows:
India P35 P100 P100 P 35
Direct materials $15
Questions 110 thru 112 are based on the following information. H & Direct labor 25
M Hanover Manufacturing has one plant located in Belgium and another plant located in the Variable overhead 6
U.S. The Belgium plant manufactures a component used in a finished product Fixed overhead 28
manufactured at the U.S. 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 113. What is the minimum transfer price that the Belgium division would be willing to
rate is 35 percent. accept? a. $140 c. $68
b. $74 d. $46
The market price of the component is $100 and the Belgium plant’s costs to manufacture
the component are as follows: 114. What is the maximum transfer price that the U.S. division would be willing
to pay? a. $140 c. $68
Direct materials $10 b. $74 d. $46
Direct labor 20
Variable overhead 5 115. Which transfer price would be in the best interest of the overall
Fixed overhead 25 corporation? a. $140 c. $68
b. $74 d. $46
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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Comprehensive D. Optimize the overall profit goals of Adler Industries.

Questions 116 through 118 are based on the following information. CMA 1290 3-21 to
23 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 of two of Adler's other divisions. The Board Division manufactures printed
circuit boards (PCBs). One PCB model is made exclusively for the Systems Division using
proprietary designs, whereas 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 Division.

The costs per unit of the products used by the Systems Division are as follows:
PCB Transistor
Direct materials $2.50 $ .80
Direct labor 4.50 1.00
Variable overhead 2.00 .50
Fixed overhead .80 .75
Total cost $9.80 $3.05

The Board Division sells its commercial products at full cost plus a 25 markup and
believes the proprietary board made for the Systems Division would sell for $12.25 per unit on
the open market. The market price of the transistor used by the Systems Division is $3.70
per unit.

116. A per unit transfer price from the Transistor Division to the Systems Division at full cost,
$3.05, would
A. Allow evaluation of both divisions on a competitive basis.
B. Satisfy the Transistor Division's profit desire by allowing recovery of opportunity costs.
C. Demotivate the Systems Division and cause mediocre performance.
D. Provide no profit incentive for the Transistor Division to control or reduce costs.

117. Assume the Systems Division is able to purchase a large quantity of transistors from
an outside source at $2.90 per unit. The Transistor Division, having excess capacity,
agrees to lower its transfer price to $2.90 per unit. This action would
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.
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 MANAGEMENT ADVISORY Responsibility Accounting & Transfer
118. The Board and Systems Divisions have negotiated a transfer price of $11.00 per b. $45 d. $30
printed circuit board. This price will
A. Cause the Board Division to reduce the number of commercial printed circuit
boards it manufactures.
B. Motivate both divisions as estimated profits are shared.
C. Encourage the Systems Division to seek an outside source for printed circuit
boards.
D. Demotivate the Board Division causing mediocre performance.

Questions 119 through 123 are based on the following information.

Barfield Office Products Inc. manufactures and sells various high-tech office automation
products. Two divisions of Office Products Inc. are the Computer Chip Division and the
Computer Division. The Computer Chip Division manufactures one product, a "super
chip," that can be used by both the Computer Division and other external customers. The
following information is available on this month's operations in the Computer Chip Division:

Selling price per chip $50

Variable costs per chip $20
Fixed production costs $60,000
Fixed SG&A costs $90,000
Monthly capacity 10,000 chips
External sales 6,000 chips
Internal sales 0 chips

Presently, the Computer Division purchases no chips from the Computer Chips Division,
but instead pays $45 to an external supplier for the 4,000 chips it needs each month.

119. Assume that next month's costs and levels of operations in the Computer and
Computer Chip 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?
a. $50 c. $20
b. $45 d. $35

120. Assume that next month's costs and levels of operations in the Computer and
Computer Chip Divisions are similar to this month. What is the maximum of the
transfer price range for a possible transfer of the chip from one division to the other?
a. $50 c. $35
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121. Two possible transfer prices (for 4,000 units) are under consideration by the two divisions: $35
125.What is the minimum of the transfer price range for a transfer between the two
divisions?
and $40. Corporate profits would be if $35 is selected as the transfer price a. $96 c. $70
than $40. rather b. $90 d. $106
a. $20,000 larger c. $20,000 smaller divisions? a. $106 c. $90
b. $40,000 larger d. the same b. $100 d. $70

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
a. rise by $20,000 compared to the prior period.
b. drop by $40,000 compared to the prior period.
c. drop by $20,000 compared to the prior period.
d. rise by $80,000 compared to the prior period.

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 4,000 units to the Computer Division at $45? (Assume that the
Computer Division can purchase the super chip from an outside supplier for $45.)
a. no effect c. $20,000 decrease
b. $20,000 increase d. $90,000 increase

Questions 124 thru 126 are based on the following information. Barfield
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 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 operating at its capacity of 15,000 units per month and sells all of its output to a
foreign car manufacturer at $106 per unit. Its cost structure (on 15,000 units) is:

Variable production costs $70

Variable selling costs 10
All fixed costs 10

Assume that the Carburetor Division would not incur any variable selling costs on units
that are transferred internally.

124. What is the maximum of the transfer price range for a transfer between the two

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 MANAGEMENT ADVISORY Responsibility Accounting & Transfer

126.If the two divisions agree to transact with one another, corporate profits will
a. drop by $30,000 per month.
b. rise by $20,000 per month.
c. rise by $50,000 per month.
d. rise or fall by an amount that depends on the level of the transfer price.

Questions 127 through 133 are based on the following information.

Gleim The information was presented as part of Question 6 on Part 4 of the December
1981 CMA Examination.
PortCo Products is a divisionalized furniture manufacturer. The divisions are
autonomous segments, with each division being responsible for its own sales, costs of
operations, working capital management, and equipment acquisition. Each division serves a
different market in the furniture industry. Because the markets and products of the divisions
are so different, there have never been any transfers between divisions.

The Commercial Division manufactures equipment and furniture that are purchased by
the restaurant industry. The division plans to introduce a new line of counter and chair
units that feature a cushioned seat for the counter chairs. John Kline, the division manager,
has discussed the manufacturing of the cushioned seat with Russ Flegel for a price for
100-unit lots of the cushioned seat. The following conversation took place about the
price to be charged for the cushioned seats:

Flegel: “John, we can make the necessary modifications to the cushioned seat easily.
The raw 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 fabrication operation basically is the same. I would price the seat at our
regular rate – full cost plus
30 markup.”
Kline: “This is higher than I expected. Russ, I was thinking that a good price would be
your variable manufacturing costs. After all, your capacity costs will be incurred regardless of
the job.” Flegel: “John, I’m at capacity. By making the cushion seats for you, I’ll have to
cut my production of deluxe office stools. Of course, I can increase my production of
economy office stools. The labor time freed by not having to fabricate the frame or assemble
the deluxe stool can be shifted to the frame fabrication and assembly of the economy office
stool. Fortunately, I can switch my labor force between these two models of stools without any
loss of efficiency. As you know, overtime is

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not a feasible alternative in our community. I’d like to sell it to you at variable cost, but I Property taxes Nonvariable – any change in amounts/rates 200,000
have excess demand for both products. I don’t mind changing my product mix to the economy and insurance is independent of production
model if I taxes
get a good return on the seats I make for you. Here are my standard costs for the two Depreciation Fixed dollar total 1,700,000
stools and a schedule of my manufacturing overhead.” Employee benefits 20 of supervision, direct and indirect labor 575,000
Total overhead $3,840,000
Kline: “I guess I see your point, Russ, but I don’t want to price myself out of the market. Capacity in DLH 300,000
Maybe we should talk to Corporate to see if they can give us any guidance.” Overhead rate/DLH $12.80
Office Division
127.What amount of employee benefit is associated with direct labor costs? (E)
Standard Costs and Prices
a. $675,000 c. $450,000
b. $75,000 d. $500,000
Deluxe Office Stool Economy Office Stool
Raw materials
128. What is the variable manufacturing overhead rate? (E)
Framing $ 8.15 $
a. $7.80/hr. c. $5.17/hr.
9.76 Cushioned seat
b. $11.25/hr. d. $5.00/hr.
Padding 2.40 -
Vinyl 4.00
129. What is the transfer price per 100-unit lot based on variable manufacturing costs to
- Molded seat (purchased)
produce the modified cushioned seat? (E)
6.00
a. $1,329 c. $789
Direct labor b. $1,869 d. $1,986
Frame fabrication (.5x$7.50/DLH) 3.75 (.5x$7.50/DLH) 3.75
Cushion fabrication 3.75 -
(.5x$7.50/DLH) 130. What is the fixed manufacturing overhead rate? (E)
Assembly* (.5x$7.50/DLH) 3.75 (.3x$7.50/DLH) 2.25
a. $7.80/hr. c. $5.17/hr.
Manufacturing
b. $11.25/hr. d. $5.00/hr.
Overhead (1.5DLHx$12.60/DLH) 19.20 (.8DLHx$12.80/DLH) 10.24
Total standard cost $45.00 $32.00
131. How many economy office stools can be produced with the labor hours currently
Selling price (30 markup) $58.50 $41.60 used to make 100 deluxe stools? (E)
* Attaching seats to frames and attaching rubber feet. a. 187 c. 100
b. 125 d. 150
Office Division
Manufacturing Overhead Budget 132. When computing the opportunity cost for the deluxe office stool, what is the
contribution margin per unit produced? (E)
Overhead Item Nature Amount a. $25.20 c. $45.00
Supplies Variable – at current market prices $ 420,000 b. $15.84 d. $33.30
Indirect labor Variable 375,000
Supervision Nonvariable 250,000 133. What is the opportunity cost of the Office Division if 125 economy stools can
Power Use varies with activity; rates are fixed 180,000 be made in the time required for 100 deluxe stools? (E)
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MANAGEMENT ADVISORY Responsibility Accounting & Transfer
Heat and light Nonvariable – light is fixed regardless of 140,000 a. $789 c. $1,329
production b. $1,869 d. $540
while heat/airconditioning varies with fuel charges

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MANAGEMENT ADVISORY Responsibility Accounting & Transfer

Answer Key
1. A 11. D 21. D 31. A 41. A
2. B 12. C 22. C 32. A 42. B
3. B 13. D 23. B 33. B 43. C
4. B 14. C 24. B 34. B 44. A
5. A 15. C 25. A 35. D 45. C
6. B 16. D 26. C 36. A 46. A
7. C 17. B 27. D 37. C 47. B
8. B 18. D 28. B 38. C 48. C
9. B 19. B 29. D 39. C 49. D
10. A 20. B 30. B 40. B 50. A

51. B 61. A 71. C 81. D 91. B

52. B 62. E 72. A 82. A 92. C
53. E 63. B 73. C 83. B 93. C
54. A 64. D 74. B 84. B 94. B
55. C 65. B 75. A 85. C 95. B
56. C 66. D 76. B 86. B 96. C
57. B 67. A 77. C 87. C 97. D
58. D 68. C 78. A 88. B 98. D
59. E 69. C 79. B 89. C 99. A
60. C 70. D 80. D 90. D 100. A

101. B 111. D 121. D 131. B

102. B 112. A 122. D 132. A
103. A 113. D 123. C 133. D
104. D 114. A 124. B
105. B 115. A 125. A
106. A 116. D 126. C
107. A 117. D 127. C
108. D 118. B 128. D
109. B 119. C 129. A
110. A 120. B 130. A

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