RESPONSIBILITY ACCOUNTING AND TRANSFER PRICING

PROBLEM EXERCISES:

1. For each of the following independent cases, the minimum desired Return on Investment (ROI) is 20%.
Certified Public Accountant
Sales P 400,000 (5) ______ P 700,000
Operating Income (1) ______ (6) ______ P 42,000
Operating Assets (2) ______ P 300,000 (9) ______
Margin 15% 8% (10) _____
Turnover (3) ______ 3 times (11) _____
Return on Investments 30% (7) ______ (12) _____
Residual Income (4) ______ (8) ______ P 22,000
REQUIRED: Compute for each Division’s missing items.

2. The following data pertain to New York, Inc. operations for July 2006:
TOTAL NORTH Division CENTRAL Division
Amount % Amount % Amount %
Sales P1,000,000 (100%) (100%) (100%)
Less: Variable Expenses ( ) ( ) ( )
Contribution Margin ( ) P360,000 ( 60% ) ( )
Less: Traceable fixed expenses ( ) (P150,000) ( ) P200,000 ( )
Division segment margin ( ) ( ) P120,000 ( 30% )
Less: Common fixed expenses ( )
Income P 40,000 ( )

REQUIRED: Fill-in the missing data.

3. The CBA company’s Division A produces a small tool used by other companies as a key pert in their products. Cost
and sales data relating to the small tool are given below:
Selling price per unit P 50
Variable cost per unit P 30
Fixed costs per unit* P 20
* Based on A division’s capacity of 40,00 tools per year.
CBA Company’s Division B is introducing a new product that will use a tool such as the one produced in the Division
A. An outside supplier has quoted the Division B a price of P 48 per tool. The Division B would like to purchase the
tools from Division A instead, if an acceptable transfer price can be worked out.

REQUIRED:
a. Determine the lower limit of the transfer assuming that:
1. Division A has ample idle capacity to handle all the Division B’s needs.
2. Division A is presently selling all the tools it can produce to outside customers.
b. From the standpoint of the entire company, should the Division B purchase the tools from the Division A
(operating at a capacity) or from outside supplier? Why?
c. Assume that the Division B requires 10,000 tools per year and the Division A is presently selling 35,000 tools
per year to outside customer:
1. Determine the lower limit of the transfer price
2. What would be the impact on company’s overall profits if all 10,000 tools were acquired from the Division
A rather than from the outside suppliers?