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
Gross margin 70,000 equipment should remain constant, and working capital (cash, receivables and inventories)
Net operating income 50,000 should vary 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 his performance is a. 40% c. 20%
measured using the residual income method. Webb is reviewing the following forecasted b. 13% d. 33% Barfield
information for the division for next year.
Category Amount (thousands) Return on Investment, Minimum Required Rate of Return & Residual Income
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 EVA Computation – Given Operating Income after Tax
segment are 30% and 10%, respectively, the segment with the highest economic value added 27. Samovar Company has operating income after taxes of $50,000. It has $200,000 of equity
(EVA) is (M) capital, which has an after-tax weighted-average cost of 12%. Samovar also has $10,000 of
A. Segment A. C. Segment C. Gleim current liabilities (noninterest-bearing) and no long-term liabilities. What is the company's
B. Segment B. D. Not determinable from this information. economic value added (EVA) for the period?
A. $(24,000) C. $24,000
23. Assume Avionics Industries reported at year-end that operating income before taxes for the B. $(26,000) D. $26,000 Gleim
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 28. Ralph, an investor, is interested in loaning money to a secure corporation. He always bases
book value of the equity capital for Avionics is $900,000 less than its fair value. Current assets his decision on the company with the largest economic value added (EVA). Ralph has
are listed at $2,000,000 and long-term assets equal $9,600,000. The claims against those narrowed his choices down to four, and has collected the following information:
assets are in the form of $1,500,000 in current liabilities and $2,200,000 in long-term liabilities. Operating
The income tax rate for Avionics is 30%. What is the economic value added (EVA)? (D) Income after Tax Equity Capital WACC Current Liabilities
a. $731,240 c. $1,668,760 Company A $50,000 $200,000 12% $10,000
b. $948,760 d. $1,680,000 Gleim Company B 60,000 150,000 20% 18,000
Company C 45,000 220,000 10% 30,000
Questions 24 thru 26 are based on the following information. Horngren Company D 55,000 250,000 15% 5,000
Waldorf Company has two sources of funds: long-term debt with a market and book value of $10 Based on largest EVA and assuming that none of the companies have any long-term liabilities,
million issued at an interest rate of 12%, and equity capital that has a market value of $8 which company should Ralph invest in?
million (book value of $4 million). Waldorf Company has profit centers in the following locations A. Company A. C. Company C.
with the following operating incomes, total assets, and total liabilities. The cost of equity capital B. Company B. D. Company D. Gleim
is 12%, while the tax rate is 25%.
Operating Income Assets Current Liabilities Equity Value Creation, Market Value Added & Total Shareholder Return
St. Louis $ 960,000 $ 4,000,000 $ 200,000 Questions 29 thru 31 are based on the following information. Gleim
Cedar Rapids $1,200,000 $ 8,000,000 $ 600,000 Semibar Co. reports net income of $630,000. The information below or the year just ended is also
Wichita $2,040,000 $12,000,000 $1,200,000 available:
24. What is the EVA for St. Louis? (M) January 1 December 31
a. $255,740 c. $392,540 Shareholders’ equity $4,200,000 $4,480,000
b. $327,460 d. $720,000 Share price $25 $30
Shares outstanding 400,000 400,000
25. What is the EVA for Cedar Rapids? (M) Cost of equity 10% 10%
a. $135,580 c. $234,000 Dividends per share $1.00
b. $220,000 d. $305,000
29. Equity value creation is
26. What is the EVA for Wichita? (M) a. $630,000 c. $420,000
a. $450,000 c. $414,360 b. $448,000 d. $210,000
b. $1,530,000 d. $1,115,640

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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 26
b. $1,720,000 d. $280,000 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: Totals $450,000 $90,000
Assets available for use $1,000,000
Residual income 100,000 During 1992, Rho produced 300,000 units of industrial photo-prints, which were sold for $2.00
Return on investment 15% each. Oslo’s investment in Rho was $500,000 and $700,000 at January 1, 1992 and December
If expenses increased by $20,000 in Apple Division, (E) 31, 1992, respectively. Oslo normally imputes interest on investments at 15% of average invested
a. return on investment would decrease. c. the target rate of return would decrease. 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 was
33. Division A had the following information: 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) was
Weighted-average cost of capital 12% a. $150,000 c. $(45,000)
If the asset base is decreased by $200,000, with no other changes, the return on investment of b. $60,000 d. $(30,000)
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-even?
b. 16.7% e. 20.0% a. 180,000 c. 90,000
c. 600.0% H&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
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 is
Segment A Segment B Segment C Segment D 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 is
Net income as % of sales - - - - 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 is
Minimum ROI - % 20% 6% - - a. $30,000 c. $4,800
Residual income - -0- $2,250 - b. $6,750 d. $120,000

39. For Segment B, net income as a percentage of sales is 48. Assume that the minimum dollar ROI is $6,750 for Segment C. The minimum percentage of
a. 8% c. 4% ROI is
b. 6.67% d. 10% a. 20% c. 15%
b. 6% d. 10%
40. For Segment C, net income as a percentage of sales is
a. 5% c. 4% 49. In Segment D, the minimum percentage of ROI is
b. 6.67% d. 20% a. 20% c. 15%
b. 6% d. 10%
41. For Segment C, the turnover of investment is
a. 3 c. 2.5 50. In Segment A, the residual income is
b. 1.5 d. 4 a. $200 c. $(30,000)
b. $12,000 d. $4,800
42. For Segment D, the turnover of investment is
a. 3 c. 2.5 51. In Segment D, the residual income is
b. 1.5 d. 4 a. $12,000 c. $(60,000)
b. $(30,000) d. $9,000
43. For segment A, ROI is
a. 6% c. 20.8% SEGMENTED INCOME STATEMENT
b. 20% d. 7.5% Sales
52. During April, Division D of Carney Company had a segment margin ratio of 15%, a variable
44. For segment B, ROI is expense ratio of 60% of sales, and traceable fixed expenses of $15,000. Division D's sales
a. 6% c. 20% were closest to: (M)
b. 20.8% d. 7.5% a. $100,000. c. $33,333.
b. $60,000. d. $22,500. G & N 9e

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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 of
Sales revenue $500,000 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,
b. $325,000 e. $215,000 when sales in Division B were $200,000. Net income for the company was $25,000 and
c. $350,000 H&M 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 salary) 100,000 - - 57. Redding Company has two divisions with the following segment margins for the current year:
Fixed costs controllable by Div. Managers Northern, $200,000; Southern, $400,000. Common expenses of the company are $50,000.
(e.g., advertising, eng’g supervision costs) 90,000 50,000 40,000 What is Redding Company’s net income? (E)
Net revenue 1,000,000 600,000 400,000 a. $150,000 d. $650,000
Variable selling and administrative costs 130,000 70,000 60,000 b. $550,000 e. $350,000
Fixed costs controllable by others (e.g., c. $600,000 H&M
depreciation, insurance) 120,000 70,000 50,000
Using the information presented above, the contribution by Division 1 was (M) Comprehensive
a. $190,000 c. $310,000 Questions 58 & 59 are based on the following information. H&M
b. $260,000 d. $380,000 CIA 1186 IV-17 Barmore Company has the following information pertaining to its two divisions for 1995:
Division A Division B
55. A and B are autonomous divisions of a corporation. They have no beginning or ending Variable selling & administrative expenses $ 35,000 $ 45,000
inventories, and the number of units produced is equal to the number of units sold. Following Direct fixed manufacturing expenses 17,500 50,000
is financial information relating to the two divisions. Sales 100,000 200,000
A B Direct fixed selling/admin. Expenses 15,000 35,000
Sales $150,000 $400,000 Variable manufacturing expenses 20,000 50,000
Other revenue 10,000 15,000 Common expenses are $12,000 for 1995.
Direct materials 30,000 65,000
Direct labor 20,000 40,000 58. Common expenses are $12,000 for 1995. What is the segment margin for Division B? (E)
Variable factory overhead 5,000 15,000 a. $155,000 d. $20,000
Fixed factory overhead 25,000 55,000 b. $105,000 e. $8,000
Variance S&A expense 15,000 30,000 c. $55,000
Fixed S&A expense 35,000 60,000
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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 9e
Canon Company has two sales areas: North and South. During last year, the contribution margin in
the North Area was $50,000, or 20% of sales. The segment margin in the South was $15,000, or
8% of sales. Traceable fixed costs are $15,000 in the North and $10,000 in the South. During last
year, the company reported total net income of $26,000.
Questions 65 thru 68 are based on the following information. G & N 9e
Ieso Company has two stores: J and K. During November, Ieso Company reported a net income
of $30,000 and sales of $450,000. The contribution margin in Store J was $100,000, or 40% of
sales. The segment margin in Store K was $30,000, or 15% of sales. Traceable fixed expenses are
$60,000 in Store J, and $40,000 in Store K.

60. The variable costs for the South Area for the year were: (M) 65. Sales in Store J totaled: (M)
a. $230,000. c. $162,500. a. $400,000. c. $150,000.
b. $185,000. d. $65,000. b. $250,000. d. $100,000.

61. The total fixed costs (traceable and common) for Canon Company for the year were: (M) 66. Variable expenses in Store K totaled: (M)
a. $49,000. c. $24,000. a. $70,000. c. $200,000.
b. $25,000. d. $50,000. b. $110,000. d. $130,000.

Questions 62 thru 64 are based on the following information. H&M 67. The segment margin ratio in Store J was: (M)
Nauman Company has the following information pertaining to its two divisions for 1995: a. 16%. c. 40%.
Division X Division Y b. 24%. d. 60%.
Variable selling & administrative expenses $ 70,000 $ 90,000
Direct fixed manufacturing expenses 35,000 100,000 68. Ieso Company's total fixed expenses for the year were: (M)
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 100
62. What is the net income for the Nauman Company? (E) 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 d. $160,000 Administrative $ 180,000 $ 60,000 $ 60,000 $ 60,000
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
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Cost of sales 980,000 360,000 420,000 200,000 71. One company executive has expressed concern about the operating loss that has occurred in
Rent 280,000 84,000 140,000 56,000 Product Line 2 and has suggested that Product Line 2 be discontinued. If Product Line 2 is
Salaries 110,000 54,000 32,000 24,000 dropped, the manager of the line would be retained and assigned other duties with the
Total costs & expenses $1,830,000 $670,000 $750,000 $410,000 company, but the other employees would not be retained. Management has indicated that the
Operating income (loss) $ 170,000 $130,000 $(50,000) $ 90,000 nature of the company's advertising might change with the elimination of Product Line 2, but
The company buys the goods in the three product lines directly from manufacturers' the total dollar amount would not change. If Product Line 2 were to be dropped, the operating
representatives. Each product line is directed by a manager whose salary is included in the income of the company would (M)
administrative expenses. Administrative expenses are allocated to the three product lines equally A. Increase by $50,000. C. Decrease by $234,000.
because the administration is spread evenly among the three product lines. Salaries represent B. Decrease by $94,000. D. Increase by $416,000.
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, 72. A customer, operating in an isolated foreign market, has approached the head salesperson for
the advertising is allocated to the three product lines in proportion to the sales revenue. Product Line 1 and offered to purchase 4,000 units of a special-order product over the next 12
Commissions are paid to the salespersons in each product line based on 2% of gross sales. Rent months. This product would be sold in the same manner as Product Line 1's other products
represents the cost of the retail store and warehouse under a lease agreement with 5 years except that the customer is hoping for a price break. Product Line 1's cost to purchase this
remaining. The product lines share the retail and warehouse space, and the rent is allocated to the product (cost of sales) would be $14.70. Product Line 1 has excess capacity, meaning that the
three product lines based on the square footage occupied by each of the product lines. 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-
69. The segmented income statement for this retail company does not facilitate performance order product would be (M)
evaluation because it does not distinguish between controllable and uncontrollable costs. The A. $15.00 C. $27.50
only costs and expenses controllable at the product-line level for this retail company are (M) B. $17.30 D. $30.20
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. SPECIAL ORDER
Operating at Full Capacity
70. The company has an opportunity to promote one of its product lines by making a one-time Effect on Profit
$7,000 expenditure. The company can choose only one of the three product lines to promote. 73. Ajax Division of Carlyle Corporation produces electric motors, 20% of which are sold to
The incremental sales revenue that would be realized from this $7,000 promotion expenditure Bradley Division of Carlyle and the remainder to outside customers. Carlyle treats its divisions
in each of the product lines is estimated as follows: as profit centers and allows division managers to choose their sources of sale and supply.
Increase in Sales Revenue 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
Product Line 1 $15,000
ending December 31, 2000, based on the full capacity of 100,000 units, are as follows:
Product Line 2 20,000
Product Line 3 14,000 Bradley Outsiders
In order to maximize profits, the promotion expenditure should be spent on <List A>, resulting Sales $900,000 $8,000,000
in an increase in operating income of <List B>. (M) Variable costs (900,000) (3,600,000)
Fixed costs (300,000) (1,200,000)
A. B. C. D.
Gross margin $(300,000) $(3,200,000)
List A Product Line 2 Product Line 2 Product Line 3 Product Line 3 Unit sales 20,000 80,000
List B $13,000 $5,000 $1,400 $1,120

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Ajax has an opportunity to sell the above 20,000 units to an outside customer at a price of $75 At the price of P7 offered by foreign customer, what is the maximum number of units in regular
per unit during 2000 on a continuing basis. Bradley can purchase its requirements from an sales that Houston could sacrifice and still maintain its expected residual income?
outside suppler at a price of $85 per unit. A. 2,333 C. 2,667
Assuming that Ajax Division desires to maximize its gross margin, should Ajax take on the new B. 3,333 D. 3,667 Pol Bobadilla
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. TRANSFER PRICING
b. Yes, because Ajax Division’s gross margin would increase by $300,000. Transfer Pricing Formula
c. Yes, because Ajax division’s gross margin would increase by $600,000. 76. The management of James Corporation has decided to implement a transfer pricing system.
d. No, because Bradley Division’s gross margin would decrease by $800,000. 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
Operating with Excess Capacity assessed based on number of reports (assume that all reports require the same amount of
Minimum Price time and resources to produce). The cost to operate the MIS department at its full capacity of
74. Houston Division of Texacon, Inc. expects the following result for 2004: 1,000 reports per year is budgeted at $45,000. The user subunits expect to request 250
Units sales 70,000 reports each this year. The cost of temporary labor and additional facilities used to produce
Units selling price P10 reports beyond capacity is budgeted at $48.00 per report. James could purchase the same
Unit variable cost P 4 services from an external Information Services firm for $70,000. What amounts should be
Total fixed costs P300,000 used as the ceiling and the floor in determining the negotiated transfer price?
Total investment P500,000 a. b. c. d.
The minimum required ROI is 15%, and divisions are evaluated on residual income. A foreign Floor $36.00 $45.60 $48.00 $57.00
customer has approached Houston’s manager with an offer to buy 10,000 units at P7 each. If Ceiling $56.00 $56.00 $70.00 $82.00
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. Questions 77 thru 80 are based on the following information. Barfield
What is the minimum price that Houston could accept for the order and still maintain its Bigole Corp. produces various products used in the construction industry. The Plumbing Division
expected residual income? produces and sells 100,000 copper fittings each month. Relevant information for last month
A. P5.00 C.P4.75 follows:
B. P5.60 D. P9.00 Pol Bobadilla Total sales (all external) $250,000
Expenses (all on a unit base):
Maximum Lost Units Variable manufacturing $0.50
75. Houston Division of Texacon, Inc. expects the following result for 2004: Fixed manufacturing .25
Units sales 70,000 Variable selling .30
Units selling price P10 Fixed selling .40
Unit variable cost P 4 Variable G&A .15
Total fixed costs P300,000 Fixed G&A .50
Total investment P500,000 Total $2.10
The minimum required ROI is 15%, and divisions are evaluated on residual income. A foreign Top-level managers are trying to determine how a transfer price can be set on a transfer of 10,000
customer has approached Houston’s manager with an offer to buy 10,000 units at P7 each. If of the copper fittings from the Plumbing Division to the Bathroom Products Division.
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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77. A transfer price based on variable cost will be set at ___________ per unit. operating at its capacity of 15,000 units per month and sells all of its output to a foreign car
a. $0.50 c. $0.95 manufacturer at $106 per unit. Its cost structure (on 15,000 units) is:
b. $0.80 d. $0.75 Variable production costs $70
Variable selling costs 10
78. A transfer price based on full production cost would be set at ___________ per unit. All fixed costs 10
a. $0.75 c. $1.45 Assume that the Carburetor Division would not incur any variable selling costs on units that
b. $2.10 d. $1.60 are transferred internally. What is the minimum of the transfer price range for a transfer
between the two divisions? (M)
79. A transfer price based on market price would be set at ___________ per unit. a. $96 c. $70
a. $2.10 c. $1.60 b. $90 d. $106 Barfield
b. $2.50 d. $2.25
83. Division A produces a part with the following characteristics:
80. If the Plumbing Division is operated as an autonomous investment center and its capacity is Capacity in units 50,000
100,000 fittings per month, the per-unit transfer price is not likely to be below Selling price per unit $30
a. $0.75. c. $2.10. Variable costs per unit $18
b. $1.60. d. $2.50. Fixed costs per unit $3
Division B, another division in the company, would like to buy this part from Division A.
Operating at Full Capacity Division B is presently purchasing the part from an outside source at $28 per unit. If Division A
Minimum Transfer Price sells to Division B, $1 in variable costs can be avoided.
81. The High Division of Para Company produces a high quality kite. Unit production costs (based Suppose Division A is currently operating at capacity and can sell all of the units is produces
on capacity production of 100,000 units per year) follow: on the outside market for its usual selling price. From the point of view of Division A, any sales
Direct materials P 60 to Division B should be priced no lower than: (M)
Direct labor 25 a. $27. c. $20.
Overhead (20% variable) 15 b. $29. d. $28. G & N 9e
Other information
Sales price 120 Maximum Transfer Price
Selling expenses (15% variable) 20 84. The Motor Division of Super Truck Co. uses 5,000 carburetors per month in its production of
The High Division is producing and selling at capacity. automotive engines. It presently buys all of the carburetors it needs from two outside suppliers
What is the minimum selling price that the division would consider as a “transfer price” to the at an average cost of $100. The Carburetor Division of Super Truck Co. manufactures the
Recreation Division on which no variable period costs would be incurred? (M) exact type of carburetor that the Motor Division requires. The Carburetor Division is presently
a. P120 c. P 91 operating at its capacity of 15,000 units per month and sells all of its output to a foreign car
b. P 88 d. P117 Pol Bobadilla manufacturer at $106 per unit. Its cost structure (on 15,000 units) is:
Variable production costs $70
82. The Motor Division of Super Truck Co. uses 5,000 carburetors per month in its production of Variable selling costs 10
automotive engines. It presently buys all of the carburetors it needs from two outside suppliers All fixed costs 10
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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Assume that the Carburetor Division would not incur any variable selling costs on units that d. rise or fall by an amount that depends on the level of the transfer price. Barfield
are transferred internally. What is the maximum of the transfer price range for a transfer
between the two divisions? (M) Comprehensive
a. $106 c. $90 Questions 87 and 88 are based on the following information. RPCPA 0585
b. $100 d. $70 Barfield 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,
Effect on Profit - Make Gumamela Division, manufactures steel containers, 20% of which are sold to Daisy Division and
85. Division A makes a part with the following characteristics: the balance to outside customers. Inter-divisional sales and purchases are recorded at variable
Production capacity in units 15,000 units cost as a transfer price. Based on a full capacity of 150,000 units, the estimated sales and
Selling price to outside customers $25 standard cost data for Gumamela Division for the year 1985 are as follows:
Variable cost per unit $18 Daisy Outsiders
Total fixed costs $60,000 Sales P 900,000 P 9,600,000
Division B, another division of the same company, would like to purchase 5,000 units of the Variable costs (900,000) (3,600,000)
part each period from Division A. Division B is now purchasing these parts from an outside Fixed costs (200,000) (800,000)
supplier at a price of $24 each. Gross margin P(200,000) P 5,200,000
Suppose that Division A is operating at capacity and can sell all of its output to outside Unit sales 30,000 120,000
customers at its usual selling price. If Division A sells the parts to Division B at $24 per unit Gumamela has the option to sell the above 30,000 units to an outside customer at a price of P50
(Division B’s outside price), the company as a whole will be: (M) per unit during 1985 on a continuing basis. Daisy in turn may purchase its requirements from an
a. better off by $5,000 each period. outside supplier at a price of P60 per unit.
b. worse off by $15,000 each period, 87. Assuming that Gumamela wishes to improve its gross margin, should Gumamela accept the
c. worse off by $5,000 each period. order of the new customer, and drop its sales to Daisy for 1985 and why? (M)
d. there will be no change in the status of the company as a whole. G & N 9e a. No, because the gross margin from the company’s overall viewpoint would decrease by
P300,000.
86. The Motor Division of Super Truck Co. uses 5,000 carburetors per month in its production of b. Yes, because Gumamela Division’s gross margin would increase by P300,000.
automotive engines. It presently buys all of the carburetors it needs from two outside suppliers c. Yes, because Gumamela Division’s gross margin would increase by P600,000.
at an average cost of $100. The Carburetor Division of Super Truck Co. manufactures the d. No, because Daisy Division’s gross margin would decrease by P900,000.
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 88. Assume, however, that Rosa Corporation allows the division managers to negotiate the
manufacturer at $106 per unit. Its cost structure (on 15,000 units) is: transfer price for 1985. The managers agreed on a tentative transfer price of P50 per unit; to
Variable production costs $70 be reduced based on an equal sharing of the additional gross margin to Gumamela resulting
Variable selling costs 10 from the sales to Daisy of 30,000 units at P50 per unit. The actual transfer price for 1985
All fixed costs 10 would be (M)
Assume that the Carburetor Division would not incur any variable selling costs on units that a. P35.50 c. P45.00
are transferred internally. b. P40.00 d. P50.00
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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Questions 89 thru 91 are based on the following information. CMA 0696 3-26 to 28 91. Assume that the Plastic Division has excess capacity and it has negotiated a transfer price of
Parkside, Inc. has several divisions that operate as decentralized profit centers. Parkside’s $5.60 per plastic component with the Entertainment Division. This price will (M)
Entertainment Division manufactures video arcade equipment using the products of two of a. Cause the Plastics Division to reduce the number of commercial plastic components it
Parkside’s other divisions. The Plastics Division manufactures plastic components, one type that is manufactures.
made exclusively for the Entertainment Division, while other less complex components are sold to b. Motivate both divisions as estimated profits are shared.
outside markets. The products of the Video Cards Division are sold in a competitive market, c. Encourage the Entertainment Division to seek an outside source for plastic components.
however, one video card model is also used by the Entertainment Division. The actual costs per d. Demotivate the Plastics Division causing mediocre performance.
unit used by the Entertainment Division are 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 customers
Fixed overhead 0.40 2.25 at $24 per unit. The annual capacity is 20,000 units and the variable cost to make each unit is
Total cost $ 5.00 $ 9.15 $16. Division Y of Charter Corporation would like to buy 10,000 units a year from Division X to
use in its products. There would be no cost savings from transferring the units within the
The Plastics Division sells its commercial products at full cost plus a 25% markup and believes the company rather than selling them on the outside market. What should be the lowest
proprietary plastic component made for the Entertainment Division would sell for $6.25 per unit on acceptable transfer price from the perspective of Division X? (D)
the open market. The market price of the video card used by the Entertainment Division is $10.98 a. $24.00 c. $17.60
per unit. 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 93. The Post Division of the M.T. Woodhead Company produces basic posts which can be sold to
cost, $9.15, would (M) outside customers or sold to the Lamp Division of the M.T. Woodhead Company. Last Year
a. Allow evaluation of both divisions on a competitive basis. the Lamp Division bought all of its 25,000 posts from Post at $1.50 each. The following data
b. Satisfy the Video Cards Division’s profit desire by allowing recovery of opportunity costs. 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 cards Fixed costs, total $150,000
from an outside source at $8.70 per unit. The Video Cards Division having excess capacity, Suppose the transfers of posts to the Lamp Division cut into sales to outside customers by
agrees to lower its transfer price to $8.70 per unit. This action would (M) 15,000 units. What is the lowest transfer price that would not reduce the profits of the Post
a. Optimize the profit goals of the Entertainment Division while subverting the profit goals of Division? (D)
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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94. The Vega Division of Ace Company makes wheels which can either be sold to outside with basic posts at $1.45 each. If the Lamp Division had chosen to buy all of its posts from the
customers or transferred to the Walsh Division of Ace Company. Last month the Walsh outside supplier instead of the Post Division, the change in net operating income for the
Division bought all 4,000 of its wheels from the Vega Division for $42 each. The following data company as a whole would have been: (D)
are available from last month's operations for the Vega Company: a. $1,250 decrease. c. $1,000 decrease.
Capacity 12,000 wheels b. $10,250 increase. d. $13,750 decrease. G & N 9e
Selling price per wheel to outside customers $45
Variable costs per wheel when sold to outside customers $30 Operating at Idle Capacity
If the Vega Division sells wheels to the Walsh Division, Vega can avoid $2 per wheel in sales Minimum Transfer Price
commissions. An outside supplier has offered to supply wheels to the Walsh Division for $41 97. Division A makes a part that it sells to customers outside of the company. Data concerning this
each. part appear below:
Suppose that Vega can sell 9,000 wheels each month to outside consumers, so transfers to Selling price to outside customers $40
the Walsh Division cut into outside sales. What should be the lowest acceptable transfer price Variable cost per unit $30
from the perspective of the Vega Division? (VD) Total fixed costs $10,000
a. $28.00 c. $41.00 Capacity in units 20,000
b. $31.75 d. $42.00 G & N 9e 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
Effect on Profit - Make $38 per unit and would substitute the part made by Division A. Division B requires 5,000 units
95. Division P of Turbo Corporation has the capacity for making 75,000 wheel sets per year and of the part each period. Division A has ample capacity to produce the units for Division B
regularly sells 60,000 each year on the outside market. The regular sales price is $100 per without any increase in fixed costs and without cutting into sales to outside customers. If
wheel set, and the variable production cost per unit is $65. Division Q of Turbo Corporation Division A sells to Division B rather than to outside customers, the variable cost be unit would
currently buys 20,000 wheel sets (of the kind made by Division P) yearly from an outside be $1 lower. What should be the lowest acceptable transfer price from the perspective of
supplier at a price of $90 per wheel set. If Division Q were to buy the 30,000 wheel sets it Division A? (M)
needs annually from Division P at $87 per wheel set, the change in annual net operating a. $40. c. $30.
income for the company as a whole, compared to what it is currently, would be: (D) b. $38. d. $29. G & N 9e
a. $225,000. c. $500,000.
b. $325,000 d. $75,000. G & N adapted 98. Division A produces a part with the following characteristics:
Capacity in units 50,000
Effect on Profit - Buy Selling price per unit $30
96. The Post Division of the M.T. Woodhead Company produces basic posts which can be sold to Variable costs per unit $18
outside customers or sold to the Lamp Division of the M.T. Woodhead Company. Last Year Fixed costs per unit $3
the Lamp Division bought all of its 25,000 posts from Post at $1.50 each. The following data Division B, another division in the company, would like to buy this part from Division A.
are available for last year's activities of the Post Division: Division B is presently purchasing the part from an outside source at $28 per unit. If Division A
Capacity in units 300,000 posts sells to Division B, $1 in variable costs can be avoided.
Selling price per post to outside customers $1.75 Suppose that Division A has ample idle capacity to handle all of Division B's needs without any
Variable costs per post $0.90 increase in fixed costs and without cutting into its sales to outside customers. From the point of
Fixed costs, total $150,000 view of Division A, any sales to Division B should be priced no lower than: (M)
Suppose the transfers of posts to the Lamp Division cut into sales to outside customers by a. $29. c. $18.
15,000 units. Further suppose that an outside supplier is willing to provide the Lamp Division b. $30. d. $17. G & N 9e
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Maximum Transfer Price 101. What is the maximum price per wheel that Walsh should be willing to pay Vega? (M)
99. Cline Company had the following historical accounting data per unit: 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 customers for
Variable selling expenses 15 $20 per unit. At its current level of production, which is 60% of capacity, Division Z's fixed cost
Fixed selling expenses 3 of producing this component is $5 per unit and its variable cost is $12 per unit. Division Y of
The units are normally transferred internally from Division X to Division Y. The units also may the same company would like to purchase this component from Division Z for $10. Division Z
be sold externally for $70 per unit. The minimum profit level accepted by the company is a has enough excess capacity to fill Division Y's requirements. The managers of both divisions
markup of 30 percent. There were no beginning or ending inventories. are compensated based upon reported profits. Which of the following transfer prices will
If the negotiated price is used, Division X’s transfer price should be maximize total company profits and be most equitable to the managers of Division Y and
a. a maximum of $70.00 d. a minimum of $40.00 Division Z? (M)
b. a minimum of $51.00 e. a minimum of $43.00. A. $12 per unit. C. $20 per unit.
c. a maximum of $66.30 H&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 9e Production and sales data for component C is as follows:
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 Division bought all Selling price per unit P100
4,000 of its wheels from the Vega Division for $42 each. The following data are available from last Variable cost per unit 36
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 outside
Selling price per wheel to outside customers $45 supplier has quoted Department II a price of P96 per unit. This represents the usual P100
Variable costs per wheel when sold to outside customers $30 price less a quantity discount due to the large number of Department II’s requirements.
The Company has transfer price formula of: Transfer price = Variable cost per unit + Lost
If the Vega Division sells wheels to the Walsh Division, Vega can avoid $2 per wheel in sales contribution margin per unit on outside sales.
commissions. An outside supplier has offered to supply wheels to the Walsh Division for $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 Division a. Sell to Department II at the same quoted price of P96 per unit.
would not cut into its sales to outside customers. What should be the lowest acceptable b. Sell to Department II at minimum price of P60 per unit.
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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104. A company has two divisions, A and B, each operated as a profit center. A charges B $35 per 107. Division A makes a part with the following characteristics:
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
Division B, another division of the same company, would like to purchase 5,000 units of the
A is planning to raise its transfer price to $50 per unit, Division B can purchase units at $40 part each period from Division A. Division B is now purchasing these parts from an outside
each from outsiders, but doing so would idle A’s facilities now committed to producing units for supplier at a price of $24 each.
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? Suppose that Division A has ample idle capacity to handle all of Division B's needs without any
(M) increase in fixed costs and without cutting into sales to outside customers. If Division B
a. Outside vendors. continues to purchase parts from an outside supplier rather then from Division A, the company
b. Division A, but only at the variable cost per unit. as a whole will be: (M) G & N 9e
c. Division A, but only until fixed costs are covered, then from outside vendors. a. worse off by $30,000 each period. c. better off by $15,000 each period.
d. Division A, despite the increased transfer price. CIA 1183 IV-5 b. worse off by $10,000 each period. d. worse off by $35,000 each period.

Effect on Profit International Transfer Pricing

Questions 105 & 106 are based on the following information. L & H 10e 108. Hancock Manufacturing has one plant located in Italy and another plant located in the U.S.
Alcatraz Division of XYZ Corp. sells 80,000 units of part X to the outside market. Part X sells for The Italian plant manufactures a component used in a finished product manufactured at the
$40, has a variable cost of $22, and a fixed cost per unit of $10. Alcatraz has a capacity to produce U.S. plant. Currently, the Italian plant is operating at 75 percent capacity. In Italy the income
100,000 units per period. Capone Division currently purchases 10,000 units of part X from Alcatraz tax rate is 32 percent; in the U.S. the corporate income tax rate is 35 percent.
for $40. Capone has been approached by an outside supplier willing to supply the parts for $36.
The market price of the component is $120 and the Italian plant’s costs to manufacture the
105. What is the effect on XYZ's overall profit if Alcatraz REFUSES the outside price and Capone component are as follows:
decides to buy outside? (M)
a. no change c. $80,000 decrease in XYZ profits Direct materials $30
b. $140,000 decrease in XYZ profits d. $40,000 increase in XYZ profits Direct labor 20
Variable overhead 10
106. What is the effect on XYZ's overall profit if Alcatraz ACCEPTS the outside price and Capone Fixed overhead 15
continues to buy inside? (M) Which transfer price would be in the best interest of the overall corporation?
a. no change c. $80,000 decrease in XYZ profits a. $60 c. $75
b. $140,000 decrease in XYZ profits d. $40,000 increase in XYZ profits 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 plant 111. What is the maximum transfer price that the U.S. division would be willing to pay?
located in the Philippines. Both plants manufactures a component used in a finished product a. $35 c. $60
manufactured in the Philippine plant. Currently, both plants are operating at 70% capacity. In b. $55 d. $100
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 to b. $55 d. $100
manufacture the component are as follows:
Questions 113 thru 115 are based on the following information. H&M
Direct materials P10 Hampton Manufacturing has one plant located in Belgium and another plant located in the U.S.
Direct labor 20 The Belgium plant manufactures a component used in a finished product manufactured at the U.S.
Variable overhead 5 plant. Currently, the Belgium plant is operating at 70 percent capacity. In Belgium the income tax
Fixed overhead 25 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? The market price of the component is $140 and the Belgium plant’s costs to manufacture the
Pol Bobadilla A. B. C. D. component are as follows:
Malaysia P35 P 35 P100 P100
India P35 P100 P100 P 35 Direct materials $15
Direct labor 25
Questions 110 thru 112 are based on the following information. H&M Variable overhead 6
Hanover Manufacturing has one plant located in Belgium and another plant located in the U.S. The Fixed overhead 28
Belgium plant manufactures a component used in a finished product manufactured at the U.S.
plant. Currently, the Belgium plant is operating at 70 percent capacity. In Belgium the income tax 113. What is the minimum transfer price that the Belgium division would be willing to accept?
rate is 42 percent; in the U.S. the corporate income tax rate is 35 percent. 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 corporation?
Fixed overhead 25 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 118. The Board and Systems Divisions have negotiated a transfer price of $11.00 per printed circuit
Questions 116 through 118 are based on the following information. CMA 1290 3-21 to 23 board. This price will
Adler Industries is a vertically integrated firm with several divisions that operate as decentralized A. Cause the Board Division to reduce the number of commercial printed circuit boards it
profit centers. Adler's Systems Division manufactures scientific instruments and uses the products manufactures.
of two of Adler's other divisions. The Board Division manufactures printed circuit boards (PCBs). B. Motivate both divisions as estimated profits are shared.
One PCB model is made exclusively for the Systems Division using proprietary designs, whereas C. Encourage the Systems Division to seek an outside source for printed circuit boards.
less complex models are sold in outside markets. The products of the Transistor Division are sold D. Demotivate the Board Division causing mediocre performance.
in a well-developed competitive market; however, one transistor model is also used by the Systems
Division. Questions 119 through 123 are based on the following information. Barfield
Office Products Inc. manufactures and sells various high-tech office automation products. Two
The costs per unit of the products used by the Systems Division are as follows: divisions of Office Products Inc. are the Computer Chip Division and the Computer Division. The
PCB Transistor Computer Chip Division manufactures one product, a "super chip," that can be used by both the
Direct materials $2.50 $ .80 Computer Division and other external customers. The following information is available on this
Direct labor 4.50 1.00 month's operations in the Computer Chip Division:
Variable overhead 2.00 .50
Fixed overhead .80 .75 Selling price per chip $50
Total cost $9.80 $3.05 Variable costs per chip $20
Fixed production costs $60,000
The Board Division sells its commercial products at full cost plus a 25% markup and believes the Fixed SG&A costs $90,000
proprietary board made for the Systems Division would sell for $12.25 per unit on the open market. Monthly capacity 10,000 chips
The market price of the transistor used by the Systems Division is $3.70 per unit. External sales 6,000 chips
Internal sales 0 chips
116. A per unit transfer price from the Transistor Division to the Systems Division at full cost, $3.05,
would Presently, the Computer Division purchases no chips from the Computer Chips Division, but
A. Allow evaluation of both divisions on a competitive basis. instead pays $45 to an external supplier for the 4,000 chips it needs each month.
B. Satisfy the Transistor Division's profit desire by allowing recovery of opportunity costs.
C. Demotivate the Systems Division and cause mediocre performance. 119. Assume that next month's costs and levels of operations in the Computer and Computer Chip
D. Provide no profit incentive for the Transistor Division to control or reduce costs. 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?
117. Assume the Systems Division is able to purchase a large quantity of transistors from an a. $50 c. $20
outside source at $2.90 per unit. The Transistor Division, having excess capacity, agrees to b. $45 d. $35
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 120. Assume that next month's costs and levels of operations in the Computer and Computer Chip
Industries. Divisions are similar to this month. What is the maximum of the transfer price range for a
B. Allow evaluation of both divisions on the same basis. possible transfer of the chip from one division to the other?
C. Subvert the profit goals of the Transistor Division while optimizing the profit goals of the a. $50 c. $35
Systems Division. b. $45 d. $30
D. Optimize the overall profit goals of Adler Industries.
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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 rather a. $96 c. $70
than $40. b. $90 d. $106
a. $20,000 larger c. $20,000 smaller
b. $40,000 larger d. the same 126. If the two divisions agree to transact with one another, corporate profits will
a. drop by $30,000 per month.
122. If a transfer between the two divisions is arranged next period at a price (on 4,000 units of b. rise by $20,000 per month.
super chips) of $40, total profits in the Computer Chip division will c. rise by $50,000 per month.
a. rise by $20,000 compared to the prior period. d. rise or fall by an amount that depends on the level of the transfer price.
b. drop by $40,000 compared to the prior period.
c. drop by $20,000 compared to the prior period. Questions 127 through 133 are based on the following information. Gleim
d. rise by $80,000 compared to the prior period. The information was presented as part of Question 6 on Part 4 of the December 1981 CMA
Examination.
123. Assume, for this question only, that the Computer Chip Division is selling all that it can PortCo Products is a divisionalized furniture manufacturer. The divisions are autonomous
produce to external buyers for $50 per unit. How would overall corporate profits be affected if it segments, with each division being responsible for its own sales, costs of operations, working
sells 4,000 units to the Computer Division at $45? (Assume that the Computer Division can capital management, and equipment acquisition. Each division serves a different market in the
purchase the super chip from an outside supplier for $45.) furniture industry. Because the markets and products of the divisions are so different, there have
a. no effect c. $20,000 decrease never been any transfers between divisions.
b. $20,000 increase d. $90,000 increase
The Commercial Division manufactures equipment and furniture that are purchased by the
Questions 124 thru 126 are based on the following information. Barfield restaurant industry. The division plans to introduce a new line of counter and chair units that
The Motor Division of Super Truck Co. uses 5,000 carburetors per month in its production of feature a cushioned seat for the counter chairs. John Kline, the division manager, has discussed
automotive engines. It presently buys all of the carburetors it needs from two outside suppliers at the manufacturing of the cushioned seat with Russ Flegel for a price for 100-unit lots of the
an average cost of $100. The Carburetor Division of Super Truck Co. manufactures the exact type cushioned seat. The following conversation took place about the price to be charged for the
of carburetor that the Motor Division requires. The Carburetor Division is presently operating at its cushioned seats:
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: 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
Variable production costs $70 in our deluxe office stool. However, the labor time should be the same because the seat
Variable selling costs 10 fabrication operation basically is the same. I would price the seat at our regular rate – full cost plus
All fixed costs 10 30% markup.”
Kline: “This is higher than I expected. Russ, I was thinking that a good price would be your
Assume that the Carburetor Division would not incur any variable selling costs on units that are variable manufacturing costs. After all, your capacity costs will be incurred regardless of the job.”
transferred internally. 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
124. What is the maximum of the transfer price range for a transfer between the two divisions? labor time freed by not having to fabricate the frame or assemble the deluxe stool can be shifted to
a. $106 c. $90 the frame fabrication and assembly of the economy office stool. Fortunately, I can switch my labor
b. $100 d. $70 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 have Property taxes and Nonvariable – any change in amounts/rates is 200,000
excess demand for both products. I don’t mind changing my product mix to the economy model if I insurance taxes independent of production
get a good return on the seats I make for you. Here are my standard costs for the two stools and a Depreciation Fixed dollar total 1,700,000
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. Maybe we Capacity in DLH 300,000
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 $ 9.76 a. $7.80/hr. c. $5.17/hr.
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 produce
Molded seat (purchased) 6.00 the modified cushioned seat? (E)
Direct labor a. $1,329 c. $789
Frame fabrication (.5x$7.50/DLH) 3.75 (.5x$7.50/DLH) 3.75 b. $1,869 d. $1,986
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 used to make
Selling price (30% markup) $58.50 $41.60 100 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 be made in the
Power Use varies with activity; rates are fixed 180,000 time required for 100 deluxe stools? (E)
Heat and light Nonvariable – light is fixed regardless of production 140,000 a. $789 c. $1,329
while heat/airconditioning varies with fuel charges b. $1,869 d. $540
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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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