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Exercise 5 (7 Dec 2022)
Exercise 5 (7 Dec 2022)
Exercise 5 (7 Dec 2022)
QUESTION 1
Integrated Auto Sdn. Bhd. specialises in manufacturing the compact car and family car. It
operates in two (2) divisions. The following are the division’s financial measures for year
ended 2011:
Compact Car Division Family Car
Division
Total assets RM43,000,000 RM38,500,000
Current liabilities RM16,600,000 RM18,400,000
Operating income RM 3,217,500 RM3,334,500
Required rate of return 12 percent 12 percent
REQUIRED :
(a) Calculate Return on Investment (ROI) for each division using total assets as a
measure of investment.
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QUESTION 2
Deria Corporation presented two years of data for its Sporting Goods Division and its
Camping Division.
REQUIRED:
a) Compute the ROI and the margin and turnover ratios for each year for the Sporting
Goods Division.
b) Compute the ROI and the margin and turnover ratios for each year for the Camping
Goods Division.
c) Explain the change in ROI from Year 1 to Year 2 for each division.
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QUESTION 4
Trendy’s cost of good sold is considered to be entirely variable; however, its administrative
expenses do not depend on volume. Selling expenses are a mixed cost with 40% attributed to
sales volume. The operating income for Trendy is as follows:
Items RM RM
Sales revenue 7,000,000
Less: Expenses
Cost of good sold 3,700,000
Administrative expenses 791,000
Selling expenses 540,000 5,031,000
Operating income before tax 1,969,000
The division’s assets and liabilities as at 31st December 2012 are as follows:
Items RM
Current assets* 6,460,000
Long-term assets* 9,690,000
Current liabilities 2,500,000
Long-term debt 5,000,000
*Note: For the 2011 year-end balance, total assets are RM16,000,000.
REQUIRED:
(a) Calculate Trendy Division’s unit contribution margin if it produced and sold 300,000
units for the year ended 31st December 2012.
(b) Calculate the following performance measures for 2012 for Trendy Division:
(i) ROI, based on average operating assets employed.
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(ii) Residual income (RI), calculated on the basis of average operating assets
employed.
(c) Trendy management is presented with the opportunity to invest in a project that would
earn an ROI of 10%. Determine whether Trendy is likely to accept or not the new
project. Explain your decision.
(d) Identify TWO (2) items that Trendy should control if it is to be fairly evaluated as a
separate investment center within BMSB. using either ROI or RI as performance
measures.
(f) Explain ONE (1) difference between profit center and investment center.
QUESTION 5
PSI Technology Sdn. Bhd. is a manufacturing firm. The company has a number of divisions that
produce digital camera, video camera, MP3 player, battery and camera bag. The Battery Division
manufactures a variety of battery that can be sold externally to an open market or internally to PSI’s
Camera Division. Sales and cost data per unit for battery is as follows:
RM
Unit selling price 22.40
Unit variable cost 9.20
Unit product fixed cost* 5.60
Practical capacity (units) 500,000
*RM2,800,000/500,000
For the next year, the Battery Division expects to sell 390,000 units battery. The Camera Division
currently plans to buy 100,000 batteries on the outside market for RM22.40 per unit. Mr. Raymond,
manager of the Battery Division, approached Mr. Ayman, manager of the Camera Division, and
offered to sell 100,000 batteries for RM22.00 per unit. Mr. Raymond explained to Mr. Ayman that he
can avoid selling costs of RM0.80 per battery by selling internally and that he would split the savings
by offering a RM0.40 discount on the usual price.
REQUIRED:
(a) Determine the minimum price that the Battery Division would be willing to accept and the
maximum price that the Camera Division would be willing to pay.
(b) Based on your answer in (a), determine whether an internal transfer would take place and
calculate the benefit (or loss) to the company as a whole if the internal transfer occurs.
(c) Suppose Mr. Ayman knows that the Battery Division has idle capacity. Do you think that he
would agree to the transfer price of RM22.00? If he counters with an offer to pay RM19.20
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per unit, would Mr. Raymond, be interested in this price? Explain your answer with
supporting computations.
(d) Suppose that PSI Technology’s policy is that all internal transfers take place at full
manufacturing cost. Determine the transfer price and whether the internal transfer would take
place.
(e) “Under the general transfer-pricing guideline, the minimum transfer price will vary depending
on whether the supplying division has idle capacity or not”. Do you agree? Explain.