Question : 144. The Service Division one part of Corcoran Corporation. For 2012, : 1208313

 

144. The Service Division is one part of Corcoran Corporation. For 2012, the Service Division reported income of $120,000 on an investment in operating assets of $800,000. The division expects this level of performance to continue for 2013. Senior management of Corcoran Corporation has asked the Service Division to consider adding a new product line that would result in the following revenues and costs:
  
Required:
1) Compute the ROI that would be generated by the new product line.
2) Compute the ROI for the Service Division without the new product line
3) Compute the Service Division’s residual income without the new product line and with the new product line. The target ROI is 12%.
4) Would the new product line benefit the company as a whole? ROI for the company as a whole is 10%. Will the Service Division likely add the new product line given the company’s use of ROI as a performance measure? Why or why not? Which performance evaluation measure will more likely motivate the division manager to do what is best for the company as a whole?

145. Houston Corporation includes two divisions, Filter Division and Motor Division. The Filter Division makes specialized filters, including one that could be used by the Motor Division. Costs for the filter are: variable costs, $8; fixed costs, $10. Filter Division has capacity to make 20,000 of the filters, and it is operating at capacity. It sells the filters to other companies for $26 each. The Motor Division needs 8,000 filters per year, and it has been purchasing them from another company for $22.50 each.
Required:
1) Businesses traditionally have used different bases for establishing transfer prices. What basis should be used in this case?
2) If a transfer were to occur between Filter Division and Motor Division, what is the maximum that Motor Division should be willing to pay for the filters?
3) If a transfer were to occur between Filter Division and Motor Division, what is the minimum price that Filter Division should be willing to accept?
4) Do you recommend that a transfer occur between Filter Division and Motor Division? If the transfer did occur, what would be the effect on the overall profits of Houston Corporation?

146. Santa Clara Corporation includes two divisions, Filter Division and Motor Division. The Filter Division makes specialized filters, including one that could be used by the Motor Division. Costs for the filter are: variable costs, $8; fixed costs, $10. Filter Division has capacity to make 20,000 of the filters, and it is operating at capacity. It sells the filters to other companies for $26 each. If a sale was made to the Motor Division, variable costs would be reduced by $2 per filter on those units. The Motor Division needs 8,000 filters per year, and it has been purchasing them from another company for $22.50 each.
Required:
1) If a transfer were to occur between Filter Division and Motor Division, what is the maximum that Motor Division should be willing to pay for the filters?
2) If a transfer were to occur between Filter Division and Motor Division, what is the minimum price that Filter Division should be willing to accept?
3) Do you recommend that a transfer occur between Filter Division and Motor Division? If the transfer did occur, what would be the effect on the overall profits of Santa Clara Corporation?

 

 

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