Question : SHORT ANSWER. Write the word or phrase that best completes each : 1196209

 

SHORT ANSWER.

Write the word or phrase that best completes each statement or answers the question. 71)

For each of the following activities, characteristics, and applications, tell whether they are primarily labelled as being found in a centralized organization, a decentralized organization, or both types of organizations.

 

a.Freedom for managers at lower organizational levels to make decisions.

b.Gathering information may be very expensive.

c.Greater responsiveness to user needs.

d.Have few interdependencies among divisions.

e.Maximum constraints and minimum freedom for managers at lowest levels.

f.Maximization of benefits over costs.

g.Minimization of duplicate functions.

h.Minimum of sub optimization.

i.Multiple responsibility centres with various reporting units.

j.Profit centres 71)

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72)

For each of the following transfer price descriptions or operating situations, tell which of the general methods of transfer pricing it is probably categorized as:

 

a.Bargaining between selling and buying units.

b.Budgeted costs.

c.145% of full costs.

d.Internal product transfers are required if goods are available internally.

e.Manufacturing plus marketing plus distribution plus customer service costs.

f.Prices listed in a trade journal.

g.Selling price less normal sales commissions.

h.Variable manufacturing cost plus a mark-up. 72)

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73)

A company has a plant in a high tax jurisdiction that produces products for a facility in a low tax

jurisdiction.

Suggest a strategy, including transfer prices, which will result in the lowest tax for the

overall corporation.

 73)

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74)

The Mill Flow Company has two divisions.

The Cutting Division prepares timber at its sawmills.

The

Assembly Division prepares the cut lumber into finished wood for the furniture industry.

No inventories

exist in either division at the beginning of 20X5.

During the year, the Cutting Division prepared 60,000

cords of wood at a cost of $660,000.

All the lumber was transferred to the Assembly Division, where

additional operating costs of $6 per cord were incurred.

The 600,000 boardfeet of finished wood were

sold for $2,500,000.

 

Required:

a.Determine the operating income for each division if the transfer price from Cutting to Assembly is at cost — $11 a cord.

 

b.Determine the operating income for each division if the transfer price is $9 per cord.

 

c.Since the Cutting Division sells all of its wood internally to the Assembly Division, does the manager care what price is selected?

Why?

Should the Cutting Division be a cost center or a profit center under the circumstances?

 

 74)

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75)

The Millwright Company has two divisions. The Lumber Division prepares timber at its sawmills. The Finishing Division prepares the cut lumber into finished wood for the furniture industry. No inventories exist in either division at the beginning of 2001. During the year the Lumber Division prepared 80,000 cords of wood at a cost of $480,000. All the lumber was transferred to the Finishing Division where additional operating costs of $5 per cord were incurred. The 800,000 board metres of finished wood were sold for $2,000,000.

 

Required:

 

a.Determine the operating income for each division if the transfer price from Lumber to Finishing is at cost, $6 a cord.

b.Determine the operating income for each division if the transfer price is $5 per cord.

c.Since the Lumber Division has all of its sales internally to the Finishing Division, does the manager care what price is selected? Why? Should the Lumber Division be a cost centre or a profit centre under the circumstances? 75)

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76)

Vancouver Valley Company has two divisions, Computer Services and Management Advisory Services. In addition to their external customers, each division performs work for the other division. The external fees earned by each division in 2001 were $200,000 for Computer Services and $350,000 for Management Advisory Services. Computer Services worked 3,000 hours for Management Advisory Services and they in turn worked 1,200 hours for Computer Services. The total costs of external services performed by Computer Services were $110,000 and $240,000 by Management Advisory Services.

 

Required:

 

a.Determine the operating income for each division and for the company as a whole if the transfer price from Computer Services to Management Advisory Services is $15 per hour and the transfer price from Management Advisory Services to Computer Services is $12.50 per hour.

b.Determine the operating income for each division and for the company as a whole if the transfer price from each to the other is $15 per hour.

c.What are the operating income results for each division and for the company as a whole if the two divisions net their hours worked for each other and charge $12.50 per hour for the one with the excess? Which division manager prefers this arrangement? 76)

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77)

Bedtime Bedding Company manufactures pillows. The Cover Division makes covers and the Assembly Division makes the finished products. The covers can be sold separately for $5.00. The pillows sell for $6.00. The information related to manufacturing for the most recent year is as follows:

 

Cover Division manufacturing costs $6,000,000

Sales of covers by Cover Division4,000,000

Market value of covers transferred to Assembly6,000,000

Sales of pillows by Assembly Division7,200,000

Additional manufacturing of Assembly Division1,500,000

 

Required:

 

Compute the operating income for each division and the company as a whole. Use market value as the transfer price. Are all managers happy with this concept? Explain. 77)

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78)

Better Food Company recently acquired an olive oil processing company that has an annual capacity of 4,000,000 litres and that processed and sold 1,400,000 litres last year at a price of $4 per litre. The purpose of the acquisition was to furnish oil for the Cooking Division. The Cooking Division needs 800,000 litres of oil per year. It has been purchasing oil from supplies at the market price. Production costs at capacity of the olive oil company, now a division, are as follows:

 

Direct materials per litre$1.00

Direct processing labour0.50

Variable processing overhead0.24

Fixed processing overhead

0.40

Total$2.14

 

Management is trying to decide what transfer price to use for sales from the newly acquired company to the Cooking Division. The manager of the Olive Oil Division argues that $4, the market price, is appropriate. The manager of the Cooking Division argues that the cost of $2.14 should be used, or perhaps a lower price since fixed overhead cost should be recomputed with the larger volume. Any output of the Olive Oil Division not sold to the Cooking Division can be sold to outsiders for $4 per litre.

 

Required:

 

a.Compute the operating income for the Olive Oil Division using a transfer price of $4.

b.Compute the operating income for the Olive Oil Division using a transfer price of $2.14.

c.What transfer price(s) do you recommend? Compute the operating income for the Olive Oil Division using your recommendation. 78)

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79)

A company has two divisions. The Bottle Division produces products that have variable costs of $3 per unit. Its 2001 sales were 150,000 to outsiders at $5 per unit and 40,000 units to the Mixing Division at 140 percent of variable costs. Under a dual transfer pricing system, the Mixing Division pays only the variable cost per unit. The fixed costs of Bottle Division were $125,000 per year.

 

Mixing sells its finished products to outside customers for $11.50 per unit. Mixing has variable costs of $2.50 per unit in addition to the costs from Bottle. The annual fixed costs of Mixing were $85,000. There were no beginning or ending inventories during the year.

 

Required:

 

What are the operating incomes of the two divisions and the company as a whole for the year? Explain why the company operating income is less than the sum of the two divisions’ total income. 79)

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80)

Sportswear Company manufactures socks.

The Athletic Division sells its socks for $6 a pair to outsiders.

 

Socks have manufacturing costs of $2.50 each for variable and $1.50 for fixed.

The division’s total fixed

manufacturing costs are $105,000 at the normal volume of 70,000 units.

 

The European Division has offered to buy 15,000 socks at the full cost of $4.

The Athletic Division

has excess capacity and the 15,000 units can be produced without interfering with the current outside

sales of 70,000.

The 85,000 volume is within the division’s relevant operating range.

 

Explain whether the Athletic Division should accept the offer.

 80)

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