17) The president of Silicon Company has just returned from a week of professional development courses and is very excited that she will not have to change the organization from a centralized structure to a decentralized structure just to have responsibility centers. However, she is somewhat confused about how responsibility centers relate to centralized organizations where a few managers have most of the authority.
Required:
Explain how a centralized organization might allow for responsibility centers.
Objective 22.3
1) A product may be passed from one subunit to another subunit in the same organization. The product is known as a(n):
A) interdepartmental product
B) intermediate product
C) subunit product
D) transfer product
2) Transfer prices should be judged by whether they promote:
A) goal congruence.
B) the balanced scorecard method.
C) a high level of subunit autonomy in decision making.
D) Both A and C are correct.
3) A transfer-pricing method leads to goal congruence when managers:
A) always act in their own best interest
B) act in their own best interest and the decision is in the long-term best interest of the manager's subunit
C) act in their own best interest and the decision is in the long-term best interest of the company
D) act in their own best interest and the decision is in the short-term best interest of the company
4) Negotiated transfer prices are often employed when:
A) market prices are stable
B) market prices are volatile
C) market prices change by a regular percentage each year
D) goal congruence is not a major objective
5) The costs used in cost-based transfer prices:
A) are actual costs
B) are budgeted costs
C) can either be actual or budgeted costs
D) are lower than the market-based transfer prices
Answer the following questions using the information below:
Penn Oil Corporation has two divisions, Refining and Production. The company's primary product is Luboil Oil. Each division's costs are provided below:
Production: Variable costs per barrel of oil$ 9
Fixed costs per barrel of oil$ 6
Refining:Variable costs per barrel of oil$30
Fixed costs per barrel of oil$36
The Refining Division has been operating at a capacity of 40,000 barrels a day and usually purchases 25,000 barrels of oil from the Production Division and 15,000 barrels from other suppliers at $60 per barrel.
6) What is the transfer price per barrel from the Production Division to the Refining Division, assuming the method used to place a value on each barrel of oil is 180% of variable costs?
A) $16.20
B) $27.00
C) $54.00
D) $70.20
7) What is the transfer price per barrel from the Production Division to the Refining Division, assuming the method used to place a value on each barrel of oil is 110% of full costs?
A) $16.50
B) $66.00
C) $72.60
D) $89.10
8) Assume 200 barrels are transferred from the Production Division to the Refining Division for a transfer price of $18 per barrel. The Refining Division sells the 200 barrels at a price of $120 each to customers. What is the operating income of both divisions together?
A) $7,200
B) $7,800
C) $10,800
D) $20,400
