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Exam 19: Strategic Performance Measurement: Investment Centers

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Question 41

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Consider the following data from two business units of a company,P and Q: If both units were presented with an opportunity to invest in a project that is estimated to achieve an ROI of 15%,what will the units likely decide?

A) Unit P will invest;Unit Q will not invest.
B) Unit P will invest;Unit Q will be indifferent.
C) Unit P will not invest;Unit Q will invest.
D) Unit P will be indifferent;Unit Q will not invest.
E) Neither unit will invest in the projects.

F) D) and E)
G) B) and D)

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Question 42

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Consider the following data from two business units of a company,P and Q: If the minimum rate of return is 11%,what is Unit P's residual income (RI) ?

A) $160,000.
B) $1,040,000.
C) $1,060,000.
D) $1,434,000.
E) $3,934,000.

F) All of the above
G) A) and B)

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Question 43

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When investments in facilities are shared by different subunits in a firm,allocation of cost of these common facilities to sharing units should be determined by:

Since residual income (RI) is not a percentage,it is not useful for:

What special problems and opportunities arise in setting transfer prices in an international setting (i.e. ,for transfers between subunits that operate in different countries)? Hint: In terms of special problems,make sure you reference OECD requirements and practical implementation alternatives for general OECD requirements. )

Pacific Mill consists of two operating divisions,a Cutting Division and an Assembly Division.The former division prepares timber at its sawmills,while the assembly division prepares the cut lumber into finished wood (which is sold to various furniture manufacturers).During the most recent year the Cutting Division prepared 60,000 cords of wood at a cost of $1,320,000.All of this lumber was transferred to the Assembly Division,where incremental costs of $12 per cord were added.Pacific Mill sold the 600,000 board-feet of finished wood for $5,000,000. Required: 1.What would the operating income for each of the two divisions be if the transfer price from Cutting to Assembly was set at cost,$22 per cord? (Show calculations. ) 2.What would the operating income for each of the two divisions be if the transfer price is set at $18 per cord? (Show calculations. ) 3.Since Cutting transfers all of its output internally (to Assembly),does the manager of Cutting care what price is selected? Why? Should Cutting be treated as a cost center under the circumstances (rather than a profit center or investment center)? Explain.

All of the following are listed as possible transfer pricing methods except:

Selected data from Chering Division's accounting records revealed the following: Chering Division's asset turnover (AT) is calculated to be:

Selected data from one of the investment centers from Jones Company are as follows:

Consider the following data for three divisions of a company,X,Y,and Z: The return on sales (ROS) for Division X is:

A dollar amount equal to the operating income of a business unit less a charge for the level of investment in the unit is called:

Because residual income (RI) is a dollar amount,in contrast to a percentage (as is return on investment,ROI) ,RI:

Selected data from an investment center's accounting records reveal the following:

Expropriation occurs when the government in which a foreign company's investment assets are located:

All of the following are true of cost-based transfer prices except:

Assume two divisions of a company,P (producing)and B (buying),that are treated as investment centers for performance-evaluation purposes.As the management accountant,you've been asked to provide input to the determination of the appropriate transfer price for an exchange of product between these two divisions.In case #1,Division P is experiencing a capacity constraint,while in case #2 it is assumed that Division P has excess capacity.The incremental production cost incurred by Division P,to the point of transfer,is $80.00 per unit.Division P can sell its output externally for $120.00 per unit,less a sales commission charge of $5.00 per unit.Currently,Division B is purchasing the product from an external supplier at $120.00 per unit,plus a $3.00 transportation charge per unit. Required: 1.Assume that Division P has limited capacity.Thus,for each unit it sells internally,it loses the opportunity to sell that unit externally.Use the general transfer-pricing rule to determine the minimum transfer price for internal transfers of units,that Division P would charge Division B.From the standpoint of Division P,why is the figure you calculated considered an acceptable transfer price? 2.What is the maximum transfer price that Division B would be willing to pay per unit on any internal transfers? 3.If top management of the company allows the managers of Divisions P and B to negotiate a transfer price,what is the likely range of possible transfer prices? 4.Assume now that Division P has excess capacity.Use the general transfer-pricing rule to determine the minimum transfer price that Division P would be willing to accept from Division B for any internal transfers.Would this transfer price motivate the correct economic decision (internal versus external transfer)from the standpoint of the company as a whole? Explain. 5.Given the situation described above in (4),would top management of the company want the transfer to take place internally? Why? (Show calculations,if appropriate. )How could top management ensure that an internal transfer would take place?

Consider the following data from two business units of a company,P and Q: If the minimum rate of return is 11%,what is Unit Q's residual income (RI) ?

Residual income (RI) may be a better measure for performance evaluation of an investment center than return on investment (ROI) because:

Replacement cost of a division's assets will most probably be greater than:

ROI,though widely used,is subject to which one of the following limitations?