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    Jawab Latihan Sesi 8

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    Feni Alvita
    The document discusses two problems involving transfer pricing between divisions of companies. Problem 10.25 involves a board and systems division, where the negotiated transfer price of $11 provides profits for both divisions. It allows the board division to realize a $1.70 profit per board and reduces the systems division's costs by $1.00 per board. Problem 10.26 provides financial information for Keimer Steel Company, calculates its ROI and residual income, and notes that residual income would have been a better performance measure for evaluating a potential capital acquisition that management rejected using ROI.

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    Jawab Latihan Sesi 8

    Uploaded by

    Feni Alvita
    22 views2 pages
    The document discusses two problems involving transfer pricing between divisions of companies. Problem 10.25 involves a board and systems division, where the negotiated transfer price of $11 provides profits for both divisions. It allows the board division to realize a $1.70 profit per board and reduces the systems division's costs by $1.00 per board. Problem 10.26 provides financial information for Keimer Steel Company, calculates its ROI and residual income, and notes that residual income would have been a better performance measure for evaluating a potential capital acquisition that management rejected using ROI.

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    The document discusses two problems involving transfer pricing between divisions of companies. Problem 10.25 involves a board and systems division, where the negotiated transfer price of $11 provides profits for both divisions. It allows the board division to realize a $1.70 profit per board and reduces the systems division's costs by $1.00 per board. Problem 10.26 provides financial information for Keimer Steel Company, calculates its ROI and residual income, and notes that residual income would have been a better performance measure for evaluating a potential capital acquisition that management rejected using ROI.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    22 views2 pages

    Jawab Latihan Sesi 8

    Uploaded by

    Feni Alvita
    The document discusses two problems involving transfer pricing between divisions of companies. Problem 10.25 involves a board and systems division, where the negotiated transfer price of $11 provides profits for both divisions. It allows the board division to realize a $1.70 profit per board and reduces the systems division's costs by $1.00 per board. Problem 10.26 provides financial information for Keimer Steel Company, calculates its ROI and residual income, and notes that residual income would have been a better performance measure for evaluating a potential capital acquisition that management rejected using ROI.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    Problem 10.

    25

    1. Minimum transfer price = $3.45


    Maximum transfer price = $3.45
    Since a market price exists for the transistor used by the Systems Division, the
    minimum and maximum transfer prices are the same.

    2. Yes, since the variable cost of the transistor is $2.00 ($2.75 less the $0.75 of allocated
    fixed overhead).

    3. The negotiated price of $11.00 provides profit for both the Board and Systems
    divisions. The Board Division realizes a profit of $1.70 per board ($11.00 – $9.30). The
    Systems Division realizes a reduction in cost of $1.00 per board ($12.00 – $11.00).
    It should be noted that the $12.00 is not a true market price because this particular
    board is not sold externally. Thus, the Board Division is not necessarily foregoing
    profit by not selling externally at its regular markup.

    Problem 10.26

    1. Keimer Steel Company


    Unit Contribution Margin
    For the Year Ended November 30, 2015
    Sales revenue.................................................. $ 25,000,000
    Less variable costs:
    Cost of goods sold.................................. $16,500,000
    Selling expenses ($2,700,000 × 40%).... 1,080,000
    ................................................17,580,000
    Contribution margin....................................... $ 7,420,000
    Unit contribution margin = $7,420,000/1,187,200 units
    = $6.25 per unit

    2. a. ROI = Income before taxes/Average operating assets*


    = $1,845,000/$12,300,000
    = 15%
    *Average operating assets = ($12,600,000 + $12,000,000)/2
    = $12,300,000
    Where November 30, 2014, operating assets = $12,600,000/1.05

    b. Residual income = $1,845,000 – (0.13 × $12,300,000)


    = $1,845,000 – $1,599,000
    = $246,000

    3. The management of Keimer Steel would have been more likely to accept the
    contemplated capital acquisition if residual income were used as the performance
    measure because the investment would have increased both the division’s residual
    income and the management bonuses. Using residual income, management would
    accept all investments with a return higher than 13 percent as these investments would
    all increase the dollar value of residual income. When using ROI as a performance
    measure, Keimer’s management is likely to reject any investment that would lower the
    overall ROI (15 percent in 2015), even though the return is higher than the required
    minimum, as this would lower bonuses.
    4. Keimer must be able to control all items related to profits and investment if it is to be
    evaluated fairly as an investment center using either ROI or residual income as
    performance measures. Keimer must control all elements of the business except the
    cost of invested capital, that being controlled by Raddington Industries.

    Problem 10–28

    1. Part 4CM Model 7AC Company


    Sales..................................... $ 64,500* $ 580,000** $644,500
    Variable expenses............... 46,500 479,500 526,000
    Contribution margin..... $ 18,000 $ 100,500 $118,500
    *While all 10,000 units could be sold externally, currently none are.
    **Variable cost = $6.45 + $23.00 + $15.00 + $3.50

    2. The transfer price should be the market price of $12. This is the minimum price for the
    Components Division and the maximum price for the Small AC Division.

    3. Unless the manager of the Small AC Division is able to increase the price of Model
    7AC, he will discontinue production and will not purchase any of the component. (The
    full cost of producing the window unit will increase from $54.45 to $60, a cost greater
    than the current selling price.)

    4. All 10,000 units of Part 4CM will be sold externally at the market price of $12 per unit.

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