Nogo Motors, Inc., has several divisions that often purchase component parts from each other. Thecompany is fully decentralized and each division is selling to other divisions or in outside markets. Eachdivision makes its decision on where to buy and sell in conformity with divisional goals. Igo Divisionpurchases most of its airbags from Letgo Division. The managers of these two divisions are currentlynegotiating a transfer price for the airbags for next year, when the airbag will be standard equipment onall Igo vehicles. Letgo Division prepared the following financial information for negotiating purposes:Costs of airbag as manufactured by Letgo:Direct materials costsP 4055Direct manufacturing labor costsVariable manufacturing overhead costs10Fixed manufacturing overhead costsVariable marketing costsFixed marketing costsFixed administrative costsTotal costs2551510P160Letgo Division is currently working at 80% of its capacity. Letgo's policy is to achieve an operatingincome of 20% of sales.There has been a drop in price for airbags. The current market price is P 130 per unit.Required: Consider cach of the requirements independently.1. If Letgo Division desires to achieve it's operating income goal of 20% of sales, what should bethe transfer price?2. Assume that Letgo Division wants to maximize its operating income, what transfer price wouldyou recommend that the Letgo Division negotiate?3.What is the transfer price that you believe Letgo Division should charge if overall company-operating income is to be maximized?

Requirement 1 Transfer Price = Total cost + Operating margin @20% on transfer priceTransfer Price =…

Required: Consider each of the requirements independently. 1. If Letgo Division desires to achieve it's operating income goal of 20% of sales, what should be the transfer price? 2. Assume that Letgo Division wants to maximize its operating income, what transfer price would you recommend that the Letgo Division negotiate? What is the transfer price that you believe Letgo Division should charge if overall company- operating income is to be maximized? 3.

Required: Consider each of the requirements independently. 1. If Letgo Division desires to achieve it's operating income goal of 20% of sales, what should be the transfer price? 2. Assume that Letgo Division wants to maximize its operating income, what transfer price would you recommend that the Letgo Division negotiate? What is the transfer price that you believe Letgo Division should charge if overall company- operating income is to be maximized? 3.

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter10: Evaluating Decentralized Operations

Section: Chapter Questions

Problem 17E: Materials used by the Instrument Division of Ziegler Inc. are currently purchased from outside...

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Materials used by the Instrument Division of Ziegler Inc. are currently purchased from outside suppliers at a cost of 1,350 per unit. However, the same materials are available from the Components Division. The Components Division has unused capacity and can produce the materials needed by the Instrument Division at a variable cost of 900 per unit. a. If a transfer price of 1,000 per unit is established and 75,000 units of materials are transferred, with no reduction in the Components Divisions current sales, how much would Ziegler Inc.s total operating income increase? b. How much would the Instrument Divisions operating income increase? c. How much would the Components Divisions operating income increase?
The Mega Supply Corporation has three divisions: Commercial Products, Consumer Products, and Corporate Offices, which are located in Hatfield, South Carolina; Palo Alto, California; and Tulsa, Oklahoma, respectively. The Commercial Products division deals exclusively in sales of industrial products and supplies to business organizations. The Consumer Products division sells nonindustrial products to private consumers. Both divisions have dedicated inventory warehouses at their respective locations in Hatfield and Palo Alto. Because of the dissimilar nature of the commercial and consumer division product lines, they do not share customers or vendors. Currently Mega Supply uses a centralized database, which is located at their Corporate Division in Tulsa. Some relevant database tables and attributes are presented in the figure designated Problem 1. When customers contact their respective sales division, the sales clerk logs into the corporate database, checks credit, determines product availability, and creates a sales invoice. The corporate office typically bills the customer within 3 or 4 days and extends terms of net 30. Inventory control, AR processing, cash receipts, purchases from vendors and AP processing, and cash disbursements are performed by the corporate office. Due to Megas rapid growth, the company has seen a significant increase in sales and purchase transactions, which has resulted in excessive delays in processing transactions from the central database. Since customer service, including rapid response to customer inquiries and sales order processing, is a cornerstone of Megas business model, these delays are unacceptable. Required Mega wants to improve response time by distributing some parts of the corporate database while keeping other parts of it centralized. (A) Develop a schema for distributing Mega Supply Corporations database. Add new tables and attributes as needed but limit the schema to the tables needed to support sales, cash receipts, purchases/AP, and cash disbursements. In your schema, indicate whether tables are centralized, replicated, or partitioned. (B) Explain how the new system will operate.
Quest Motors, Inc., operates as a decentralized multidivision company. The Vivo division of Quest Motors purchases most of its airbags from the airbag division. The airbag division’s incremental cost for manufacturing the airbags is $90 per unit. The airbag division is currently working at 80% of capacity. The current market price of the airbags is $125 per unit. Q. If the two divisions were to negotiate a transfer price, what is the range of possible transfer prices? Evaluate this negotiated transfer-pricing policy using the criteria of goal congruence, evaluating division performance, motivating management effort, and preserving division autonomy.
T-Comm makes a variety of products. It is organized in two divisions, North and South. The managers for each division are paid, in part, based on the financial performance of their divisions. The South Division normally sells to outside customers but, on occasion, also sells to the North Division. When it does, corporate policy states that the price must be cost plus 15 percent to ensure a “fair” return to the selling division. South received an order from North for 600 units. South’s planned output for the year had been 2,400 units before North’s order. South’s capacity is 3,000 units per year. The costs for producing those 2,400 units follow. Total Per Unit Materials $ 480,000 $ 200 Direct labor 230,400 96 Other costs varying with output 153,600 64 Fixed costs (do not vary with output) 2,016,000 840 Total costs $ 2,880,000 $ 1,200 Required: a. If you are the manager of the South Division, what unit cost would you ask…
XYZ is a large multinational company that is structured into six divisions. Many of the divisions trade with each other, usually providing intermediate components that are then used in the manufacture of final products in the other division. The senior management of XYZ has a policy of using dual-rate transfer prices for all inter- divisional transactions (where the supplying division receives the full cost plus a mark-up on each transaction and the receiving division is charged at the variable cost of the transfers. However, a number of concerns have been expressed about the policy including the following; (i) The use of different transfer prices can cause confusion between divisions (ii) Different transfer prices can increase divisional incentives to compete effectively (iii) Different transfer prices can lead to the double counting of internal profits Which of the above claims made about dual-rate transfer prices is/are incorrect? a. (i) only is incorrect…
Cleene Division of Soaphen Corporation produces soap, 20% of which are sold to Bubbly Division of Soaphen Corporation. The remainder is sold to outside customers. Soaphen treats its divisions as profit centers and allows division managers to choose their sources of sale and supply. Corporate policy requires that all interdivisional sales and purchases be recorded at variable cost at transfer price. Cleene Division’s estimated sales and standard cost data for the year ending December 31, 2000, based on capacity of 100,000 units are as follows: BUBBLY OUTSIDERS Sales 900,000 8,000,000 Variable Costs (900,000) (3,600,000) Fixed costs (300,000) (1,200,000) Gross Margin (300,000) (320,000) Unit Sales 20,000 80,000 Cleene has an opportunity to sell the 20,000 units shown above to an outside customer at a price of P75 per unit. Bubbly can purchase its requirements from an outside supplier at a price of P85 per unit.…
The Kelly-Elias Corporation, manufacturer of tractors and other heavy farm equipment, is organized along decentralized product lines, with each manufacturing division operating as a separate profit center. Each division manager has been delegated full authority on all decisions involving the sale of that division’s output both to outsiders and to other divisions of Kelly-Elias. Division C has in the past always purchased its requirement of a particular tractor-engine component from division A. However, when informed that division A is increasing its selling price to $135, division C’s manager decides to purchase the engine component from external suppliers. Division C can purchase the component for $115 per unit in the open market. Division A insists that, because of the recent installation of some highly specialized equipment and the resulting high depreciation charges, it will not be able to earn an adequate return on its investment unless it raises its price. Division A’s manager…
The Kelly-Elias Corporation, manufacturer of tractors and other heavy farm equipment, is organized along decentralized product lines, with each manufacturing division operating as a separate profit center. Each division manager has been delegated full authority on all decisions involving the sale of that division’s output both to outsiders and to other divisions of Kelly-Elias. Division C has in the past always purchased its requirement of a particular tractor-engine component from division A. However, when informed that division A is increasing its selling price to $135, division C’s manager decides to purchase the engine component from external suppliers. Division C can purchase the component for $115 per unit in the open market. Division A insists that, because of the recent installation of some highly specialized equipment and the resulting high depreciation charges, it will not be able to earn an adequate return on its investment unless it raises its price. Division A’s manager…
The Kelly-Elias Corporation, manufacturer of tractors and other heavy farm equipment, is organized along decentralized product lines, with each manufacturing division operating as a separate profit center. Each division manager has been delegated full authority on all decisions involving the sale of that division’s output both to outsiders and to other divisions of Kelly-Elias. Division C has in the past always purchased its requirement of a particular tractor-engine component from division A. However, when informed that division A is increasing its selling price to $135, division C’s manager decides to purchase the engine component from external suppliers. Division C can purchase the component for $115 per unit in the open market. Division A insists that, because of the recent installation of some highly specialized equipment and the resulting high depreciation charges, it will not be able to earn an adequate return on its investment unless it raises its price. Division A’s manager…
Phoenix Inc., a cellular communication company, has multiple business units, organized as divisions. Each division’s management is compensated based on the division’s operating income. Division A currently purchases cellular equipment from outside markets and uses it to produce communication systems. Division B produces similar cellular equipment that it sells to outside customers—but not to division A at this time. Division A’s manager approaches division B’s manager with a proposal to buy the equipment from division B. If it produces the cellular equipment that division A desires, division B will incur variable manufacturing costs of $60 per unit. Relevant Information about Division B Sells 90,000 units of equipment to outside customers at $130 per unit Operating capacity is currently 80%; the division can operate at 100% Variable manufacturing costs are $70 per unit Variable marketing costs are $8 per unit Fixed manufacturing costs are $900,000 Income per Unit for Division A…
Lansing Electronics Inc. manufactures a variety of printers, scanners, and fax machines in itstwo divisions: the PSF Division and the Components Division. The Components Division produces electronic components that can be used by the PSF Division. All the components thisdivision produces can be sold to outside customers. However, from the beginning, nearly allof its output has been used internally. The current policy requires that all internal transfers ofcomponents be transferred at full cost.Recently, Cam DeVonn, the chief executive officer of Lansing Electronics, decided to investigate the transfer pricing policy. He was concerned that the current method of pricing internaltransfers might force decisions by divisional managers that would be suboptimal for the firm. Aspart of his inquiry, he gathered some information concerning Component Y34, which is usedby the PSF Division in its production of a basic scanner, Model SC67.The PSF Division sells 40,000 units of Model SC67 each year…
Bostonian Inc. has a number of divisions, including the Delta Division and the Listen Now Division. The Listen Now Division owns and operates a line of MP3 players. Each year, the Listen Now Division purchases component AZ in order to manufacture the MP3 players. Currently, it purchases this component from an outside supplier for $6.50 per component. The manager of the Delta Division has approached the manager of the Listen Now Division about selling component AZ to the Listen Now Division. The full product cost of component AZ is $3.10. The Delta Division can sell all of the component AZs it makes to outside companies for $6.50. The Listen Now Division needs 18,000 component AZs per year; the Delta Division can make up to 60,000 components per year. Required: A. Which division sets the maximum transfer price? Which division sets the minimum transfer price? Maximum Minimum B. Suppose the company policy is that all transfer take place at full cost. What is the transfer…