123484995 Hilton Chapter 13 Solutions

8/9/2019 123484995 Hilton Chapter 13 Solutions

1/71

CHAPTER 13

Investment Centers and Transfer Pricing

ANSWERS TO REVIEW QUESTIONS

13-1 Goal congruence means a meshing of objectives, in whichthe managers throughout an organization strive toachieve goals that are consistent with the goals set bytop management. Goal congruence is important fororganizational success because managers often areunaware of the effects of their decisions on theorganization's other subunits. lso, it is natural for peopleto be more concerned with the performance of their own

subunit than with the effectiveness of the entireorganization. !n order for the organization to be effective,it is important that everyone in it be striving for the sameultimate objectives.

13-" #he managerial accountant's primary objective indesigning a responsibility-accounting system is to provideincentives for the organization's subunit managers tostrive toward achieving the organization's goals.

13-3 $nder the management-by-objectives %&() philosophy,managers participate in setting goals that they thenstrive to achieve. #hese goals may be e*pressed infinancial or other +uantitative terms, and theresponsibility-accounting system is used to evaluateperformance in achieving them. #he &( approach isconsistent with an emphasis on obtaining goalcongruence throughout an organization.

13- n investment center is a responsibility-accountingcenter, the manager of which is held accountable not onlyfor the investment center's profit but also for the capitalinvested to earn that profit. *amples of investmentcenters include a division of a manufacturing company, alarge geographical territory of a hotel chain, and ageographical territory consisting of several stores in aretail company.

McGraw-Hill/Irwin 2002 The McGraw-Hill Companies,Inc.

Managerial Accounting, 5/e 13-1


2/71

13-capitinvested

revensales

revenuesales

income

capitalinvested

income%/(!)investmenton/eturn ==

13-0 division's /(! can be improved by improving the salesmargin, by improving the capital turnover, or by somecombination of the two. #he manager of the automobiledivision of an insurance company could improve the salesmargin by increasing the profit margin on each insurancepolicy sold. s a result, every sales dollar would generatemore income. #he capital turnover could be improved byincreasing sales of insurance policies while eepinginvested capital fi*ed, or by decreasing the investedassets re+uired to generate the same sales revenue.

13-2 *ample of the calculation of residual income 4uppose an

investment center's profit is 5166,666, invested capital is5766,666, and the imputed interest rate is 1" percent

ratinterest

imputed

capitalinvested

scenter'investmentprofitscenter'investmentincome/esidual

/esidual income 8 5166,666 %5766,666) %1"9) 8 5,666

#he imputed interest rate is used in calculating residualincome, but it is not used in computing /(!. #he imputed

interest rate reflects the firm's minimum re+uired rate ofreturn on invested capital.

13-7 #he chief disadvantage of /(! is that for an investmentthat earns a rate of return greater than the company'scost of raising capital, the manager in charge of decidingabout that investment may have an incentive to reject it ifthe investment would result in reducing the manager's/(!. #he residual-income measure eliminates thisdisadvantage by including in the residual-income

calculation the imputed interest rate, which reflects thefirm's cost of capital. ny project that earns a returngreater than the imputed interest rate will show apositive residual income.

13-: #he rise in /(! or residual income across time resultsfrom the fact that periodic depreciation charges reducethe boo value of the asset, which is generally used in


13-2 Solutions Manual


3/71

determining the investment base to use in the /(! orresidual-income calculation. #his phenomenon can have aserious effect on the incentives of investment-centermanagers. !nvestment centers with old assets will showhigher /(!s than investment centers with relatively new

assets. #his result can discourage investment-centermanagers from investing in new e+uipment. !f thisbehavioral tendency persists for a long time, a division'sassets can become obsolete, maing the divisionuncompetitive.

13-16 #he economic value added %;) is defined asfollows

capital

ofcostavera-


4/71

13-11 a. #otal assets !ncludes all divisional assets. #hismeasure of invested capital is appropriate if thedivision manager has considerable authority in maingdecisions about all of the division's assets, including

nonproductive assets.b. #otal productive assets *cludes assets that are not in

service, such as construction in progress. #his measureis appropriate when a division manager is directed bytop management to eep nonproductive assets, such asvacant land or construction in progress.

c. #otal assets less current liabilities ll divisional assetsminus current liabilities. #his measure is appropriatewhen the division manager is allowed to secure short-

term ban loans and other short-term credit. #hisapproach encourages investment-center managers tominimize resources tied up in assets and ma*imize theuse of short-term credit to finance operations.

13-1" #he use of gross boo value instead of net boo valueto measure a division's invested capital eliminates theproblem of an artificially increasing /(! or residualincome across time. lso, the usual methods of computingdepreciation, such as straight-line or declining-balance

methods, are arbitrary. s a result, some managers prefernot to allow these depreciation charges to affect /(! orresidual-income calculations.

13-13 !t is important to mae a distinction between aninvestment center and its manager, because in evaluatingthe manager's performance, only revenues and costs thatthe manager can control or significantly influence shouldbe included in the profit measure. #he objective of themanager's performance measure is to provide anincentive for that manager to adhere to goal-congruentbehavior. !n evaluating the investment center as a viableeconomic investment, all revenues and costs that aretraceable to the investment center should be considered.>ontrollability is not an issue in this case.

13-1 ?ay for performance is a one-time cash payment to aninvestment-center manager as a reward for meeting a


13-! Solutions Manual


5/71

predetermined criterion on a specified performancemeasure. #he objective of pay for performance is to getthe manager to strive to achieve the performance targetthat triggers the payment.

13-1 n alternative to using /(! or residual income toevaluate a division is to loo at its income and investedcapital separately. ctual divisional profit for a period oftime is compared to a fle*ible budget, and variances areused to analyze performance. #he division's majorinvestments are evaluated through a postaudit of theinvestment decisions. #his approach avoids the necessityof combining profit and invested capital in a singlemeasure, such as /(! or residual income.

13-10 @uring periods of inflation, historical-cost asset valuessoon cease to reflect the cost of replacing those assets.#herefore, some accountants argue that investment-center performance measures based on historical-costaccounting are misleading. &ost managers, however,believe that measures based on historical-cost accountingare ade+uate when used in conjunction with budgets andperformance targets.

13-12 *amples of nonfinancial measures that could be usedto evaluate a division of an insurance company includethe following %1) new policies issued and insuranceclaims settled in a specified period of time, %") averagetime re+uired to settle an insurance claim, and %3)number of insurance claims settled without litigationversus claims that re+uire litigation.

13-17 Aonfinancial information is useful in measuringinvestment-center performance because it gives topmanagement insight into the summary financial measuressuch as /(! or residual income. y eeping trac of

important nonfinancial data, top managers often can seea problem developing before it becomes a seriousproblem. Bor e*ample, if a manufacturer's rate ofdefective products has been increasing over some periodof time, management can observe this phenomenon andtae steps to improve product +uality before seriousdamage is done to customer relations.


Managerial Accounting, 5/e 13-"


6/71

13-1: #he goal in setting transfer prices is to establishincentives for autonomous division managers to maedecisions that support the overall goals of theorganization. #ransfer prices should be chosen so thateach division manager, when striving to ma*imize his or

her own division's profit, maes the decision thatma*imizes the company's profit.

13-"6 Bour methods by which transfer prices may be set areas follows

%a) #ransfer price 8 additional outlay costs incurredbecause goods are transferred C opportunity costs tothe organization because of the transfer.

%b) #ransfer price 8 e*ternal maret price.

%c) #ransfer prices may be set on the basis ofnegotiations among the division managers.

%d) #ransfer prices may be based on the cost ofproducing the goods or services to be transferred.

13-"1


7/71

13-"" #he management of a multinational company has anincentive to set transfer prices so as to minimize theincome reported for divisions in countries with relativelyhigh income-ta* rates, and to shift this income to

divisions with relatively low income-ta* rates. 4omecountries' ta* laws prohibit this practice, while othercountries' laws permit it.

13-"3 &ultinational firms may be charged import duties, ortariffs, on goods transferred between divisions indifferent countries. #hese duties often are based on thereported value of the transferred goods. 4uch companiesmay have an incentive to set a low transfer price in orderto minimize the duty charged on the transferred goods.


Managerial Accounting, 5/e 13-$


8/71

SO%UTIONS TO E&ERCISES

D/>!4 13-" %16 &!A$#4)

4ales margin 8 revensales

income

8 656,666,

5,666,

8 79

>apitalturnover

8capitinvested

revensales8

65"6,666,

656,666,8 ".

/eturn oninvestment

8capitinvested

income8

65"6,666,

5,666,8 "69

D/>!4 13-" %1 &!A$#4)

#here are an infinite number of ways to improve the division's/(! to " percent. Eere are two of them

1.

!mprove the sales margin to 16 percent by increasingincome to 5,666,666

/(!

8 sales margin capital turnover

865"6,666,

656,666,

656,666,66

5,666,666

8 169

". 8 "9

4ince sales revenue remains unchanged, this implies a costreduction of 51,666,666 at the same volume.

".

!mprove the turnover to 3.1" by decreasing averageinvested capital to 510,666,666

/(!


86510,666,656,666,

656,666,665,666,666

8 79 3.1" 8 "9

4ince sales revenue remains unchanged, this implies thatthe firm can divest itself of some productive assets without


13-' Solutions Manual


9/71

affecting sales volume.

D/>!4 13-"0 % &!A$#4)

/esidual

income

8 investment

center income

F

ratinterest

imputed

capital

invested

8 5,666,666 F

%5"6,666,666 119)

8 51,766,666

D/>!4 13-"2 %"6 &!A$#4)

#he weighted-average cost of capital %>) is defined asfollows

e+uityofvalue&ar1et

debtofvalue&ar1et

e+uitofvalue&ar1e

capitale+uity

of>ost

debtofvalue&ar1et

capitaldebtofcostta*-fter

capitalofcostaverage-onstruction ssociates= 506million of debt is 16 percent, and the company=s ta* rate is 6percent. #herefore, Golden Gate=s after-ta* cost of debt is 0

percent 169

%1

69)H. #he cost of Golden Gate=s e+uitycapital is 1 percent. &oreover, the maret value of thecompany=s e+uity is 5:6 million. #he following calculationshows that Golden Gate=s > is 11. percent.

11.65:6,666,666506,666,66

666,666)%.1)%5:6,666,666)%.60)%506,capitalofcostaverage-


10/71

D/>!4 13-"7 %"6 &!A$#4)

#he economic value added %;) is defined as follows

capitalofcost

avera-


11/71

b. !ncome from operations before income ta*es. . 5",06,6

66Iess imputed interest charge

verage productive assets............ 51",366

,666!mputed interest rate...................

.1

!mputed interest charge.............................. 1,7,666

/esidual income............................................. 501,666




12/71

D/>!4 13-": %>(A#!A$@)

".

Kes, Bairmont=s management probably would haveaccepted the investment if residual income were used. #heinvestment opportunity would have lowered Bairmont=s

"6*1 /(! because the project's e*pected return %17percent) was lower than the division's historical returns%1:.3 percent to "".1 percent) as well as its actual "6*1 /(!%"6 percent). &anagement may have rejected theinvestment because bonuses are based in part on the /(!performance measure. !f residual income were used as aperformance measure %and as a basis for bonuses),management would accept any and all investments thatwould increase residual income %i.e., a dollar amount ratherthan a percentage) including the investment opportunity it

had in "6*1.

D/>!4 13-36 %36 &!A$#4)

1. 4tudents= calculation of return on investment andresidual income will depend on the company selectedand the year when the internet search is conducted.4tudents will need to decide how to determine theincome and the invested assets to use in bothcalculations. #he discussion in the te*t will serve as a

guide in this regard.

". 4ome companies= annual reports include a calculationand discussion of /(! in the Lmanagement report andanalysisM section or the Lfinancial highlightsM section.4tudents= calculation of /(! may differ frommanagement=s due to differing assumptions about thedetermination of income and invested capital.

D/>!4 13-31 %1 &!A$#4)

&emorandum@ate #oday

#o ?resident, 4un >oast Bood >enters

Brom !. &. 4tudent




13/71

4ubject

ehavior of /(! over time

!4 13-3" %16 &!A$#4)

1.

#he same employee is responsible for eeping the inventoryrecords andtaing the physical inventory count. !n addition,when the records and the count do not agree, the employeechanges the count, rather than investigating the reasons forthe discrepancy. #his leaves open the possibility that theemployee would steal inventory and conceal the theft byaltering both the records and the count. ven without any

dishonesty by the employee, this system is not designed tocontrol inventory since it does not encourage resolution ofdiscrepancies between the records and the count.

".

#he internal control system could be strengthened in twoways

%a)

ssign two different employees the responsibilities forthe inventory records and the physical count.


14/71

D/>!4 13-33 %1 &!A$#4)

1

.

4ales

margin

8revensales

income8

",666,

N166,668 9

N!ncome 8 O166,666 8 O",666,666 F O1,166,666 F O766,666

>apitalturnover

8 capitinvested

revensales8 1,666,

",666,8 "

/(! 8 capitinvested

income8 1,666,

166,68 169


13-1! Solutions Manual


15/71

D/>!4 13-33 %>(A#!A$@)

".

/(! 819

8 capitinvested

income8 1,666,

incom

!ncome 8 19 O1,666,666

8 O16,666

!ncome 8 sales revenue F e*penses 8 O16,666

!ncome 8 O",666,666 F e*penses 8 O16,666

*penses 8 O1,76,666

#herefore, e*penses must be reduced to O1,76,666 inorder to raise the firm's /(! to 1 percent.

3. 4alesmargin

8 revensales

income8 2.",666,666

16,666=

/(! 8 sales margin capital turnover

8 2.9 "

8 19

D/>!4 13-3 %16 &!A$#4)

1. #ransfer

price8

outlay

cost

Copportu

nitycost

8 5366N C 576P8 5376

N(utlay cost 8 unit variable production costP(pportunitycost

8 forgone contribution margin

8 5376 F 5366 8 576

".

!f the Babrication @ivision has e*cess capacity, there is noopportunity cost associated with a transfer. #herefore


Managerial Accounting, 5/e 13-1"


16/71

#ransferprice

8outlay

cost

Copportu

nitycost

8 5366 C 6 8 5366


13-1# Solutions Manual


17/71

D/>!4 13-3 %" &!A$#4)

1.

#he ssembly @ivision's manager is liely to reject thespecial order because the ssembly @ivision's incrementalcost on the special order e*ceeds the division's incremental

revenue

!ncremental revenue per unit in specialorder.....................................................

50

!ncremental cost to ssembly @ivisionper unitin special order#ransfer price.................................... 532dditional variable cost...................... 166

#otal incremental cost........................... 2

Ioss per unit in special order................. 5 %:)

".

#he ssembly @ivision manager's liely decision to rejectthe special order is not in the best interests of the companyas a whole, since the company'sincremental revenue on thespecial order e*ceeds the company'sincremental cost

!ncremental revenue per unit in specialorder...................................................

50

!ncremental cost to company per unit inspecial order

$nit variable cost incurred inBabrication @ivision.............................

5366

$nit variable cost incurred inssembly @ivision................................

166

#otal unit variable cost........................ 66?rofit per unit in special order.............. 5 0

3

.

#he transfer price could be set in accordance with the

general rule, as follows

#ransferprice

8outla

ycost

Copportu

nitycost

8 5366 C 6N

8 5366


Managerial Accounting, 5/e 13-1$


18/71

N(pportunity cost is zero, since the Babrication @ivision hase*cess capacity.

Aow the ssembly @ivision manager will have an incentive

to accept the special order since the ssembly @ivision'sincremental revenue on the special order exceeds theincremental cost. #he incremental revenue is still 50 perunit, but the incremental cost drops to 566 per unit %5366transfer price C 5166 variable cost incurred in the ssembly@ivision).


13-1' Solutions Manual


19/71

SO%UTIONS TO PRO*%E+S

?/(I& 13-30 %" &!A$#4)

#he answer to the +uestion as to which division is the most

successful depends on the firm's cost of capital. #o see this,compute the residual income for each division using variousimputed interest rates.

%a)

!mputed interest rate of 169

@ivision!

@ivision!!

@ivisional profit.................................. 5:66,666

5"66,666

Iess.............!mputed interest charge! 50,666,666 169.................... 066,666

!! ....................51,666,666 169 QQQQQQQ 166,666

/esidual income.................................. 5366,666

5166,666

%b)


@ivision

!

@ivision

!!@ivisional profit.................................. 5:66,66

65"66,66

6Iess.............!mputed interest charge

! 50,666,666 19.................... 76,666

!! ....................51,666,666 19 QQQQQQQQ 16,666

/esidual income.................................. 506,666

506,666

%c)


@ivisional profit.................................. 5:66,666

5"66,666

Iess.............!mputed interest charge

! 50,666,666 19.................... :66,666

!! ....................51,666,666 19 QQQQQQQQ 16,66


Managerial Accounting, 5/e 13-1(


20/71

6/esidual income.................................. 5

65

6,666

!f the firm's cost of capital is 16 percent, then @ivision ! has a

higher residual income than @ivision !!.


21/71

?/(I& 13-32 % &!A$#4)

@ivision

@ivision

@ivision>

4ales revenue............................ 5",666,

666e516,666

,666

5

766,666l

!ncome...................................... 566,666

5",666,6

66

5"66,666

verage investment................... 5",666,666f

5",66,6

66

51,666,666j

4ales margin.............................. "69 "69a "9>apital turnover......................... 1 b .7i

/(!............................................ "69g 769c "69

/esidual income......................... 5"6,666

h

51,766,6

66d

51"6,666

*planatory notes

"66516,666,66

5",666,666

revenuesales

incomemargin4alesa =

5",66,66

6516,666,6

capitalinvested

revenuesalesturnover>apitalb =

c /(! 8 sales margin capital turnover 8 "69 8 769d /esidual income 8 income F %imputed interest rate)%invested capital)

8 5",666,666 F %79)%5",66,666) 8 51,766,666

e 4alesmargin

8revensales

income

"69 8revensales

566,66

#herefore, sales revenue 8 5",666,666

f>apital 8capitinvested

revensales




22/71

turnover

1 8capitinvested

5",666,6

#herefore, invested capital 8 5",666,666g/(!


/(! 8 "69 1 8 "69




23/71

?/(I& 13-32 %>(A#!A$@)

h/esidualincome

8 income F %imputed interest rate)%investedcapital)

8 566,666 F %79)%5",666,666)

8 5"6,666

i/(! 8 sales margin capital turnover

"69

8 "9 capitaltrunover

#herefore, capital turnover 8 .7

j/(! 8capitinvested

income 8 "69

#herefore, income 8 %"69)%invested capital)

/esidualincome

8 income F %imputed interest rate)%investedcapital)

8 51"6,666

4ubstituting from above for income

%"69)%invested capital) F %79)%invested

capital) 8 51"6,666

#herefore, %1"9)%invested capital) 851"6,666

4o, invested capital 8 51,666,666

/(!

8capitinvested

income

"6

9

8

51,666,

incom

#herefore, income 8 5"66,666

l4alesmargin

8revensales

income




24/71

"9 8revensales

5"66,66

#herefore, sales revenue 8 5766,666

?/(I& 13-37 %"6 &!A$#4)

1.

#hree ways to increase @ivision 's /(!

%a)

!ncrease income, while eeping invested capital thesame. 4uppose income increases to 5","6,666. #henew /(! is

:65",66,666

5","6,666

capitalinvested

income/(! ===

%b)

@ecrease invested capital, while eeping income thesame. 4uppose invested capital decreases to5",66,666. #he new /(! is

%rounded)73.395",66,666

5",666,666

capitalinvested

income/(!

%c) !ncrease income and decrease invested capital. 4upposeincome increases to 5",166,666 and invested capitaldecreases to 5",66,666. #he new /(! is

72.5",66,666

5",166,666

capitalinvested

income/(! ===

".

/(!

8 sales margin

capital turnover

8 "9

18 "9


13-2! Solutions Manual


25/71

?/(I& 13-3: %" &!A$#4)

#his problem is similar to ?roblem 13-30, e*cept that herestudents are given a hint in answering the +uestion aboutwhich division is the most successful by re+uiring the

calculation of residual income for three different imputedinterest rates. !f the firm's cost of capital is 1" percent, then@ivision ! has a higher residual income than @ivision !.


26/71

?/(I& 13-3: %>(A#!A$@)

3.


@ivision

!

@ivision

!!@ivisional profit................................... 5

:66,6665"66,66

6Iess..............!mputed interest charge

! ......................50,666,666

179 1,676,666

!! .....................51,666,666 179 176,666

/esidual income................................... 5%176,666)

5"6,666

#he imputed interest rate r,at which the two divisions=residual income is the same, is 1 percent, computed asfollows

@ivision !!=sresidual income

8 @ivision !'s residual income

5"66,666 F (r)%51,666,666)

8 5:66,666 F (r)%50,666,666)

(r)%5,666,666) 8 5266,666 r 8 5266,666J5,666,666

r 8 19

Bor any imputed interest rate less than 1 percent, @ivision! will have a higher residual income. Bor any rate over 1percent, @ivision !!'s residual income will be higher.


13-2# Solutions Manual


27/71

?/(I& 13-6 %6 &!A$#4)

Kear

!ncomeefore

@epreciation

nnual@eprecia

tion

!ncomeAet of

@epreciation

verageAet

oo;alue

N

/(!ased

onAet

oo;alueP

vera

geGrossoo;alue

/(!ased on

Grossoo;alue

1 516,666

5"66,666 5%6,666)

566,666

R 566,666

R

" 16,666

1"6,666 36,666 "6,666

1".9 66,666

0.69

3 16,666

2",666 27,666 1,666

."9 66,666

1.09

16,666

,666 :0,666 71,666

117.9

66,666

1:."9

16,666

,666 :0,666 "2,666

3.09

66,666

1:."9

Nverage net boo value is the average of the beginning andending balances for the year in net boo value. !n Kear 1, fore*ample, the average net boo value is

566,"

5366,666566,666=

P/(! rounded to the nearest tenth of 1 percent.

1.

#his table differs from *hibit 13-3 in that /(! rises evenmore steeply across time than it does in *hibit 13-3.


28/71

performance evaluation in the early years of the project. !nan e*treme case, a manager may worry that he or she willno longer have the job when the project begins to show ahigher return in its later years.


13-2' Solutions Manual


29/71

?/(I& 13-1 %6 &!A$#4)

ased on Aet oo;alue

ased on Gross oo;alue

Kear

!ncomeefore

@epreciation

nnual@eprecia

tion

!ncomeAet of

@epreciation

verageAet

oo;alue

N

!mputed

!nterest

>hargeP

/esidual

!ncome

verage

Grossoo;alue

!mputed

!nterest

>hargeP

/esidual

!ncome

1 516,666

5166,666

56,666 56,666

5,666

5,666

566,666

56,666

6

" 16,666 166,666 6,666 36,666

3,666

1,666

66,666

6,666

6

3 16,666 166,666 6,666 "6,666

",666

",666

66,666

6,666

6

16,666 166,666 6,666 16,666

1,666

3,666

66,666

6,666

6

16,666 166,666 6,666 6,666

,666 ,666

66,666

6,666

6

Nverage net boo value is the average of the beginning and ending balances forthe year in net boo value.P!mputed interest charge is 16 percent of the average boo value, either net orgross.

McGraw-Hill/Irwin 2002 The McGraw-Hill Companies, Inc.

Managerial Accounting, 5/e 13-2(


30/71

Aotice in the table that residual income, computed on thebasis of net boo value, increases over the life of the asset.#his effect is similar to the one demonstrated for /(!.

!t is not very meaningful to compute residual income onthe basis of gross boo value. Aotice that this asset shows azero residual income for all five years when the calculation isbased on gross boo value.

McGraw-Hill/Irwin 2002 The McGraw-Hill Companies, Inc.

13-) Solutions Manual


31/71

?/(I& 13-" %3 &!A$#4)

1. >urrent /(! of the Aortheast @ivision

4ales

revenueSSSSSSSSSSSSSS

57,66,

666

Iess ;ariable costs%57,66,666 * 269)SS

5,776,666

Bi*edcostsSSSSSSSSSSSS..

",16,666

7,636,666

!ncomeSSSSSSSSSSSSSSSSS..

5326,666

/(! 8 !ncome T investedcapital

8 5326,666 T 51,76,6668 "69

Aortheast=s /(! if competitor is ac+uired

4ales revenue %57,66,666 C5,"66,666)SS.

513,066,666

Iess ;ariable costs

5,776,666 C%5,"66,666 * 09)HSSSSSSS

5:,"06,666

Bi*ed costs %5",16,666 C51,026,666)...

3,7"6,666

13,676,666

!ncomeSSSSSSSSSSSSSSSSS...

5"6,666


8 5"6,666 T 51,76,666C %50",666 C532,666)H

8 17."9

". @ivisional management will liely be against theac+uisition because /(! will be lowered from "69 to




32/71

17."9. 4ince bonuses are awarded on the basis of /(!,the ac+uisition will result in less compensation.

3. n e*amination of the competitor=s financial statisticsreveals the following

4alesrevenueSSSSSSSSSSSSSS..

5,"66,666

Iess ;ariable costs%5,"66,666 * 09)SS..

53,376,666

Bi*ed costsSSSSSSSSSSSS..

1,026,666

,66,666

!ncomeSSSSSSSSSSSSS

SSSS...

5

16,666


8 516,666 T 50",6668 "9




33/71

?/(I& 13-" %>(A#!A$@)

>orporate management would probably favor theac+uisition. &egatronoics has been earning a 139 return,and the competitor=s /(! of "9 will help the organization

as a whole. ven if the 532,666 upgrade is made, thecompetitor=s /(! would be 19 if past earnings trendscontinue 516,666 T %50",666 C 532,666) 8 19H.

. Kes, the divisional /(! would increase to "1.619.Eowever, the absence of the upgrade could lead to long-run problems, with customers being confused %andperhaps turned-off) by two different retail environmentsRthe retail environment they have come to e*pect withother &egatronics outlets and that of the newly ac+uired,

non-upgraded competitor.

4ales revenue %57,66,666 C5,"66,666)SS.

513,066,666

Iess ;ariable costs5,776,666 C%5,"66,666 * 09)HSSSSSSS

5:,"06,666

Bi*ed costs %5",16,666 C51,026,666)...

3,7"6,666

13,676,666

!ncomeSSSSSSSSSSSSSSSSS...

5"6,666


8 5"6,666 T %51,76,666C 50",666)

8 "1.619

. >urrent residual income of the Aortheast @ivision

@ivisionalprofitSSSSSSSSSSSSSSSSSS

5326,666

Iess !mputed interest charge%51,76,666 * 1"9)SS

""",666

/esidual 517,


Managerial Accounting, 5/e 13-


34/71

incomeSSSSSSSSSSSSSSSSS..

666

/esidual income if competitor is ac+uired

@ivisional profit %5326,666 C516,666)SSSSS...

5"6,666

Iess !mputed interest charge%51,76,666 C %50",666C 532,666)) * 1"9HSSSS...

3",666

/esidualincomeSSSSSSSSSSSSSSS...

5127,666

Kes, management most liely will change its attitude./esidual income will increase by 536,666 %5127,666 -517,666) as a result of the ac+uisition.


13-! Solutions Manual


35/71

?/(I& 13-3 %36 &!A$#4)

1. 4ales margin income divided by sales revenue.

>apital turnover sales revenue divided by invested

capital

/eturn on investmenti income divided by investedcapital %or sales margin * capital turnover).

4ales margin 5306,666 T 5,766,666 8 2.9>apital turnover 5,766,666 T 50,666,666 8 769/eturn on investment 5306,666 T 50,666,666 8 09, or

2.9 * 769 8 09

". 4trategy %a) !ncome will be reduced to 5366,666 becauseof the loss, and invested capital will fall to 5,:6,666from the disposal. /(! 8 5366,666 T 5,:6,666, or.69. #his strategy should be rejected, since it furtherhurts


36/71

?/(I& 13-3 %>(A#!A$@)

. nderson &anufacturing /(! %53,666,666 - 5",66,666) T5,666,666 8 1"9?alm each nterprises /(! %5,66,666 - 5,1"6,666) T

5,26,666 8 79

Brom the preceding calculations, both investments appearattractive given the current state of affairs %i.e.,/eliable=scurrent 09 /(!). Eowever, if urrent

>urrent

Cnderso

n

>urrent Cnderson

C ?almeach

!ncomeSSSSSS.

5306,666

5:06,666N

51,36,666NN

!nvestedcapitalSS

0,666,666

11,666,666

1,26,666

/(!SSSSSS

SS

09 7.239 7.19

N 5306,666 C %53,666,666 - 5",66,666)NN 5306,666 C %53,666,666 - 5",66,666) C%5,66,666 - 5,1"6,666)

?/(I& 13- %3 &!A$#4)

1. #he weighted-average cost of capital %>) is defined asfollows


13-# Solutions Manual


37/71

e+uityof

value&ar1et

debtof

value&ar1et

e+uitofvalue&ar1e

capitale+uity

of>ost

debtofvalue&ar1et

capitaldebtofcostta*-fter

capitalofcostaverage->I4=s 576 million of debt is : percent,and the company=s ta* rate is 6 percent. #herefore, the after-

ta* cost of debt is . percent :9 %169)H. #he cost of>>I4=s e+uity capital is 1 percent. &oreover, the maretvalue of the company=s e+uity is 51"6 million. #he followingcalculation shows that >ape >od Iobster 4hacs= > is16.0 percent.

16.6651"6,666,66576,666,66,666,666)%.1)%51"6,666,666)%.6)%576

capitalofcostaverage-


38/71

?/(I& 13- %>(A#!A$@)

". #he economic value added %;) is defined as follows

capitalofcost

avera-


39/71

?/(I& 13- %>(A#!A$@)

". #he three divisions= economic-value-added measures arecalculated as follows

@ivision

fter-#a*(peratin

g!ncome

%inmillions)

#otalsset

s%in

millions)

>urrent

Iiabilities%in

millions)

>

8

conomic;aluedded

%inmillions)

?acific. 51

%1

.36)

%526

50)

.6:2

"H

8 53,2:,"6

6?lains.. 5

%1.36)

%5366

5)

.6:2"H

8 5",7"0,666

tlantic 57

%1.36)

%576

5:)

.6:2"H

8 5%1",171,"66)

3. #he ; analysis reveals that ll->anadian=s tlantic@ivision is in trouble. !ts substantial negative ; merits

the immediate attention of the management team.

?/(I& 13-0 %6 &!A$#4)

1.

a. #ransferprice

8 outlay cost C opportunity cost

8 50 C 51 8 576

b. #ransfer

price

8 standard variable cost C %169)%standard

variable cost)

8 50 C %169) %50) 8 521.6

Aote that the Brame @ivision manager would refuse totransfer at this price.

" a. #ransfer 8 outlay cost C opportunity cost


Managerial Accounting, 5/e 13-(


40/71

. price

8 50 C 6 8 50

b.


41/71

?/(I& 13-0 %>(A#!A$@)

c. Bi*ed overhead per frame %1"9)%5"6) 8 5"

#ransfer

price

8 variable cost C fi*ed overhead per frame

C %169)%variable cost C fi*ed overheadper frame)

8 50 C 5" C %169)%50 C 5")H

8 5::

d. !ncremental revenue per window..... 51!ncremental cost per window, for>learview ompany

@irect material %Brame @ivision).... 51

@irect labor %Brame @ivision)........ "6;ariable overhead %Brame @ivision) 36@irect material %Glass @ivision)..... 36@irect labor %Glass @ivision).......... 1;ariable overhead %Glass @ivision) 36#otal variable %incremental) cost... 16

!ncremental contribution per windowin special orderfor >learview ompany.....

5 1

#he special order should be accepted because theincremental revenue e*ceeds the incremental cost, for>learview ompany as a whole.

e. !ncremental revenue per window..... 5 1!ncremental cost per window, for theGlass @ivision

#ransfer price for frame fromre+uirement "%c)H............................

5::

@irect material %Glass @ivision)..... 36

@irect labor %Glass @ivision).......... 1;ariable overhead %Glass @ivision) 36#otal incremental cost.................. 12

!ncremental loss per window inspecial orderfor Glass @ivision...........................

5 %1:)


Managerial Accounting, 5/e 13-!1


42/71

#he Glass @ivision manager has an incentive to rejectthe special order because the Glass @ivision's reportednet income would be reduced by 51: for every window inthe order.


13-!2 Solutions Manual


43/71

?/(I& 13-0 %>(A#!A$@)

f. (ne can raise an ethical issue here to the effect that adivision manager should always strive to act in the bestinterests of the whole company, even if that action

seemingly conflicts with the division=s best interests. !ncomple* transfer pricing situations, however, it is notalways as clear what the company=s optimal action is asit is in this rather simple scenario.

3.

#he use of a transfer price based on the Brame @ivision'sfull cost has caused a cost that is a fi*ed cost for the entirecompany to be viewed as a variable cost in the Glass@ivision. #his distortion of the firm's true cost behavior hasresulted in an incentive for a dysfunctional decision by the

Glass @ivision manager.


Managerial Accounting, 5/e 13-!


44/71

?/(I& 13-2 %" &!A$#4)

1. #he irmingham divisional manager will liely be opposedto the transfer. >urrently, the division is selling all theunits it produces at 522 each. ortez uses aresponsibility accounting system, awarding bonusesbased on divisional performance. #op management=sinterventionJprice-lowering decision would undermine theauthority and autonomy of irmingham=s and #ampa=sdivisional managers. !deally, the two divisional managers%or their representatives) should negotiate a mutuallyagreeable price.

. >ortez would benefit more if it sells the diode reducere*ternally. (bserve that the transfer price is ignored inthis evaluationRone that loos at the firm as a whole.?ut simply, irmingham would record the transfer price asrevenue whereas #ampa would record the transfer priceas a cost, thereby creating a LwashM on the part of theoverall entity.


13-!! Solutions Manual


45/71

?roduce@iodeU 4ell*ternally

?roduce@iodeU

#ransferU 4ell?ositioning

4ystem

4alesrevenueSSSSSS.

522 51,66

Iess ;ariablecost

566SSSSSS..

566 C

5026SSS

66 1,126

>ontributionmarginSSS..

5"2 5 "36


Managerial Accounting, 5/e 13-!"


46/71

?/(I& 13-7 %36 &!A$#4)

1. !f the transfer price is set e+ual to the $.4. variablemanufacturing cost, lpha >ommunications will mae53".76 per circuit board

$.4. operation4ales revenue %transfer price)SSSSSSSSSSS...

5136.66

Iess ;ariable manufacturingcostSSSSSSSSS..

136.66

>ontributionmarginSSSSSSSSSSSSSSSS.

5 --

German operation

4alesrevenueSSSSSSSSSSSSSS

5306.66

Iess #ransferpriceSSSSSSSSSSS.

5136.66

4hippingfeesSSSSSSSSSSS.

"6.66

dditional processingcostsSSSS..

11.66

!mport duties %5136.66 *

169)SSSS

13.

66

"27.6

6!ncome beforeta*SSSSSSSSSSSS.

57".66

Iess !ncome ta* e*pense%57".66 * 069)S.

:."6

!ncome afterta*SSSSSSSSSSSSS

53".76

". !f the transfer price is set e+ual to the $.4. maret price,lpha will mae 53:."6 per circuit board 5".66 C 51."6

8 53:."6. #he $.4. maret price is therefore moreattractive as a transfer price than the $.4. variablemanufacturing cost.

$.4. operation4alesrevenueSSSSSSSSSSSSSSSS

5126.66


13-!# Solutions Manual


47/71

SSS.Iess ;ariable manufacturingcostSSSSSSSSS..

136.66

!ncome beforeta*SSSSSSSSSSSSSSSSS.

56.66

Iess !ncome ta* e*pense %56.66 *69)SSSSSS.

10.66

!ncome afterta*SSSSSSSSSSSSSSSSSS.

5".66

German operation4alesrevenueSSSSSSSSSSSSSS

5306.66

Iess #ransfer

priceSSSSSSSSSSS.

5126.

664hipping

feesSSSSSSSSSSS. "6.66

dditional processingcostsSSSS..

11.66

!mport duties %5126.66 *169)SSSS

12.66

3"".66

!ncome beforeta*SSSSSSSSSSSS.

537.66

Iess !ncome ta* e*pense

%537.66 * 069)S.

"".7

6!ncome afterta*SSSSSSSSSSSSS

51."6


Managerial Accounting, 5/e 13-!$


48/71

?/(I& 13-7 %>(A#!A$@)

3. %a) #he head of the German division should be a teamplayerU however, when the

circuit board can be obtained locally for 51, it is

difficult to get e*cited about doing business with the$.4. operation. >ourtesy of the shipping fee andimport duty, both of which can be avoided, it isadvantageous to purchase in Germany. ven if thelower of the two transfer prices is adopted, theGerman division would be better off to ac+uire thecircuit board at home %51 vs. 5136 C 5"6 C 513 85103).

%b) Kes. lpha will mae 506.66 per circuit board

%5".66 C 530.66) if no transfer taes place and allcircuit boards are sold in the $.4.

$.4. operation4alesrevenueSSSSSSSSSSSSSSSSSS.

5126.66

Iess ;ariable manufacturingcostSSSSSSSS..

136.66

!ncome before

ta*SSSSSSSSSSSSSSSS..

5

6.66Iess !ncome ta* e*pense %56.66 *69)SSSSS..

10.66

!ncome afterta*SSSSSSSSSSSSSSSSS.

5".66

German operation4alesrevenueSSSSSSSSSSSSS..

5306.66

Iess ?urchasepriceSSSSSSSSSS.

51.66

dditional processingcostsSSSS

11.66

"26.66

!ncome beforeta*SSSSSSSSSSS...

5:6.66

Iess !ncome ta* e*pense .


13-!' Solutions Manual


49/71

%5:6.66 * 069)S 66!ncome afterta*SSSSSSSSSSSS...

530.66

.


50/71

?/(I& 13-: %6 &!A$#4)

1. mong the reasons transfer prices based on total actualcosts are not appropriate as a divisional performancemeasure are the following

#hey provide little incentive for the selling division tocontrol manufacturing costs, because all costs incurredwill be passed on to the buying division.

#hey often lead to suboptimal decisions for thecompany as a whole, because they can obscure costbehavior. >osts that are fi*ed for the company as a wholecan be made to appear variable to the division buying thetransferred goods.

". $sing the maret price as the transfer price, thecontribution margin for both the &ining @ivision and the&etals @ivision is calculated as follows

&ining@ivision

&etals@ivision

4elling price.........................................

Iess ;ariable costs@irect material..............................@irect labor...................................&anufacturing overhead................#ransfer price................................

$nit contribution margin.......................;olume.................................................

#otal contribution margin......................

5:6

1"10

"N

537

* 66,666

51,"66,666

516

0"6

16 :6

5 "*66,666

5:,066,666

N;ariable overhead 8 53" * 29 8 5";ariable overhead 8 5" * 69 8 516


13-") Solutions Manual


51/71

Aote the 5 variable selling cost that the &ining @ivisionwould incur for sales on the open maret should not beincluded, because this is an internal transfer.


Managerial Accounting, 5/e 13-"1


52/71

?/(I& 13-: %>(A#!A$@)

3. !f ?>/> instituted the use of a negotiated transfer pricethat also permitted the divisions to buy and sell on theopen maret, the price range for toldine that would be

acceptable to both divisions would be determined asfollows.

#he &ining @ivision would lie to sell to the &etals@ivision for the same price is can obtain on the outsidemaret, 5:6 per unit. Eowever, &ining would be willingto sell the toldine for 57 per unit, because the 5variable selling cost would be avoided.

#he &etals @ivision would lie to continue paying the

bargain price of 500 per unit. Eowever, if &ining does notsell to &etals, &etals would be forced to pay 5:6 on theopen maret. #herefore, &etals would be satisfied toreceive a price concession from &ining e+ual to the coststhat &ining would avoid by selling internally. #herefore,a negotiated transfer price for toldine between 57 and5:6 would be acceptable to both divisions and benefitsthe company as a whole.

. General transfer-pricing rule

#ransfer price 8 outlay cost C opportunity cost8 %51" C 510 C 5")N C %537 - 5)**8 5" C 533 8 57

N(utlay cost 8 direct material C direct labor C variableoverhead see re+uirement %")HNN(pportunity cost 8 forgone contribution margin fromoutside sale on open maret

8 537 contribution margin from internal sale

calculated in re+uirement %"), less theadditional 5 variable selling cost incurredfor an e*ternal sale

#herefore, the general rule yields a minimum acceptabletransfer price to the &ining @ivision of 57, which isconsistent with the conclusion in re+uirement %3).


13-"2 Solutions Manual


53/71

. negotiated transfer price is probably the most liely toelicit desirable management behavior, because it will dothe following

ncourage the management of the &ining @ivisionto be more conscious of cost control.

enefit the &etals @ivision by providing toldine at alower cost than that of its competitors.

?rovide the basis for a more realistic measure ofdivisional performance.

SO%UTIONS TO CASES

>4 13-6 %6 &!A$#4)

1.

!f Aew ge !ndustries continued to use return oninvestment as the sole measure of division performance,Eoliday ntertainment >orporation %E>) would bereluctant to ac+uire /ecreational Ieasing, !nc. %/I!),because the post-ac+uisition combined /(! would decrease.

/eturn on !nvestmentE> /I! >ombin

ed(perating income................... 5",666,

6665

066,6665

",066,666

#otal assets............................ 7,666,666

3,666,666

11,666,666

/eturn on investment%incomeJassets)......................

"9 "69 "3.09N

N/ounded.

#he result would be that E>'s management would eitherlose their bonuses or have their bonuses limited to 6percent of the eligible amounts. #he assumption is thatmanagement could provide convincing e*planations for thedecline in return on investment.


Managerial Accounting, 5/e 13-"


54/71

".

/esidual income is the profit earned that e*ceeds an amountcharged for funds committed to a business unit. #he amountcharged for funds is e+ual to an imputed interest rate

multiplied by the business unit's invested capital.

!f Aew ge !ndustries could be persuaded to use residualincome to measure performance, E> would be more willingto ac+uire /I!, because the residual income of the combinedoperations would increase.

/esidual !ncomeE> /I! >ombin

ed

#otal assets.......................... 57,666,666

53,"66,666N

511,"66,666

!ncome................................. 5",666,666

5066,666

5",066,6

66Iess !mputed interest charge

%assets

19)................... 1,"66,6

66

76,666 1,076,666

/esidual income.................... 5

766,666

5

1"6,666

5

:"6,666

N>ost to ac+uire /I!.


13-"! Solutions Manual


55/71

>4 13-6 %>(A#!A$@)

3.

a. #he liely effect on the behavior of division managerswhose performance is measured by return oninvestment includes incentives to do the following

?ut off capital improvements or modernization toavoid capital e*penditures.

4hy away from profitable opportunities orinvestments that would yield more than thecompany's cost of capital but that could lower /(!.

b. #he liely effect on the behavior of division managerswhose performance is measured by residual income

includes incentives to do the following

4ee any opportunity or investment that will increaseoverall residual income.

4ee to reduce the level of assets employed in thebusiness.


Managerial Accounting, 5/e 13-""


56/71

>4 13-1 % &!A$#4)

1. Kes, ir >omfort @ivision should institute the 9 pricereduction on its air conditioner units because net

income would increase by 513",666. 4upportingcalculations follow

efore 9?rice

/eduction

fter 9?rice

/eduction

?er

$nit

#otal%in

thousands)

?er

$nit

#otal%in

thousands)

#otal@ifferenc

e%in

thousands)

4ales revenue566

50,666 5376 50,01".6 501".6

;ariable costs

>ompressor5

2651,66 52

6 51,"17.6 5107.6 (ther directmaterial 32

32 03.7 77.7

@irect labor

36 6 36

"".6 2".6 ;ariableoverhead

02 273.6 167.6

;ariableselling

17 "26 17313." 3."

#otalvariable costs

5"66

53,666 5"66 53,76.6 576.6

>ontributionmargin

5"66

53,666 5176 53,13".6 513".6

4ummarized presentation

>ontribution margin of sales increase %5176 ",66)53",666

Ioss in contribution margin on original volume arisingfrom

decrease in selling price %5"6

1,666)


13-"# Solutions Manual


57/71

366,666!ncrease in net income before ta*es

513",666

". Ao, the >ompressor @ivision should not sell all 12,66units to the ir >omfort @ivision for 56 each. !f the>ompressor @ivision does sell all 12,66 units to ir>omfort, >ompressor will only be able to sell 2,066units to outside customers instead of 0,666 unitsdue to the capacity restrictions. #his would decreasethe >ompressor @ivision=s net income before ta*esby 53,66. >ompressor @ivision would be willing toaccept any orders from ir >omfort above the 0,666unit level at 56 per unit because there would be a

positive contribution margin of 5"1.6 per unit.4upporting calculations follow.


Managerial Accounting, 5/e 13-"$


58/71

>4 13-1 %>(A#!A$@)

(utside4ales

ir>omfort

4ales

4elling price .......................................... 5166 56.66;ariable costs

@irect material..................................... 1" 516.6 @irect labor ......................................... 7 7.66 ;ariable overhead .......................... 16 16.66 ;ariable selling e*penses .................... 0 R

#otal variable costs ............................. 5 30 5"7.6>ontribution margin ............................... 5 0 5"1.6

>apacity calculation in units

#otal capacity ................................................. 2,6664ales to ir >omfort ........................................ 12,66 alance ....................................................... 2,066?rojected sales to outsiders ............................ 0,666Iost sales to outsiders .................................... 0,66

4olution

>ontribution from sales to ir >omfort %5"1.6 12,66) ...........................................................

532,166

Ioss in contribution from loss of sales to outsiders

%50 0,66) ................................................6:,06

6@ecrease in net income before ta*es ............... 5

3,66

3. Kes, it would be in the best interests of !nterGlobal

!ndustries for the >ompressor @ivision to sell theunits to the ir >omfort @ivision at 56 each. #he netadvantage to !nterGlobal !ndustries is 531",66 asshown in the following analysis. #he net advantage isthe result of the cost savings from purchasing thecompressor unit internally and the contribution


13-"' Solutions Manual


59/71

margin lost from the 0,66 units that the >ompressor@ivision otherwise would sell to outside customers.


Managerial Accounting, 5/e 13-"(


60/71

>4 13-1 %>(A#!A$@)

>ost savings by using compressor unit from>ompressor @ivision

>ompressor @ivision

(utside purchase price ............................ 526.66

>ompressor @ivision=s variable cost toproduce %see re+. "). ....................................... "7.6

4avings per unit...................................... 5 1.6 * Aumber of units.................................... *

12,66#otal cost savings ..................... 52"",166

>ompressor @ivision=s loss in contribution from

lossof sales to outsiders %see re+. ") 50

0,66 .............................................................. 6:,066!ncrease in net income before ta*es for!nterGlobal !ndustries ..................................... 531",66

. s the answers to re+uirements %") and %3) show, 56 isnot a goal-congruent transfer price. lthough atransfer is in the best interests of !nterGlobal

!ndustries as a whole, a transfer of 56 will not beperceived by the >ompressor @ivision=s managementas in that division=s best interests.


13-#) Solutions Manual


61/71

>4 13-" %6 &!A$#4)

1. @iagram of scenario

".

Birst, compute the unit contribution margin of an I@? andan E@? as follows

I@? E@?

?rice...................................... 5"7 5 11Iess..................;ariable cost

$nsilled labor................. 5 5 4illed labor..................... 36/aw material.................... 3 7?urchased components..... 1";ariable overhead............ 1


Managerial Accounting, 5/e 13-#1

GA/I !A4#/$&A##!(A>(&?AK

#op &anagement

E$@4(A K @!;!4!(A

Vac+ueline @ucharme

;(IW&/ #>E(/

@!;!4!(Aertram &ueller

Iow-@ensity?anels%I?@)

Eigh-@ensity?anels%E?@) >ontrol

?ac!mported

#>E-3"6#achometer

(utside&aret

(utside&aret

(utside&aret

lternative1

#ransferthe

lternative"

uy the>ontrol


62/71

#otal variable cost............ "" 26$nit contribution margin......... 5 0 5

>4 13-" %>(A#!A$@)

4econd, compute the unit contribution margin of ;olmar's#>E-3"6 under each of its alternatives, as follows

#>E-3"6 $sing

!mported >ontrol ?ac

#>E-3"6$sing

anE@?

?rice................................... 5"26.66

5"26.66

Iess ;ariable cost$nsilled labor.............. 5 .6 5 .64illed labor................. 1.66 7.66/aw material................ 11.6 0.66?urchased components. 16.66 .66;ariable overhead......... 11.66 11.66;ariable cost of

manufacturing E@?-6- 26.66

;ariable cost oftransporting E@?.................

-6- .6

#otal variable cost........ ""7.66 170.66

$nit contribution margin...... 5 ".66 57.66

@ifferenceis 5".

Brom the perspective of the entire company, the scarceresource that will limit overall company profit is the limitedsilled labor time available in the Eudson ay @ivision. #he

+uestion, then, is how can the company as a whole best usethe limited silled labor time available at Eudson ayX #hedivision has two products I@? and E@?. (ne can view theseas three products, though, in the sense that the E@? units canbe produced either for outside sale or for transfer to the;olmar #achometer @ivision.


13-#2 Solutions Manual


63/71

Eudson ay's Y#hreeY?roductsE@? for e*ternal saleE@? for transferI@?


Managerial Accounting, 5/e 13-#


64/71

>4 13-" %>(A#!A$@)

ontributionto

>overing the

>ompany's Bi*ed>ost and ?rofit

E@? solde*ternally

5

E@? transferredinternally

"

I@? 0

#he analysis of these three products' contribution margins %toGeneral !nstrumentation as a whole) has not gone far enough,

because the products do not re+uire the same amount of thescarce resource, silled labor time. #he important +uestion ishow much one hour of limited silled labor at Eudson ayspent on each of the three products will contribute toward theoverall firm's fi*ed cost and profit.

Eudson ay's?roduct

$nit>ontributio

n

&argin

4illed Iaborper

$nit /e+uiredat

Eudson ay

>ontribution&argin

per Eour

E@? solde*ternally

5 1.6 536

E@? transferredinternally

" 1.6 "7

I@? 0 ." "


13-#! Solutions Manual


65/71


66/71

.

Eudson ay's minimum acceptable transfer price is givenby the general transfer-pricing rule, as follows

&inimum acceptabletransfer price

8

additional

outlaycosts

incurredbecause

goods aretransferred

C

opportunit

y cost tothe

organization because

of thetransfer

8 526 C 530

8 5160


13-## Solutions Manual


67/71

>4 13-" %>(A#!A$@)

*planatory notes

%a) #he outlay cost is e+ual to the variable cost of

manufacturing an E@?.

%b)

#he opportunity cost is e+ual to the forgonecontribution margins on the I@? units that Eudson aywill be unable to produce because it is manufacturingan E@? for transfer. !n the 1. hours of silled labortime re+uired to produce an E@? for transfer, Eudsonay could manufacture si* I@?s, since each I@?re+uires only ." hours. #hus, the forgone contribution

margin is 530 %0 units 50 unit contribution margin).

. #he ma*imum transfer price that the ;olmar #achometer@ivision would find acceptable is 511", computed asfollows

4avings if #>E-3"6 is produced using an E@?!mported control pac.................................... 51.66(ther raw material......................................... .6#otal savings................................................. 516.6

Iess !ncremental costs if #>E-3"6 is producedusing an E@?

#ransportation cost........................................ %.6)4illed labor................................................... %3.66)

Aet savings if E@? is used................................. 511".66

!f ;olmar's management must pay 511" for an E@?, it willbe indifferent between using the E@? and the importedcontrol pac. !f the transfer price is lower than 511", the;olmar #achometer @ivision will be better off with theE@?. t a transfer price in e*cess of 511", ;olmar'smanagement will prefer the control pac.

0.

#he transfer is in the overall company's best interest. #hus,any transfer price in the interior of the range 5160 to 511"will provide the proper incentives to the management ofeach division to agree to a transfer. Bor e*ample, a transferprice of 516: would split the range evenly, and mae each


Managerial Accounting, 5/e 13-#$


68/71

division better off by maing the transfer.


13-#' Solutions Manual


69/71

CURRENT ISSUES IN +ANA,ERIA% ACCOUNTIN,

!44$ 13-3

L&/ 2, 1:::, />> I$&A4#!A A@ A!>(IE//!4.

#Z# intends to provide local phone service nationwide. #hecompany will serve customers it cannot reach through itscable holdings or cable joint ventures.

!44$ 13-

LE/;/@ $A!;/4!#K -- 4(/(4 4$!# /!AG4 /$44!AAW/$?#>K B!GE# #( $.4. >($/#,Y THE WALL STREET

JOURNAL, A(;&/ "3, 1:::, 4#; I!4&A.

#yumen (il allegedly used transfer-pricing methods todivert oil revenue from the subsidiaries. #he investors sayoil was sold cheaply to buyers related to #yumen (il, whichthen sold the crude at world prices but failed to revert theprofits to the 4idanco units.


Managerial Accounting, 5/e 13-#(


70/71

!44$ 13-0

L>((?/#!(A (/ >(&?#!#!(A,Y STRATE!" F!NAN"E,B/$/K "666, @A E!II.

#hree core principles

1. Bocus

a. mployee rewards based on overall company results

b. mployee rewards not based on local merits

". &otivation that is fair

a. ll employees share in the company's wealth

creation

b. &eaningful rewards for superior companyperformance

3. bility to succeed

a. >omprehensive information feedbac loop

b. !nformation for improvement, not measurement

c. /esult is cooperation and unlocing of resources

!44$ 13-2

LD>$#!; ?K,Y #US!NESS WEE$, ?/!I "1, 1::2, VAA!B//!AG(I@.

1. &anagement performance can be lined to financialand nonfinancial measures. Binancial factors, such asearnings-per-share %?4), profit, return on assets %/()and return on sales %/(4), could be used to assessmanagement performance. >ompensation pacages couldthen be based on items other than share price.


13-$) Solutions Manual


71/71

". Binancial marets may decline due to generalmacroeconomic factors. #his could unfairly penalize ane*ecutive.

3. Ao. >osts associated with issuing stoc options include opportunity

costs and administrativecosts.

123484995 Hilton Chapter 13 Solutions

Documents