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Chapter 24: Q25RQ (page 1355)
What is a transfer price?
Answer
Transfer price is the consideration amount paid by one unit of an organization to another unit.
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Question:The accountant for a subunit of Speed Sports Company went on vacation before completing the subunit’s monthly responsibility report. This is as far as she got:
Speed—Subunit X Revenue by Product Actual Results Flexible Budget Variance Flexible Budget Sales Volume Variance Static Budget
Downhill-RI \( 321,000 (a) (b) \) 17,000 F \( 295,000
Downhill-RII 151,000 (c) \) 161,000 (d) 145,000
Cross-EXI 285,000 \( 3,000 U 288,000 (e) 303,000
Cross-EXII 259,000 (f) 255,000 16,500 U 271,500
Snow-LXI 425,000 2,000 F (g) (h) 404,000
Total \) 1,441,000 (i) (j) (k) \( 1,418,500
Requirements
1. Complete the responsibility report for this subunit.
2. Based on the data presented, what type of responsibility center is this subunit?
3. Which items should be investigated if part of management’s decision criteria is to investigate all variances exceeding \)12,000?
Using ROI and RI to evaluate investment centers
Consider the following condensed financial statements of Pure Life, Inc. The company’s target rate of return is 30%.
PURE LIFE, INC. Income Statement For the Year Ended December 31, 2018 Net Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses 2,300,000 2,000,000 300,000 (34,000) 266,000 3,700,000 \( 6,000,000 Operating Income Interest Expense Other Income and (Expenses): Income Before Income Tax Expense Income Tax Expense Net Income 93,100 \) 172,900
PURE LIFE, INC. Comparative Balance Sheet As of December 31, 2018 and 2017 Assets 2018 2017 Cash Accounts Receivable Supplies Property, Plant, and Equipment, net Patents, net Total Assets Accounts Payable Short-term Notes Payable Long-term Notes Payable Common Stock, no Par Retained Earnings Total Liabilities and Stockholders’ Equity Liabilities and Stockholders’ Equity \( 62,000 200 204,000 101,000 \) 394,000 26,800 \( 76,000 600 305,000 163,000 \) 606,000 61,400 52,000 \( 31,000 126,500 169,000 15,500 \) 394,000 148,000 \( 29,000 196,000 205,500 27,500 \) 606,000
Requirements
1. Calculate the company’s ROI. Round all of your answers to four decimal places.
2. Calculate the company’s profit margin ratio. Interpret your results.
3. Calculate the company’s asset turnover ratio. Interpret your results.
4. Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results.
5. Calculate the company’s RI. Interpret your results.
Padgett Company has compiled the following data:
Net sales revenue $1,000,000
Operating income 60,000
Average total assets 400,000
Management’s target rate of return 12%
Compute the following amounts for Padgett:
Usually, which outweighs the other in decentralization—advantages ordisadvantages?
What is the typical focus of responsibility reports for cost centers, revenue centers, and profit centres?
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