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Chapter 24: Q26RQ (page 1355)
Explain the difference between market-based transfer prices and cost-based transfer prices.
Transfer cost based on the current market price of the goods is known as market-based transfer cost. The cost of manufacturing things serves as the setting for cost-based transfer pricing.
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Well-designed performance evaluation systems accomplish many goals. Describe the potential benefits performance evaluation systems offer.
Consider the following key performance indicators, and classify each according to the balanced scorecard perspective it addresses. Choose from financial perspective, customer perspective, internal business perspective, or learning and growth perspective.
a. Number of employee suggestions implemented
b. Revenue growth
c. Number of on-time deliveries
d. Percentage of sales force with access to real-time inventory levels
e. Customer satisfaction ratings
f. Number of defects found during manufacturing
g. Number of warranty claims
h. Return on investment
i. Variable cost per unit
j. Percentage of market share
k. Number of hours of employee training
l. Number of new products developed
m. Yield rate (number of units produced per hour)
n. Average repair time
o. Employee satisfaction
p. Number of repeat customers
What is a key performance indicator?
What is the biggest disadvantage of using ROI to evaluate investment centers?
The Harris Company is decentralized, and divisions are considered investment centers. Harris has one division that manufactures oak dining room chairs with upholstered seat cushions. The Chair Division cuts, assembles, and finishes the oak chairs and then purchases and attaches the seat cushions. The Chair Division currently purchases the cushions for \(22 from an outside vendor. The Cushion Division manufactures upholstered seat cushions that are sold to customers outside the company. The Chair Division currently sells 800 chairs per quarter, and the Cushion Division is operating at capacity, which is 800 cushions per quarter. The two divisions report the following information:
Chair Division Cushion Division
Sales Price per Chair \) 85 Sales Price per Cushion \( 32
Variable Cost (other than cushion) 42 Variable Cost per Cushion 13
Variable Cost (cushion) 22
Contribution Margin per Chair \) 21 Contribution Margin per Cushion $ 19
Requirements
1. Determine the total contribution margin for Harris Company for the quarter.
2. Assume the Chair Division purchases the 800 cushions needed from the Cushion Division at its current sales price. What is the total contribution margin for each division and the company?
3. Assume the Chair Division purchases the 800 cushions needed from the Cushion Division at its current variable cost. What is the total contribution margin for each division and the company?
4. Review your answers for Requirements 1, 2, and 3. What is the best option for Harris Company?
5. Assume the Cushion Division has capacity of 1,600 cushions per quarter and can continue to supply its outside customers with 800 cushions per quarter and also supply the Chair Division with 800 cushions per quarter. What transfer price should Harris Company set? Explain your reasoning. Using the transfer price you determined, calculate the total contribution margin for the quarter.
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