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Chapter 24: Q5TI (page 1348)

Sheffield Company manufactures power tools. The Electric Drill Division (an investment center) can purchase the motors for the drills from the Motor Division (another investment center) or from an outside vendor. The cost to purchase from the outside vendor is \(20. The Motor Division also sells to outside customers. The motor needed by the Electric Drill Division sells for \)25 to outside customers and has a variable cost of $15. The Motor Division has excess capacity.

21. If Sheffield Company allows division managers to negotiate transfer prices, what is the minimum amount the manager of the Motor Division should consider?

22. What is the maximum transfer price the manager of the Electric Drill Division should consider?

Short Answer

Expert verified

Themaximum transfer price considered by the manager should be $20.

Step by step solution

01

Meaning of Transfer Price

The term transfer price is used to denote thetransfer price paid for goods or services from the organization’s one department to another unit. Such other units can be in the same country or other countries.

02

Consideration of minimum amount

As per the given information, motor division has access capacity then the utilization of such capacity will facilitate the company to negotiatetransfer prices. Hence, in the given scenario the motor division should consider the equivalent to the cost i.e. $15.

03

Maximum transfer price

In addition, the maximum transfer price considered by the manager should be equivalent to the price offered by the outsider vendor i.e. $20. In such a way, the company can have transfer pricing of maximum ofout of pocket expense.

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Most popular questions from this chapter

Explain the difference between a controllable and a non-controllable cost.

List the disadvantages of decentralization.

Question: Using ROI and RI to evaluate investment centers

This problem continues the Piedmont Computer Company situation from Chapter 23. Piedmont Computer Company reported 2020 sales of \(3,600,000 and operating income of \)183,600. Average total assets during 2020 were $600,000. Piedmont Computer Company’s target rate of return is 16%.

Calculate Piedmont Computer Company’s profit margin ratio, asset turnover ratio, ROI, and RI for 2020. Comment on the results.

Preparing a financial budget—budgeted income statement and balance sheet

Bradley Company has the following post-closing trial balance on December 31, 2018:

The company’s accounting department has gathered the following budgeting information for the first quarter of 2019:

Budgeted total sales, all on account $ 305,000 Budgeted direct materials to be purchased and used 32,000 Budgeted direct labor cost 12,500 Budgeted manufacturing overhead costs:

Variable manufacturing overhead 2,100 Depreciation 1,300 Insurance and property taxes 1,350 Budgeted cost of goods sold 72,000 Budgeted selling and administrative expenses:

Salaries expense 7,000 Rent expense 2,000 Insurance expense 1,100 Depreciation expense 550 Supplies expense 15,250 Budgeted cash receipts from customers 263,500 Budgeted income tax expense 41,000 Budgeted purchase and payment for capital expenditures (additional equipment) 43,000

Additional information:

a. Direct materials purchases are paid 70% in the quarter purchased and 30% in the next quarter.

b. Direct labor, manufacturing overhead, selling and administrative costs, and income tax expense are paid in the quarter incurred.

c. Accounts payable at December 31, 2018 are paid in the first quarter of 2019. Requirements

1. Prepare Bradley Company’s budgeted income statement for the first quarter of 2019.

2. Prepare Bradley Company’s budgeted balance sheet as of March 31, 2019

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.
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