finance data bank

116.Assume that the Plastics Division has excess capacity and it has negotiated a transfer price of $5.60 per plastic component with the Entertainment Division. This price will likely:

A. Cause the Plastics Division to reduce the number of commercial plastic components it manufactures.

B. Motivate both divisions because estimated profits will be shared.

C. Encourage the Entertainment Division to seek an outside source for plastic components.

D. Demotivate the Plastics Division, causing mediocre performance.

E. Motivate the Plastics Division to increase the portion of its manufacturing devoted to the Entertainment Division.

117.Alice and Jon Harrison operate two full-service dry cleaning outlets in the St. Louis metropolitan area. One of the outlets generates over $800,000 revenue per year and has more than a million dollar investment in state-of-the-art equipment. The other outlet is older, generates $20,000 revenue per month, and has 20-25 year-old equipment currently worth approximately $85,000. Both outlets are profitable with growing market bases. (The ratio between operating income and sales for each unit, based on historical-cost accounting numbers, is roughly the same.) Managers at each location are currently paid a base salary, and receive a year-end bonus which is five percent of total operating profit produced by both outlets combined. Alice has just finished a workshop on investment center performance evaluation, and wants to change the evaluation and reward structure, hoping to motivate the two managers to produce greater revenue and profit.

Required:

What type of evaluation mechanisms should she propose for the two managers?

118.Ellie Jackson is upset by the new transfer pricing system recently implemented at Monson Company. As manager of the first of three sequential production departments, she can't see the value of a transfer pricing system for her department. "We can't sell what we produce to any outside buyer. And we're never pushed for capacity, so I don't think transfer pricing will do anything but make my life more complicated." You are Ellie's boss.

Required:

Explain how transfer pricing can help Ellie evaluate her department's operations and allow you to more effectively evaluate her management abilities.

119.Consider the following data for three divisions of a company, X, Y, and Z:

Required:

Calculate return on investment (ROI), return on sales (ROS), and asset turnover (AT) for each division. Round your answers to two decimal places where appropriate.

120.1. Calculate return on investment (ROI) for this investment center (show separately the two major components of the ROI calculation)

2. Calculate residual income (RI) for this investment center.

Round all computations to two decimal places.

Selected data from an investment center's accounting records reveal the following:

Required:

121.1. Compute the return on sales (ROS) for Division A.

2. Compute the asset turnover (AT) for Division A.

3. Compute return on investment (ROI) for this division, using answers to parts (1) and (2).

4. Compute residual income (RI) for Division A.

5. Describe how Alpha Manufacturing would determine whether or not to invest in any particular project in the future.

Accounting records from Division A, Alpha Manufacturing Company indicate the following:

Required: