finance data bank
128.Pearl Inc. has the following financial results for 2013 for its three regional divisions:
Calculate return on investment (ROI), asset turnover (AT), and return on sales (ROS) for each division for 2013. The sales in the Northeast, Midwest, and Southeast regions are $700,000, $800,000, and $990,000, respectively. Calculate ROI and AT for each of the four measures of investment (i.e., NBV, GBV, Replacement Cost, and Liquidation Value). Round all answers except ROI to 2 decimal places (e.g., 0.12522 becomes 12.52%); round ROI to whole percentage amounts, e.g., 0.1998 becomes
129.1. Calculate return on investment (ROI), including each of the two component measures of ROI. 2. Calculate residual income (RI).
Selected data from one of the investment centers from Jones Company are as follows:
130.1. Determine the operating income for each division if the transfer price from the Cutting Division to the Assembly Division is set at cost, $11 per cord.
2. Determine the operating income for each division if the transfer price is set at $9 per cord.
3. Since the Cutting Division sells all of its output internally, does the manager care about what price is charged? Why? Should the Cutting Division in this case be considered a cost center or a(n) profit/ investment center?
Brown's Mill has two operating units, each of which is considered an investment center for evaluation purposes. The Cutting Division of the mill prepares timber at its sawmills. Afterwards, the Assembly Division prepares the cut lumber into finished wood, to be sold to furniture manufacturers. During the most recent year, the Cutting Division produced 120,000 cords of wood, at a total cost of $1,320,000. The entire output was transferred to the Assembly Division, where additional costs of $6 per cord were incurred. The 1,200,000 board-feet of finished wood were then sold in the open market for $5,000,000.
131.1. What is the operating income for each of the two divisions and for the company as a whole? (Use market value as the transfer price.)
2. Do you think each of the two divisional managers is happy with this transfer-pricing method? Explain.
Simmons Bedding Company manufactures an array of bedding-related products, including pillows. The Cover Division of Simmons makes covers, while the Assembly Division of the company produces finished pillows. The covers can be sold separately for $10.00 a piece, while the pillows sell for $12.00 per unit. For performance-evaluation purposes, these two divisions are treated as investment centers. Financial results from the most recent accounting period are as follows:
132.1. What is the current ROI for the processing division of XYZ Corporation? (Show calculations.)
2. What will be the divisional ROI if the new investment is undertaken?
3. Suppose that the compensation contract for the manager of the processing division consists of a base salary plus a bonus that is proportional to the ROI earned by the division. Is this manager's total compensation higher with or without the new investment? (Show calculations.)
4. What changes to the divisional manager's compensation contract might corporate management make that would better align divisional manager's compensation (and performance evaluation) with overall corporate goals?
The manager of the processing division of XYZ Corporation is considering the purchase of new equipment, which would modernize an aging plant. Currently, the division has an asset base of $8,000,000 and net operating income of $1,200,000. The new equipment is expected to cost $1,000,000; it supports the corporate strategy of competing on the basis of quality and customer response time.
The new investment is also expected to increase operating income by $100,000 next year, which is an acceptable return on investment from the standpoint of corporate management.
133.The following questions pertain to the process of transfer pricing.
1. Define the term "transfer price."
2. What the three general alternatives for setting domestic transfer prices?
3. What is meant by the term "dual pricing," as used within the context of the transfer pricing decision? Give one example of "dual pricing."
4. What criteria can be used to judge a particular transfer pricing alternative? (Hint: think about the different objectives of transfer pricing, including objectives in an international setting.)
5. What is meant by the term "advance pricing agreement" (APA)? What is the essential purpose of an APA?
134.1. Present, in equation form, the general transfer-pricing rule presented in the chapter. Briefly describe the elements of the model.
2. In what sense is the model presented in the chapter a general transfer-pricing rule?
3. Evaluate the general transfer-pricing rule in light of the objectives for transfer pricing that are presented in the chapter.
4. What are some of the major implementation issues associated with applying the general transfer-pricing rule in practice?
The text presents what it calls a "general transfer-pricing" rule that can be used to help set an appropriate transfer price. The following questions pertain to this general rule.
135.What special problems and opportunities arise in setting transfer prices in an international setting (i.e., for transfers between subunits that operate in different countries)? Hint: In terms of special problems, make sure you reference OECD requirements and practical implementation alternatives for general OECD requirements.)