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Question # 00004324 Posted By: spqr Updated on: 12/01/2013 08:33 PM Due on: 12/28/2013
Subject Finance Topic Finance Tutorials:
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142.1. Discuss the similarities between ROI, residual income (RI), and EVA®.

2. In what sense is EVA® similar to and in what sense is it distinct from residual income (RI)?

3. Present the equation for calculating EVA® and provide a brief discussion of the elements that go into the calculation of EVA®.

4. What are the two approaches that can be used to estimate the two major components of EVA®? Which of these two approaches is superior?

This question deals with summary financial performance indicators.


143.A fellow student of yours who has just completed a course in management accounting recently made the following comment to you regarding the establishment of transfer prices for transnational transfers of goods and services within the same company: "In the process of preparing consolidated financial statements, all profit and loss attributable to internal transfers of goods and services are removed. The amount of profit a company reports is therefore affected only by transactions with external parties. Therefore, the subject of transfer pricing may be important for motivational purposes or some other managerial objective, but the choice of a transfer pricing system has no effect on the bottom line, even when transfers are made between units of a company operating in different countries."


Critically analyze and respond to the above assertion.

144.1. What is the current return on investment (ROI) for Division C?

2. What will be the ROI of the division if the new investment is undertaken?

3. Suppose the manager's compensation consists of a salary plus a bonus proportional to divisional ROI. Would the manager's compensation be higher with, or without, the new investment?

4. Suggest changes to corporate management that will better align performance evaluation and compensation with corporate goals.

Michael Cianci, manager of Division C of the FX Corporation, is considering a new investment for his division. The division currently has an investment base of $4,000,000, and operating income of approximately $600,000 per year. The new investment of $500,000 supports corporate strategy and is expected to increase operating income by $50,000 next year, an acceptable level of return from the standpoint of the corporation as a whole.


145.This question pertains to the use of market-based transfer prices.


What is the primary advantage and what is the primary difficulty in using market-based transfer prices?

146.1. What would the operating income for each of the two divisions be if the transfer price from Cutting to Assembly was set at the cord cost of $22 per cord? (Show calculations.)

2. What would the operating income for each of the two divisions be if the transfer price is set at $18 per cord? (Show calculations.)

3. Since Cutting transfers all of its output internally (to Assembly), does the manager of Cutting care what price is selected? Why? Should Cutting be treated as a cost center under the circumstances (rather than a profit center or investment center)? Explain.

Pacific Mill consists of two operating divisions, a Cutting division and the Assembly division. The Cutting division prepares cords of timber at its sawmills, while the Assembly division prepares the cut cords of lumber into board-feet of finished wood (which is sold to various furniture manufacturers). During the most recent year the Cutting division prepared 60,000 cords of wood at a cost of $1,320,000. All of this lumber was transferred to the Assembly division, where incremental costs of $12 per cord were added. Pacific Mill sold the 600,000 board-feet of finished wood for $5,000,000.


147.This question pertains to factors affecting the setting of transfer prices in an international setting.


What are the primary factors affecting the setting of transfer prices between divisions of a company that operates in different countries?

148.1. Use the general transfer pricing rule to compute a transfer price for the computer module. 2. Explain the underlying logic of the general transfer pricing rule discussed in the chapter.

The microprocessor division of Zenith Systems Company sells a computer module to the company's Assembly Division, which puts together the finished product (viz., guidance systems). The Microprocessor Division is currently working at capacity. The computer module costs $10,000 to manufacture, and it can be sold externally to companies for approximately $13,500 per unit.


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Tutorials for this Question
  1. Tutorial # 00004121 Posted By: spqr Posted on: 12/01/2013 09:34 PM
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