Solution Manual13 JAWABAN

8/9/2019 Solution Manual13 JAWABAN

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CHAPTER 13

Investment Centers and Transfer Pricing

ANSWERS TO REVIEW QUESTIONS

13-1 Goal congruence means a meshing of objectives, in which the managers throughoutan organization strive to achieve goals that are consistent with the goals set by topmanagement. Goal congruence is important for organizational success becausemanagers often are unaware of the effects of their decisions on the organization'sother subunits. lso, it is natural for people to be more concerned with theperformance of their own subunit than with the effectiveness of the entireorganization. !n order for the organization to be effective, it is important thateveryone in it be striving for the same ultimate objectives.

13-" #he managerial accountant's primary objective in designing a responsibility-accounting system is to provide incentives for the organization's subunit managersto strive toward achieving the organization's goals.

13-3 $nder the management-by-objectives %&() philosophy, managers participate insetting goals that they then strive to achieve. #hese goals may be e*pressed infinancial or other +uantitative terms, and the responsibility-accounting system isused to evaluate performance in achieving them. #he &( approach is consistent

with an emphasis on obtaining goal congruence throughout an organization.

13- n investment center is a responsibility-accounting center, the manager of which isheld accountable not only for the investment center's profit but also for the capitalinvested to earn that profit. *amples of investment centers include a division of a manufacturing company, a large geographical territory of a hotel chain, and a geographical territory consisting of several stores in a retail company.

13-

capiinvested

revenusales

revenuesales

income

capitalinvested

income %/(!)investmenton/eturn ×==

13-0 division's /(! can be improved by improving the sales margin, by improving thecapital turnover, or by some combination of the two. #he manager of the automobiledivision of an insurance company could improve the sales margin by increasing theprofit margin on each insurance policy sold. s a result, every sales dollar wouldgenerate more income. #he capital turnover could be improved by increasing salesof insurance policies while eeping invested capital fi*ed, or by decreasing theinvested assets re+uired to generate the same sales revenue.

McGraw-Hill/Irwin 2002 The McGraw-Hill Companies,

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Managerial Accounting, 5/e 13-1


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13-2 *ample of the calculation of residual income 4uppose an investment center's profitis 5166,666, invested capital is 5766,666, and the imputed interest rate is 1" percent

×

rateinterest

imputed

capitalinvested

scenter'investment profitscenter'investment income/esidual

/esidual income 8 5166,666 %5766,666) %1"9) 8 5,666

#he imputed interest rate is used in calculating residual income, but it is not used incomputing /(!. #he imputed interest rate reflects the firm's minimum re+uired rateof return on invested capital.

13-7 #he chief disadvantage of /(! is that for an investment that earns a rate of returngreater than the company's cost of raising capital, the manager in charge of decidingabout that investment may have an incentive to reject it if the investment would

result in reducing the manager's /(!. #he residual-income measure eliminates thisdisadvantage by including in the residual-income calculation the imputed interestrate, which reflects the firm's cost of capital. ny project that earns a return greaterthan the imputed interest rate will show a positive residual income.

13-: #he rise in /(! or residual income across time results from the fact that periodicdepreciation charges reduce the boo value of the asset, which is generally used indetermining the investment base to use in the /(! or residual-income calculation.#his phenomenon can have a serious effect on the incentives of investment-centermanagers. !nvestment centers with old assets will show higher /(!s than investmentcenters with relatively new assets. #his result can discourage investment-centermanagers from investing in new e+uipment. !f this behavioral tendency persists for a long time, a division's assets can become obsolete, maing the divisionuncompetitive.

13-16 #he economic value added %;) is defined as follows

×

capitalofcostaverage-


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13-11 a. #otal assets !ncludes all divisional assets. #his measure of invested capital isappropriate if the division manager has considerable authority in maingdecisions about all of the division's assets, including nonproductive assets.

b. #otal productive assets *cludes assets that are not in service, such asconstruction in progress. #his measure is appropriate when a division manageris directed by top management to eep nonproductive assets, such as vacantland or construction in progress.

c. #otal assets less current liabilities ll divisional assets minus current liabilities.#his measure is appropriate when the division manager is allowed to secureshort-term ban loans and other short-term credit. #his approach encouragesinvestment-center managers to minimize resources tied up in assets andma*imize the use of short-term credit to finance operations.

13-1" #he use of gross boo value instead of net boo value to measure a division'sinvested capital eliminates the problem of an artificially increasing /(! or residualincome across time. lso, the usual methods of computing depreciation, such asstraight-line or declining-balance methods, are arbitrary. s a result, some managersprefer not to allow these depreciation charges to affect /(! or residual-incomecalculations.

13-13 !t is important to mae a distinction between an investment center and its manager,because in evaluating the manager's performance, only revenues and costs that themanager can control or significantly influence should be included in the profitmeasure. #he objective of the manager's performance measure is to provide an

incentive for that manager to adhere to goal-congruent behavior. !n evaluating theinvestment center as a viable economic investment, all revenues and costs that aretraceable to the investment center should be considered. >ontrollability is not anissue in this case.

13-1 ?ay for performance is a one-time cash payment to an investment-center manager asa reward for meeting a predetermined criterion on a specified performance measure.#he objective of pay for performance is to get the manager to strive to achieve theperformance target that triggers the payment.

13-1 n alternative to using /(! or residual income to evaluate a division is to loo at itsincome and invested capital separately. ctual divisional profit for a period of time iscompared to a fle*ible budget, and variances are used to analyze performance. #hedivision's major investments are evaluated through a postaudit of the investmentdecisions. #his approach avoids the necessity of combining profit and investedcapital in a single measure, such as /(! or residual income.


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13-10 @uring periods of inflation, historical-cost asset values soon cease to reflect the costof replacing those assets. #herefore, some accountants argue that investment-centerperformance measures based on historical-cost accounting are misleading. &ostmanagers, however, believe that measures based on historical-cost accounting areade+uate when used in conjunction with budgets and performance targets.

13-12 *amples of nonfinancial measures that could be used to evaluate a division of aninsurance company include the following %1) new policies issued and insuranceclaims settled in a specified period of time, %") average time re+uired to settle aninsurance claim, and %3) number of insurance claims settled without litigation versusclaims that re+uire litigation.

13-17 Aonfinancial information is useful in measuring investment-center performancebecause it gives top management insight into the summary financial measures suchas /(! or residual income. y eeping trac of important nonfinancial data, topmanagers often can see a problem developing before it becomes a serious problem.Bor e*ample, if a manufacturer's rate of defective products has been increasing oversome period of time, management can observe this phenomenon and tae steps toimprove product +uality before serious damage is done to customer relations.

13-1: #he goal in setting transfer prices is to establish incentives for autonomous divisionmanagers to mae decisions that support the overall goals of the organization.#ransfer prices should be chosen so that each division manager, when striving toma*imize his or her own division's profit, maes the decision that ma*imizes thecompany's profit.

13-"6 Bour methods by which transfer prices may be set are as follows

%a) #ransfer price 8 additional outlay costs incurred because goods are transferred Copportunity costs to the organization because of the transfer.

%b) #ransfer price 8 e*ternal maret price.

%c) #ransfer prices may be set on the basis of negotiations among the divisionmanagers.

%d) #ransfer prices may be based on the cost of producing the goods or services to

be transferred.

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13-"" #he management of a multinational company has an incentive to set transfer pricesso as to minimize the income reported for divisions in countries with relatively highincome-ta* rates, and to shift this income to divisions with relatively low income-ta*rates. 4ome countries' ta* laws prohibit this practice, while other countries' lawspermit it.

13-"3 &ultinational firms may be charged import duties, or tariffs, on goods transferredbetween divisions in different countries. #hese duties often are based on thereported value of the transferred goods. 4uch companies may have an incentive toset a low transfer price in order to minimize the duty charged on the transferredgoods.


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SO#UTIONS TO E$ERCISES

D/>!4 13-" %16 &!A$#4)

4ales margin 8 revenuesales

income

8 65.6,666,66

5,666,666

8 79

>apital turnover 8 capitalinvestedrevenuesales

8 65"6,666,6665.6,666,66

8 ".

/eturn on investment 8 capitalinvestedincome

8 65"6,666,665,666,666

8 "69

D/>!4 13-" %1 &!A$#4)

#here are an infinite number of ways to improve the division's /(! to " percent. Eere aretwo of them

1. !mprove the sales margin to 16 percent by increasing income to 5,666,666

/(! 8 sales margin × capital turnover

8 65"6,666,6665.6,666,66

65.6,666,66

5.,666,666×

8 169 × ". 8 "9

4ince sales revenue remains unchanged, this implies a cost reduction of 51,666,666 atthe same volume.

". !mprove the turnover to 3.1" by decreasing average invested capital to 510,666,666


8 6510,666,6665.6,666,66

65.6,666,66

5,666,666×

8 79 × 3.1" 8 "9

4ince sales revenue remains unchanged, this implies that the firm can divest itself ofsome productive assets without affecting sales volume.


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D/>!4 13-"0 % &!A$#4)

/esidualincome

8 investment center income F

rateinterest

imputed

capital

invested

8 5,666,666 F %5"6,666,666 × 119)

8 51,766,666

D/>!4 13-"2 %"6 &!A$#4)

#he weighted-average cost of capital %>) is defined as follows


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e+uityofvalue

&ar1et

debtofvalue

&ar1ete+uityof

value&ar1et

capital

e+uityof>ost

debtof

value&ar1et

capital

debtof costta*-fter

capitalofcostaverage-onstruction ssociates= 506 million of debt is 16 percent,and the company=s ta* rate is 6 percent. #herefore, Golden Gate=s after-ta* cost of debt is

0 percent 169 × %1 69)H. #he cost of Golden Gate=s e+uity capital is 1 percent.

&oreover, the maret value of the company=s e+uity is 5:6 million. #he followingcalculation shows that Golden Gate=s > is 11. percent.


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11.65:6,666,666506,666,66

666,666)%.1)%5:6,666,666)%.60)%506,capitalofcostaverage-


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D/>!4 13-"7 %"6 &!A$#4)

#he economic value added %;) is defined as follows

×

capitalofcostaverage-


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D/>!4 13-": %>(A#!A$@)

". Kes, Bairmont=s management probably would have accepted the investment if residualincome were used. #he investment opportunity would have lowered Bairmont=s "6*1/(! because the project's e*pected return %17 percent) was lower than the division's

historical returns %1:.3 percent to "".1 percent) as well as its actual "6*1 /(! %"6percent). &anagement may have rejected the investment because bonuses are basedin part on the /(! performance measure. !f residual income were used as a performance measure %and as a basis for bonuses), management would accept anyand all investments that would increase residual income %i.e., a dollar amount ratherthan a percentage) including the investment opportunity it had in "6*1.

D/>!4 13-36 %36 &!A$#4)

1. 4tudents= calculation of return on investment and residual income will depend on the

company selected and the year when the internet search is conducted. 4tudents willneed to decide how to determine the income and the invested assets to use in bothcalculations. #he discussion in the te*t will serve as a guide in this regard.

". 4ome companies= annual reports include a calculation and discussion of /(! in theLmanagement report and analysisM section or the Lfinancial highlightsM section.4tudents= calculation of /(! may differ from management=s due to differing assumptionsabout the determination of income and invested capital.

D/>!4 13-31 %1 &!A$#4)

&emorandum@ate #oday

#o ?resident, 4un >oast Bood >enters

Brom !. &. 4tudent

4ubject ehavior of /(! over time


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D/>!4 13-3" %16 &!A$#4)

1. #he same employee is responsible for eeping the inventory records and taing thephysical inventory count. !n addition, when the records and the count do not agree, theemployee changes the count, rather than investigating the reasons for the discrepancy.

#his leaves open the possibility that the employee would steal inventory and conceal thetheft by altering both the records and the count. ven without any dishonesty by theemployee, this system is not designed to control inventory since it does not encourageresolution of discrepancies between the records and the count.

". #he internal control system could be strengthened in two ways

%a) ssign two different employees the responsibilities for the inventory records andthe physical count. !4 13-33 %1 &!A$#4)

1. 4ales margin 8 revenuesalesincome

8 ",666,666N166,666

8 9

N!ncome 8 O166,666 8 O",666,666 F O1,166,666 F O766,666

>apital turnover 8 capitalinvestedrevenuesales

8 1,666,666

",666,666

8 "

/(! 8 capitalinvestedincome

8 1,666,666

166,666

8 169


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£

£

£

£

££


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D/>!4 13-33 %>(A#!A$@)

". /(! 8 19 8 capitalinvestedincome

8 1,666,666

income

!ncome 8 19 × O1,666,666 8 O16,666

!ncome 8 sales revenue F e*penses 8 O16,666

!ncome 8 O",666,666 F e*penses 8 O16,666

*penses 8 O1,76,666

#herefore, e*penses must be reduced to O1,76,666 in order to raise the firm's /(! to1 percent.

3. 4ales margin 8 revenuesalesincome

8 2.9 ",666,666

16,666


8 2.9 × "

8 19

D/>!4 13-3 %16 &!A$#4)

1.#ransfer price 8

outlaycost C

opportunitycost

8 5366N C 576P 8 5376

N(utlay cost 8 unit variable production cost

P(pportunity cost 8 forgone contribution margin

8 5376 F 5366 8 576

". !f the Babrication @ivision has e*cess capacity, there is no opportunity cost associated with a transfer. #herefore

#ransfer price 8outlaycost C

opportunitycost

8 5366 C 6 8 5366


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D/>!4 13-3 %" &!A$#4)

1. #he ssembly @ivision's manager is liely to reject the special order because thessembly @ivision's incremental cost on the special order e*ceeds the division'sincremental revenue

!ncremental revenue per unit in special order........................ 50!ncremental cost to ssembly @ivision per unit

in special order#ransfer price...................................................................... 532dditional variable cost...................................................... 166

#otal incremental cost.............................................................. 2Ioss per unit in special order.................................................. 5 %:)

". #he ssembly @ivision manager's liely decision to reject the special order is not in thebest interests of the company as a whole, since the company's incremental revenue onthe special order e*ceeds the company 's incremental cost

!ncremental revenue per unit in special order..................... 50!ncremental cost to company per unit in special order

$nit variable cost incurred in Babrication @ivision......... 5366$nit variable cost incurred in ssembly @ivision........... 166

#otal unit variable cost.......................................................... 66?rofit per unit in special order.............................................. 5 0

3. #he transfer price could be set in accordance with the general rule, as follows

#ransfer price 8outlaycost C

opportunitycost

8 5366 C 6N

8 5366

N(pportunity cost is zero, since the Babrication @ivision has e*cess capacity.

Aow the ssembly @ivision manager will have an incentive to accept the special ordersince the ssembly @ivision's incremental revenue on the special order exceeds theincremental cost. #he incremental revenue is still 50 per unit, but the incrementalcost drops to 566 per unit %5366 transfer price C 5166 variable cost incurred in thessembly @ivision).


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SO#UTIONS TO PRO*#E+S

?/(I& 13-30 %" &!A$#4)

#he answer to the +uestion as to which division is the most successful depends on the

firm's cost of capital. #o see this, compute the residual income for each division usingvarious imputed interest rates.

%a) !mputed interest rate of 169

@ivision ! @ivision !!@ivisional profit.................................................................... 5:66,666 5"66,666Iess !mputed interest charge

! 50,666,666 × 169................................................ 066,666

!! 51,666,666 × 169................................................ QQQQQQQ 166,666

/esidual income................................................................... 5366,666 5166,666

%b) !mputed interest rate of 19

@ivision ! @ivision !!@ivisional profit.................................................................... 5:66,666 5"66,666Iess !mputed interest charge

! 50,666,666 × 19................................................ 76,666

!! 51,666,666 × 19................................................ QQQQQQQQ 16,666

/esidual income................................................................... 5 06,666 5 06,666

%c) !mputed interest rate of 19

@ivisional profit.................................................................... 5:66,666 5"66,666Iess !mputed interest charge

! 50,666,666 × 19................................................ :66,666

!! 51,666,666 × 19................................................ QQQQQQQQ 16,666

/esidual income................................................................... 5 6 5 6,666

!f the firm's cost of capital is 16 percent, then @ivision ! has a higher residual income than

@ivision !!.


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?/(I& 13-32 % &!A$#4)

@ivision @ivision @ivision >4ales revenue......................................................... 5",666,666e 516,666,666 5 766,666l

!ncome.................................................................... 5 66,666 5 ",666,666 5 "66,666

verage investment............................................... 5",666,666f 5 ",66,666 51,666,666 j

4ales margin ......................................................... "69 "69a "9>apital turnover..................................................... 1 b .7i

/(!.......................................................................... "69g 769c "69/esidual income.................................................... 5 "6,666h 5 1,766,666d 5 1"6,666

*planatory notes

"696516,666,66

5",666,666

revenuesales

income margin4alesa

5",66,666

6516,666,66

capitalinvested

revenuesales turnover>apitalb =

c /(! 8 sales margin × capital turnover 8 "69 × 8 769

d /esidual income 8 income F %imputed interest rate)%invested capital)

8 5",666,666 F %79)%5",66,666) 8 51,766,666

e 4ales margin 8 revenuesales

income

"69 8 revenuesales566,666

#herefore, sales revenue 8 5",666,666

f>apital turnover 8 capitalinvestedrevenuesales

1 8 capitalinvested5",666,666

#herefore, invested capital 8 5",666,666

g/(! 8 sales margin × capital turnover /(! 8 "69 × 1 8 "69


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?/(I& 13-32 %>(A#!A$@)

h/esidual income 8 income F %imputed interest rate)%invested capital)

8 566,666 F %79)%5",666,666)

8 5"6,666i/(! 8 sales margin × capital turnover

"69 8 "9 × capital trunover

#herefore, capital turnover 8 .7

j/(! 8 capitalinvestedincome

8 "69

#herefore, income 8 %"69)%invested capital)

/esidualincome

8 income F %imputed interest rate)%invested capital)

8 51"6,666

4ubstituting from above for income

%"69)%invested capital) F %79)%invested capital) 8 51"6,666

#herefore, %1"9)%invested capital) 8 51"6,666

4o, invested capital 8 51,666,666

/(! 8capitalinvested

income

"69 851,666,666

income

#herefore, income 8 5"66,666

l4ales margin 8revenuesales

income

"9 8 revenuesales

5"66,666

#herefore, sales revenue 8 5766,666


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?/(I& 13-37 %"6 &!A$#4)

1. #hree ways to increase @ivision 's /(!

%a) !ncrease income, while eeping invested capital the same. 4uppose income

increases to 5","6,666. #he new /(! is

:695",66,666

5","6,666

capitalinvested

income /(! ===

%b) @ecrease invested capital, while eeping income the same. 4uppose investedcapital decreases to 5",66,666. #he new /(! is

%rounded)73.39

5",66,666

5",666,666

capitalinvested

income/(! ===

%c) !ncrease income and decrease invested capital. 4uppose income increases to5",166,666 and invested capital decreases to 5",66,666. #he new /(! is

72.95",66,666

5",166,666

capitalinvested

income /(! ===

". /(! 8 sales margin × capital turnover

8 "9 × 1

8 "9


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?/(I& 13-3: %" &!A$#4)

#his problem is similar to ?roblem 13-30, e*cept that here students are given a hint inanswering the +uestion about which division is the most successful by re+uiring thecalculation of residual income for three different imputed interest rates. !f the firm's cost of

capital is 1" percent, then @ivision ! has a higher residual income than @ivision !.


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?/(I& 13-3: %>(A#!A$@)

3.

!mputed interest rate of 179

@ivision ! @ivision !!

@ivisional profit...................................................................... 5 :66,666 5"66,666Iess !mputed interest charge

! 50,666,666 × 179................................................... 1,676,666

!! 51,666,666 × 179................................................... 176,666

/esidual income.................................................................... 5%176,666) 5 "6,666

#he imputed interest rate r, at which the two divisions= residual income is the same, is 1percent, computed as follows

@ivision !!=s residual income 8 @ivision !'s residual income

5"66,666 F (r)%51,666,666) 8 5:66,666 F (r)%50,666,666)

(r)%5,666,666) 8 5266,666

r 8 5266,666J5,666,666

r 8 19

Bor any imputed interest rate less than 1 percent, @ivision ! will have a higher residualincome. Bor any rate over 1 percent, @ivision !!'s residual income will be higher.


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?/(I& 13-6 %6 &!A$#4)

Kear

!ncomeefore

@epreciationnnual

@epreciation

!ncomeAet of

@epreciation

verageAet oo

;alueN

/(!ased

onAet oo

;alueP

verage

Grossoo;alue

/(!ased

on

Grossoo;alue

1 516,666 5"66,666 5%6,666) 566,666 R 566,666 R" 16,666 1"6,666 36,666 "6,666 1".9 66,666 0.693 16,666 2",666 27,666 1,666 ."9 66,666 1.09 16,666 ,666 :0,666 71,666 117.9 66,666 1:."9 16,666 ,666 :0,666 "2,666 3.09 66,666 1:."9

Nverage net boo value is the average of the beginning and ending balances for the year in net

boo value. !n Kear 1, for e*ample, the average net boo value is

566,666"

5366,666 5.66,666

P/(! rounded to the nearest tenth of 1 percent.

1. #his table differs from *hibit 13-3 in that /(! rises even more steeply across time thanit does in *hibit 13-3.


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?/(I& 13-1 %6 &!A$#4)

ased on Aet oo ;alue ased on Gross oo ;alue

Kear

!ncomeefore

@epreciationnnual

@epreciation

!ncomeAet of

@epreciation

verageAet oo

;alueN

!mputed!nterest>hargeP

/esidual!ncome

verageGrossoo;alue

!mputed!nterest>hargeP

/esidual!ncome

1 516,666 5166,666 56,666 56,666 5,666 5 ,666 566,666 56,666

6

" 16,666 166,666 6,666 36,666 3,666 1,666 66,666 6,666

63 16,666 166,666 6,666 "6,666 ",666 ",666 66,666 6,666

6 16,666 166,666 6,666 16,666 1,666 3,666 66,666 6,666

6 16,666 166,666 6,666 6,666 ,666 ,666 66,666 6,666

6

Nverage net boo value is the average of the beginning and ending balances for the year in net boo value.

P!mputed interest charge is 16 percent of the average boo value, either net or gross.

Aotice in the table that residual income, computed on the basis of net boo value,increases over the life of the asset. #his effect is similar to the one demonstrated for /(!.

!t is not very meaningful to compute residual income on the basis of gross boovalue. Aotice that this asset shows a zero residual income for all five years when thecalculation is based on gross boo value.

McGraw-Hill/Irwin 2002 The McGraw-Hill Companies, Inc.



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?/(I& 13-" %3 &!A$#4)

1. >urrent /(! of the Aortheast @ivision

4ales revenueSSSSSSSSSSSSSS 57,66,666

Iess ;ariable costs %57,66,666 * 269)SS 5,776,666Bi*ed costsSSSSSSSSSSSS.. ",16,666 7,636,666

!ncomeSSSSSSSSSSSSSSSSS.. 5 326,666

/(! 8 !ncome T invested capital8 5326,666 T 51,76,6668 "69

Aortheast=s /(! if competitor is ac+uired

4ales revenue %57,66,666 C 5,"66,666)SS. 513,066,666Iess ;ariable costs 5,776,666 C

%5,"66,666 * 09)HSSSSSSS 5:,"06,666Bi*ed costs %5",16,666 C 51,026,666)... 3,7"6,666 13,676,666

!ncomeSSSSSSSSSSSSSSSSS... 5 "6,666

/(! 8 !ncome T invested capital8 5"6,666 T 51,76,666 C %50",666 C

532,666)H8 17."9

". @ivisional management will liely be against the ac+uisition because /(! will belowered from "69 to 17."9. 4ince bonuses are awarded on the basis of /(!, theac+uisition will result in less compensation.

3. n e*amination of the competitor=s financial statistics reveals the following

4ales revenueSSSSSSSSSSSSSS.. 5,"66,666Iess ;ariable costs %5,"66,666 * 09)SS.. 53,376,666

Bi*ed costs SSSSSSSSSSSS.. 1,026,666 ,66,666!ncomeSSSSSSSSSSSSSSSSS... 5 16,666

/(! 8 !ncome T invested capital8 516,666 T 50",6668 "9


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?/(I& 13-" %>(A#!A$@)

>orporate management would probably favor the ac+uisition. &egatronoics hasbeen earning a 139 return, and the competitor=s /(! of "9 will help theorganization as a whole. ven if the 532,666 upgrade is made, the competitor=s /(!

would be 19 if past earnings trends continue 516,666 T %50",666 C 532,666) 819H.

. Kes, the divisional /(! would increase to "1.619. Eowever, the absence of theupgrade could lead to long-run problems, with customers being confused %andperhaps turned-off) by two different retail environmentsRthe retail environment theyhave come to e*pect with other &egatronics outlets and that of the newly ac+uired,non-upgraded competitor.

4ales revenue %57,66,666 C 5,"66,666)SS. 513,066,666

Iess ;ariable costs 5,776,666 C%5,"66,666 * 09)HSSSSSSS 5:,"06,666

Bi*ed costs %5",16,666 C 51,026,666)... 3,7"6,666 13,676,666!ncomeSSSSSSSSSSSSSSSSS... 5 "6,666

/(! 8 !ncome T invested capital8 5"6,666 T %51,76,666 C 50",666)8 "1.619

. >urrent residual income of the Aortheast @ivision

@ivisional profitSSSSSSSSSSSSSSSSSS 5326,666Iess !mputed interest charge %51,76,666 * 1"9)SS """,666/esidual incomeSSSSSSSSSSSSSSSSS.. 517,666

/esidual income if competitor is ac+uired

@ivisional profit %5326,666 C 516,666)SSSSS... 5"6,666Iess !mputed interest charge %51,76,666 C

%50",666 C 532,666)) * 1"9HSSSS... 3",666/esidual incomeSSSSSSSSSSSSSSS... 5127,666

Kes, management most liely will change its attitude. /esidual income will increaseby 536,666 %5127,666 - 517,666) as a result of the ac+uisition.


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1. 4ales margin income divided by sales revenue.

>apital turnover sales revenue divided by invested capital

/eturn on investmenti income divided by invested capital %or sales margin * capitalturnover).

4ales margin 5306,666 T 5,766,666 8 2.9>apital turnover 5,766,666 T 50,666,666 8 769/eturn on investment 5306,666 T 50,666,666 8 09, or

2.9 * 769 8 09

". 4trategy %a) !ncome will be reduced to 5366,666 because of the loss, and invested

capital will fall to 5,:6,666 from the disposal. /(! 8 5366,666 T 5,:6,666, or.69. #his strategy should be rejected, since it further hurts


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?/(I& 13-3 %>(A#!A$@)

. nderson &anufacturing /(! %53,666,666 - 5",66,666) T 5,666,666 8 1"9?alm each nterprises /(! %5,66,666 - 5,1"6,666) T 5,26,666 8 79

Brom the preceding calculations, both investments appear attractive given thecurrent state of affairs %i.e.,/eliable=s current 09 /(!). Eowever, if urrent>urrent Cnderson

>urrent Cnderson C?alm each

!ncomeSSSSSS. 5 306,666 5 :06,666N 5 1,36,666NN!nvested capitalSS 0,666,666 11,666,666 1,26,666

/(!SSSSSSSS 09 7.239 7.19

N 5306,666 C %53,666,666 - 5",66,666)NN 5306,666 C %53,666,666 - 5",66,666) C %5,66,666 - 5,1"6,666)

?/(I& 13- %3 &!A$#4)

1. #he weighted-average cost of capital %>) is defined as follows


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e+uityofvalue

&ar1et

debtofvalue

&ar1ete+uityof

value&ar1et

capital

e+uityof>ost

debtof

value&ar1et

capital

debtof costta*-fter

capitalofcostaverage->I4=s 576 million of debt is : percent, and the company=s ta* rate is 6

percent. #herefore, the after-ta* cost of debt is . percent :9 × %1 69)H. #he cost of

>>I4=s e+uity capital is 1 percent. &oreover, the maret value of the company=s e+uity is51"6 million. #he following calculation shows that >ape >od Iobster 4hacs= > is16.0 percent.


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160.6651"6,666,66576,666,66

,666,666)%.1)%51"6,666,666)%.6)%576capitalofcostaverage-


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". #he economic value added %;) is defined as follows

×

capitalofcost

average-


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e+uityof

value&ar1et

debtof

value&ar1et

e+uity

ofvalue&ar1et

capital

e+uityof>ost

debtof

value&ar1et

capitaldebt

ofcost ta*-fter

capitalofcost

average -anadian=s > is :.2" percent.

6:2".665066,666,666566,666,6

,666,666)%.1")%50666,666,666)%.603)%56capitalofcost

average-


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". #he three divisions= economic-value-added measures are calculated as follows

@ivision

fter-#a*

(perating!ncome

%in millions)

#otal

ssets%in

millions)

>urrent

Iiabilities%in

millions)

× > 8

conomic

;aluedded

%in millions)

?acific...... 51 × %1 .36) %5 26 50) × .6:2"H 8 5 3,2:,"66

?lains....... 5 × %1 .36) %5366 5) × .6:2"H 8 5 ",7"0,666

tlantic.... 57 × %1 .36) %576 5:) × .6:2"H 8 5%1",171,"66)

3. #he ; analysis reveals that ll->anadian=s tlantic @ivision is in trouble. !tssubstantial negative ; merits the immediate attention of the management team.

?/(I& 13-0 %6 &!A$#4)

1. a. #ransfer price 8 outlay cost C opportunity cost

8 50 C 51 8 576

b. #ransfer price 8 standard variable cost C %169)%standard variable cost)

8 50 C %169) %50) 8 521.6

Aote that the Brame @ivision manager would refuse to transfer at this price.

". a. #ransfer price 8 outlay cost C opportunity cost

8 50 C 6 8 50

b.


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c. Bi*ed overhead per frame %1"9)%5"6) 8 5"

#ransfer price 8 variable cost C fi*ed overhead per frame

C %169)%variable cost C fi*ed overhead per frame)8 50 C 5" C %169)%50 C 5")H

8 5::

d. !ncremental revenue per window.................................. 51!ncremental cost per window, for >learview ompany

@irect material %Brame @ivision)............................... 51@irect labor %Brame @ivision).................................... "6;ariable overhead %Brame @ivision).......................... 36@irect material %Glass @ivision)................................ 36@irect labor %Glass @ivision)..................................... 1;ariable overhead %Glass @ivision)........................... 36#otal variable %incremental) cost............................... 16

!ncremental contribution per window in special orderfor >learview ompany................................ 5 1

#he special order should be accepted because the incremental revenue e*ceedsthe incremental cost, for >learview ompany as a whole.

e. !ncremental revenue per window.................................. 5 1!ncremental cost per window, for the Glass @ivision

#ransfer price for frame from re+uirement "%c)H..... 5::@irect material %Glass @ivision)................................ 36@irect labor %Glass @ivision)..................................... 1;ariable overhead %Glass @ivision)........................... 36#otal incremental cost................................................ 12

!ncremental loss per window in special orderfor Glass @ivision........................................................ 5 %1:)

#he Glass @ivision manager has an incentive to reject the special order becausethe Glass @ivision's reported net income would be reduced by 51: for every

window in the order.


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f. (ne can raise an ethical issue here to the effect that a division manager shouldalways strive to act in the best interests of the whole company, even if that actionseemingly conflicts with the division=s best interests. !n comple* transfer pricing

situations, however, it is not always as clear what the company=s optimal action isas it is in this rather simple scenario.

3. #he use of a transfer price based on the Brame @ivision's full cost has caused a costthat is a fi*ed cost for the entire company to be viewed as a variable cost in the Glass@ivision. #his distortion of the firm's true cost behavior has resulted in an incentive fora dysfunctional decision by the Glass @ivision manager.


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1. #he irmingham divisional manager will liely be opposed to the transfer. >urrently,the division is selling all the units it produces at 522 each. ortez uses a responsibilityaccounting system, awarding bonuses based on divisional performance. #opmanagement=s interventionJprice-lowering decision would undermine the authorityand autonomy of irmingham=s and #ampa=s divisional managers. !deally, the twodivisional managers %or their representatives) should negotiate a mutually agreeableprice.

. >ortez would benefit more if it sells the diode reducer e*ternally. (bserve that the

transfer price is ignored in this evaluationRone that loos at the firm as a whole.?ut simply, irmingham would record the transfer price as revenue whereas #ampa would record the transfer price as a cost, thereby creating a LwashM on the part ofthe overall entity.

?roduce @iodeU4ell *ternally

?roduce @iodeU#ransferU 4ell

?ositioning 4ystem

4ales revenueSSSSSS. 522 51,66Iess ;ariable cost

566SSSSSS..566 C 5026SSS

66 1,126

>ontribution marginSSS.. 5"2 5 "36


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1. !f the transfer price is set e+ual to the $.4. variable manufacturing cost, lpha >ommunications will mae 53".76 per circuit board

$.4. operation4ales revenue %transfer price)SSSSSSSSSSS... 5136.66Iess ;ariable manufacturing costSSSSSSSSS.. 136.66>ontribution marginSSSSSSSSSSSSSSSS. 5 --

German operation4ales revenueSSSSSSSSSSSSSS 5306.66Iess #ransfer priceSSSSSSSSSSS. 5136.66

4hipping feesSSSSSSSSSSS. "6.66dditional processing costsSSSS.. 11.66

!mport duties %5136.66 * 169)SSSS 13.66 "27.66!ncome before ta*SSSSSSSSSSSS. 5 7".66Iess !ncome ta* e*pense %57".66 * 069)S. :."6!ncome after ta*SSSSSSSSSSSSS 5 3".76

". !f the transfer price is set e+ual to the $.4. maret price, lpha will mae 53:."6 percircuit board 5".66 C 51."6 8 53:."6. #he $.4. maret price is therefore moreattractive as a transfer price than the $.4. variable manufacturing cost.

$.4. operation

4ales revenueSSSSSSSSSSSSSSSSSSS. 5126.66Iess ;ariable manufacturing costSSSSSSSSS.. 136.66!ncome before ta*SSSSSSSSSSSSSSSSS. 5 6.66Iess !ncome ta* e*pense %56.66 * 69)SSSSSS. 10.66!ncome after ta*SSSSSSSSSSSSSSSSSS. 5 ".66

German operation4ales revenueSSSSSSSSSSSSSS 5306.66Iess #ransfer priceSSSSSSSSSSS. 5126.66

4hipping feesSSSSSSSSSSS. "6.66dditional processing costsSSSS.. 11.66!mport duties %5126.66 * 169)SSSS 12.66 3"".66

!ncome before ta*SSSSSSSSSSSS. 5 37.66Iess !ncome ta* e*pense %537.66 * 069)S. "".76!ncome after ta*SSSSSSSSSSSSS 5 1."6


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3. %a) #he head of the German division should be a team playerU however, when thecircuit board can be obtained locally for 51, it is difficult to get e*citedabout doing business with the $.4. operation. >ourtesy of the shipping fee

and import duty, both of which can be avoided, it is advantageous topurchase in Germany. ven if the lower of the two transfer prices is adopted,the German division would be better off to ac+uire the circuit board at home%51 vs. 5136 C 5"6 C 513 8 5103).

%b) Kes. lpha will mae 506.66 per circuit board %5".66 C 530.66) if no transfertaes place and all circuit boards are sold in the $.4.

$.4. operation4ales revenueSSSSSSSSSSSSSSSSSS. 5126.66

Iess ;ariable manufacturing costSSSSSSSS.. 136.66!ncome before ta*SSSSSSSSSSSSSSSS.. 5 6.66Iess !ncome ta* e*pense %56.66 * 69)SSSSS.. 10.66!ncome after ta*SSSSSSSSSSSSSSSSS. 5 ".66

German operation4ales revenueSSSSSSSSSSSSS.. 5306.66Iess ?urchase priceSSSSSSSSSS. 51.66

dditional processing costsSSSS 11.66 "26.66!ncome before ta*SSSSSSSSSSS... 5 :6.66

Iess !ncome ta* e*pense %5:6.66 * 069)S .66!ncome after ta*SSSSSSSSSSSS... 5 30.66

.


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1. mong the reasons transfer prices based on total actual costs are not appropriate asa divisional performance measure are the following

• #hey provide little incentive for the selling division to control manufacturing costs,because all costs incurred will be passed on to the buying division.

• #hey often lead to suboptimal decisions for the company as a whole, because they

can obscure cost behavior. >osts that are fi*ed for the company as a whole can bemade to appear variable to the division buying the transferred goods.

". $sing the maret price as the transfer price, the contribution margin for both the&ining @ivision and the &etals @ivision is calculated as follows

&ining@ivision

&etals@ivision

4elling price.............................................................................

Iess ;ariable costs@irect material..............................................................@irect labor...................................................................

&anufacturing overhead.............................................#ransfer price...............................................................

$nit contribution margin.........................................................;olume......................................................................................

#otal contribution margin........................................................

5:6

1"10

"N

537* 66,666

51,"66,666

516

0"6

16† :6

5 "* 66,666

5:,066,666

N;ariable overhead 8 53" * 29 8 5"†;ariable overhead 8 5" * 69 8 516

Aote the 5 variable selling cost that the &ining @ivision would incur for sales on the openmaret should not be included, because this is an internal transfer.


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3. !f ?>/> instituted the use of a negotiated transfer price that also permitted thedivisions to buy and sell on the open maret, the price range for toldine that wouldbe acceptable to both divisions would be determined as follows.

#he &ining @ivision would lie to sell to the &etals @ivision for the same price is canobtain on the outside maret, 5:6 per unit. Eowever, &ining would be willing to sellthe toldine for 57 per unit, because the 5 variable selling cost would be avoided.

#he &etals @ivision would lie to continue paying the bargain price of 500 per unit.Eowever, if &ining does not sell to &etals, &etals would be forced to pay 5:6 on theopen maret. #herefore, &etals would be satisfied to receive a price concessionfrom &ining e+ual to the costs that &ining would avoid by selling internally.#herefore, a negotiated transfer price for toldine between 57 and 5:6 would be

acceptable to both divisions and benefits the company as a whole.

. General transfer-pricing rule

#ransfer price 8 outlay cost C opportunity cost 8 %51" C 510 C 5")N C %537 - 5) ** 8 5" C 533 8 57

N(utlay cost 8 direct material C direct labor C variable overhead see re+uirement %")HNN(pportunity cost 8 forgone contribution margin from outside sale on open maret

8 537 contribution margin from internal sale calculated inre+uirement %"), less the additional 5 variable selling costincurred for an e*ternal sale

#herefore, the general rule yields a minimum acceptable transfer price to the &ining@ivision of 57, which is consistent with the conclusion in re+uirement %3).

. negotiated transfer price is probably the most liely to elicit desirable managementbehavior, because it will do the following

• ncourage the management of the &ining @ivision to be more conscious of cost

control.

• enefit the &etals @ivision by providing toldine at a lower cost than that of its

competitors.

• ?rovide the basis for a more realistic measure of divisional performance.


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SO#UTIONS TO CASES

>4 13-6 %6 &!A$#4)

1. !f Aew ge !ndustries continued to use return on investment as the sole measure of

division performance, Eoliday ntertainment >orporation %E>) would be reluctant toac+uire /ecreational Ieasing, !nc. %/I!), because the post-ac+uisition combined /(! would decrease.

/eturn on !nvestmentE> /I! >ombined

(perating income.................................................. 5",666,666 5 066,666 5 ",066,666#otal assets............................................................ 7,666,666 3,666,666 11,666,666/eturn on investment %incomeJassets)................ "9 "69 "3.09N

N/ounded.

#he result would be that E>'s management would either lose their bonuses or havetheir bonuses limited to 6 percent of the eligible amounts. #he assumption is thatmanagement could provide convincing e*planations for the decline in return oninvestment.

". /esidual income is the profit earned that e*ceeds an amount charged for fundscommitted to a business unit. #he amount charged for funds is e+ual to an imputedinterest rate multiplied by the business unit's invested capital.

!f Aew ge !ndustries could be persuaded to use residual income to measureperformance, E> would be more willing to ac+uire /I!, because the residual income ofthe combined operations would increase.

/esidual !ncomeE> /I! >ombined

#otal assets.................................................... 57,666,666 53,"66,666N 511,"66,666!ncome............................................................ 5",666,666 5 066,666 5 ",066,666Iess !mputed interest charge

%assets × 19)........................................... 1,"66,666 76,666

1,076,666

/esidual income............................................ 5 766,666 5 1"6,666 5 :"6,666

N>ost to ac+uire /I!.


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3. a. #he liely effect on the behavior of division managers whose performance ismeasured by return on investment includes incentives to do the following

• ?ut off capital improvements or modernization to avoid capital e*penditures.

• 4hy away from profitable opportunities or investments that would yield more

than the company's cost of capital but that could lower /(!.

b. #he liely effect on the behavior of division managers whose performance ismeasured by residual income includes incentives to do the following

• 4ee any opportunity or investment that will increase overall residual income.

•

4ee to reduce the level of assets employed in the business.


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>4 13-1 % &!A$#4)

1. Kes, ir >omfort @ivision should institute the 9 price reduction on its airconditioner units because net income would increase by 513",666. 4upportingcalculations follow

efore 9?rice /eduction

fter 9?rice /eduction

?er$nit

#otal%in thousands)

?er$nit

#otal%in thousands)

#otal@ifference

%in thousands)

4ales revenue 566 50,666 5376 50,01".6 501".6;ariable costs >ompressor 5 26 51,66 526 51,"17.6 5107.6

(ther direct material 32 32 03.7 77.7 @irect labor 36 6 36 "".6 2".6 ;ariable overhead 02 273.6 167.6 ;ariable selling 17 "26 17 313." 3."

#otal variable costs 5"66 53,666 5"66 53,76.6 576.6>ontribution margin 5"66 53,666 5176 53,13".6 513".6

4ummarized presentation

>ontribution margin of sales increase %5176 × ",66) 53",666

Ioss in contribution margin on original volume arising from

decrease in selling price %5"6 × 1,666) 366,666

!ncrease in net income before ta*es 513",666

". Ao, the >ompressor @ivision should not sell all 12,66 units to the ir >omfort@ivision for 56 each. !f the >ompressor @ivision does sell all 12,66 units to ir>omfort, >ompressor will only be able to sell 2,066 units to outside customersinstead of 0,666 units due to the capacity restrictions. #his would decrease the>ompressor @ivision=s net income before ta*es by 53,66. >ompressor @ivision

would be willing to accept any orders from ir >omfort above the 0,666 unit level at

56 per unit because there would be a positive contribution margin of 5"1.6 perunit. 4upporting calculations follow.


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>4 13-1 %>(A#!A$@)

(utside4ales

ir >omfort4ales

4elling price ................................................................................................5166 56.66

;ariable costs

@irect material..........................................................................................1" 516.6 @irect labor ..............................................................................................7 7.66 ;ariable overhead ............................................................................16 16.66 ;ariable selling e*penses .......................................................................0 R

#otal variable costs .................................................................................5 30 5"7.6>ontribution margin ...................................................................................5 0 5"1.6

>apacity calculation in units

#otal capacity ............................................................................................ 2,6664ales to ir >omfort ................................................................................. 12,66 alance .................................................................................................. 2,066?rojected sales to outsiders .................................................................... 0,666Iost sales to outsiders ............................................................................. 0,66

4olution

>ontribution from sales to ir >omfort %5"1.6 × 12,66) ................... 532,166Ioss in contribution from loss of sales to outsiders %50 × 0,66) .... 6:,066 @ecrease in net income before ta*es ...................................................... 5 3,66

3. Kes, it would be in the best interests of !nterGlobal !ndustries for the >ompressor@ivision to sell the units to the ir >omfort @ivision at 56 each. #he net advantageto !nterGlobal !ndustries is 531",66 as shown in the following analysis. #he netadvantage is the result of the cost savings from purchasing the compressor unitinternally and the contribution margin lost from the 0,66 units that the >ompressor

@ivision otherwise would sell to outside customers.


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>4 13-1 %>(A#!A$@)

>ost savings by using compressor unit from >ompressor @ivision

>ompressor @ivision

(utside purchase price .................................................................... 5 26.66

>ompressor @ivision=s variable cost to produce %see re+. "). ...... "7.6 4avings per unit................................................................................ 5 1.6

* Aumber of units............................................................................. *12,66

#otal cost savings ......................................................... 52"",166>ompressor @ivision=s loss in contribution from loss

of sales to outsiders %see re+. ") 50 × 0,66 .................................. 6:,066 !ncrease in net income before ta*es for !nterGlobal !ndustries ............ 531",66

. s the answers to re+uirements %") and %3) show, 56 is not a goal-congruenttransfer price. lthough a transfer is in the best interests of !nterGlobal !ndustries asa whole, a transfer of 56 will not be perceived by the >ompressor @ivision=smanagement as in that division=s best interests.


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1. @iagram of scenario

". Birst, compute the unit contribution margin of an I@? and an E@? as follows

I@? E@??rice...................................................................................... 5"7 5 11

Iess ;ariable cost$nsilled labor...........................................................5 5 4illed labor................................................................ 36/aw material...............................................................3 7?urchased components............................................ 1";ariable overhead...................................................... 1#otal variable cost...................................................... "" 26

$nit contribution margin..................................................... 5 0 5


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13-!! Solutions Manual

GA/I !A4#/$&A##!(A >(&?AK#op &anagement

E$@4(A K @!;!4!(A

Vac+ueline @ucharme

;(IW&/ #>E(&#/ @!;!4!(A

ertram &ueller

Iow-@ensity?anels%I?@)

Eigh-@ensity?anels%E?@) >ontrol ?ac

!mported fromVapan

#>E-3"6#achometer

(utside&aret

(utside&aret

(utside&aret

lternative 1#ransfer the

E@?

lternative "uy the

>ontrol ?ac


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>4 13-" %>(A#!A$@)

4econd, compute the unit contribution margin of ;olmar's #>E-3"6 under each of itsalternatives, as follows

#>E-3"6 $sing

!mported >ontrol ?ac

#>E-3"6$sing

anE@?

?rice............................................................. 5"26.66 5"26.66Iess ;ariable cost

$nsilled labor.................................. 5 .6 5 .64illed labor...................................... 1.66 7.66/aw material...................................... 11.6 0.66?urchased components................... 16.66 .66

;ariable overhead............................. 11.66 11.66;ariable cost of manufacturing E@? -6- 26.66;ariable cost of transporting E@?... -6- .6#otal variable cost............................. ""7.66 170.66

$nit contribution margin............................. 5 ".66 5 7.66

@ifferenceis 5".

Brom the perspective of the entire company, the scarce resource that will limit overallcompany profit is the limited silled labor time available in the Eudson ay @ivision. #he+uestion, then, is how can the company as a whole best use the limited silled labor timeavailable at Eudson ayX #he division has two products I@? and E@?. (ne can view theseas three products, though, in the sense that the E@? units can be produced either foroutside sale or for transfer to the ;olmar #achometer @ivision.

Eudson ay's Y#hreeY ?roducts

E@? for e*ternal saleE@? for transferI@?


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>4 13-" %>(A#!A$@)

ontribution to>overing the >ompany's

Bi*ed >ost and ?rofitE@? sold e*ternally 5E@? transferred internally "I@? 0

#he analysis of these three products' contribution margins %to General !nstrumentation as a whole) has not gone far enough, because the products do not re+uire the same amount ofthe scarce resource, silled labor time. #he important +uestion is how much one hour oflimited silled labor at Eudson ay spent on each of the three products will contributetoward the overall firm's fi*ed cost and profit.

Eudson ay's ?roduct$nit >ontribution

&argin

4illed Iabor per$nit /e+uired at

Eudson ay

>ontribution&argin

per Eour

E@? sold e*ternally 5 1.6 536E@? transferred internally " 1.6 "7I@? 0 ." "


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>4 13-" %>(A#!A$@)

#his analysis shows that from the perspective of the entire company, Eudson ay's bestuse of its limited silled labor resource is to produce E@?s for e*ternal sale, up to thema*imum demand of 0,666 units per year. #he second best use of Eudson ay's limited

silled labor is to produce E@?s for internal transfer, up to the ma*imum number of unitsneeded by the ;olmar #achometer @ivision. #his number is 16,666 E@?s, since that is thedemand for ;olmar's #>E-3"6. Eudson ay's least profitable product is the I@?. #herefore,from the perspective of General !nstrumentation as a whole, the Eudson ay @ivisionshould use its limited silled labor time as follows

4illed labor time available at Eudson ay.................................... 6,666 hours%1) ?roduce 0,666 E@?s for e*ternal sale

%0,666 units × 1. hours)............................................................... :,666 hours

Eours remaining............................................................................... 31,666 hours

%") ?roduce 16,666 E@?s for internal transfer%16,666 units × 1. hours)............................................................. 1,666 hours

Eours remaining............................................................................... 10,666 hours%3) ?roduce 0,666 I@?s %0,666 units × ." hours)........................... 10,666 hours

Eours remaining............................................................................... -6-

#he final answer to re+uirement %") is that all of the re+uired 16,666 #>E-3"6tachometers should be manufactured using the E@? unit from the Eudson ay@ivision.

3. Given that 16,666 E@?s are transferred, there is no effect on General !nstrumentation>ompany's overall income. #he transfer price affects only the way the company'soverall profit is divided between the two divisions.

. Eudson ay's minimum acceptable transfer price is given by the general transfer-pricing rule, as follows

&inimum acceptable transfer price 8

additional outlaycosts incurredbecause goods

are transferred

C

opportunitycost to the

organization

because of thetransfer

8 526 C 530

8 5160


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*planatory notes

%a) #he outlay cost is e+ual to the variable cost of manufacturing an E@?.

%b) #he opportunity cost is e+ual to the forgone contribution margins on the I@?units that Eudson ay will be unable to produce because it is manufacturing anE@? for transfer. !n the 1. hours of silled labor time re+uired to produce anE@? for transfer, Eudson ay could manufacture si* I@?s, since each I@?

re+uires only ." hours. #hus, the forgone contribution margin is 530 %0 units ×

50 unit contribution margin).

. #he ma*imum transfer price that the ;olmar #achometer @ivision would findacceptable is 511", computed as follows

4avings if #>E-3"6 is produced using an E@?!mported control pac............................................................................ 51.66(ther raw material.................................................................................. .6#otal savings........................................................................................... 516.6

Iess !ncremental costs if #>E-3"6 is produced using an E@?#ransportation cost................................................................................ %.6)4illed labor............................................................................................ %3.66)

Aet savings if E@? is used.......................................................................... 511".66

!f ;olmar's management must pay 511" for an E@?, it will be indifferent between using

the E@? and the imported control pac. !f the transfer price is lower than 511", the;olmar #achometer @ivision will be better off with the E@?. t a transfer price ine*cess of 511", ;olmar's management will prefer the control pac.

0. #he transfer is in the overall company's best interest. #hus, any transfer price in theinterior of the range 5160 to 511" will provide the proper incentives to the managementof each division to agree to a transfer. Bor e*ample, a transfer price of 516: would splitthe range evenly, and mae each division better off by maing the transfer.


Inc.

13-!' Solutions Manual


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CURRENT ISSUES IN +ANA,ERIA# ACCOUNTIN,

!44$ 13-3

L&/ 2, 1:::, />>I$&A4#!A A@ A!>(I E//!4.

#Z# intends to provide local phone service nationwide. #he company will servecustomers it cannot reach through its cable holdings or cable joint ventures.

!44$ 13-

LE/;/@ $A!;/4!#K -- 4(/(4 4$!# /!AG4 /$44!A AW/$?#>K B!GE# #( $.4.>($/#,Y THE WALL STREET JOURNAL, A(;&/ "3, 1:::, 4#; I!4&A.

#yumen (il allegedly used transfer-pricing methods to divert oil revenue from thesubsidiaries. #he investors say oil was sold cheaply to buyers related to #yumen (il,

which then sold the crude at world prices but failed to revert the profits to the 4idancounits.


Inc.

Managerial Accounting, 5/e 13-!(


50/50

!44$ 13-0

L>((?/#!(A (/ >(&?#!#!(A,Y STRATE!" F!NAN"E , B/$/K "666, @A E!II.

#hree core principles

1. Bocus

a. mployee rewards based on overall company results

b. mployee rewards not based on local merits

". &otivation that is fair

a. ll employees share in the company's wealth creation

b. &eaningful rewards for superior company performance

3. bility to succeed

a. >omprehensive information feedbac loop

b. !nformation for improvement, not measurement

c. /esult is cooperation and unlocing of resources

!44$ 13-2

LD>$#!; ?K,Y #US!NESS WEE$ , ?/!I "1, 1::2, VAA!B/ /!AG(I@.

1. &anagement performance can be lined to financial and nonfinancial measures.Binancial factors, such as earnings-per-share %?4), profit, return on assets %/()and return on sales %/(4), could be used to assess management performance.>ompensation pacages could then be based on items other than share price.

". Binancial marets may decline due to general macroeconomic factors. #his could

unfairly penalize an e*ecutive.3. Ao. >osts associated with issuing stoc options include opportunity costs and administrative

costs.

Solution Manual13 JAWABAN

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