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Exam 15: Capital Budgeting and Strategic Investment Decisions

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Question 31

True/False

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If divisional autonomy is increased then profitability will improve.

A) True
B) False

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Question 32

Multiple Choice

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Sueusueme Solicitors use time and material pricing. The following relates to job 14693. Standard contract £200 Junior solicitor's time 4 hours @ £50 per hour Senior Solicitor's time 1 hour @ £200 per hour The billed amount would be

A) £1,000
B) £1,400
C) £600
D) £2,200

E) A) and B)
F) None of the above

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Question 33

Multiple Choice

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Krenski Corporation has a Parts Division that does work for other Divisions in the company as well as for outside customers. The company's Equipment Division has asked the Parts Division to provide it with 10,000 special parts each year. The special parts would require £12.00 per unit in variable production costs. The Equipment Division has a bid from an outside supplier for the special parts at £31.00 per unit. In order to have time and space to produce the special part, the Parts Division would have to cut back production of another part-the TW3 that it presently is producing. The TW3 sells for £35.00 per unit, and requires £13.00 per unit in variable production costs. Packaging and shipping costs of the TW3 are £3.00 per unit. Packaging and shipping costs for the new special part would be only £2.00 per unit. The Parts Division is now producing and selling 50,000 units of the TW3 each year. Production and sales of the TW3 would drop by 10% if the new special part is produced for the Equipment Division. - The minimum transfer price for the Equipment Division is

Division D has asked Division C of the same company to supply it with 4,000 units of part L763 this year to use in one of products. Division D has received a bid from an outside supplier for the parts at a price of £26.00 per unit. Division C has the capacity to produce 15,000 units of part L763 per year. Division C expects to sell 12,000 units of part L763 to outside customers this year at a price of £29.00 per unit. To fill the order from Division D, Division C would have to cut back its sales to outside customers. Division C produces part L763 at a variable cost of £20.00 per unit. The cost of packing and shipping the parts for outside customers is £1.00 per unit. These packing and shipping costs would not have to be incurred on sales of the parts to Division D. -The minimum transfer price for Division D is

Division S of Goody Company makes a part with the following characteristics: $\begin{array}{lrr} \text { Production capacity. } & \text {50,000 units } &\\ \text {Selling price on the outside market. } &£ 20 \\ \text {Variable costs per unit. } &£ 12 \\ \text { Fixed costs per unit } &£ 3\\\end{array}$ Division B, another division in the same company, presently is purchasing 10,000 units of a similar part each period from an outside supplier, but would like to start purchasing from Division S. Division B is now paying a price of £18 per unit to the outside supplier. -Suppose that Division S can sell all that it can produce to outside customers at its regular selling price. If Division S sells to Division B at a price of £18 per unit, the company as a whole will be

International transfer pricing is less complex than setting transfer prices between divisions in the same country

The Red River Division of Alto Company produces and sells bags of pottery clay that can either be sold to outside customers or transferred to the White Mountain Division of Alto Company. The following data are available from the last year: By selling to the White Mountain Division, the Red River Division will avoid £3 per bag in selling costs. -If Red River can sell only 10,000 bags annually to outside customers, according to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division

Suppose that last year an outside supplier would have been willing to provide the Flag Division with the basic poles at £2.10 each. If Flag had chosen to buy all of its poles from the outside supplier instead of the Pole Division, the change in net operating income for the company as a whole would have been

Fixed Overheads are £40,000; Direct Materials per unit £6; Direct Labour per unit £2, Budgeted Production 10,000 units; Mark up is 25% on full absorption cost. The unit Selling Price is

Transfer prices are normally based on market prices

Divisional Autonomy means that Head Office should never interfere in setting Transfer Prices or even give guidance. Discuss.

The North Division of Barter Company makes and sells a single product, which is a part used in manufacturing trucks. The annual production capacity is 35,000 units and the variable cost of each unit is £24. Presently the North Division sells 32,000 units per year to outside customers at £40 per unit. The South Division of Barter Company would like to buy 15,000 units a year from North to use in its production. There would be no savings in variable costs from transferring the units internally rather than selling them externally. The lowest acceptable transfer price from the standpoint of the North Division would be closest to

A product's markup is the difference between the selling price and the overhead cost

Fyodor Corporation has a Parts Division that does work for other Divisions in the company as well as for outside customers. The company's Machine Division has asked the Parts Division to provide it with 8,000 special parts each year. The special parts would require £19.00 per unit in variable production costs. The Machine Division has a bid from an outside supplier for the special parts at £27.00 per unit. In order to have time and space to produce the special part, the Parts Division would have to cut back production of another part-the QR4 that it presently is producing. The QR4 sells for £34.00 per unit, and requires £18.00 per unit in variable production costs. Packaging and shipping costs of the QR4 are £2.00 per unit. Packaging and shipping costs for the new special part would be only £0.50 per unit. The Parts Division is now producing and selling 40,000 units of the QR4 each year. Production and sales of the QR4 would drop by 5% if the new special part is produced for the Machine Division. -From the point of view of the Parts Division, profits would increase if the transfer price is

Division X makes a part with the following characteristics: $\begin{array}{lrr} \text { Production capacity. } &\text {25,000 units}\\ \text { Selling price to outside customers. } &£ 18\\ \text { Variable cost per unit.} &11\\ \text { Fixed cost, total. } &£ 100,000\\ \end{array}$ Division Y of the same company would like to purchase 10,000 units each period from Division X. Division Y now purchases the part from an outside supplier at a price of £17 each. - Suppose Division X has ample excess capacity to handle all of Division Y's needs without any increase in fixed costs and without cutting into sales to outside customers. If Division X refuses to accept the £17 price internally and Division Y continues to buy from the outside supplier, the company as a whole will be

The price elasticity of demand measures the degree to which the volume of sales for a product or service is affected by a change in price

Target costing is short term not strategic

Discuss the role of idle capacity in the setting of Transfer Prices.