Chapter 22: Chapter 22

Calgary Lumber has a raw lumber division and a finished lumber division. The variable costs are as follows: \(\bullet\)Raw lumber division: 125 dollar per 100 board-feet of raw lumber \(\bullet\)Finished lumber division: 145 dollar per 100 board-feet of finished lumber Assume that there is no board-feet loss in processing raw lumber into finished lumber. Raw lumber can be sold at 175 dollar per 100 board-feet. Finished lumber can be sold at 345 dollar per 100 board-feet. 1\. Should Calgary Lumber process raw lumber into its finished form? Show your calculations. 2\. Assume that internal transfers are made at \(130 \%\) of variable cost. Will each division maximize its division operating-income contribution by adopting the action that is in the best interest of Calgary Lumber as a whole? Explain. 3\. Assume that internal transfers are made at market prices. Will each division maximize its division operating-income contribution by adopting the action that is in the best interest of Calgary Lumber as a whole? Explain.

Describe three criteria you would use to evaluate whether a management control system is effective

Tech Friendly Computer, Inc., with headquarters in San Francisco, manufactures and sells a desktop computer. Tech Friendly has three divisions, each of which is located in a different country: a. China division-manufactures memory devices and keyboards b. South Korea division- assembles desktop computers using locally manufactured parts, along with memory devices and keyboards from the China division c. U.S. division-packages and distributes desktop computers Each division is run as a profit center. The costs for the work done in each division for a single desktop computer are as follows: \(\bullet\)Chinese income tax rate on the China division's operating income: $40 \%$ \(\bullet\)South Korean income tax rate on the South Korea division's operating income: \(20 \%\) \(\bullet\)U.S. income tax rate on the U.S. division's operating income: \(30 \%\) Each desktop computer is sold to retail outlets in the United States for 3,800 dollars. Assume that the current foreign exchange rates are as follows: $\begin{aligned} 9 \text { yuan } &= 1 \text { U.S. } \text{dollar} \\ 1,000 \text { won } &= 1 \text { U.S. } \text{dollar}\end{aligned}$ Both the China and the South Korea divisions sell part of their production under a private label. The China division sells the comparable memory/keyboard package used in each Tech Friendly desktop computer to a Chinese manufacturer for 4,500 yuan. The South Korea division sells the comparable desktop computer to a South Korean distributor for 1,340,000 won. 1\. Calculate the after-tax operating income per unit earned by each division under the following transferpricing methods: (a) market price, (b) \(200 \%\) of full cost, and (c) \(350 \%\) of variable cost. (Income taxes are not included in the computation of the cost-based transfer prices.) 2\. Which transfer-pricing method(s) will maximize the after-tax operating income per unit of Tech Friendly Computer?

\((\mathrm{CMA}, \text { adapted). }\) Quest Motors, Inc., operates as a decentralized multidivision company. The Vivo division of Quest Motors purchases most of its airbags from the airbag division. The airbag division's incremental cost for manufacturing the airbags is 90 dollarper unit. The airbag division is currently working at \(80 \%\) of capacity. The current market price of the airbags is 125 dollar per unit. 1\. Using the general guideline presented in the chapter, what is the minimum price at which the airbag division would sell airbags to the Vivo division? 2\. Suppose that Quest Motors requires that whenever divisions with unused capacity sell products internally, they must do so at the incremental cost. Evaluate this transfer-pricing policy using the criteria of goal congruence, evaluating division performance, motivating management effort, and preserving division autonomy. 3\. If the two divisions were to negotiate a transfer price, what is the range of possible transfer prices? Evaluate this negotiated transfer-pricing policy using the criteria of goal congruence, evaluating division performance, motivating management effort, and preserving division autonomy. 4\. Instead of allowing negotiation, suppose that Quest specifies a hybrid transfer price that "splits the difference" between the minimum and maximum prices from the divisions' standpoint. What would be the resulting transfer price for airbags?

The Burton Company manufactures chainsaws at its plant in Sandusky, Ohio. The company has marketing divisions throughout the world. A Burton marketing division in Lille, France, imports 200,000 chainsaws annually from the United States. The following information is available: Suppose the United States and French tax authorities only allow transfer prices that are between the full manufacturing cost per unit of 175 dollar and a market price of 250 dollar, based on comparable imports into France. The French import duty is charged on the price at which the product is transferred into France. Any import duty paid to the French authorities is a deductible expense for calculating French income taxes. 1\. Calculate the after-tax operating income earned by the United States and French divisions from transferring 200,000 chainsaws (a) at full manufacturing cost per unit and (b) at market price of comparable imports. (Income taxes are not included in the computation of the cost-based transfer prices. 2\. Which transfer price should the Burton Company select to minimize the total of company import duties and income taxes? Remember that the transfer price must be between the full manufacturing cost per unit of 175 dollar and the market price of 250 dollar of comparable imports into France. Explain your reasoning.

The Kelly-Elias Corporation, manufacturer of tractors and other heavy farm equipment, is organized along decentralized product lines, with each manufacturing division operating as a separate profit center. Each division manager has been delegated full authority on all decisions involving the sale of that division's output both to outsiders and to other divisions of Kelly- Elias. Division \(C\) has in the past always purchased its requirement of a particular tractor-engine component from division A. However, when informed that division \(A\) is increasing its selling price to 135 dollar, division C's manager decides to purchase the engine component from external suppliers. Division \(C\) can purchase the component for 115 dollar per unit in the open market. Division \(A\) insists that, because of the recent installation of some highly specialized equipment and the resulting high depreciation charges, it will not be able to earn an adequate return on its investment unless it raises its price. Division A's manager appeals to top management of Kelly-Elias for support in the dispute with division \(\mathrm{C}\) and supplies the following operating data: 1\. Assume that there are no alternative uses for internal facilities of division A. Determine whether the company as a whole will benefit if division \(C\) purchases the component from external suppliers for 115 dollar per unit. What should the transfer price for the component be set at so that division managers acting in their own divisions' best interests take actions that are also in the best interest of the company as a whole? 2\. Assume that internal facilities of division A would not otherwise be idle. By not producing the 1,900 units for division \(\mathrm{C}\), division A's equipment and other facilities would be used for other production operations that would result in annual cash-operating savings of 22,800 dollar. Should division \(C\) purchase from external suppliers? Show your computations. 3\. Assume that there are no alternative uses for division A's internal facilities and that the price from outsiders drops 15 dollar. Should division \(C\) purchase from external suppliers? What should the transfer price for the component be set at so that division managers acting in their own divisions' best interests take actions that are also in the best interest of the company as a whole?

The Slate Company manufactures and sells television sets. Its assembly division (AD) buys television screens from the screen division (SD) and assembles the TV sets. The SD, which is operating at capacity, incurs an incremental manufacturing cost of 65 dollar per screen. The SD can sell all its output to the outside market at a price of 100 dollar per screen, after incurring a variable marketing and distribution cost of 8 dollar per screen. If the \(A D\) purchases screens from outside suppliers at a price of 100 dollar per screen, it will incur a variable purchasing cost of 7 dollar per screen. Slate's division managers can act autonomously to maximize their own division's operating income. 1\. What is the minimum transfer price at which the SD manager would be willing to sell screens to the AD? 2\. What is the maximum transfer price at which the AD manager would be willing to purchase screens from the SD? 3\. Now suppose that the SD can sell only \(70 \%\) of its output capacity of 20,000 screens per month on the open market. Capacity cannot be reduced in the short run. The AD can assemble and sell more than \(20,000 \mathrm{TV}\) sets per month. a. What is the minimum transfer price at which the SD manager would be willing to sell screens to the AD? b. From the point of view of Slate's management, how much of the SD output should be transferred to the AD? c. If Slate mandates the SD and AD managers to "split the difference" on the minimum and maximum transfer prices they would be willing to negotiate over, what would be the resulting transfer price? Does this price achieve the outcome desired in requirement \(3 b ?\)

What is the relationship among motivation, goal congruence, and effort?

Ballantine Corp. produces and sells lead crystal glassware. The firm consists of two divisions, Commercial and Specialty. The Commercial division manufactures 300,000 glasses per year. It incurs variable manufacturing costs of 8 dollar per unit and annual fixed manufacturing costs of 900,000 dollar. The Commercial division sells 100,000 units externally at a price of 12 dollar each, mostly to department stores. It transfers the remaining 200,000 units internally to the Specialty division, which modifies the units, adds an etched design, and sells them directly to consumers online. Ballantine Corp. has adopted a market-based transfer-pricing policy. For each glass it receives from the Commercial division, the Specialty division pays the weighted-average external price the Commercial division charges its customers outside the company. The current transfer price is accordingly set at 12 dollar. Eileen McCarthy, the manager of the Commercial division, receives an offer from Home Décor, a chain of upscale home furnishings stores. Home Décor offers to buy 20,000 glasses at a price of 9 dollar each, knowing that the entire lead crystal industry (including Ballantine Corp.) has excess capacity at this time. The variable manufacturing cost to the Commercial division for the units Home Décor is requesting is 8 dollar, and there are no additional costs associated with this offer. Accepting Home Décor's offer would not affect the current price of 12 dollar charged to existing external customers. 1\. Calculate the Commercial division's current annual level of profit (without the new order). 2\. Compute the change in the Commercial division's profit if it accepts Home Décor's offer. Will Eileen McCarthy accept this offer if her aim is to maximize the Commercial division's profit? 3\. Would the top management of Ballantine Corp. want the Commercial division to accept the offer? Compute the change in firm-wide profit associated with Home Décor's offer.

Beacon, a division of Libra Corporation, is located in the United States. Its effective income tax rate is \(30 \%\). Another division of Libra, Falcon, is located in Canada, where the income tax rate is \(40 \% .\) Falcon manufactures, among other things, an intermediate product for Beacon called XPS-2022. Falcon operates at capacity and makes 15,000 units of \(X P S-2022\) for Beacon each period, at a variable cost of 28 dollar per unit. Assume that there are no outside customers for XPS-2022. Because the XPS-2022 must be shipped from Canada to the United States, it costs Falcon an additional 4 dollar per unit to ship the \(\mathrm{XPS}-2022\) to Beacon. There are no direct fixed costs for \(\mathrm{XPS}-2022 .\) Falcon also manufactures other products. A product similar to XPS-2022 that Beacon could use as a substitute is available in the United States for 38.50 dollar per unit. 1\. What is the minimum and maximum transfer price that would be acceptable to Beacon and Falcon for XPS-2022, and why? 2\. What transfer price would minimize income taxes for Libra Corporation as a whole? Would Beacon and Falcon want to be evaluated on operating income using this transfer price? 3\. Suppose Libra uses the transfer price from requirement 2 and each division is evaluated on its own after-tax division operating income. Now suppose Falcon has an opportunity to sell 8,000 units of \(X P S\) 2022 to an outside customer for 31 dollar each. Falcon will not incur shipping costs because the customer is nearby and offers to pay for shipping. Assume that if Falcon accepts the special order, Beacon will have to buy 8,000 units of the substitute product in the United States at 38.50 dollar per unit. a. Will accepting the special order maximize after-tax operating income for Libra Corporation as a whole? b. Will Beacon want Falcon to accept this special order? Why or why not? c. Will Falcon want to accept this special order? Explain. d. Suppose Libra Corporation wants to operate in a decentralized manner. What transfer price should Libra set for \(\mathrm{XPS}-2022\) so that each division acting in its own best interest takes actions with respect to the special order that are in the best interests of Libra Corporation as a whole?