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Exam 15: Capital Budgeting and Strategic Investment Decisions

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Question 21

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The Hogan Division of Reston Company makes and sells K7 motors that can either be sold to outside customers or transferred to the Jasper Division of Reston Company. The following data were supplied by the Hogan Division: $\begin{array}{lc} \text { Selling price per K7 motor to outs ide customers. } & £ 115\\ \text { Unit variable production cost. } &£ 75\\ \text {Monthly production capacity. } &3,500 \text { motors}\\\end{array}$ The Jasper Division is currently purchasing similar motors from an outside supplier at £110 each. Instead, the Jasper Division would like to buy 1,200 of the K7 motors from Hogan next month. -The Hogan Division has proposed a transfer price of £105 per motor. Suppose sales of K7 motors to outside customers are expected to be 2,800 units next month. If Jasper acquires the 1,200 motors from Hogan rather than from the outside supplier, the effect on the monthly net operating income of the company as a whole will be

A) £6,000 decrease
B) £6,000 increase
C) £4,500 increase
D) £4,500 decrease

E) A) and D)
F) A) and C)

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Question 22

Multiple Choice

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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 that Division X is operating at capacity and can sell all of its output to outside customers. If Division X sells the parts to Division Y at £17 per unit, the company as a whole will be

A) better off by £10,000 each period
B) worse off by £20,000 each period
C) worse off by £10,000 each period
D) there will be no change in the status of the company as a whole

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

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Question 23

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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 15,000 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

The Hogan Division of Reston Company makes and sells K7 motors that can either be sold to outside customers or transferred to the Jasper Division of Reston Company. The following data were supplied by the Hogan Division: $\begin{array}{lc} \text { Selling price per K7 motor to outs ide customers. } & £ 115\\ \text { Unit variable production cost. } &£ 75\\ \text {Monthly production capacity. } &3,500 \text { motors}\\\end{array}$ The Jasper Division is currently purchasing similar motors from an outside supplier at £110 each. Instead, the Jasper Division would like to buy 1,200 of the K7 motors from Hogan next month. -The Hogan Division has proposed a transfer price of £105 per motor. Suppose there is ample idle capacity at the Hogan Division so that transfers to the Jasper Division do not cut into sales to outside customers. If the Jasper Division acquires the 1,200 motors from the Hogan Division rather than from the outside supplier, the effect on the monthly net operating income of the company as a whole will be

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 DivisionD. - The minimum transfer price for Division C is

Cost based transfer prices are usually regarded as the best approach to setting a transfer price

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 optimal range of transfer prices is between

One of the advantages of the Absorption costing approach is

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. -The variable cost for the Parts Division 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 has ample idle capacity to handle all of Division B's needs without any increase in fixed costs and without cutting into sales to outsiders. If Division S refuses to accept the £18 price from Division B, the company as a whole will be

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. - What is the maximum transfer price the White Mountain Division should be willing to pay

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 Parts Division is

The CD Division of Sound Company makes and sells compact disk players (CDP) that can be sold it presently sells to outside customers. Budgeted costs next month for the CD Division are as follows: $\begin{array}{lrr} \text {Sales of CDPs to outside customers. } & \text { 2,800 units} \\ \text { Selling price per CDP to outside customers. } &£ 185\\ \text {Unit variable production costs. } &£ 120\\\end{array}$ MaxiSound, another division of Sound Company, would like to buy 1,000 of the CDPs from the CD Division. An outside supplier has offered to sell similar CDPs to MaxiSound for £170 each. - Assume that CD Division's monthly production capacity is 3,200 units and the MaxiSound Division will acquire the CDPs from the outside supplier if they are not available from the CD Division. If the CD Division sells 1,000 CDPs to MaxiSound for £170 each, the effect on the monthly profits of Sound Company as a whole will be a

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. -The opportunity cost for the Parts Division is

The Pole Division of Hillyard Company produces poles that can be sold to outside customers or transferred to the Flag Division of Hillyard Company. Last year the Flag Division bought 50,000 poles from Pole at £2.50 each. The following data are available for last year's activities in the Pole Division: $\begin{array}{lc} \text { Capacity in units. } & \text {400,000 poles}\\ \text {Quantity sold to outside customers. } & \text { 350,000 poles}\\ \text { Selling price per pole to outside customers. } & £ 3.00 \\ \text {Total variable costs per pole. } &£ 2.00\\ \text { Fixed operating costs } &£ 200,000\\\end{array}$ In order to sell 50,000 poles to the Flag Division, the Pole Division must give up sales of 30,000 poles to outside customers. That is, the Pole Division could sell 380,000 poles each year to outside customers (rather than only 350,000 poles as shown above) if it were not making sales to the Flag Division. According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division

Using the formula in the text, if the lowest acceptable transfer price to the selling division is £90 and the lost contribution margin per unit on outside sales is £40, then the variable cost per unit must be

Time and Material pricing is NOT commonly used in one of the following

Discuss the advantages and the disadvantages of the various methods of pricing. Is there a best method?

Bounous Company has two divisions, Division X and Division Y. Division X has a production capacity of 6,000 units of a particular part per month. Division X sells 4,600 units of the part each month to outside customers at a contribution margin of £36 per unit. Division Y would like to buy 2,000 units of the part each month from Division X. In computing the lowest acceptable transfer price from the perspective of the selling division, the lost contribution margin per unit portion of the transfer price computation would be

A negotiated transfer is usually imposed by the head office of a company