The Fruity Bakers specialize in making delicious cakes. Their trademark fruit cake ismade in Division X (the supplying division) and sold to external customers for themto decorate, or it can be enjoyed plain. It is also transferred to Division Y (thereceiving division) where it is iced and decorated to be sold as a luxury wedding cake.Fruity Bakers are currently trying to decide what the optimum price to sell the cakesfrom Division X to Y should be in order to motivate the managers of both divisions.The following data shows the costs incurred by Division X to make a fruit cake andby Division Y to ice and decorate the wedding cake:$/unitDivision XVariable costs22Fixed overhead931Division YVariable costs33Fixed overhead8.41Plain fruit cakes can be sold and purchased externally for $35.Wedding cakes can be sold for $80.Instructions:1. Should the company make the fruit cakes internally or buy them in?2. What non-financial factors should also be taken into consideration?3. What would be the implication of using the following transfer pricing policies?a. Variable cost plus 30%b. Variable cost onlyc. The external market priced. Full cost plus 5% Question 1: True / false(A1)1. Internal transfers should be preferred when there is an external market for thetransferred item because there will be more control over quality and delivery.2. The transfer price will determine how profits will be shared between the twodivisions.3. Residual income as a measure of performance enables fair comparisons to bemade between the performances of different divisions in the company.4. When a transfer price is based on cost because there is no eternal market for thetransferred item, at least one of the divisional managers is likely to consider thetransfer price as 'unfair.5. ROI is usually measured as divisional operating profit before deductingdepreciation as a percentage of the division's capital employed.6. Residual income is calculated after deducting both depreciation on non-currentassets and notional interest on the division's capital employed.7. Performance reports allow comparisons between actual performance and budgetexpectations.8. Residual income is the amount of profit left after subtracting expenses of aparticular investment center.9. Like ROI, residual income is a performance measure displayed as a ratio.

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The Fruity Bakers specialize in making delicious cakes. Their trademark fruit cake is made in Division X (the supplying division) and sold to external customers for them to decorate, or it can be enjoyed plain. It is also transferred to Division Y (the receiving division) where it is iced and decorated to be sold as a luxury wedding cake. Fruity Bakers are currently trying to decide what the optimum price to sell the cakes from Division X to Y should be in order to motivate the managers of both divisions. The following data shows the costs incurred by Division X to make a fruit cake and by Division Y to ice and decorate the wedding cake: $/unit Division X Variable costs 22 Fixed overhead 9. 31 Division Y Variable costs 33 Fixed overhead 8. 41 Plain fruit cakes can be sold and purchased extermally for $35. Wedding cakes can be sold for $80. Instructions: 1. Should the company make the fruit cakes internally or buy them in? 2. What non-financial factors should also be taken into consideration? 3. What would be the implication of using the following transfer pricing policies? a. Variable cost plus 30% b. Variable cost only c. The external market price d. Full cost plus 5%

The Fruity Bakers specialize in making delicious cakes. Their trademark fruit cake is made in Division X (the supplying division) and sold to external customers for them to decorate, or it can be enjoyed plain. It is also transferred to Division Y (the receiving division) where it is iced and decorated to be sold as a luxury wedding cake. Fruity Bakers are currently trying to decide what the optimum price to sell the cakes from Division X to Y should be in order to motivate the managers of both divisions. The following data shows the costs incurred by Division X to make a fruit cake and by Division Y to ice and decorate the wedding cake: $/unit Division X Variable costs 22 Fixed overhead 9. 31 Division Y Variable costs 33 Fixed overhead 8. 41 Plain fruit cakes can be sold and purchased extermally for $35. Wedding cakes can be sold for $80. Instructions: 1. Should the company make the fruit cakes internally or buy them in? 2. What non-financial factors should also be taken into consideration? 3. What would be the implication of using the following transfer pricing policies? a. Variable cost plus 30% b. Variable cost only c. The external market price d. Full cost plus 5%

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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