Managerial Accounting: Creating Value in a Dynamic Business Environment
12th Edition
ISBN: 9781260417074
Author: HILTON, Ronald
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Textbook Question
Chapter 13, Problem 51C
InterGlobal Industries is a diversified corporation with separate operating divisions. Each division’s performance is evaluated on the basis of profit and
The Air Comfort Division manufactures and sells air-conditioner units. The coming year’s
Air Comfort’s division manager believes sales can be increased if the price of the air-conditioners is reduced. A
The Air Comfort Division uses a compressor in its units, which it purchases from an outside supplier at a cost of $70 per compressor. The Air Comfort Division manager has asked the manager of the Compressor Division about selling compressor units to Air Comfort. The Compressor Division currently manufactures and sells a unit to outside firms that is similar to the unit used by the Air Comfort Division. The specifications of the Air Comfort Division compressor are slightly different, which would reduce the Compressor Division’s direct material cost by $1.50 per unit. In addition, the Compressor Division would not incur any variable selling costs in the units sold to the Air Comfort Division. The manager of the Air Comfort Division wants all of the compressors it uses to come from one supplier and has offered to pay $50 for each compressor unit.
The Compressor Division has the capacity to produce 75,000 units. Its budgeted income statement for the coming year, which follows, is based on a sales volume of 64,000 units without considering Air Comfort’s proposal.
Required:
- 1. Should the Air Comfort Division institute the 5 percent price reduction on its air-conditioner units even if it cannot acquire the compressors internally for $50 each? Support your conclusion with appropriate calculations.
- 2. Independently of your answer to requirement (1), assume the Air Comfort Division needs 17,400 units. Should the Compressor Division be willing to supply the compressor units for $50 each? Support your conclusions with appropriate calculations.
- 3. Independently of your answer to requirement (1), assume Air Comfort needs 17,400 units. Suppose InterGlobal’s top management has specified a transfer price of $50. Would it be in the best interest of InterGlobal Industries for the Compressor Division to supply the compressor units at $50 each to the Air Comfort Division? Support your conclusions with appropriate calculations.
- 4. Is $50 a goal-congruent transfer price? [Refer to your answers for requirements (2) and (3).]
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Colonial Pharmaceuticals is a small firm specializing in new products. It is organized into two divisions, which are based on the
products they produce. AC Division is smaller and the life of the products it produces tend to be shorter than those produced by the
larger SO Division. Selected financial data for the past year is shown as follows. Divisional Investment is as of the beginning of the year.
Colonial Pharmaceuticals uses a 10 percent cost of capital and uses beginning-of-the-year Investment when computing ROI and
residual income. Ignore Income taxes.
Allocated corp. overhead
Cost of goods sold
Divisional investment
R&D
Sales
SG&A
AC Division
$ 620
3,240
9,400
2,200
8,800
760
SO Division
$ 1,600
6,600
78,000
3,400
18,000
1,330
Required:
a. Compute divisional Income for the two divisions.
b. Calculate the operating margin, which is equivalent to the return on sales, for the two divisions.
c. Calculate ROI for the two divisions.
d. Compute residual income for the two divisions.
Colonial Pharmaceuticals is a small firm specializing in new products. It is organized into two divisions, which are based on the
products they produce. AC Division is smaller and the life of the products it produces tend to be shorter than those produced by the
larger SO Division. Selected financial data for the past year is shown as follows. Divisional investment is as of the beginning of the
year. Colonial Pharmaceuticals uses a 8 percent cost of capital and uses beginning-of-the-year investment when computing ROI and
residual income. Ignore income taxes.
Allocated corp. overhead
Cost of goods sold
Divisional investment
R&D
Sales
SG&A
AC Division
$ 670
3,340
10,400
2,700
10,800
910
SO Division
$ 1,100
5,600
73,000
3,600
20,000
830
Colonial Pharmaceuticals is a small firm specializing in new products. It is organized into two divisions, which are based on the
products they produce. AC Division is smaller and the life of the products it produces tend to be shorter than those produced by the
larger SO Division. Selected financial data for the past year is shown as follows. Divisional investment is as of the beginning of the
year. Colonial Pharmaceuticals uses a 8 percent cost of capital and uses beginning-of-the-year investment when computing ROI and
residual income. Ignore income taxes.
AC Division
so Division
$ 1,050
Allocated corp. overhead
Cost of goods sold
Divisional investment
$
675
3,350
10,500
5,500
72,500
3,600
19,500
R&D
2,750
Sales
11,000
SG&A
925
780
R&D is assumed to have a two-year life in the AC Division and a nine-year life in the SO division. All R&D expenditures are spent at the
beginning of the year. Assume there are no current liabilities and (unrealistically) that no R&D investments had taken…
Chapter 13 Solutions
Managerial Accounting: Creating Value in a Dynamic Business Environment
Ch. 13 - What is the managerial accountants primary...Ch. 13 - Define goal congruence, and explain why it is...Ch. 13 - Describe the managerial approach known as...Ch. 13 - Prob. 4RQCh. 13 - Prob. 5RQCh. 13 - Prob. 6RQCh. 13 - Create an example showing how residual income is...Ch. 13 - What is the chief disadvantage of ROI as an...Ch. 13 - Why is there typically a rise in ROI or residual...Ch. 13 - Define the term economic value added. How does it...
Ch. 13 - Distinguish between the following measures of...Ch. 13 - Why do some companies use gross book value instead...Ch. 13 - Explain why it is important in performance...Ch. 13 - How do organizations use pay for performance to...Ch. 13 - Describe an alternative to using ROI or residual...Ch. 13 - Prob. 16RQCh. 13 - Prob. 17RQCh. 13 - Discuss the importance of nonfinancial information...Ch. 13 - Identify and explain the managerial accountants...Ch. 13 - Describe four methods by which transfer prices may...Ch. 13 - Explain the significance of excess capacity in the...Ch. 13 - Why might income-tax laws affect the...Ch. 13 - Prob. 23RQCh. 13 - The following data pertain to Dakota Divisions...Ch. 13 - Refer to the preceding exercise. Requited:...Ch. 13 - Refer to the data for Exercise 1324. Assume that...Ch. 13 - Golden Gate Construction Associates, a real estate...Ch. 13 - Prob. 28ECh. 13 - Prob. 29ECh. 13 - Refer to Exhibit 133. Assume that you are a...Ch. 13 - Prob. 32ECh. 13 - Prob. 33ECh. 13 - Prob. 34ECh. 13 - Prob. 35ECh. 13 - Long Beach Pharmaceutical Company has two...Ch. 13 - Prob. 37PCh. 13 - Prob. 38PCh. 13 - Long Beach Pharmaceutical Company has two...Ch. 13 - Prob. 40PCh. 13 - Prob. 41PCh. 13 - Megatronics Corporation, a massive retailer of...Ch. 13 - Prob. 43PCh. 13 - Prob. 44PCh. 13 - Prob. 45PCh. 13 - Clearview Window Company manufactures windows for...Ch. 13 - Prob. 47PCh. 13 - Alpha Communications, Inc., which produces...Ch. 13 - Prob. 49PCh. 13 - Holiday Entertainment Corporation (HHC), a...Ch. 13 - InterGlobal Industries is a diversified...Ch. 13 - Prob. 52C
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