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Chapter 24: Q25RQ (page 1355)
What is a transfer price?
Answer
Transfer price is the consideration amount paid by one unit of an organization to another unit.
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Refer to the data in Exercise E24-17. Calculate each division鈥檚 RI. Interpret your results.
Well-designed performance evaluation systems accomplish many goals. Consider the following actions, and state which goal is being achieved by the action:
a. Comparing targets to actual results
b. Providing subunit managers with performance targets
c. Comparing actual results with industry standards
d. Providing bonuses to subunit managers who achieve performance targets
e. Aligning subunit performance targets with company strategy
f. Comparing actual results of competitors
g. Taking corrective actions
h. Using the adage 鈥測ou get what you measure鈥� when designing the performance evaluation system
Using ROI and RI to evaluate investment centers
Consider the following condensed financial statements of Pure Life, Inc. The company鈥檚 target rate of return is 30%.
PURE LIFE, INC. Income Statement For the Year Ended December 31, 2018 Net Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses 2,300,000 2,000,000 300,000 (34,000) 266,000 3,700,000 \( 6,000,000 Operating Income Interest Expense Other Income and (Expenses): Income Before Income Tax Expense Income Tax Expense Net Income 93,100 \) 172,900
PURE LIFE, INC. Comparative Balance Sheet As of December 31, 2018 and 2017 Assets 2018 2017 Cash Accounts Receivable Supplies Property, Plant, and Equipment, net Patents, net Total Assets Accounts Payable Short-term Notes Payable Long-term Notes Payable Common Stock, no Par Retained Earnings Total Liabilities and Stockholders鈥� Equity Liabilities and Stockholders鈥� Equity \( 62,000 200 204,000 101,000 \) 394,000 26,800 \( 76,000 600 305,000 163,000 \) 606,000 61,400 52,000 \( 31,000 126,500 169,000 15,500 \) 394,000 148,000 \( 29,000 196,000 205,500 27,500 \) 606,000
Requirements
1. Calculate the company鈥檚 ROI. Round all of your answers to four decimal places.
2. Calculate the company鈥檚 profit margin ratio. Interpret your results.
3. Calculate the company鈥檚 asset turnover ratio. Interpret your results.
4. Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results.
5. Calculate the company鈥檚 RI. Interpret your results.
What is the biggest advantage of using RI to evaluate investment centers?
Decentralization divides company operations into various reporting units. Most decentralized subunits can be described as one of four different types of responsibility centers.
Requirements
1. Explain why companies decentralize. Describe some typical methods of decentralization.
2. List the four most common types of responsibility centers, and describe their responsibilities.
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