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Chapter 24: Q5TI (page 1348)

Sheffield Company manufactures power tools. The Electric Drill Division (an investment center) can purchase the motors for the drills from the Motor Division (another investment center) or from an outside vendor. The cost to purchase from the outside vendor is \(20. The Motor Division also sells to outside customers. The motor needed by the Electric Drill Division sells for \)25 to outside customers and has a variable cost of $15. The Motor Division has excess capacity.

21. If Sheffield Company allows division managers to negotiate transfer prices, what is the minimum amount the manager of the Motor Division should consider?

22. What is the maximum transfer price the manager of the Electric Drill Division should consider?

Short Answer

Expert verified

Themaximum transfer price considered by the manager should be $20.

Step by step solution

01

Meaning of Transfer Price

The term transfer price is used to denote thetransfer price paid for goods or services from the organization鈥檚 one department to another unit. Such other units can be in the same country or other countries.

02

Consideration of minimum amount

As per the given information, motor division has access capacity then the utilization of such capacity will facilitate the company to negotiatetransfer prices. Hence, in the given scenario the motor division should consider the equivalent to the cost i.e. $15.

03

Maximum transfer price

In addition, the maximum transfer price considered by the manager should be equivalent to the price offered by the outsider vendor i.e. $20. In such a way, the company can have transfer pricing of maximum ofout of pocket expense.

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Most popular questions from this chapter

What is a transfer price?

Fill in the blanks with the phrase that best completes the sentence.Some phrases may be used more than once and some not at all.

Phrases:

  • cost center
  • revenue center
  • investment center
  • lower
  • profit center
  • higher
  • responsibility center

1. The maintenance department at the local zoo is a(n)___________

2. The gift shop at the local zoo is a(n)____________

3. The menswear department of a department store, which is responsible forbuying and selling merchandise, is a(n)_______________

4. The production line at a manufacturing plant is a(n)

5. A( n)________________is any segment of the business whose manager isaccountable for specific activities.

6. A division of a beverage manufacturing company responsible for aparticular brand of soft drink is a(n)_______________

7. The sales manager in charge of a shoe company鈥檚 northwest sales territoryoversees a(n)

8. Managers of cost and revenue centers are at_____________ levels of theorganization than are managers of profit and investment centers.______

List the advantages of decentralization.

Wolf Paints is a national paint manufacturer and retailer. The company is segmented into five divisions: Paint Stores (branded retail locations), Consumer (paint sold through home improvement stores), Automotive (sales to auto manufacturers), International, and Administration. The following is selected divisional information for its two largest divisions: Paint Stores and Consumer.

Net Sales Operating Average

Revenue Income Total Assets

Paint Stores \( 3,980,000 \) 476,000 $ 1,380,000

Consumer 1,315,000 195,000 1,600,000

Management has specified a 21% target rate of return.

Requirements

1. Calculate each division鈥檚 ROI. Round all of your answers to four decimal places.

2. Calculate each division鈥檚 profit margin ratio. Interpret your results.

3. Calculate each division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 each division鈥檚 RI. Interpret your results, and offer a recommendation for any division with negative RI.

6. Describe some of the factors that management considers when setting its minimum target rate of return.

Question: Using ROI and RI to evaluate investment centers

This problem continues the Piedmont Computer Company situation from Chapter 23. Piedmont Computer Company reported 2020 sales of \(3,600,000 and operating income of \)183,600. Average total assets during 2020 were $600,000. Piedmont Computer Company鈥檚 target rate of return is 16%.

Calculate Piedmont Computer Company鈥檚 profit margin ratio, asset turnover ratio, ROI, and RI for 2020. Comment on the results.
See all solutions

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