Question details

Which of the following is a cost associated with decentralization
$ 15.00

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ACCT3203 Contemporary Management Accounting

Tutorial Questions with Suggested Answers

Management Control Systems and Transfer Pricing

PART (A): Multiple Choice

Instruction

: Select the

best

answer for the following questions.

1.

Which of the following is a cost associated with decentralization?

a.

Not enough time spent in gathering information about different subunits of the

organization

b.

Decreased loyalty toward the organization as a whole

c.

Focus manager’s attention on the subunit rather than the company as a

whole (pp.866 – cost of decentralization (2) unhealthy competition

d.

Lack of day-to-day involvement by top management in operating decisions

2.

A transfer-pricing method leads to goal congruence when managers:

a.

always act in their own best interest

b.

act in their own best interest and the decision is in the long-term best interest of

the manager's subunit

c.

act in their own best interest and the decision is in the long-term best interest

of the company

(pp. 869 – align with the objectives of top management)

d.

act in their own best interest and the decision is in the short-term best interest of

the company

3.

In analyzing transfer prices, the:

a.

buyer will not willingly purchase a product for less than the incremental costs

incurred to manufacture the product internally

b.

seller will not willingly sell a product for less than the incremental costs

incurred to make the product

c.

buyer will willingly pay more than the ceiling transfer price

d.

buyer will not pay less than the ceiling transfer price

1

 

 

 

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 4 THROUGH 7:

Calculate the Division operating income for the BetaShoe Company which manufactures only

one type of shoe and has two divisions, the Sole Division, and the Assembly Division. The Sole

Division manufactures soles for the Assembly Division, which completes the shoe and sells it to

retailers. The Sole Division "sells" soles to the Assembly Division. The market price for the

Assembly Division to purchase a pair of soles is $20. (Ignore changes in inventory.) The fixed

costs for the Sole Division are assumed to be the same over the range of 40,000-100,000 units.

The fixed costs for the Assembly Division are assumed to be $7 per pair at 100,000 units.

Sole's costs per pair of soles are

:

Direct materials

$4

Direct labor

$3

Variable overhead

$2

Division fixed costs

$1

Assembly's costs per completed pair of shoes are

:

Direct materials

$6

Direct labor

$2

Variable overhead

$1

Division fixed costs

$7

4.

What is the market-based transfer price per pair of soles from the Sole Division to the

Assembly Division?

a.

$10

b.

$16

c.

$20

d.

$26

$20 as given in the problem.

5.

What is the transfer price per pair of shoes from the Sole Division to the Assembly

Division per pair of soles if the transfer price per pair of soles is 125% of full costs?

a.

$10

b.

$12.50

c.

$13

d.

$15

$10 x 1.25 = $12.50

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6.

Assume the transfer price for a pair of soles is 180% of total costs of the Sole Division and

40,000 of soles are produced and transferred to the Assembly Division. The Sole Division's

operating income is:

a.

$320,000

b.

$360,000

c.

$400,000

d.

$440,000

Revenue (1.8 x $10) x 40,000)) =

$720,000

Costs ($10 x 40,000) =

(

400,000)

Operating income

$320,000

7.

If the Assembly Division sells 100,000 pairs of shoes at a price of $60 a pair to customers,

what is the operating income of both divisions together?

a.

$4,400,000

b.

$3,400,000

c.

$3,000,000

d.

$2,600,000

Revenues = ($60 x 100,000) =

$6,000,000

Cost = ($26 x 100,000) =

2,600,000

Operating income =

$3,400,000

Additional Discussion Questions for Beta Shoes:

Calculate and compare the difference in overall corporate net income between Scenario A and

Scenario B if the Assembly Division sells 100,000 pairs of shoes for $60 per pair to

customers.

Scenario A: Negotiated transfer price of $15 per pair of soles

Scenario B: Market-based transfer price

a.

$500,000 more net income under Scenario A

b.

$500,000 of net income using Scenario B

c.

$100,000 of net income using Scenario A.

d.

None of these answers is correct.

The net income would be the same under both scenarios.

3

 

Available solutions