Fundamentals Of Cost Accounting (6th Edition)
6th Edition
ISBN: 9781259969478
Author: WILLIAM LANEN, Shannon Anderson, Michael Maher
Publisher: McGraw Hill Education
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Textbook Question
Chapter 15, Problem 47P
Western States Supply, Inc. (WSS), consists of three divisions—California, Northwest, and Southwest—that operate as if they were independent companies. Each division has its own sales force and production facilities. Each division manager is responsible for sales, cost of operations, acquisition and financing of divisional assets, and
Southwest has just been awarded a contract for a product that uses a component manufactured by outside suppliers as well as by Northwest, which is operating well below capacity. Southwest used a cost figure of $37 for the component in preparing its bid for the new product. Northwest supplied this cost figure in response to Southwest’s request for the
Northwest’s regular selling price for the component that Southwest needs is $65. Northwest’s management indicated that it could supply Southwest the required quantities of the component at the regular selling price less variable selling and distribution expenses. Southwest management responded by offering to pay standard variable manufacturing cost plus 25 percent.
The two divisions have been unable to agree on a transfer price. Corporate management has never established a transfer price policy. The corporate controller suggested a price equal to the standard full manufacturing cost (that is, no selling and distribution expenses) plus a 20 percent markup. The two division managers rejected this price because each considered it grossly unfair.
The unit cost structure for the Northwest component and the suggested prices follow
Required
- a. Discuss the effect that each of the proposed prices could have on the attitude of Northwest’s management toward intracompany business.
- b. Is the negotiation of a price between Northwest and Southwest a satisfactory method to solve the transfer price problem? Explain your answer.
- c. Should WSS’s corporate management become involved in this transfer price controversy? Explain your answer.
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Bentler Industries provides high-technology navigation and communication equipment for the aerospace and shipbuilding
industries. It is organized into two divisions, Aeronautics and Marine. The division presidents are given wide decision-
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beginning-of-year assets. Divisional income includes allocated corporate overhead.
For the most recent year (year 3), data from the two divisions shows the following:
Allocated corporate overhead ($000)
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Other general and administrative costs
R&D costs
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Total assets (January 1, Year 3)
The tax rate applied at Bentler is 20 percent.
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$ 16,300
21,300
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18,900
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Problem 14-63 (Algo) Divisional Income, ROI, and…
Lauderdale Corporation is organized in three geographical divisions (regions) with managers responsible for revenues, costs, and
assets in their respective regions. The firm is highly decentralized and managers are evaluated solely on divisional performance.
Corporate overhead (all fixed) is allocated to the regions based on regional gross margin (regional revenue minus regional cost of
sales).
The following information is from Lauderdale's first year of operations:
Revenues
Cost of sales
Selling, General and Administrative (all
fixed)
Corporate overhead
Required:
Region I
$ 1,203,000
451,500
424,500
Region II
$ 1,653,000
811,500
634,500
Region III
$ 2,253,000
1,141,500
854,500
Total
Corporation
$ 5,109,000
2,404,500
1,913,500
438,000
a. Compute divisional operating income for the three regions. Ignore taxes.
b. How have these regions performed?
Complete this question by entering your answers in the tabs below.
Required A
Required B
Compute divisional operating income for the three…
Lauderdale Corporation is organized in three geographical divisions (regions) with managers responsible for revenues, costs, and
assets in their respective regions. The firm is highly decentralized and managers are evaluated solely on divisional performance.
Corporate overhead (all fixed) is allocated to the regions based on regional gross margin (regional revenue minus regional cost of
sales).
The following Information is from Lauderdale's first year of operations:
Revenues
Cost of sales
Selling, General and
Administrative (all fixed)
Corporate overhead
Region I
$ 1,217,000
458,500
Region II
$ 1,667,000
818,500
445,500
655,500
Region III
$ 2,267,000
1,148,500
875,500
Total
Corporation
$ 5,151,000
2,425,500
1,976,500
466,000
Information on the division assets in the three regions of Lauderdale Corporation follows:
Region I
Region II
Region III
$ 717,000
647,000
1,313,000
Lauderdale Corporation has a cost of capital of 8.6 percent.
The Individual regions are responsible for research and…
Chapter 15 Solutions
Fundamentals Of Cost Accounting (6th Edition)
Ch. 15 - What is the purpose of a transfer price?Ch. 15 - Prob. 2RQCh. 15 - Prob. 3RQCh. 15 - What are the limitations of market-based transfer...Ch. 15 - Prob. 5RQCh. 15 - When would you advise a firm to use prices other...Ch. 15 - What is the basis for choosing between actual and...Ch. 15 - What are the advantages and disadvantages of a...Ch. 15 - Prob. 9RQCh. 15 - Why is transfer pricing important in tax...
Ch. 15 - Prob. 11RQCh. 15 - What should an effective transfer pricing system...Ch. 15 - Prob. 13CADQCh. 15 - Prob. 14CADQCh. 15 - Refer to the Business Application item, Transfer...Ch. 15 - Prob. 16CADQCh. 15 - Prob. 17CADQCh. 15 - In what ways is transfer pricing like cost...Ch. 15 - In Chapter 12, we discussed corporate cost...Ch. 15 - Prob. 20ECh. 15 - Prob. 21ECh. 15 - Apply Transfer Pricing Rules Best Practices, Inc.,...Ch. 15 - Prob. 23ECh. 15 - Prob. 24ECh. 15 - Evaluate Transfer Pricing System Southwest...Ch. 15 - Prob. 26ECh. 15 - Evaluate Transfer Pricing System Carmen Seville...Ch. 15 - Prob. 28ECh. 15 - Prob. 29ECh. 15 - Prob. 30ECh. 15 - Prob. 31ECh. 15 - Prob. 32ECh. 15 - Prob. 33ECh. 15 - Prob. 34ECh. 15 - Prob. 35ECh. 15 - Segment Reporting Leapin Larrys Pre-Owned Cars has...Ch. 15 - Segment Reporting Perth Corporation has two...Ch. 15 - Prob. 38PCh. 15 - Prob. 39PCh. 15 - Prob. 40PCh. 15 - International Transfer Prices Skane Shipping Ltd....Ch. 15 - International Transfer Prices Badger Air is an...Ch. 15 - Prob. 43PCh. 15 - Prob. 44PCh. 15 - Prob. 45PCh. 15 - Weaver, Inc., is a large consumer products...Ch. 15 - Western States Supply, Inc. (WSS), consists of...Ch. 15 - Prob. 48PCh. 15 - Midwest Entertainment has four operating...Ch. 15 - Prob. 50PCh. 15 - Mathes Corporation manufactures paper products....Ch. 15 - Refer to the data in Problem 15-51. At the end of...Ch. 15 - CHS is a large multidivision firm. One division,...Ch. 15 - Prob. 54PCh. 15 - Prob. 56IC
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