Chapter 24: Q26RQ (page 1355)
Explain the difference between market-based transfer prices and cost-based transfer prices.
Transfer cost based on the current market price of the goods is known as market-based transfer cost. The cost of manufacturing things serves as the setting for cost-based transfer pricing.
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Preparing a financial budget—budgeted income statement and balance sheet
Bradley Company has the following post-closing trial balance on December 31, 2018:
The company’s accounting department has gathered the following budgeting information for the first quarter of 2019:
Budgeted total sales, all on account $ 305,000 Budgeted direct materials to be purchased and used 32,000 Budgeted direct labor cost 12,500 Budgeted manufacturing overhead costs:
Variable manufacturing overhead 2,100 Depreciation 1,300 Insurance and property taxes 1,350 Budgeted cost of goods sold 72,000 Budgeted selling and administrative expenses:
Salaries expense 7,000 Rent expense 2,000 Insurance expense 1,100 Depreciation expense 550 Supplies expense 15,250 Budgeted cash receipts from customers 263,500 Budgeted income tax expense 41,000 Budgeted purchase and payment for capital expenditures (additional equipment) 43,000
Additional information:
a. Direct materials purchases are paid 70% in the quarter purchased and 30% in the next quarter.
b. Direct labor, manufacturing overhead, selling and administrative costs, and income tax expense are paid in the quarter incurred.
c. Accounts payable at December 31, 2018 are paid in the first quarter of 2019. Requirements
1. Prepare Bradley Company’s budgeted income statement for the first quarter of 2019.
2. Prepare Bradley Company’s budgeted balance sheet as of March 31, 2019
List the disadvantages of decentralization.
XTreme Sports Company makes snowboards, downhill skis, cross-country skis, skateboards, surfboards, and inline skates. The company has found it beneficial to split operations into two divisions based on the climate required for the sport: Snow Sports and Non-snow Sports. The following divisional information is available for the past year:
Net Sales Revenue | Operating Income | Average Total Assets | ROI | |
Snow Sports | \(5,500,000 | \)990,000 | $4,100,000 | 24.1% |
Non-snow Sports | 8,500,000 | 1,530,000 | 6,100,000 | 25.1% |
XTreme’s management has specified a 13% target rate of return. Calculate each division’s profit margin ratio.
Interpret your results.
The Harris Company is decentralized, and divisions are considered investment centers. Harris has one division that manufactures oak dining room chairs with upholstered seat cushions. The Chair Division cuts, assembles, and finishes the oak chairs and then purchases and attaches the seat cushions. The Chair Division currently purchases the cushions for \(22 from an outside vendor. The Cushion Division manufactures upholstered seat cushions that are sold to customers outside the company. The Chair Division currently sells 800 chairs per quarter, and the Cushion Division is operating at capacity, which is 800 cushions per quarter. The two divisions report the following information:
Chair Division Cushion Division
Sales Price per Chair \) 85 Sales Price per Cushion \( 32
Variable Cost (other than cushion) 42 Variable Cost per Cushion 13
Variable Cost (cushion) 22
Contribution Margin per Chair \) 21 Contribution Margin per Cushion $ 19
Requirements
1. Determine the total contribution margin for Harris Company for the quarter.
2. Assume the Chair Division purchases the 800 cushions needed from the Cushion Division at its current sales price. What is the total contribution margin for each division and the company?
3. Assume the Chair Division purchases the 800 cushions needed from the Cushion Division at its current variable cost. What is the total contribution margin for each division and the company?
4. Review your answers for Requirements 1, 2, and 3. What is the best option for Harris Company?
5. Assume the Cushion Division has capacity of 1,600 cushions per quarter and can continue to supply its outside customers with 800 cushions per quarter and also supply the Chair Division with 800 cushions per quarter. What transfer price should Harris Company set? Explain your reasoning. Using the transfer price you determined, calculate the total contribution margin for the quarter.
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’s target rate of return is 16%.
Calculate Piedmont Computer Company’s profit margin ratio, asset turnover ratio, ROI, and RI for 2020. Comment on the results.
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