Responsibility Accounting and Transfer Pricing PDF

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2 . Ad v a n t a g e so f d e c e n t r a l i z a t i o ni n c l u d ea l l o f t h ef o l l o wi n ge x c e p t A. d i v i s i o n a l ma n a g e me n ti sa b l et or e a c t t oc h a n g i n gma r k e t c o n d i t i o n smo r er a p i d l yt h a nt o pma n a g e me n t B. d i v i s i o n a l ma n a g e me n ti sas o u r c eo f p e r s o n n e l f o rp r o mo t i o nt ot o pma n a g e me n t p o s i t i o n s C.d e c e n t r a l i z a t i o nc a nmo t i v a t ed i v i s i o n a l ma n a g e r s D.d e c e n t r a l i z a t i o np e r mi t sd i v i s i o n a l ma n a g e me n tt oc o n c e n t r a t eo nc o mp a n y wi d ep r o b l e msa n dl o n g r a n g e p l a n n i n g 1 6 .Go a l c o n g r u e n c ei smo s t l i k e l yt or e s u l t wh e n A. r e p o r t st oma n a g e r si n c l u d ea l l c o s t s B. ma n a g e r s ’ b e h a v i o ri sa ff e c t e db yt h ec r i t e r i au s e dt oj u d g et h e i rp e r f o r ma n c e C.p e r f o r ma n c ee v a l u a t i o nc r i t e r i ae n c o u r a g eb e h a v i o ri nt h ec o mp a n y ’ sb e s ti n t e r e s t sa swe l la si nt h e ma n a g e r ’ sb e s t i n t e r e s t s D.ama n a g e r k n o wst h ec r i t e r i au s e dt oj u d g eh i so rh e rp e r f o r ma n c e 1 9 .Ama n a g e me n td e c i s i o nma yb eb e n e fi c i a l f o rag i v e np r o fi tc e n t e r ,b u tn o tf o rt h ee n t i r ec o mp a n y .F r o mt h e o v e r a l l c o mp a n yv i e wp o i n t , t h i sd e c i s i o nwo u l dl e a dt o A.g o a l c o n g r u e n c e C.c e n t r a l i z a t i o n B. s u b o p t i mi z a t i o n D.ma x i mi z a t i o n 3 6 .Wh i c ho f t h ef o l l o wi n gi sc r i t i c a l l yi mp o r t a n t f o rar e s p o n s i b i l i t ya c c o u n t i n gs y s t e mt ob ee ff e c t i v e ? A. Ea c he mp l o y e es h o u l dr e c e i v eas e p a r a t ep e r f o r ma n c er e p o r t . B. Se r v i c ed e p a r t me n t c o s t ss h o u l db ea l l o c a t e dt ot h eo p e r a t i n gd e p a r t me n t st h a t u s et h es e r v i c e . C.Ea c hma n a g e rs h o u l dk n o wt h ec r i t e r i au s e df o re v a l u a t i n gh i so rh e rp e r f o r ma n c e . D.T h ed e t a i l so nt h ep e r f o r ma n c er e p o r t sf o ri n d i v i d u a l ma n a g e r ss h o u l da d du pt ot h et o t a l so nt h er e p o r tt o t h e i rs u p e r v i s o r . 2 6 .Wh i c ho f t h ef o l l o wi n gr e s p o n s i b i l i t yc e n t e r sh a v ema n a g e r swh oa r eh e l da c c o u n t a b l ef o rc o s t s ? A.Co s t c e n t e r sa n dI n v e s t me n t c e n t e r s B. Re v e n u ec e n t e r sa n dPr o fi t c e n t e r s C.Re v e n u ec e n t e r sa n dI n v e s t me n t c e n t e r s D.Co s t c e n t e r sa n dPr o fi t c e n t e r s 4 1 .I n t e r n a l r e p o r t sp r e p a r e du n d e rt h er e s p o n s i b i l i t ya c c o u n t i n ga p p r o a c hs h o u l db el i mi t e dt owh i c ho f t h ef o l l o wi n g c o s t s ? A. On l yv a r i a b l ec o s t so f p r o d u c t i o n B. On l yc o n v e r s i o nc o s t s C.On l yc o n t r o l l a b l ec o s t s D.On l yc o s t sp r o p e r l ya l l o c a b l et ot h ec o s t c e n t e ru n d e rg e n e r a l l ya c c e p t e da c c o u n t i n gp r i n c i p l e s 6 5 .I no r d e rt op r o mo t eg o a l c o n g r u e n c eama n a g e r o f a ni n v e s t me n t c e n t e ri sb e s t e v a l u a t e du s i n g A. s t a n d a r dv a r i a b l ec o s t i n gi n c o mes t a t e me n t s B. r e t u r no ni n v e s t me n t C.b u d g e t sa n ds t a n d a r dc o s t s D.r e s i d u a l i n c o me 5 4 .Ot h e rf a c t o r sr e ma i n i n gu n c h a n g e d , t h er a t eo f r e t u r no ni n v e s t me n t ma yb ei mp r o v e db y A. i n c r e a s i n gi n v e s t me n t i na s s e t s . B. i n c r e a s i n ge x p e n s e s . C.r e d u c i n gs a l e s

D.d e c r e a s i n gi n v e s t me n t i na s s e t s . 6 7 .Ec o n o mi cv a l u ea d d e dwo u l dd e c r e a s ei f : A. o p e r a t i n gi n c o mei n c r e a s e s B. t h ed i v i s i o ni n v e s t si nap r o j e c t wh e r e i nt h ea f t e r t a xo p e r a t i n gi n c o mei smo r et h a nt h ec o s t o f c a p i t a l C.o p e r a t i n ge x p e n s e si n c r e a s e D.c o s t o f c a p i t a l d e c r e a s e s 4 . At r a n s f e rp r i c i n gs y s t e ms h o u l ds a t i s f ywh i c ho f t h ef o l l o wi n go b j e c t i v e s ? A. a c c u r a t ep e r f o r ma n c ee v a l u a t i o n C.g o a l c o n g r u e n c e D.a l l o f t h ea b o v e B. p r e s e r v a t i o no f d i v i s i o n a l a u t o n o my 1 3 .I f a ni n t e r me d i a t ema r k e t e x i s t s , t h eo p t i ma l t r a n s f e rp r i c ei st h e : A.o u t l a yc o s t f o rp r o d u c i n gt h eg o o d s . B. o p p o r t u n i t yc o s t o f n o t s e l l i n gt ot h eo u t s i d ema r k e t . C.ma r k e t p r i c e . D.v a r i a b l ec o s t sa s s o c i a t e dwi t hp r o d u c i n gt h ep r o d u c t . 1 6 .I f t h e r ei sn oe x c e s sc a p a c i t y , t h et r a n s f e rp r i c ei so f t e n A. ma r k e t p r i c e B. o p p o r t u n i t yc o s t p l u si n c r e me n t a l c o s t C.v a r i a b l ec o s t o rv a r i a b l ec o s t p l u sp r o fi t D.ao rb 2 8 .T h eb e s t t r a n s f e r p r i c ei su s u a l l y A. a c t u a l c o s t p l u sap e r c e n t a g ema r k u p B. ar e l i a b l ema r k e t p r i c e C.b u d g e t e df u l l c o s t p l u sap e r c e n t a g ema r k u p D.b u d g e t e dv a r i a b l ec o s t p l u sap e r c e n t a g ema r k u p 8 . Ab a l a n c e ds c o r e c a r da p p r o a c ht op e r f o r ma n c eme a s u r e me n t a . c a no n l yb eu s e di np r o fi t o ri n v e s t me n t c e n t e r s . b .b a l a n c e sfi n a n c i a l me a s u r e swi t hn o n fi n a n c i a l me a s u r e s . c . u s e so n l yq u a l i t a t i v ed a t at oe v a l u a t ep e r f o r ma n c e . d . u s e sb u d g e t e dd a t ar a t h e rt h a nh i s t o r i c a l d a t a .

14. In the balanced scorecard framework, a survey of employee satisfaction is a potential measure in which of the four perspectives? a. Financial. b. Customer. c. Internal business processes. d. Learning and growth. Se g me n tAg e n e r a t e ds a l e sr e v e n u e so fP4 0 0 , 0 0 0a n dv a r i a b l eo p e r a t i n ge x p e n s e so fP1 8 0 , 0 0 0 .I t sc o n t r o l l a b l e fi x e de x p e n s e swe r eP4 0 , 0 0 0 .I twa sa s s i g n e d2 0 %o fP2 0 0 , 0 0 0o ffi x e dc o s t sc o n t r o l l e db yo t h e r s .Th e c o mmo nfi x e dc o s t swe r eP2 5 , 0 0 0 . Wh a t wa sSe g me n t A' sc o n t r o l l a b l es e g me n t p r o fi t ma r g i n ? A.P2 2 0 , 0 0 0 C.P1 4 0 , 0 0 0 B. P1 8 0 , 0 0 0 D.P1 6 0 , 0 0 0

Ma r s hCo mp a n yt h a th a dc u r r e n to p e r a t i n ga s s e t so fo n emi l l i o na n dn e ti n c o meo fP2 0 0 , 0 0 0h a da no p p o r t u n i t yt o i n v e s ti nap r o j e c tt h a tr e q u i r e sa na d d i t i o n a li n v e s t me n to fP2 5 0 , 0 0 0a n di n c r e a s e dn e ti n c o meb yP4 0 , 0 0 0 . Af t e rt h ei n v e s t me n t , t h ec o mp a n y ' sROI wi l l b e A. 1 6 . 0 % C.1 9 . 2 % B. 1 8 . 0 % D.2 0 . 2 % Th ef o l l o wi n gd a t ar e l a t et ot h eMo t o rDi v i s i o no f Eu r o s u nCo mp a n y : Sa l e s P1 0 , 0 0 0 , 0 0 0 Va r i a b l ec o s t s 3 , 0 0 0 , 0 0 0 Di r e c t fi x e dc o s t s 5 , 0 0 0 , 0 0 0 I n v e s t e dc a p i t a l 8 , 0 0 0 , 0 0 0 Al l o c a t e da c t u a l i n t e r e s t c o s t s 8 0 0 , 0 0 0 Ca p i t a l c h a r g e 1 2 % Sa l e s Va r i a b l ec o s t s Di r e c t fi x e dc o s t s I n v e s t e dc a p i t a l Al l o c a t e da c t u a l i n t e r e s t c o s t s Ca p i t a l c h a r g e Th ed i v i s i o n a l r e t u r no ni n v e s t me n t i s : A.1 5p e r c e n t B. 2 5p e r c e n t

P1 0 , 0 0 0 , 0 0 0 3 , 0 0 0 , 0 0 0 5 , 0 0 0 , 0 0 0 8 , 0 0 0 , 0 0 0 8 0 0 , 0 0 0 1 2 % C.1 3p e r c e n t D.2 0p e r c e n t

Th ec u r r e n ti n c o mef o ras u b u n i ti sP3 6 , 0 0 0 .I t sc u r r e n ti n v e s t e dc a p i t a li sP2 0 0 , 0 0 0 .Th es u b u n i ti sc o n s i d e r i n g p u r c h a s i n gf o rP2 0 , 0 0 0e q u i p me n t t h a t wi l l i n c r e a s ea n n u a l i n c o meb ya ne s t i ma t e dP2 , 8 0 0 . Th efi r m' sc o s t o f c a p i t a l i s1 2 %. I f t h ee q u i p me n t i sp u r c h a s e d , t h er e s i d u a l i n c o meo f t h es u b u n i t wi l l A.i n c r e a s eb yP2 , 8 0 0 C.i n c r e a s eb yP4 0 0 B. i n c r e a s eb yP1 6 , 0 0 0 D.i n c r e a s eb y4 % Ma t i p i dDi v i s i o no f Ex p e n d i t u r e sCo mp a n ye x p e c t st h ef o l l o wi n gr e s u l t sf o r2 0 2 0 : Un i ts a l e s 7 0 , 0 0 0 Un i ts e l l i n gp r i c e P 1 0 Un i tv a r i a b l ec o s t P 4 T o t a l fi x e dc o s t s P3 0 0 , 0 0 0 T o t a l i n v e s t me n t P5 0 0 , 0 0 0 Th emi n i mu mr e q u i r e dROI i s1 5p e r c e n t ,a n dd i v i s i o n sa r ee v a l u a t e do nr e s i d u a l i n c o me .Af o r e i g nc u s t o me r h a sa p p r o a c h e dMa t i p i d ’ sma n a g e rwi t ha no ff e rt ob u y1 0 , 0 0 0u n i t sa t P7e a c h . I f Ma t i p i da c c e p t st h eo r d e r , i t wo u l dn o tl o s ea n yo ft h e7 0 , 0 0 0u n i t sa tt h er e g u l a rp r i c e .Ac c e p t i n gt h eo r d e rwo u l di n c r e a s efi x e dc o s t sb y P1 0 , 0 0 0a n di n v e s t me n t b yP4 0 , 0 0 0 . Wh a ti st h emi n i mu mp r i c et h a tMa t i p i dc o u l da c c e p tf o rt h eo r d e ra n ds t i l lma i n t a i ni t se x p e c t e dr e s i d u a l i n c o me ? C.P5 . 6 0 A.P5 . 0 0 B. P4 . 7 5 D.P9 . 0 0

Co n s i d e rt h ef o l l o wi n g :

I n v e s t me n t c e n t e r ’ sa f t e r t a xo p e r a t i n gp r o fi t I n v e s t me n t c e n t e r ’ st o t a l a s s e t s I n v e s t me n t c e n t e r ’ sc u r r e n tl i a b i l i t i e s We i g h t e d a v e r a g ec o s t o f c a p i t a l

Wh a t i st h ee c o n o mi cv a l u ea d d e d( EV A) ? A.P6 0 , 0 0 0 B. P3 , 2 0 0

P5 0 , 0 0 0 8 0 0 , 0 0 0 8 0 , 0 0 0 6 . 5 %

C.P6 , 0 0 0 D.P5 0 , 0 0 0

Us et h ef o l l o wi n gi n f o r ma t i o nt oa n s we rq u e s t i o n s2t h r u6 : Ca r l y l eCo mp a n yh a dt h ef o l l o wi n gi n f o r ma t i o np e r t a i n i n gt o2 0 2 0 : Pr o fi t P1 0 0 , 0 0 0 Sa l e s P1 , 0 0 0 , 0 0 0 As s e t T u r n o v e rr a t i o 2t i me s Pr o fi t Sa l e s As s e t T u r n o v e rr a t i o T h ed e s i r e dmi n i mu mr a t eo f r e t u r ni s1 5p e r c e n t .

P1 0 0 , 0 0 0 P1 , 0 0 0 , 0 0 0 2t i me s

Wh a t i st h eROI ? A. 1 0p e r c e n t B. 5p e r c e n t

C.2 0p e r c e n t D.1 5p e r c e n t

Wh a t i st h ea mo u n t o f a s s e t s ? A. P2 5 0 , 0 0 0 B. P5 0 0 , 0 0 0

C.P1 , 0 0 0 , 0 0 0 D.P2 , 0 0 0 , 0 0 0

T h ema n a g e ro f Ca r l y l ei sp a i dab o n u sb a s e do nROI . Wo u l dt h ema n a g e ri n v e s t i nap r o j e c t t h a t wi l l p a yar e t u r no n i n v e s t me n t o f 1 8p e r c e n t ? A. Y e s , b e c a u s et h ep r o j e c t ' sROI e x c e e d st h ed e s i r e dmi n i mu mr a t eo f r e t u r n . B. Y e s , b e c a u s et h ep r o j e c t ' sROI i sg r e a t e rt h a nt h ec o mp a n y ' sc u r r e n t ROI . C.Y e s , b e c a u s et h ep r o j e c t ' sROI i se q u a l t h a nt h ec o mp a n y ' sc u r r e n t ROI . D.No , b e c a u s et h ep r o j e c t ' sROI i sl e s st h a nt h ec o mp a n y ' sc u r r e n t ROI . Wh a t i sCa r l y l e ' sr e s i d u a l i n c o me ? A. P 2 5 , 0 0 0 B. P(5 0 , 0 0 0 )

C.P( 2 0 0 , 0 0 0 ) D.P1 5 0 , 0 0 0

Co mp a n yYi sh i g h l yd e c e n t r a l i z e d .Di v i s i o nX,wh i c hi so p e r a t i n ga tc a p a c i t y ,p r o d u c e sac o mp o n e n tt h a ti t c u r r e n t l ys e l l si nap e r f e c t l yc o mp e t i t i v ema r k e tf o rP1 3p e ru n i t .Att h ec u r r e n tl e v e l o fp r o d u c t i o n ,t h efi x e d c o s to fp r o d u c i n gt h i sc o mp o n e n ti sP4p e ru n i ta n dt h ev a r i a b l ec o s ti sP7p e ru n i t .Di v i s i o nZwo u l dl i k et o p u r c h a s et h i sc o mp o n e n t f r o mDi v i s i o nX.Wh a t wo u l db et h ep r i c et h a t Di v i s i o nXs h o u l dc h a r g eDi v i s i o nZ? A.P 7 C.P1 1 B. P1 3 D.P 9

Be a r i n gDi v i s i o no f Ph a n t o mCo r p . s e l l s8 0 , 0 0 0u n i t so f Pa r t Xt ot h eo u t s i d ema r k e t .Pa r t Xs e l l sf o rP1 0 . 0 0a n dh a s av a r i a b l ec o s to f P5 . 5 0a n dafi x e dc o s t p e ru n i t o f P2 . 5 0 .Be a r i n gh a sac a p a c i t yt op r o d u c e1 0 0 , 0 0 0u n i t sp e r p e r i o d .Mo t o rDi v i s i o nc u r r e n t l yp u r c h a s e s1 0 , 0 0 0u n i t so fPa r tXf r o m Be a r i n gf o rP1 0 . 0 0 .Mo t o rh a sb e e n a p p r o a c h e db ya no u t s i d es u p p l i e rwi l l i n gt os u p p l yt h ep a r t sf o rP9 . 0 0 .Wh a t i st h ee ff e c t o nXYZ’ so v e r a l l p r o fi t i f Be a r i n gr e f u s e st h eo u t s i d ep r i c ea n dMo t o rd e c i d e st ob u yo u t s i d e ? A. n oc h a n g e B. P2 0 , 0 0 0d e c r e a s ei nPh a n t o mp r o fi t s C.P3 5 , 0 0 0d e c r e a s ei nPh a n t o mp r o fi t s D.P1 0 , 0 0 0i n c r e a s ei nPh a n t o mp r o fi t s Ch i p sDi v i s i o nma n u f a c t u r e r se l e c t r o n i cc i r c u i tb o a r d s .Th eb o a r d sc a nb es o l de i t h e rt oCo mp oDi v i s i o no ft h e s a mec o mp a n yo rt oo u t s i d ec u s t o me r s . L a s t y e a r , t h ef o l l o wi n ga c t i v i t yo c c u r r e di nd i v i s i o nA: Se l l i n gp r i c ep e rc i r c u i t b o a r d Pr o d u c t i o nc o s tp e rc i r c u i t b o a r d Nu mb e r so f c i r c u i t b o a r d s : Pr o d u c e dd u r i n gt h ey e a r So l dt oo u t s i d ec u s t o me r s So l dt oCo mp oDi v i s i o n Se l l i n gp r i c ep e rc i r c u i t b o a r d Pr o d u c t i o nc o s tp e rc i r c u i t b o a r d Nu mb e r so f c i r c u i t b o a r d s : Pr o d u c e dd u r i n gt h ey e a r So l dt oo u t s i d ec u s t o me r s So l dt oCo mp oDi v i s i o n

P1 2 5 9 0 2 0 , 0 0 0 1 6 , 0 0 0 4 , 0 0 0 P1 2 5 9 0 2 0 , 0 0 0 1 6 , 0 0 0 4 , 0 0 0

Sa l e st oCo mp oDi v i s i o nwe r ea tt h es a mep r i c ea ss a l e st oo u t s i d ec u s t o me r s .Th ec i r c u i tb o a r d sp u r c h a s e d b yCo mp oDi v i s i o nwe r eu s e di na ne l e c t r o n i ci n s t r u me n tma n u f a c t u r e db yt h a td i v i s i o n( o n eb o a r dp e r i n s t r u me n t ) .Co mp oDi v i s i o ni n c u r r e dP1 0 0i na d d i t i o n a l c o s tp e ri n s t r u me n ta n dt h e ns o l dt h ei n s t r u me n tf o r P3 0 0e a c h . As s u met h a tCh i p sDi v i s i o n ’ sma n u f a c t u r i n gc a p a c i t yi s2 0 , 0 0 0c i r c u i tb o a r d s .Ne x ty e a rCo mp oDi v i s i o n wa n t st op u r c h a s e5 , 0 0 0c i r c u i t sb o a r df r o mCh i p sDi v i s i o nr a t h e rt h a n4 , 0 0 0 .( Ci r c u i tb o a r d so ft h i st y p ea r e n o t a v a i l a b l ef r o mo u t s i d es o u r c e s . ) Sh o u l dCh i p sDi v i s i o ns e l l 1 , 0 0 0a d d i t i o n a l c i r c u i tb o a r d st oCo mp oDi v i s i o no rc o n t i n u et os e l lt h e mo u t s i d e c u s t o me r s ? A.No , b e c a u s et h eo v e r a l l p r o fi t wi l l d e c r e a s eb yP3 5 , 0 0 0 . B. Y e s , b e c a u s et h eo v e r a l l p r o fi t wi l l d e c r e a s eb yP3 5 , 0 0 0 . C.No , b e c a u s et h e r ei sn oc h a n g ei nt h eo v e r a l l p r o fi t . D. Y e s , b e c a u s et h eo v e r a l l p r o fi t wi l l i n c r e a s eb yP7 5 , 0 0 0 .

The High Division of Para Company produces a high quality kite. Unit production costs (based on capacity production of 100,000 units per year) follow: Direct materials

P 60

Direct labor

25

Overhead (20% variable)

15

Other information Sales price

120

Selling expenses (15% variable) Direct materials Direct labor Overhead (20% variable) Other information Sales price Selling expenses (15% variable)

20 P 60 25 15 120 20

The High Division is producing and selling at capacity. What is the minimum selling price that the division would consider as a “transfer price” to the Recreation Division on which no variable period costs would be incurred? (M) a. P120 b.

P 88 d.

c. P 91 P117

The Motor Division of Super Truck Co. uses 5,000 carburetors per month in its production of automotive engines. It presently buys all of the carburetors it needs from two outside suppliers at an average cost of $100. The Carburetor Division of Super Truck Co. manufactures the exact type of carburetor that the Motor Division requires. The Carburetor Division is presently operating at its capacity of 15,000 units per month and sells all of its output to a foreign car manufacturer at $106 per unit. Its cost structure (on 15,000 units) is:

V a r i a b l ep r o d u c t i o nc o s t s V a r i a b l es e l l i n gc o s t s Al l fi x e dc o s t s V a r i a b l ep r o d u c t i o nc o s t s V a r i a b l es e l l i n gc o s t s Al l fi x e dc o s t s

$ 7 0 1 0 1 0 $ 7 0 1 0 1 0

Assume that the Carburetor Division would not incur any variable selling costs on units that are transferred internally. What is the maximum of the transfer price range for a transfer between the two divisions? (M) b .

a .$ 1 0 6 $ 1 0 0 d .

c .$ 9 0 $ 7 0

Di v i s i o nAma k e sap a r t wi t ht h ef o l l o wi n gc h a r a c t e r i s t i c s : Pr o d u c t i o nc a p a c i t yi nu n i t s Se l l i n gp r i c et oo u t s i d ec u s t o me r s V a r i a b l ec o s t p e ru n i t T o t a l fi x e dc o s t s Pr o d u c t i o nc a p a c i t yi nu n i t s Se l l i n gp r i c et oo u t s i d ec u s t o me r s V a r i a b l ec o s t p e ru n i t T o t a l fi x e dc o s t s

1 5 , 0 0 0u n i t s $ 2 5 $ 1 8 $ 6 0 , 0 0 0 1 5 , 0 0 0u n i t s $ 2 5 $ 1 8 $ 6 0 , 0 0 0

Di v i s i o nB,a n o t h e rd i v i s i o no ft h es a mec o mp a n y ,wo u l dl i k et op u r c h a s e5 , 0 0 0u n i t so ft h ep a r te a c hp e r i o d f r o mDi v i s i o nA.Di v i s i o nBi sn o wp u r c h a s i n gt h e s ep a r t sf r o ma no u t s i d es u p p l i e ra t ap r i c eo f $ 2 4e a c h . Su p p o s et h a tDi v i s i o nAi so p e r a t i n ga tc a p a c i t ya n dc a ns e l l a l lo fi t so u t p u tt oo u t s i d ec u s t o me r sa ti t su s u a l s e l l i n gp r i c e . I f Di v i s i o nAs e l l st h ep a r t st oDi v i s i o nBa t $ 2 4p e ru n i t ( Di v i s i o nB’ so u t s i d ep r i c e ) , t h ec o mp a n ya s awh o l ewi l l b e : ( M) a .b e t t e ro ffb y$ 5 , 0 0 0e a c hp e r i o d . b . wo r s eo ffb y$ 1 5 , 0 0 0e a c hp e r i o d , c . wo r s eo ffb y$ 5 , 0 0 0e a c hp e r i o d . d . t h e r ewi l l b en oc h a n g ei nt h es t a t u so f t h ec o mp a n ya sawh o l e . The Motor Division of Super Truck Co. uses 5,000 carburetors per month in its production of automotive engines. It presently buys all of the carburetors it needs from two outside suppliers at an average cost of $100. The Carburetor Division of Super Truck Co. manufactures the exact type of carburetor that the Motor Division requires. The Carburetor Division is presently operating at its capacity of 15,000 units per month and sells all of its output to a foreign car manufacturer at $106 per unit. Its cost structure (on 15,000 units) is:

V a r i a b l ep r o d u c t i o nc o s t s V a r i a b l es e l l i n gc o s t s Al l fi x e dc o s t s V a r i a b l ep r o d u c t i o nc o s t s V a r i a b l es e l l i n gc o s t s Al l fi x e dc o s t s

$ 7 0 1 0 1 0 $ 7 0 1 0 1 0

Assume that the Carburetor Division would not incur any variable selling costs on units that are transferred internally. I f t h et wod i v i s i o n sa g r e et ot r a n s a c t wi t ho n ea n o t h e r , c o r p o r a t ep r o fi t swi l l ( M) a .d r o pb y$ 3 0 , 0 0 0p e rmo n t h . b .r i s eb y$ 2 0 , 0 0 0p e r mo n t h . c .r i s eb y$ 5 0 , 0 0 0p e r mo n t h . d . r i s eo rf a l l b ya na mo u n t t h a t d e p e n d so nt h el e v e l o f t h et r a n s f e rp r i c e .

Di v i s i o nXo f Ch a r t e rCo r p o r a t i o nma k e sa n ds e l l sas ...