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Cassie's Computer Parts has two decentralized divisions, Hardwareand Pre-Fab. Pre-Fab has always purchased certain units fromHardware at $230 per unit. Because Hardware plans to raise theprice to $260 per unit, Pre-Fab desires to purchase these unitsfrom outside suppliers for $230 per unit. Hardware's costs follow:variable costs per unit, $200; annual fixed costs, $30,000. Annualproduction of these units for Pre-Fab is 1,500 units.
If Pre-Fab buys from an outside supplier, the facilities Hardwareuses to manufacture these units would remain idle. What would bethe result if Cassie's Computer Parts management enforces atransfer price of $260 per unit between Hardware and Pre-Fab?

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Jean Keeling
Jean KeelingLv2
28 Sep 2019

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I need all the awncers to thease questions some timesyou onley give me te first three.Multiple Choice

Select the best answer to each question. Space is provided forcomputations after the quantitative questions.

____ 1. (CMA adapted) Which of the following isdecentralization least likely to accomplish?

a. Provide a pool of management talent.

b. Shorten decision time.

c. Heighten goal congruence.

d. Increase motivation of subunit managers.

____ 2. (CPA) Brent Co. has intracompany servicetransfers from Division Core, a cost center, to Division Pro, aprofit center. Under stable economic conditions, which of thefollowing transfer prices is likely to be most conducive toevaluating whether both divisions have met theirresponsibilities?

a. Actual cost

b. Standard variable cost

c. Actual cost plus a markup

d. Negotiated price

____ 3. Designing the transfer-pricing system ismost difficult in organizations that are:

a. highly decentralized with many interdependenciesamong subunits.

b. highly centralized with many interdependenciesamong subunits.

c. highly decentralized with few interdependenciesamong subunits.

d. highly centralized with few interdependenciesamong subunits.

___ 4. (CMA) Parkside Inc. has several divisionsthat operate as decentralized profit centers. Parkside’sEntertainment Division manufactures video arcade equipment usingthe products of two of Parkside’s other divisions. The PlasticsDivision manufactures plastic components; one type is madeexclusively for the Entertainment Division, while other lesscomplex components are sold to external markets. The products ofthe Video Cards Division are sold in a competitive market, but onevideo card model is also used by the Entertainment Division. Theactual manufacturing cost per unit of the Entertainment Division isas follows:

Plastics Components

Video Cards

Direct materials used

$1.25

$2.40

Direct manuf. labor

2.35

3.00

Variable overhead

1.00

1.50

Fixed overhead

.40

2.25

Total cost per unit

$5.00

$9.15

The Plastics Division sells its commercial products at full costplus a 25% markup based on cost and believes the proprietaryplastic component made for the Entertainment Division would sellfor $6.25 per unit on the open market. The market price of thevideo card used by the Entertainment Division is $10.98 perunit.

Assuming the Video Cards Division has no unused capacity, atransfer price to the Entertainment Division of $9.15 per unitwill:

a. allow evaluation of both divisions on acompetitive basis.

b. satisfy the Video Cards Division’s profit desireby allowing recovery of opportunity costs.

c. not motivate the Entertainment Division and willcause mediocre performance.

d. provide no incentive for the Video Cards Divisionto control or reduce costs.

e. encourage the Entertainment Division to purchasevideo cards from an external source.

____ 5. Use the information in question 4 but assumethe Entertainment Division is able to purchase a large quantity ofvideo cards from an external supplier at $8.70 per unit. The VideoCards Division, having unused capacity, agrees to lower thetransfer price to $8.70 per unit. This action will:

a. optimize the profit goals of the EntertainmentDivision while subverting the profit goals of Parkside Inc.

b. provide no profit incentive for the Video CardsDivision.

c. subvert the profit goals of the Video CardsDivision while optimizing the profit goals of the EntertainmentDivision.

d. cause mediocre performance in the Video CardsDivision because opportunity costs increase.

e. optimize the overall profit goals of ParksideInc.

____ 6. Use the information in question 4 and assumethe Plastics Division has unused capacity and negotiates a transferprice of $5.60 per plastic component with the EntertainmentDivision. This price will:

a. cause the Plastics Division to reduce the numberof commercial plastic components it manufactures.

b. motivate both divisions.

c. encourage the Entertainment Division to seek anexternal supplier for plastic components.

d. not motivate the Plastics Division, causingmediocre performance.

e. satisfy the Plastics Division’s profit desire byallowing recovery of opportunity costs.

____ 7. (CPA adapted) Mar Company has twodecentralized divisions, X and Y. Division X has been purchasingcertain component parts from Division Y at $75 per unit. BecauseDivision Y plans to raise the price to $100 per unit, Division Xdesires to purchase these parts from external suppliers for $75 perunit. The following information is available:

Y’s variable cost per unit

$70

Y’s annual fixed costs

$15,000

Y’s annual production of these parts for X

1,000 units

If Division X buys from an external supplier, the facilitiesDivision Y uses to manufacture these parts will be idle. AssumingDivision Y’s fixed costs cannot be avoided, what is the result ifMar requires Division X to buy from Division Y at a transfer priceof $100 per unit?

a. It is suboptimal for the company as a wholebecause X should buy from external suppliers at $75 per unit.

b. It is more profitable for the company as a wholethan allowing X to buy from external suppliers at $75 per unit.

c. It provides higher overall company operatingincome than a transfer price of $75 per unit.

d. It provides lower overall company operatingincome than a transfer price of $75 per unit.

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