Chapter 12 Segment Reporting and Decentralization True/False Questions
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AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy 129. Ulrich Company has a Castings Division which does casting work of various types. The company's Machine Products Division has asked the Castings Division to provide it with 20,000 special castings each year on a continuing basis. The special casting would require $12 per unit in variable production costs. In order to have time and space to produce the new casting, the Castings Division would have to cut back production of another casting - the RB4 which it presently is producing. The RB4 sells for $40 per unit, and requires $18 per unit in variable production costs. Boxing and shipping costs of the RB4 are $6 per unit. Boxing and shipping costs for the new special casting would be only $1 per unit, thereby saving the company $5 per unit in cost. The company is now producing and selling 100,000 units of the RB4 each year. Production and sales of this casting would drop by 25 percent if the new casting is produced. Some $240,000 in fixed production costs in the Castings Division are now being covered by the RB4 casting; 25 percent of these costs would have to be covered by the new casting if it is produced and sold to the Machine Products Division. Required: According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division? Show all computations. Ans: Transfer Price = Variable cost + Lost contribution margin per unit on outside sales
$400,000 ÷ 20,000 new castings = $20 per casting. Therefore, the lower limit on the transfer price should be: Transfer price = $13 + $20 = $33 per casting. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting Appendix: 12A LO: 4 Level: Hard 130. Ishtaki Corporation has a Parts Division that does work for other Divisions in the company as well as for outside customers. The company's Equipment Division has asked the Parts Division to provide it with 20,000 special parts each year. The special parts would require $16.00 per unit in variable production costs. The Equipment Division has a bid from an outside supplier for the special parts at $25.00 per unit. In order to have time and space to produce the special part, the Parts Division would have to cut back production of another part-the PW27 that it presently is producing. The PW27 sells for $38.00 per unit, and requires $29.00 per unit in variable production costs. Packaging and shipping costs of the PW27 are $2.00 per unit. Packaging and shipping costs for the new special part would be only $0.50 per unit. The Parts Division is now producing and selling 40,000 units of the PW27 each year. Production and sales of the PW27 would drop by 40% if the new special part is produced for the Equipment Division. Required: What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 20,000 special parts per year from the Parts Division to the Equipment Division? Is it in the best interests of Ishtaki Corporation for this transfer to take place? Explain. Ans:
From the perspective of the Parts Division, profits would increase as a result of the transfer if and only if: Transfer price > Variable cost + Opportunity cost The opportunity cost is the contribution margin on the lost sales, divided by the number of units transferred: Opportunity cost = [($38.00-$29.00-$2.00)×16,000*]/20,000 = $5.60 * 40%×40,000 = 16,000 Therefore, Transfer price > ($16.00+$0.50)+$5.60 = $22.10.
Combining the two requirements, we get the following range of transfer prices: $22.10 < Transfer price < $25.00. Yes, the transfer should take place. From the viewpoint of the entire company, the cost of transferring the units within the company is $22.10, but the cost of purchasing the special parts from the outside supplier is $25.00. Therefore, the company’s profits increase on average by $2.90 for each of the special parts that is transferred within the company, even though this would cut into production and sales of another product. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting Appendix: 12A LO: 4 Level: Hard 131. Division G has asked Division F of the same company to supply it with 5,000 units of part WD26 this year to use in one of its products. Division G has received a bid from an outside supplier for the parts at a price of $19.00 per unit. Division F has the capacity to produce 25,000 units of part WD26 per year. Division F expects to sell 21,000 units of part WD26 to outside customers this year at a price of $18.00 per unit. To fill the order from Division G, Division F would have to cut back its sales to outside customers. Division F produces part WD26 at a variable cost of $12.00 per unit. The cost of packing and shipping the parts for outside customers is $2.00 per unit. These packing and shipping costs would not have to be incurred on sales of the parts to Division G. Required: What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 5,000 parts this year from Division G to Division F? Is it in the best interests of the overall company for this transfer to take place? Explain. Ans:
From the perspective of Division G, profits would increase as a result of the transfer if and only if: Transfer price > Variable cost + Opportunity cost The opportunity cost is the contribution margin on the lost sales, divided by the number of units transferred: Opportunity cost = [($18.00 - $12.00 - $2.00)×1,000*]/5,000 = $0.80
Therefore, Transfer price > $12.00 + $0.80 = $12.80. From the viewpoint of Division F, the transfer price must be less than the cost of buying the units from the outside supplier. Therefore, Transfer price < $19.00. Combining the two requirements, we get the following range of transfer prices: $12.80 < Transfer price < $19.00. Yes, the transfer should take place. From the viewpoint of the entire company, the cost of transferring the units within the company is $12.80, but the cost of purchasing them from the outside supplier is $19.00. Therefore, the company’s profits increase on average by $6.20 for each of the special parts that is transferred within the company. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting Appendix: 12A LO: 4 Level: Medium 132. Cannata Corporation has two operating divisions-a North Division and a South Division. The company's Logistics Department services both divisions. The variable costs of the Logistics Department are budgeted at $32 per shipment. The Logistics Department's fixed costs are budgeted at $372,300 for the year. The fixed costs of the Logistics Department are determined based on peak-period demand.
At the end of the year, actual Logistics Department variable costs totaled $335,000 and fixed costs totaled $382,850. The North Division had a total of 4,700 shipments and the South Division had a total of 5,300 shipments for the year. Required:
Prepare a report showing how much of the Logistics Department's costs should be charged to each of the operating divisions at the end of the year. How much of the actual Logistics Department costs should not be charged to the operating divisions at the end of the year? Who should be held responsible for these uncharged costs? Ans:
The amount of cost that would be charged to each of the operating divisions at the end of the year would be as follows:
The uncharged costs are:
The spending variance represents the difference between the Logistics Department’s actual costs and what those costs should have been, given the actual level of activity. This difference is properly the responsibility of the Logistics Department and should not be charged to the operating divisions. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting; Measurement Appendix: 12B LO: 5 Level: Medium 133. Sauseda Corporation has two operating divisions-an Inland Division and a Coast Division. The company's Customer Service Department provides services to both divisions. The variable costs of the Customer Service Department are budgeted at $38 per order. The Customer Service Department's fixed costs are budgeted at $433,200 for the year. The fixed costs of the Customer Service Department are determined based on the peak period orders.
At the end of the year, actual Customer Service Department variable costs totaled $303,240 and fixed costs totaled $450,280. The Inland Division had a total of 2,430 orders and the Coast Division had a total of 5,170 orders for the year. Required:
Prepare a report showing how much of the Customer Service Department's costs should be charged to each of the operating divisions at the end of the year. How much of the actual Customer Service Department costs should not be charged to the operating divisions at the end of the year? Who should be held responsible for these uncharged costs? Ans:
The amount of cost that would be charged to each of the operating divisions at the end of the year would be as follows:
The uncharged costs are:
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