1. Electronics is a decentralized organization that evaluates divisional management based on measures of divisional contribution margin. Home Audio (Home) Division and Mobile Electronics (Mobile) Division both sell electronic equipment, primarily for video and audio entertainment. Home focuses on home and personal equipment; Mobile focuses on components for automobile and other, nonresidential equipment. Home produces an audio player that it can sell to the outside market for $72 per unit. The outside market can absorb up to 90,000 units per year. These units require 3 direct labor-hours each.
If Home modifies the units with an additional hour of labor time, it can sell them to Mobile for $81 per unit. Mobile will accept up to 77,500 of these units per year.
If Mobile does not obtain 77,500 units from Home, it purchases them for $84 each from the outside. Mobile incurs $36 of additional labor and other out-of-pocket costs to convert the player into one that fits in the dashboard and integrates with the automobile's audio system. The units can be sold to the outside market for $201 each.
Home estimates that its total costs are $1,070,000 for fixed costs, $14 per direct labor-hour, and $6 per audio player for materials and other variable costs besides direct labor. Its capacity is limited to 375,000 direct labor-hours per year.
Required:
Determine the following:
a. Total contribution margin to Home if it sells 90,000 units outside.
b. Total contribution margin to Home if it sells 77,500 units to Mobil (c) & (d). The costs to be considered in determining the optimal company policy for sales by Home.
The annual contributions and costs for Home and Mobile under the optimal policy.
2. Atascadero Industries operates a Manufacturing Division and a Marketing Division. Both divisions are evaluated as profit centers.
Marketing buys products from Manufacturing and packages them for sale. Manufacturing sells many components to third parties in addition to Marketing. Selected data from the two operations follow:
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|
Manufacturing
|
Marketing
|
|
Capacity (units)
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|
1,160,000
|
|
|
516,000
|
|
|
Sales pricea
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$
|
2,200
|
|
$
|
5,350
|
|
|
Variable costsb
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$
|
720
|
|
$
|
2,000
|
|
|
Fixed costs
|
$
|
11,600,000
|
|
$
|
7,360,000
|
|
| |
a For Manufacturing, this is the price to third parties.
b For Marketing, this does not include the transfer price paid to Manufacturing.
Required:
a. Current production levels in Manufacturing are 616,000 units. Marketing requests an additional 116,000 units to produce a special order. What transfer price would you recommend?
b. Suppose Manufacturing is operating at full capacity. What transfer price would you recommend?
3. Best Practices, Inc., is a management consulting firm. Its Corporate Division advises private firms on the adoption and use of cost management systems. Government Division consultswith state and local governments. Government Division has a client that is interested in implementing an activity-based costing system in its public works department. The division's head approached the head of Corporate Division about using one of its associates. Corporate Division charges clients $670 per hour for associate services, the same rate other consulting companies charge. The Government Division head complained that it could hire its own associate at an estimated variable cost of $270 per hour, which is what Corporate pays its associates.
Required:
a. What is the minimum transfer price that Corporate Division should obtain for its services, assuming that it is operating at capacity?
b. What is the maximum price that Government Division should pay?
4. Perth Corporation has two operating divisions, a casino and a hotel. The two divisions meet the requirements for segment disclosures. Before transactions between the two divisions are considered, revenues and costs are as follows:
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|
Casino
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Hotel
|
|
Revenues
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$
|
40,000,000
|
|
$
|
30,000,000
|
|
|
Costs
|
|
17,000,000
|
|
|
14,000,000
|
|
| |
The casino and the hotel have a joint marketing arrangement by which the hotel gives coupons redeemable at casino slot machines and the casino gives discount coupons good for stays at the hotel. The value of the coupons for the slot machines redeemed during the past year totaled $5,000,000. The discount coupons redeemed at the hotel totaled $2,000,000. As of the end of the year, all coupons for the current year expired.
Required:
What are the operating profits for each division considering the effects of the costs arising from the joint marketing agreement? (Enter your answers in thousands.)
5. Seattle Transit Ltd. operates a local mass transit system. The transit authority is a state governmental agency. It has an agreement with the state government to provide rides to senior citizens for 65 cents per trip. The government will reimburse Seattle Transit for the "cost" of each trip taken by a senior citizen.
The regular fare is $3.50 per trip. After analyzing its costs, Seattle Transit figured that, with its operating deficit, the full cost of each ride on the transit system is $5.50. Routes, capacity, and operating costs are unaffected by the number of senior citizens on any route.
Required:
a. Which price would Seattle Transit prefer?
b. Which price would the state government prefer?
c. If Seattle Transit provides an average of 165,000 trips for senior citizens in a given month, what is the monthly value of the difference between the prices in full capacity?