Question 5
A company makes power tools. The Motor Division makes a motor that Small Tools Division needs for a new product. The Motor division’s variable cost of manufacturing the component is $6 per unit. The component is also available on the open market at a price of $11 per unit. The Small Tool division needs 50,000 motors per year.
a) If the Motor Division is operating at 100% capacity, explain whether a transaction will take place between the two divisions.
b) If the Motor Division has adequate capacity, should it make the motor that the Small Tools Division requires? What will the expected transfer price (be sure to include a maximum and minimum price)?
c) What principle governs the transfer of pricing between the divisions?
Question 6
Identify each of the following responsibility centers as a cost center, a revenue center, a profit center, or an investment center:
a) The Bakery Department of a Publics supermarket reports income for the current year.
b) Pace Foods is a subsidiary of Campbell Soup Company.
c) The Personnel Department of State Farm Insurance Companies prepares its budget and subsequent performance report on the basis of its expected expenses for the year.
d) The Shopping Section Burpee.com reports both revenues and expenses.
e) Burpee.com’s investor relations Web site provides operating and financial information to investors and other interested parties.
f) The manager of a BP service station is evaluated based on the station’s revenues and expenses.
g) A charter airline company.
h) The manager of the Southwest sales territory is evaluated based on a comparison of current period sales against budgeted sales.
Answer will be sent by email as attachment.
