1 answer

Answer to problem 22-19 Book Horngrens-Cost Acciunting A managerial Emphasis - 16 Edition HEwgers u uie...

Question:

answer to problem 22-19 Book Horngrens-Cost Acciunting A managerial Emphasis - 16 Edition
HEwgers u uie argar company 22-19 Transfer-pricing methods, goal congruence. Calgary Lumber has a raw lumber division and a f
23-22 Performance Ald, Inc. has two divisions: Test Preparation and Language Arts. Results (in millions) for the past three y
HEwgers u uie argar company 22-19 Transfer-pricing methods, goal congruence. Calgary Lumber has a raw lumber division and a fin- ishad lumber division. The variable costs are as follows Raw lumber division: $125 per 100 board-feet of raw lumber Finished lumber division: $145 per 100 board-feet of finished lumber Assume that there is no board-feet loss in processing raw lumber into finished lumber Raw lumber can be sold at $175 per 100 board-feat Finished lumber can be sold at $345 per 100 board-feet 1 Should Calgary Lumber process raw lumber into its finished form? Show your calculations 2 Assume that internal transfers are made at 130% of variable cost Will each division maximize its divi- sion operating-income contribution by adopting the action that is in the best interest of Calgary Lumber as a wholo? Explain 3 Assume that internal transfors are made at market prices. Will each division maximize its division oparating-income contribution by adopting the action that is in the best interest of Calgary Lumber as a whole? Explain ad
23-22 Performance Ald, Inc. has two divisions: Test Preparation and Language Arts. Results (in millions) for the past three years are partially displayed he Home Insert Page Layout Formulas Data Review View A D G C Operating Operating Operating Income Total Income Revenues Operating Operating Total Income Operating Revenues Total Assets Revenues Assets Assets 1 Test Preparation Division 2015 2 3 $630 $ 7,500 $1,500 ? 7 11% 44.0% 990 1,110 4 2016 12% 5.0 ? 5 2017 Language Arts Division 2015 6 ? $ 2,600 3,000 7 $ 650 $1,625 22.5% 2016 2017 1,875 2,500 8 2.0 25.0 % Performance Aid, Inc. 2015 10 $1,280 $10,100 $3,125 7 11 12 2016 ? 13 2017 ? Required: 1. Complete the table by filling in the blanks. 2. Use the DuPont method of profitability analysis to explain changes in the operating-income-to-total-assets ratios over the 2015-2017 perlod for Aid as a whole. Comment on the results.

Answers

1) Alt. 1: Selling as raw lumber for $175 @100 board feet

Alt. 2: Selling as finished lumber for $345 @100 board feet

Alternative 1:

Revenue

175

VC

125

CM

$50 per 100 board feet

Alternative 2:

Revenue

345

VC:

Raw lumber

125

Finished lumber

145

CM

$75 per 100 board feet

Calgary Lumber will maximize its CM with processing raw lumber into finished lumber i.e. Alternative 2

2)

Raw Lumber

Finished Lumber

Raw Lumber Division

   Division revenues

175

162.5

   Division variable costs

125

125

   Division operating income

50

37.5

Finished Lumber Division

Division revenues

345

Transferred-in costs

162.5

Division variable costs

145

Division operating income

37.5

From above calculations we can conclude that the Raw Lumber Division maximizes reported division operating income with the selling raw lumber, although it is not the action preferred by the firm as a whole. The Finished Lumber Division maximizes operating income of division with the processing raw lumber further, which coincides with the action preferred by the firm as a whole

3)

Raw Lumber

Finished Lumber

Raw Lumber Division

   Division revenues

175

175

   Division variable costs

125

125

   Division operating income

50

50

Finished Lumber Division

Division revenues

0

345

Transferred-in costs

175

Division variable costs

145

Division operating income

0

25

Because the Raw Lumber Division would be indifferent among selling the lumber in raw form or finished form, thus the company will be willing to have the raw lumber processed further, as this is the action preferred as a whole by the company.

The calculations reveal that the Finished Lumber Division would maximize division operating income with further processing of raw lumber and it is also preferred by the company as a whole. Therefore, transferring it at market price will lead in division actions which are also in the company's best interest as a whole

.

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