How does capacity affect transfer pricing decisions?
In case of operation at full capacity, the transfer price equals to market selling price, however in case of operation below capacity, than transfer price equals to variable cost per unit.
Transfer Price is defined as the transaction amount of one unit of goods when the transaction occurs between the different divisions of the same company, and the process is known as the transfer pricing.
If any division is operating at capacity, it means the company is selling all the goods without expanding the facility and adding more employees. In this case, the company has to make a choice about whom to sell the product. So, the transfer price should be a market-based transfer price.
If any division is operating below capacity, it means the division should be willing to sell the product at an amount equal to or higher than the variable cost of the product. It is a cost-based transfer price. In this situation, the manager can negotiate a transfer price that is satisfactory to both divisions.
Question: Using ROI and RI to evaluate investment centers
This problem continues the Piedmont Computer Company situation from Chapter 23. Piedmont Computer Company reported 2020 sales of $3,600,000 and operating income of $183,600. Average total assets during 2020 were $600,000. Piedmont Computer Company’s target rate of return is 16%.
Calculate Piedmont Computer Company’s profit margin ratio, asset turnover ratio, ROI, and RI for 2020. Comment on the results.
Financial performance is measured in many ways.
1. Explain the difference between lag and lead indicators.
2. The following is a list of financial measures. Indicate whether each is a lag or a lead indicator:
a. Income statement shows net income of $100,000
b. Listing of next week’s orders of $50,000
c. Trend showing that average hits on the redesigned Web site are increasing at 5% per week
d. Price sheet from vendor reflecting that cost per pound of sugar for the next month is $2
e. Contract signed last month with large retail store that guarantees a minimum shelf space for Grandpa’s Overloaded Chocolate Cookies for the next year
Match the responsibility center to the correct responsibility report.
14. Cost center
a. Includes flexible budget variances for revenues and costs.
15. Revenue center
b. Includes flexible budget variances for costs.
16. Profit center
c. Includes flexible budget variances and sales volume variances for revenues.
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