38. Altoona Corporation has two divisions, Hinges and Doors, which are both organized as profit centers; the Hinge Division produces and sells hinges to the Door Division and to outside customers. The Hinge Division has total costs of $40, $26 of which are variable. The Hinge Division is operating significantly below capacity and sells the hinges for $55.

The Door Division has received an offer from an outsider vendor to supply all the hinges it needs (20,000 hinges) at a cost of $50. The manager of the Door Division is considering the offer but wants to approach the Hinge Division first. What would be the profit impact to Altoona Corporation as a whole if the Door Division purchased the 20,000 hinges it needs from the outside vendor for $50?

No change in profit to Altoona.

$480,000 decrease in profits.

$100,000 increase in profits.

$100,000 decrease in profits.

39. Dockside Enterprises, Inc., operates two divisions: (1) a management division that owns and manages bulk carriers on the Great Lakes and (2) a repair division that operates a dry dock in Tampa, Florida. The repair division works on company ships, as well as other large-hull ships. The repair division has an estimated variable cost of $47 per labor-hour. The repair division has a backlog of work for outside ships. They charge $87 per hour for labor, which is standard for this type of work. The management division complained that it could hire its own repair workers for $57 per hour, including leasing an adequate work area.

If the repair division had idle capacity, what is the minimum transfer price that the repair division should obtain?

$47.

$57.

$40.

$87.

9. One division of the Marvin Educational Enterprises has depreciable assets costing $4,120,000. The cash flows from these assets for the past three years have been:

Year		Cash flows
1		$	1,380,000
2		$	1,448,000
3		$	1,632,000

The current (i.e., replacement) costs of these assets were expected to increase 25% each year. Marvin used the straight-line depreciation method; the estimated useful life is 10-years with no salvage value. For return on investment (ROI) calculations, Marvin uses end-of-year balances. What is the residual income for each year, assuming the cost of capital is 15% and Marvin uses historical costs and gross book values to compute residual income?

	Year 1			Year 2			Year 3
A.	$	350,000		$	418,000		$	602,000
B.	$	206,000		$	206,000		$	206,000
C.	$	345,000		$	362,000		$	408,000
D.	$	345,000		$	418,000		$	244,800

Option A

Option B

Option C

Option D