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QUESTION 1 Incorrect 0.00 points out of 5.00 Appropriate Transfer Prices: Opportunity Costs Plains Peanut Butter Company recently acquired a peanut-processing company that has a normal annual capacity of 4,000,000 pounds and that sold 2,700,000 pounds last year at a price of $2.00 per pound. The purpose of the acquisition is to furnish peanuts for the peanut butter plant, which needs 1,700,000 pounds of peanuts per year. It has been purchasing peanuts from suppliers at the market price. Production costs per pound of the peanut-processing company are as follows: Direct materials $0.50 Direct labor 0.23 Variable overhead 0.14 Fixed overhead at normal capacity 0.20 Total $1.07 Management is trying to decide what transfer price to use for sales from the newly acquired Peanut Division to the Peanut Butter Division. The manager of the Peanut Division argues that $2.00, the market price, is appropriate. The manager of the Peanut Butter Division argues that the cost price of $1.07 (or perhaps even less) should be used since xed overhead costs should be recomputed. Any output of the Peanut Division up to 2,700,000 pounds that is not sold to the Peanut Butter Division could be sold to regular customers at $2.00 per pound. (a) Compute the annual gross prot for the Peanut Division using a transfer price of $2.00. $ 0 (b) Compute the annual gross prot for the Peanut Division using a transfer price of $1.07. $ 0 (c) Which of the following is least likely to motivate the manager to take actions that will maximize corporate prots? Set the transfer price at 2.00 for all transfers. Set the transfer price at .87 for all transfers. Set the transfer price at .87 for the rst 1,300,000 lbs. transferred. Set the transfer price at .87 for the rst 1,200,000 lbs. transferred, and at 2.00 for the next 400,000 lbs. transferred. None of the above. Incorrect Marks for this submission: 0.00/5.00. Support QUESTION 2 Partially correct 0.71 points out of 5.00 Dual Transfer Pricing The Greek Company has two divisions, Beta and Gamma. Gamma Division produces a product at a variable cost of $6 per unit, and sells 140,000 units to outside customers at $10 per unit and 50,000 units to Beta Division at variable cost plus 40 percent. Under the dual transfer price system, Beta Division pays only the variable cost per unit. Gamma Division's xed costs are $240,000 per year. Beta Division sells its nished product to outside customers at $22 per unit. Beta has variable costs of $5 per unit, in addition to the costs from Gamma Division. Beta Division's annual xed costs are $150,000. There are no beginning or ending inventories. (a) Prepare the income statements for the two divisions and the company as a whole. Do not use negative signs with your answers. Greek Company Divisional Income Statement Beta Gamma Sales: External Company $ 0 $ 0 $ 0 Internal 0 0 0 Total 0 0 0 Variable costs: Incurred 0 0 0 Transferred in 0 0 0 Total 0 0 0 Contribution margin 0 0 0 Fixed costs 0 0 0 Net income $ 0 $ 0 $ 0 (b) When preparing divisional income statements for a two-division company where one division sales some product internally to the other division, the sum of the net incomes of the two divisions will always equal the total net income of the company. Partially correct Support Marks for this submission: 0.71/5.00. Support QUESTION 3 Incorrect 0.00 points out of 5.00 ROI and Residual Income:Basic Computations Watkins Associated Industries is a highly diversied company with three divisions: Trucking, Seafood, and Construction. Assume that the company uses return on investment and residual income as two of the evaluation tools for division managers. The company has a minimum desired rate of return on investment of 10 percent with a 30 percent tax rate. Selected operating data for three divisions of the company follow. Sales Trucking Seafood Construction Division Division Division $1,100,000 $720,000 $900,000 Operating assets 550,000 240,000 320,000 Net operating income 106,000 56,000 59,000 (a) Compute the return on investment for each division. (Round answers to three decimal places.) Trucking ROI = 0 Seafood ROI = 0 Construction ROI = 0 (b) Compute the residual income for each division. Residual Income Trucking Net operating income $ 0 Minimum level 0 Residual income $ 0 Seafood $ 0 Construction $ 0 $ 0 0 0 $ 0 (c) Which of the following is an appropriate statement about the performance of the three divisions: Construction has the superior performance. Residual income is always superior to ROI for assessing performance. Which division has the superior performance depends on which performance evaluation metric is used to assess performance. Trucking has the superior performance. Seafood has the superior performance. Incorrect Support Marks for this submission: 0.00/5.00. QUESTION 4 Not answered 0.00 points out of 5.00 Internal or External Acquisitions: No Opportunity Costs The Van Division of MotoCar Corporation has oered to purchase 180,000 wheels from the Wheel Division for $44 per wheel. At a normal volume of 500,000 wheels per year, production costs per wheel for the Wheel Division are as follows: Direct materials Direct labor 10 Variable overhead Fixed overhead Total $15 5 18 $48 The Wheel Division has been selling 500,000 wheels per year to outside buyers at $60 each. Capacity is 700,000 wheels per year. The Van Division has been buying wheels from outside suppliers at $57 per wheel. (a) Calculate the net benet (or cost) to the Wheel Division of accepting the oer from the Van Division. $ per wheel (b) Calculate the net benet (or cost) to Motocar Corp. if the Wheel Division accepts the oer from the Van Division. $ Support per wheel Marke ng Your business will rent a space inside the oce to imprint shirts with photos by a famous ar ste who has agreed to design these shirt picture. Your intended customers are kids and young adults. Your company is scheduled to open shop on January 1, 2017. Cost informa on: 1 The oce charges you $2,750 rent per month, which includes u li es, cleaning, and maintenance. 2 You will order white, co on T-shirts from a T-shirt wholesaler. Each T-shirt costs $2.00 to purchase (cost includes taxes, shipping, and handling). 3 You agreed to pay the ar st a $3,000 annual contract fee for twelve T-shirt designs. This same term is renewable for the next 3 years. Each T-shirt picture will only be used for one year. Therefore, in the second year, 12 new pictures will be designed for another $3,000 annual contract fee. 4 Equipment that will be required to be acquired at the start of business includes a computer, printer, and direct to garment printer. Total cost will be $25,000. The equipment is expected to last 5 years without salvage value. Straight-line method of deprecia on should be used. 5 Produc on cost per shirt is $5.20 (ink, etc.) 6 Bags for shirts cost $0.10 each. 7 Students are hired as part- me workers. On average it takes one labor hour to print 10 shirts. Each worker is paid $10 per hour. 8 Sales personnel are required 80 hours per week and are paid $10 per hour. 9 Business insurance is purchased at a cost of $2,000 per year. 10 Adver sing costs are expected to be $12,000 per year. Requirements: 1 Name your company (5 points) 2 What and how much are the variable costs? Present each item in cost per T-shirt basis (5 points). 3 What and how much are the xed costs? Present each item in total cost per year (5 points). 4 Write out the annual cost formula in Y = a + bX format (5 points). 5 Calculate the total amount of cash that will be needed at the start of the business in order to buy all necessary equipment and machines, purchase sucient materials and supplies for 1,000 shirts, and cover the rst three months of xed expenses. This amount will be your ini al investment in the business. Note that the equipment will be paid in full on the rst day of business as well as the rst annual payment to the ar st. Other expenses will be paid on a monthly basis (10 points). 6 Develop a price using a target price (what are similar T-shirts selling for) (5 points). 7 Develop a price using cost-based pricing and what you would like to see as a return on your business (i.e. 10%, 15%, 25%) (5 points). 8 Calculate contribu on margin per T-shirt and contribu on margin ra o based on the price you decided upon (either the price from item 6 or 7 above) (5 points). 9 Based on the price you decided upon, calculate how many T-shirts need to be sold in order to break-even. Calculate how much sales in dollars are needed to break-even (10 points). 10 Prepare a cost/volume/prot chart (10 points). 11 Based on the es mated sales level of 12,000 T-shirts for the rst year, prepare the company's forecasted func onal income statement for the year ended on 12/31/2017 (10 points). 12 If sales could increase by 10% (to 13,200 T-shirts), by how much in dollars would net opera ng income increase? By what percentage would net opera ng income increase? (5 points) 13 Prepare a contribu on format income statement assuming a sales increase of 10%. Compare your new net opera ng income with your answer in 11 (10 points). 14 Calculate how many T-shirts need to be sold in order to make a $25,000 target prot for the year (5 points). 15 Based on the assump on that the number of shirts calculated in item 14 are made and sold during the rst year of business, calculate the margin of safety and the opera ng leverage for the business. What do these gures tell you about how risky the business is? (10 points) 16 Prepare a cash budget for the company's rst year of opera ons based on the sales calculated in item 14. Assume all sales are cash sales and that all costs and expenses are paid in cash. The ini al cash balance is the amount calculated in #5. You decide to maintain a minimum cash balance of $10,000 at December 31, 2017 (15 points). 17 Calculate the rst year's es mated return on equity based on the sales calculated in item 14 (note that beginning equity will equal the ini al investment in the business calculated in #5). (5 points). 18 A er reviewing the budgeted income statement and the es mated return on equity for the rst year of opera ons, consider business strategies that will help to improve protability. Describe your strategies clearly and jus fy why you believe the strategies will work. Provide the variable cost per T-shirt, total xed cost, selling price per T-shirt, and contribu on margin per T-shirt under your new strategies. Provide the new cost formula. What is the new break even? (15 points). 19 A er your thorough analyses of costs, sales, and protability of your T-shirt business throughout this project, what is your overall impression of the future poten al of the business? Provide a short assessment (10 points)