QUESTION 1

Transfer Pricing

Kitchenade Corporation's Gauge Division manufactures and sells product no. 24, which is used in refrigeration systems. Per-unit variable manufacturing and selling costs amount to $23 and $7, respectively. The Division can sell this item to external domestic customers for $40 or, alternatively, transfer the product to the company's Refrigeration Division. Refrigeration is currently purchasing a similar unit from Taiwan for $36. Assume use of the general transfer-pricing rule.

Required:

1. What is the most that the Refrigeration Division would be willing to pay the Gauge Division for one unit?

2. If Gauge had excess capacity, what transfer price would the Division's management set?

3. If Gauge had no excess capacity, what transfer price would the Division's management set?

4. Repeat part "C," assuming that Gauge was able to reduce the variable cost of internal transfers by $5 per unit.

QUESTION 2

Transfer Pricing

Keepit Corporation has two divisions: Ottawa and Cornwall. Ottawa currently sells a condenser to manufacturers of cooling systems for $520 per unit. Variable costs amount to $380, and demand for this product currently exceeds the division's ability to supply the marketplace.

Keepit is considering another use for the condenser, namely, integration into an enhanced refrigeration system that would be made by Cornwall. Related information about the enhanced system follows.

Selling price of refrigeration system: $1,285

Additional variable manufacturing costs required: $820

Transfer price of condenser: $490

Top management is anxious to introduce the enhanced system; however, unless the transfer is made, an introduction will not be possible because of the difficulty of obtaining condensers in the quality and quantity desired.The company uses responsibility accounting and ROI when measuring divisional performance, and awards bonuses to divisional management.

Required:

1. How would Ottawa's divisional manager likely react to the decision to transfer condensers to Cornwall? Show computations to support your answer.

2. How would Cornwall's divisional management likely react to the $490 transfer price? Show computations to support your answer.

3. From a contribution margin perspective, does Keepit benefit more if it sells the condensers externally or transfers the condensers to Cornwall? By how much?

QUESTION 3

Compute the Return on Investment (ROl) and Residual Income

The following data pertain to the Glengarry Division of Brown Company:

Divisional contribution margin	$ 700,000
Profit margin controllable by the divisional manager	320,000
Profit margin traceable to the division	294,400
Average asset investment	1,280,000

The company uses responsibility accounting concepts when evaluating performance, and Glengarry's division manager is contemplating the following three investments. He can invest up to $400,000.

	No. 1	No. 2	No. 3
Cost	$250,000	$300,000	$400,000
Expected income	50,000	54,000	96,000

Required:

1. Calculate the ROIs of the three investments.

2. Which of the three investments would be selected if the manager's focus is on Glengarry's divisional performance?Why?

3. If Brown has an imputed interest charge of 22%, compute the residual income of investment no. 3. Is this investment attractive from Glengarry's perspective? From Brown's perspective? Why?

Hello, I need help with this, please. Show solutions if you can. Thank you!