Question 9.1

(Total: 20 marks)

With respect to each of the following activities, characteristics, and applications, indicate whether they are primarily identified as being found in a centralized organization, a decentralized organization, or both types of organizations.

1. both
2. centralization
3. decentralization

Required:

1. Freedom for managers at lower organizational levels to make decisions.
2. Gathering information may be very expensive.
3. Greater responsiveness to user needs.
4. Have few interdependencies among divisions.
5. Maximum constraints and minimum freedom for managers at lowest levels.
6. Maximization of benefits over costs.
7. Minimization of duplicate functions.
8. Minimum of sub optimal decision making.
9. Multiple responsibility centers with various reporting units.
10. Profit centers.

Question 9.2

(Total: 20 marks)

Arizona Ltd. has two divisions: 1) The Machining Division prepares the raw materials into component parts, and 2) Assembly Division assembles the components into finished product. No inventories exist in either division at the beginning of the year. During the year the Machining Division prepared 80,000 square meters of sheet metal at a cost of $480,000. All production was transferred to the Assembly Division where the metal was converted into 80,000 units of finished product at an additional cost of $5 per unit. The 80,000 units were sold for $2,000,000.

Required:

1. Determine the operating income for each division if the transfer price from Machining to Assembly is at cost.
2. Determine the operating income for each division if the transfer price is $5/square meter.
3. Since the Machining Division has all of its sales internally to the Assembly Division, does the manager care what price is selected? Why? Should the Machining Division be a cost center or a profit center under the circumstances?

Question 9.3

(Total: 18 marks)

Golden Wind Office Furniture Company makes all types of office desks. The Home Office Desk Division is currently producing 10,000 desks per year with a capacity of 15,000. The variable costs assigned to each desk are $300 and annual fixed costs of the division are $900,000. The home office desks sell for $400.

The Executive Division wants to buy 5,000 desks at $280 for its custom office design business. The Home Office Desk manager refuses the order because the price is below variable cost. The Executive manager argues that the order should be accepted because it will lower the fixed cost per desk from $90 to $60 and will take the division to its capacity, thereby causing operations to be at their most efficient level.

Required:

1. Should the order from Executive Division be accepted by Home Office Desk? Explain why or why not?
2. From the perspective of the Home Office Desk Division and the company, should the order be accepted if the Executive Division plans on selling the desks in the outside market for $420 after incurring additional costs of $100 per desk?
3. What action should the company president take?

Question 9.4

(Total: 14 marks)

East Meets West Ltd. is a Canadian company with a fully owned subsidiary in the UK. The UK subsidiary produces a component for off shore gas compressors that are sold in Canada. The components have a variable cost of 1,700 Euros and a full cost of 2,100 Euros. The 2,000 components required can be purchased in Canada for $3,500. Assume the minimum transfer price allowed by the Canadian tax authorities is the variable cost and the maximum is the market value. Also assume operating income in each country is equal to taxable income. One Euro is worth $1.45 Canadian. The marginal tax rate in Canada is 25% and in Ireland 12.5%.

Required:

1. What transfer price should be set for East Meets West Ltd. to minimize its total income taxes? Show your calculations.
3. If East Meets West Ltd. desires to minimize its total income taxes, calculate the amount of tax liability in each country in Canadian dollars.

Question 9.5

(Total: 28 marks)

The CFO Ltd. manufactures superior motherboards that are used in a variety of computers. The Motherboard Division (M Division) sells its motherboards both internally and externally. It is operating at 80% of its 250,000 unit capacity and internal sales account for approximately 20% of its current sales volume. Internally the motherboards are transferred into the Computer Division (C Division) at a transfer price of $11,250 each. Variable production costs are the same for internal and external sales.

The income statement for the M Division is presented below:

Sales	$2,850,000,000
Variable costs	$900,000,000
Contribution Margin	$1,950,000,000
Fixed Costs	$1,360,000,000
Operating Income	$590,000,000

The C Division uses one component in the production of its final product that sells for $75,000/unit. Other variable costs in the C Division are 40% of sales and fixed costs per unit at its current capacity of 40,000 units are $17,250.

The Computer Division is operating at its full capacity of 40,000 units and is evaluating whether it should invest to increase capacity. The investment would cost $900,000,000 and would have a useful life of 3 years. The equipment could be sold for $800,000 at the end of its useful life. For tax purposes it would be sold on January 1 of year 4. The machine would be used to manufacture a variation of its current product with the same transfer price. This new product would sell for $68,000 per unit. The variable cost ratio will be 45% of the selling price. The additional capacity of the new machine would be 14,000 units. It would qualify for a 30% CCA rate and the company would continue to have assets in the pool.

Required:

1. Using net present value (NPV) analysis, would the C Division manager want to invest in the new equipment if the required rate of return is 12% and the tax rate is 25%?
3. If the investment is evaluated from a corporate perspective using NPV analysis and the 12% discount rate, does the decision change? Explain.