Transfer Pricing -

Question 1

The following information applies to the budgeted operations of the Goodman division of the Telling Company.

Sales revenue (50,000 units at 8)	400,000
Variable cost (50,000 units at 6)	-300,000
Contribution	100,000
Fixed cost	-70,000
Divisional profit for the period	30,000
Divisional investment	150,000

The minimum desired return on investment is the cost of capital of15% a year.

Required:

1. Calculate and comment on the divisional expected ROI (return on investment) and RI (residual income)
2. The division has the opportunity to sell an additional 10,000 units at 7.50. Variable cost per unit would be the same as budgeted, but fixed costs would increase by 5,000. Additional investment of 20,000 would be required.

If the manager accepted this opportunity, by how much and in what direction would the residual income change?

1. Discuss two performance appraisal measures that might be used if investment centres are introduced in Telling Company Ltd.