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1 Appropriate Transfer Prices: Opportunity Costs Plains-(Answered)

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Plains Peanut Butter Company recently acquired a peanut-processing company that has a normal annual capacity of 4,000,000 pounds and that sold 2,800,000 pounds last year at a price of $2.00 per pound.


1 ? 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 2,800,000 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 1,600,000 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

 


 

0.24

 


 

Variable overhead

 


 

0.12

 


 

Fixed overhead at normal

 

capacity

 


 

0.22

 


 

Total

 


 


 

$1.08

 


 

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

 

$1.08 (or perhaps even less) should be used since fixed overhead costs should be recomputed. Any

 

output of the Peanut Division up to 2,800,000 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 profit for the Peanut Division using a transfer price of $2.00.

 

(b) Compute the annual gross profit for the Peanut Division using a transfer price of $1.08.

 


 

2- ROI and Residual Income: Basic Computations

 

Watkins Associated Industries is a highly diversified 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.

 


 


 

Trucking

 

Division

 


 

Seafood

 

Division

 


 

Construction Division

 


 

Sales

 


 

$ 1,200,000

 


 

$ 750,000

 


 

$ 900,000

 


 

Operating assets

 


 

600,000

 


 

250,000

 


 

350,000

 


 

Net operating

 


 

116,000

 


 

66,000

 


 

63,000

 


 


 


 

Trucking

 

Division

 


 

Seafood

 

Division

 


 

Construction Division

 


 

income

 


 

(a) Compute the return on investment for each division. (Round answers to three decimal places.)

 


 

(b) Compute the residual income for each division.

 


 

3 Income Statements Segmented by Territory

 

Script, Inc., has two product lines. The September income statements of each product line and the

 

company are as follows:

 


 

Pens and pencils are sold in two territories, Florida and Alabama, as follows

 


 

4 ROI and Residual Income:

 

Impact of a New Investment

 

The Mustang Division of Detroit Motors had an operating income of $800,000 and net assets of

 

$4,000,000. Detroit Motors has a target rate of return of 16 percent.

 

(a) Compute the return on investment. (Round your answer to three decimal places.)

 

Answer

 

0

 


 

0.00 points out of 1.00

 


 

(b) Compute the residual income.

 

$Answer

 

0

 


 

0.00 points out of 1.00

 


 

(c) The Mustang Division has an opportunity to increase operating income by $200,000 with an

 

$750,000 investment in assets.

 

1. Compute the Mustang Division's return on investment if the project is undertaken. (Round your

 

answer to three decimal places.)

 

Answer

 

0

 


 

0.00 points out of 1.00

 


 

2. Compute the Mustang Division's residual income if the project is undertaken.

 

$Answer

 

0

 


 

 

Paper#9209800 | Written in 27-Jul-2016

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