Unit 1: Responsibility Accounting & Transfer Pricing: Illustrative Problems

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UNIT 1: RESPONSIBILITY ACCOUNTING & TRANSFER

PRICING
ILLUSTRATIVE PROBLEMS
PROBLEM 1 (RESPONSIBILITY CENTERS)

Indicate how each of the business situations below is most likely to be organized: cost center (CC),
revenue center (RC), profit center (PC), or investment center (IC):
A. The repairs and maintenance department of DLTB Bus Co.

B. The Magnolia product division of San Miguel Corporation.
C. The Robinsons Mall car park ticket outlets.
D. The Pawing branch of Starbakz Coffee.
E. The accounting department of Banco De Orocan.
F. The College of Business Administration of UP – Diliman.
G. The parts department of Toyota Cars Corporation.
H. The convenience store that is owned by a chain organization. The head office supplies all the
goods to be sold and determines the selling prices.
PROBLEM 2 (CONTROLLABLE / NON-CONTROLLABLE COSTS, DIRECT / INDIRECT COSTS)

The supervisor of the Painting department of Honda Cars is in-charge of purchasing supplies, authorizing
repairs, and hiring labor for the department. Various costs are given:
Requirements:
1. How much is the total costs controllable by the supervisor of the Painting department?
2. How much is the total costs directly identifiable with the Painting department?
3. How much is the total costs that will have to be allocated to the factory departments?
4. How much is the total costs that do not pertain to factory operations?
1
PROBLEM 3 (SEGMENTED I/S)
The following information pertains to the product produced by the Men’s Belt Division of Leather Goods
Corporation:
Per Unit
Selling price P150
Manufacturing costs:
Prime costs 75
Variable factory overhead 15
Fixed factory overhead (Total is P80,000) 8
Selling and administrative costs:
Variable 18
Fixed (Total is P60,000) 6
During the period, the Division produced 10,000 units and sold 9,000 units, both as budgeted. There was
no beginning and work-in-process inventories, and there was no beginning finished goods inventory
during the period.
There was no difference between the total budgeted and actual fixed costs. Variable manufacturing costs
vary with production while variable selling costs vary with sales. Central administration costs are
allocated to the different divisions of the company. For this period, central administration cost allocated to
Men’s Belt Division amounted to P150,000.
Requirements:
1. How much was the division’s manufacturing margin?
2. How much was the divisions contribution margin?
3. Assume that 40% of the division’s total fixed cost is controllable by the division manager. How
much was the division’s short-run performance margin?
4. Assume that 40% of the division’s total fixed cost is controllable by the division manager. How
much was the division’s segment margin?
5. How much was the division’s operating income during the period?
PROBLEM 4
The electronics division of Wall-E Corporation provided the following data for 2014:
Sales P 4,000,000
Net operating income 500,000
Average operating assets 2,000,000
Compute for the following:

1. Return on Investment (ROI)
2. Margin
3. Turnover
4. Residual Income
PROBLEM 5
Eve Corporation reported these data at year-end:
Operating income P 4,000,000
Total assets 22,000,000
Current Liabilities 2,000,000
8% Non-Current Liabilities 5,000,000
Equity 15,000,000
Dividend declared and paid 1,500,000
Tax Rate 25%
Compute for EVA.
2
PROBLEM 6 (TRANSFER PRICING)
Division S produces, with a maximum capacity of 20,000 units, a product that is needed by Division B.
Division B needs 5,000 units of such product. Currently, Division S sells the units for P50, incurs P30 in
variable cost per unit and P10 in fixed cost per unit. Division B currently buying from an outside supplier
at P48. If Division S will be selling to Division B it will be able to save on P2 in variable cost.
Required:
1. If Division S is able to sell 18,000 units to outside customers, what should be the acceptable
transfer price?
2. If Division S set the transfer price at P43, what division’s current capacity?
3. If Division S would like to match the price of the outside supplier, what should be its current
capacity?
4. If Division S would be setting a transfer price at P28, what is the highest current capacity?
ADDITIONAL EXERCISES
Exercise 1 (ROI and RI)

Solve the missing amount:
Abuyog Burauen Campetic
Total Assets P1,000,000 P3,000,000 (9)
Total Sales 2,000,000 (5) (10)
Profit 500,000 (6) (11)
Return on Investment (1) 10% 60%
Minimum required rate of return 20% (7) 40%
Residual Income (2) 60,000 500,000
Asset turnover (3) 1.5 times (12)
Profit Margin (4) (8) 20%
Exercise 2 (Economic Value Added)

Rain Corporation reported these data at year-end:
Pre-tax Operating Income P4,000,000
Current Assets 4,000,000
Non-current Assets 16,000,000
Current Liabilities 2,000,000
Non-Current Liabilities 5,000,000
The Non-current liabilities has an interest rate of 8% and its fair value equaled to its book value at year-
end. The fair value of the equity capital is P2,000,000 greater than its book value. Rain’s income tax rate is
25% and its cost of equity capital is 10%.
Required:
1. What is the weighted-average cost of capital (WACC) to be used in the economic value added
(EVA) calculation?
2. What is the company’s economic value added (EVA) for the period ended?
3
Exercise 3 (Segmented Income Statement)
Kiwi, Inc. operates a chain of 80 retail stores throughout the Region 8 that specializes in the sale of sports
equipment. The following costs relate to Store no. 19 in Pawing, Palo:
1. Total Sales: P 3,584,000

2. Salary of store manager: P58,000
3. Allocated corporate overhead: P55,000
4. Cost of goods sold: P2,560,000
5. Landscaping and grounds costs (yearly contract): P6,800
6. Hourly wages of sales clerks: P343,000
7. Local advertising (negotiated by store manager): P76,000
8. Property taxes: P25,800
9. Sales commissions: P221,000
Required:
Construct a Segmented Income Statement indicating the segment contribution margin, segment
controllable margin, and the segment margin.
Exercise 4 (Transfer Pricing)

Division I of ABC Corporation makes and sells wheels that can either be sold to outside customers or
transferred to Division 2. The following data are available from last month:
Division 1:
Selling price per wheel to outside customers P25
Variable cost per wheel when sold to outside customers P18
Capacity in wheels 15,000
Division 2:
Number of wheels needed per month 5,000
Price per wheel paid to an outsider supplier P24
Required:
If Division 1 sells the wheels to Division 2, Division 1 can avoid P2 per wheel in sales commissions.
1. Suppose that Division 1 sells 7,500 units per month to outside customers, what is the lowest
acceptable transfer price from the viewpoint of the selling division if Division 2 requires 5,000
units per month from Division 1?
2. What is the maximum price per wheel that Division 2 should be willing to pay Division 1 if a
transfer were to take place?
3. Suppose that Division 1 sells 11,500 units each month to outside customers, what is the lowest
acceptable transfer price viewpoint of the selling division?
/mddsr

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SCOMAN2

UNIT 1: RESPONSIBILITY ACCOUNTING & TRANSFER

PROBLEM 1 (RESPONSIBILITY CENTERS)

A. The repairs and maintenance department of DLTB Bus Co.

PROBLEM 2 (CONTROLLABLE / NON-CONTROLLABLE COSTS, DIRECT / INDIRECT COSTS)

Compute for the following:

Compute for EVA.

Exercise 1 (ROI and RI)

Exercise 2 (Economic Value Added)

1. Total Sales: P 3,584,000

Exercise 4 (Transfer Pricing)

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