AMIS 525

Pop Quiz Chapters 22 and 23

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 1 THROUGH 5:
The top management at Munchie Company, a manufacturer of computer games, is
attempting to recover from a flood that destroyed some of their accounting records. The
main computer system was also severely damaged. The following information was
salvaged:
Sales
Net operating income
Operating assets
Return on investment
Return on sales
Investment turnover

Alpha Division
$2,500,000
$1,500,000
(b)
0.25
(e)
(f)

Beta Division
(a)
$650,000
(c)
0.15
0.10
(g)

Gamma Division
$1,150,000
$ 575,000
$ 766,667
(d)
0.5
1.5

1.

What were the sales for the Beta Division?

a.
$4,333,333
b.
$5,952,380
c.
$6,500,000
d.
$7,151,800

2.

What is the value of the operating assets belonging to the Alpha Division?
a.
$4,333,333
b.
$6,000,000
c.
$6,500,000
d.
$7,151,800

3.

What is the value of the operating assets belonging to the Beta Division?
a.
$4,333,333
b.
$5,952,380
c.
$6,500,000
d.
$7,151,800

4.

What is the Gamma Division's return on investment?

a.
0.25
b.
0.42
c.
0.60
d.
0.75

5.

What is the Alpha Division's return on sales?

a.
0.25
b.
0.42
c.
0.60
d.
0.75

6. The Bandage Medical Supply Company has two divisions that operate independently
of one another. The financial data for the year 20X5 reported the following results:
Sales
Operating income
Taxable income
Investment

North
$3,000,000
750,000
650,000
6,000,000

South
$2,500,000
550,000
375,000
5,000,000

The company's desired rate of return is 10%. Income is defined as operating

income.
What are the respective residual incomes for the North and South Divisions?
a.
$30,000 and $50,000
b.
$150,000 and $30,000
c.
$150,000 and $50,000
d.
$50,000 and a negative $150,000
7.

Springfield Corporation, whose tax rate is 40%, has two sources of funds: long-term
debt with a market value of $8,000,000 and an interest rate of 8%, and equity
capital with a market value of $12,000,000 and a cost of equity of 12%. Springfield
has two operating divisions, the Blue division and the Gold division, with the
following financial measures for the current year:
Operating
Total Assets Current Liabilities
Income
Blue Div. $9,500,000

$2,800,000

$1,055,000

Gold Div. $11,000,000 $2,200,000

$1,200,000

Calculate EVA for the Gold Division.

a.
$283,200
b.
$82,560
c.
$196,800
d.
$397,440

Use the following to answer questions 8-11:

Division P of the Nyers Company makes a part that can either be sold to outside
customers or transferred internally to Division Q for further processing. Annual data
relating to this part are as follows:
Annual production capacity...................................
Selling price of the item to outside customers.......
Variable cost per unit.............................................
Fixed cost per unit..................................................

80,00
0 units
$35
$23
$5

Division Q of the Nyers Company requires 15,000 units per year and is currently paying
an outside supplier $33 per unit. Consider each part below independently.
8. If outside customers demand only 50,000 units per year, what is the lowest
acceptable transfer price from the viewpoint of the selling division?
a.
$35
b.
$33
c.
$28
d.
$23
9. If outside customers demand 80,000 units, what is the lowest acceptable transfer
price from the viewpoint of the selling division?
a.
$35
b.
$33
c.
$28
d.
$23
10. If outside customers demand 80,000 units and if, by selling to Division Q,
Division P could avoid $4 per unit in variable selling expense, what is the lowest
acceptable transfer price from the viewpoint of the selling division?
a.
$35
b.
$21
c.
$31
d.
$33
11. If outside customers demand 70,000 units, what is the lowest acceptable transfer
price from the viewpoint of the selling division for each of the 15,000 units
needed by Q?
a.
$33
b.
$27
c.
$28

d.

$29

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 12 AND 13:

The BetaShoe Company manufactures only one type of shoe and has two divisions, the
Sole Division, and the Assembly Division. The Sole Division manufactures soles for the
Assembly Division, which completes the shoe and sells it to retailers. The Sole Division
"sells" soles to the Assembly Division. The market price for the Assembly Division to
purchase a pair of soles is $20. The fixed costs for the Sole Division are assumed to be $1
per pair at 100,000 units. The fixed costs for the Assembly Division are assumed to be $7
per pair at 100,000 units.
Sole's costs per pair of soles are:
Direct materials
Direct labor
Variable overhead
Division fixed costs

$4
$3
$2
$1

Assembly's costs per completed pair of shoes are:

Direct materials
$6
Direct labor
$2
Variable overhead
$1
Division fixed costs
$7
12.

Calculate and compare the difference in overall corporate net income between
Scenario A and Scenario B if the Assembly Division sells 100,000 pairs of shoes
for $60 per pair to customers.
Scenario A: Negotiated transfer price of $15 per pair of soles
Scenario B: Market-based transfer price
a.
$500,000 more net income under Scenario A
b.
$500,000 of net income using Scenario B
c.
$100,000 of net income using Scenario A.
d.
None of these answers is correct.

13.

If the Assembly Division sells 100,000 pairs of shoes at a price of $60 a pair to
customers, and the transfer price is 180% of total costs of the Sole Division, what is
the operating income of both divisions together?
a.
$4,400,000
b.
$3,400,000
c.
$3,000,000
d.
$2,600,000