Scribd
Upload
243 views4 pages

10 Responsibility Accounting Live Discussion

The Valve Division currently generates a 14% return on its operating assets of P700,000. To maintain this return, it must sell 210,000 valves annually. At this level of sales, the division would earn a margin of P1.50 per valve and have a turnover of 3.33 times.

Uploaded by

Lee Suarez
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
243 views4 pages

10 Responsibility Accounting Live Discussion

The Valve Division currently generates a 14% return on its operating assets of P700,000. To maintain this return, it must sell 210,000 valves annually. At this level of sales, the division would earn a margin of P1.50 per valve and have a turnover of 3.33 times.

Uploaded by

Lee Suarez
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 4

Problem 1

The Valve Division of Bench Co. produces a small valve that is used by various companies as a
component part in their products Bench operates its divisions as autonomous units, giving its
divisional managers great discretion in pricing and other decisions. Each division is expected to
generate a rate of return of at least 14% on its operating assets. The Valve Division has
average operating assets of P700,000. The valves are sold for P5 each. Variable costs are P3
per valve, and fixed costs total P462,000 per year. The division has a capacity of 300,000
valves each year.

1. How many valves must the Valve Division sell each year to generate the desired rate of
return on its assets?
A. What is the margin earned at this level of sales?

B. What is the turnover at this level of sales?

2. Assume that the Valve Division’s current ROI is just equal to the minimum required 14%. In
order to increase the division’s ROI, the divisional manager want to increase the selling price
per valve by 4%. Market studies indicate that an increase in the selling price would cause sales
to drop by 20,000 units each year. However, operating assets could be reduced by P50,000 due
to decreased needs for accounts receivable and inventory. Compute the margin, turnover, and
ROI if these changes are made.
3. Refer to the original data. Assume again that the Valve Division’s current ROI is just equal to
the minimum required 14%. Rather than increase the selling price, the sales managers wants to
reduce the selling price per valve by 4%. Market studies indicate that this would fill the plant to
capacity. In order to carry the greater level of sales, however, operating assets would increase
by P50,000. Compute the margin, turnover, and ROI if these changes are made.

4. Refer to the original data. Assume that the normal volume of sales is 280,000 valves each
year at a price of P5 per valve. Another division of the company is currently purchasing 20,000
valves each year from an overseas supplier, at a price of P4.25 per valve. The manager of the
Valve Division has adamantly refused to meet this price, pointing out that it would result in a
loss for his division:

Selling price per valve P4.25


Cost per valve:
Variable P3.00
Fixed (P462,000/300,000) 1.54 4.54
Net loss per valve P(0.29)

The manager of Valve Division also points out that the normal P5 selling price barely allows his
division the required 14% rate of return. “If we take on some business at only P4.25 per unit,
then our ROI is obviously going to suffer,” he reasons, “and maintaining that ROI figure is the
key to my future. Besides, taking on these extra units would require us to increase our operating
assets by at least P50,000 due to the larger inventories and receivables we would be carrying.”
Would you recommend that the Valve Division sell to the other division at P4.25? Show ROI
computations to support your answer.

Problem 2
Seiko Company’s Audio Division produces a speaker that is widely used by manufacturers of
various audio products. Sales and cost data on the speaker follow:

Selling price per unit on the intermediate market P60


Variable cost per unit 42
Fixed costs per unit 8
Capacity in units 25,000

Seiko Company has just organized a Hi-Fi Division that could use this speaker in one of its
products. The Hi-Fi Division will need 5,000 speakers per year. It has received a quote of P57
per speaker from another manufacturer. Seiko Company evaluates divisional managers on the
basis of divisional profits.

A. Assume that the Audio Division is now selling only 20,000 speakers per year to outside
customers on the intermediate market
1. From the standpoint of the Audio Division, what is the lowest acceptable transfer price
for speakers sold to the Hi-Fi Division?
2. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price
for speakers purchased from the Audio Division?
3. If left free to negotiate without interference, would you expect division managers to
voluntarily agree to the transfer of 5,000 speakers from the Audio Division to the Hi-Fi
Division? Why or why not?
4. From the standpoint of the entire company, should the transfer take place? Why or
why not?

B. Assume that the Audio Division is now selling only 22,000 speakers per year to outside
customers on the intermediate market
1. From the standpoint of the Audio Division, what is the lowest acceptable transfer price
for speakers sold to the Hi-Fi Division?
2. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price
for speakers purchased from the Audio Division?
3. If left free to negotiate without interference, would you expect division managers to
voluntarily agree to the transfer of 5,000 speakers from the Audio Division to the Hi-Fi
Division? Why or why not?
4. From the standpoint of the entire company, should the transfer take place? Why or
why not?

C. Assume that the Audio Division is selling all of the speakers it can produce to outside
customers on the intermediate market.
1. From the standpoint of the Audio Division, what is the lowest acceptable transfer price
for speakers sold to the Hi-Fi Division?
2. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price
for speakers purchased from the Audio Division?
3. If left free to negotiate without interference, would you expect division managers to
voluntarily agree to the transfer of 5,000 speakers from the Audio Division to the Hi-Fi
Division? Why or why not?
4. From the standpoint of the entire company, should the transfer take place? Why or
why not?

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy