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Exam 15: Capital Budgeting and Strategic Investment Decisions

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Question 1

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Target costing is used by many Japanese companies

A) True
B) False

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Question 2

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One of the assumptions behind target costing is that

A) cost is irrelevant.
B) the product has already been developed.
C) The company already know the price that will be charged
D) The company has control over the pricing

E) A) and B)
F) B) and D)

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Question 3

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Krenski Corporation has a Parts Division that does work for other Divisions in the company as well as for outside customers. The company's Equipment Division has asked the Parts Division to provide it with 10,000 special parts each year. The special parts would require £12.00 per unit in variable production costs. The Equipment Division has a bid from an outside supplier for the special parts at £31.00 per unit. In order to have time and space to produce the special part, the Parts Division would have to cut back production of another part-the TW3 that it presently is producing. The TW3 sells for £35.00 per unit, and requires £13.00 per unit in variable production costs. Packaging and shipping costs of the TW3 are £3.00 per unit. Packaging and shipping costs for the new special part would be only £2.00 per unit. The Parts Division is now producing and selling 50,000 units of the TW3 each year. Production and sales of the TW3 would drop by 10% if the new special part is produced for the Equipment Division. -From the point of view of the Parts Division, profits would increase if the transfer price is

The CD Division of Sound Company makes and sells compact disk players (CDP) that can be sold it presently sells to outside customers. Budgeted costs next month for the CD Division are as follows: $\begin{array}{lrr} \text {Sales of CDPs to outside customers. } & \text { 2,800 units} \\ \text { Selling price per CDP to outside customers. } &£ 185\\ \text {Unit variable production costs. } &£ 120\\\end{array}$ MaxiSound, another division of Sound Company, would like to buy 1,000 of the CDPs from the CD Division. An outside supplier has offered to sell similar CDPs to MaxiSound for £170 each. -Assume the CD Division's monthly production capacity is 4,000 units. If the CD Division sells 1,000 CDPs to MaxiSound for £170 each, the monthly effect on the profits of CD Division will be a

The international aspects of Transfer Price Setting add nothing to the rules on how to set Transfer Prices. Discuss.

Suboptimisation occurs when managers do not act in the best interests of the company

Explain how prices tend to be set in service organizations.

The CD Division of Sound Company makes and sells compact disk players (CDP) that can be sold it presently sells to outside customers. Budgeted costs next month for the CD Division are as follows: $\begin{array}{lrr} \text {Sales of CDPs to outside customers. } & \text { 2,800 units} \\ \text { Selling price per CDP to outside customers. } &£ 185\\ \text {Unit variable production costs. } &£ 120\\\end{array}$ MaxiSound, another division of Sound Company, would like to buy 1,000 of the CDPs from the CD Division. An outside supplier has offered to sell similar CDPs to MaxiSound for £170 each. - Assume that CD Division's monthly production capacity is 2,800 units. If CD sells 1,000 CDPs to MaxiSound for £170 each, the monthly effect on the profits of CD Division will be a

Discuss the different Transfer Pricing methods. Is there a best method?

A transfer price is the price charged when one segment of a company provides goods or services to another segment of the company.

If a garage repairs your car and uses time and material pricing them you will always be charged the exact number of hours that they spend on you car.

Price Elasticity of demand plays no part in the setting of prices

Llanelli employ target costing. The following rules relate to a new hand dryer The likely price will be £200; expected sales, £100,000; investment to develop £1,000,000; Company requires 10% ROI. The target cost to manufacture, sell, distribute and service is

Fyodor Corporation has a Parts Division that does work for other Divisions in the company as well as for outside customers. The company's Machine Division has asked the Parts Division to provide it with 8,000 special parts each year. The special parts would require £19.00 per unit in variable production costs. The Machine Division has a bid from an outside supplier for the special parts at £27.00 per unit. In order to have time and space to produce the special part, the Parts Division would have to cut back production of another part-the QR4 that it presently is producing. The QR4 sells for £34.00 per unit, and requires £18.00 per unit in variable production costs. Packaging and shipping costs of the QR4 are £2.00 per unit. Packaging and shipping costs for the new special part would be only £0.50 per unit. The Parts Division is now producing and selling 40,000 units of the QR4 each year. Production and sales of the QR4 would drop by 5% if the new special part is produced for the Machine Division. - The minimum transfer price for the Parts Division is

Target pricing is useful companies that have little control over market prices

Krenski Corporation has a Parts Division that does work for other Divisions in the company as well as for outside customers. The company's Equipment Division has asked the Parts Division to provide it with 10,000 special parts each year. The special parts would require £12.00 per unit in variable production costs. The Equipment Division has a bid from an outside supplier for the special parts at £31.00 per unit. In order to have time and space to produce the special part, the Parts Division would have to cut back production of another part-the TW3 that it presently is producing. The TW3 sells for £35.00 per unit, and requires £13.00 per unit in variable production costs. Packaging and shipping costs of the TW3 are £3.00 per unit. Packaging and shipping costs for the new special part would be only £2.00 per unit. The Parts Division is now producing and selling 50,000 units of the TW3 each year. Production and sales of the TW3 would drop by 10% if the new special part is produced for the Equipment Division. - The variable cost for the Parts Division is

Explain what is meant by Revenue and Yield Management. In what industries is it typically used?

Fyodor Corporation has a Parts Division that does work for other Divisions in the company as well as for outside customers. The company's Machine Division has asked the Parts Division to provide it with 8,000 special parts each year. The special parts would require £19.00 per unit in variable production costs. The Machine Division has a bid from an outside supplier for the special parts at £27.00 per unit. In order to have time and space to produce the special part, the Parts Division would have to cut back production of another part-the QR4 that it presently is producing. The QR4 sells for £34.00 per unit, and requires £18.00 per unit in variable production costs. Packaging and shipping costs of the QR4 are £2.00 per unit. Packaging and shipping costs for the new special part would be only £0.50 per unit. The Parts Division is now producing and selling 40,000 units of the QR4 each year. Production and sales of the QR4 would drop by 5% if the new special part is produced for the Machine Division. - The minimum transfer price for the Machine Division is

Krenski Corporation has a Parts Division that does work for other Divisions in the company as well as for outside customers. The company's Equipment Division has asked the Parts Division to provide it with 10,000 special parts each year. The special parts would require £12.00 per unit in variable production costs. The Equipment Division has a bid from an outside supplier for the special parts at £31.00 per unit. In order to have time and space to produce the special part, the Parts Division would have to cut back production of another part-the TW3 that it presently is producing. The TW3 sells for £35.00 per unit, and requires £13.00 per unit in variable production costs. Packaging and shipping costs of the TW3 are £3.00 per unit. Packaging and shipping costs for the new special part would be only £2.00 per unit. The Parts Division is now producing and selling 50,000 units of the TW3 each year. Production and sales of the TW3 would drop by 10% if the new special part is produced for the Equipment Division. - The opportunity cost for the Parts Division is

Selling and admin expenses re included as part of full absorption cost.