Problem 1 - The Chip Division of Circuit Co has just revised its actual cost data for the year just ended. Chip Division transfers circuit boards to the Assembly Division, and incurs no selling expense for such transfers. Assembly Division can buy the same goods in the open market for $132 each. Chip's new cost data are:
Direct materials $ 60
Direct labor 30
Variable manufacturing overhead 10
Fixed manufacturing overhead 8
Variable selling expenses 6
Fixed selling and administrative expenses 12
Total costs $126
Desired return 20
Sales price $146
Current production is 400,000 units, and Chip has a capacity of 600,000 units.
Required:
a. What is the lowest price Chip should charge for the internal transfer of its goods?
b. What is the highest price Assembly should pay Chip for the units?
c. Give the primary reason why Chip should reduce its price for internal transfers below the market price.
Problem 2 - Hinsdale Company has the following data for this year:
Bottling Division Mixing Division
Average operating assets $320,000 $ 800,000
Contribution margin 160,000 500,000
Operating income 80,000 120,000
Sales 400,000 1,200,000
Weighted-average cost of capital 18% 18%
Hinsdale Company has a target ROI of 18 percent.
Required: Calculate the following amounts for each division:
a. Return on sales ratio
b. Operating investment turnover
c. ROI
d. Residual income