Kings Company Has Two Decentralized Divisions

1. Kings Company has two decentralized divisions, Bee and Seed.
Division Bee has always

purchased certain units from Division Seed at P75 per unit. Because Division Seed plans
to raise the price to P100 per unit, Division Bee is seeking an outside supplier of the part
for the old price of P75 per unit. Division Seed's costs follow:
Seed’s variable costs per unit
.................................................................................P70
Seed’s annual fixed costs…………………………………………….................................. P15,000
Seed’s annual production of these units for Bee…………………………………….... 1,000 units
If Division Bee buys from an outside supplier, the facilities Division Seed uses to
manufacture these units would be idle. What would be the result if the top management
of Kings Company insists that Division Bee purchase from Division Seed at a transfer
price of P100 per unit?
A) it would reduce the company's overall profit because Division Bee should buy from
outside suppliers at P75 per unit if possible.
B) it would provide lower overall company net operating income than the old transfer
price of P75 per unit.
C) it would provide higher overall company net operating income than the old transfer
price of P75 per unit.
D) it would be more profitable for the company than allowing Bee to buy from outside
suppliers at P75 per unit.
Division A makes a part with the following characteristics:

Production capacity in units ......................15,000 units
Selling price to outside customers …………………......P30
Variable cost per unit ............................................P20
Fixed cost per unit ..................................................P4
Total fixed costs .............................................P60,000
Division B, another division of the same company, would like to purchase 5,000 units of
the part each period from Division A. Division B is now purchasing these parts from an
outside supplier at a price of P28 each.
2. Suppose that Division A has ample idle capacity to handle all of Division B's needs
without any increase in fixed costs and without cutting into sales to outside customers.
If Division A refuses to accept the P28 price internally, the company as a whole will be:
A) worse off by P40,000 each period.
B) worse off by P20,000 each period.
C) better off by P10,000 each period.
D) worse off by P30,000 each period.
3. Suppose that Division A is operating at capacity and can sell all of its output to outside
customers at its usual selling price. If Division A sells the parts to Division B at P28 per
unit (Division B's outside price), the company as a whole will be:
A) better off by P20,000 each period.
B) worse off by P10,000 each period.
C) worse off by P40,000 each period.
D) There will be no change in the status of the company as a whole.
Division T of Clocker Company makes a timer which it sells for P30 to outside
customers.
The division has supplied the following data concerning the timer:
Monthly capacity ...................12,000 timers
Variable cost per unit .................... P15
Fixed cost per unit ......................... P10
Presently, Division S of Clocker Company is currently buying 5,000 similar timers each
month from an overseas supplier at P27 each. Division S would like to acquire its timers
from Division T if the price is right.
4. Suppose Division T is operating at capacity and can sell all of the timers it produces to
outside customers at its usual selling price. If Division T meets the price of the overseas
supplier and sells 5,000 timers to Division S each month, the effect on the monthly net
operating income of the company as a whole will be:
A) increase of P15,000
B) decrease of P15,000
C) decrease of P60,000
D) increase of P10,000
5. Suppose that Division T can sell only 10,000 timers to outside customers. According to
the formula in the text, what is the lowest acceptable transfer price from the viewpoint
of the selling division?
A) P24
B) P27
C) P30
D) P15
Division 1 of Ace Company 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 .................................................... P50
Variable cost per wheel when sold to outside customers .............................. ..P35
Capacity in wheels ........................................................................................ 15,000
Division 2:
Number of wheels needed per month……………............................................ 5,000
Price per wheel paid to an outside supplier ......................................................... P47
If Division 1 sells the wheels to Division 2, Division 1 can avoid P2 per wheel in sales
commissions.
6. Suppose that Division 1 sells 7,500 units per month to outside customers. According to
the formula in the text, 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?
A) P33
B) P35
C) P47
D) P50
7. Suppose that Division 1 sells 11,500 units each month to outside customers. According
to the formula in the text, what is the lowest acceptable transfer price from the
viewpoint of the selling division?
A) P47.00
B) P43.50
C) P37.50
D) P34.73
8. T/F: Increasing customers is the main aim of any kind of economic activity.
9. T/F: Wealth maximization is the same as profit maximization.
10. T/F: Investors would sometimes put their money in risky investments because these
investments offer higher actual returns.

Kings Company Has Two Decentralized Divisions

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1. Kings Company has two decentralized divisions, Bee and Seed.

Division Bee has always

Division A makes a part with the following characteristics:

9. T/F: Wealth maximization is the same as profit maximization.

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