Business Math

BusinessMath

Institutions’Name

P5-11- Cogen’s solution

Quantity

Price in thousand

Revenue

Variable Cost of Generator

Transfer Price

Total Cost

Generators returns/Profit

1

$1000

$1000

$200

$150

$1750

$750

2

$950

$1900

$400

$300

$2100

$200

3

$900

$2700

$600

$450

$2450

$250

4

$850

$3400

$800

$600

$2800

$600

5

$800

$4000

$1000

$750

$3150

$850

6

$750

$4500

$1200

$900

$3500

$1000

7

$700

$4900

$1400

$1050

$3850

$1050

8

$650

$5200

$1600

$1200

$4200

$1000

  1. The division will have to buy seven generators in order to maximize on profits

B. The mean turbine costs in thousands

PartC

Supposethe transfer is set at full cost (FC) = $240, 000

Generatorneed to purchase six turbines:

Quantity

Price in thousand

Revenue

Variable Cost of Generator

Transfer Price

Total Cost

Generators returns/Profit

8

$650

$5,200

$1600

$1920

$4920

$280

7

$700

$4,900

$1400

$1680

$4480

$420

6

$750

$4,500

$1200

$1440

$4040

$460

5

$800

$4,000

$1000

$1200

$3600

$400

4

$850

$3,400

$800

$960

$3160

$240

3

$900

$2,700

$600

$720

$2720

$(20)

2

$950

$1,900

$400

$480

$2280

$(380)

1

$1,000

$1,000

$200

$240

$1840

($840)

Partd

Accordingto the common knowledge, variable cost transfer pricing normallyyield the company –solution with maximum profit. This is trueprovided the variable cost is observed carefully, reasonably, and notconditional on gaming. Nevertheless, the turbine section themotivation to reclassify the actual fixed costs as a variable cost.Besides, they can convert the fixed cost activities into a variablecost. They can achieve this by replacing contracts, which are in theform of fixed cash flows with those in the form of variable cashoutflows based on the units produced. Therefore, full-cost transfercosts, being easy to manage and not sophisticated, might be moreappropriate than variable transfer costs although full-cost transfercosts lead to reduced units being transferred, thus a small reductionin total profits (Zimmerman, 2016).

P4-21

Thelow or high profits situation that Rothwell faces can be explainedpartially using an incongruence districts and corporate’sobjectives developed through compensation plan. Given the bonus planstructure, districts increase their bonus through the generation ofsubstantial revenues at the expense of the company profits.Particular weakness of bonus plan of Rothwell is as indicated:

  • Bonus and quotas points are determined using the generated revenue of every product line. A district can produce bonus points even when making the least returns for the company. For example, selling a product or unit at the maximum possible price would net equal bonus credits similar to selling two units at 50% reduction in price. It is much easier to sell two units at 50% of the original price than the sale of a unit for the maximum price (Zimmerman, 2016).

  • Selling revenues for bonus calculation and qualification, and sharing sales across districts encourage the suboptimal behavior. Managers unable to make the targeted measure in a product line can easily arrange to transfers sales to managers surpassing the set quota in the given line. They can do it in a manner that will benefit the two districts. Such form of conspiracy can cause high bonus overheads corresponding to the total number of sales and minimizes company revenues

  • The current compensation plan fails to solve the issue of sales cost. Districts are given the same bonuses for the equivalent amount of sales, albeit one of the districts recorded higher sell value than the other district.

Partb

Compensationplan alternative:

  • Carry on with the well-adjusted selling plan by ensuring bonus qualification meet every product line. Units should be defined based on the number of units sold and not the sales proceeds.

  • Utilize contribution margin of the sold items as a basis for determining bonus point. Combining both bonuses generated through contribution margin and bonus qualification on units sold would ensures districts do not get rewards for reducing the price in an attempt to sell extra units as before.

  • Pinpoint budget products that are optional at the district level. Measure performance against the set budget and deduct or award points as appropriate. Taking into account discretionary costs and contribution margins when calculating bonus will offer the managers a good platform to minimize sales cost.

P5-17

Horse Falls (Forecasts)

Broadway (Actual)

Operating income prior to depreciation

$3.300

$1.050

Depreciation

$ 1. 1425

$ 0.210

Net income

$1.875

$0.840

Investment

Fixed assets

$4.60

$0.90

Receivables and inventories

$2.90

$ 2.10

Total investment

$7.50

$3.00

ROI

25%

28%

Net income

$ 1.500

($ 0. 600)

Residual income

$ 0.375

$ 0.240

a.Chris expects to retire in five years. Do you expect her to acceptthe proposal to open the horse falls store and close the Broadwaystore? Explain?

Yes,I would advise him to open horse fall store since the residual incomeis higher than that in Broadway store. The residual income for Horsefall is $0.375, while that of Broadway is $0.240. Therefore, Horsefall is the most appropriate as compared to Broadway.

b. Offera plausible hypothesis supported by facts in the problem thatexplains why Stale-Mart is losing market share and also explains thepoor relative performance of its stock price. What changes atStale-mart would you suggest to correct the problem?

Stale-Martis losing its market share due to newer chains. These chains haveproducts with strong brand names and are less costly than theproducts of this organization. Since the quality of its products hasreduced, so does the market share (Zimmerman, 2016). The stock pricewill be reduced because the market share has reduced resulting insmall profits. Stale-Mart can build stronger brands and improve thequality of the services it provides.

References

Zimmerman,J. (2016). Accountingfor Decision Making and Control.New York: McGraw-Hill Higher Education.