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193.     The Lasorda Company provided the following information:

Cost of machine





Life in years

3 years




Residual value





Depreciation method


The operating income before depreciation during each of the three years the machine was in use was $150,000.

a.     Compute the rate of return on the average investment for each of the three years using the net book value.

b.     Compute the rate of return on the average investment for each of the three years using the gross book value.


194.     The Nicholson and Cage Divisions are part of the same company. Currently the Cage Division buys a part from Nicholson for $82. The Nicholson Division wants to increase the price of the part it sells to Cage to $100. Cage Division can buy the part from an outside supplier for $94. The cost data for the Nicholson Division is as follows:

               Direct materials     $25.50
               Direct labor     32.50
               Variable overhead     22.50
               Fixed overhead     9.60


     a.     If Nicholson ceases to produce the parts for Cage, it will be able to avoid
one-fourth of the fixed manufacturing overhead. The Nicholson Division has excess capacity but no alternative uses for its facilities. From the standpoint of the company as a whole, should Cage continue to buy from Nicholson or start to buy from the outside supplier?

          b.     What should the transfer price for the part be?

195.     Sweater Division of Clothes, Inc., manufactures sweaters. The buttons used in production are presently purchased from an outside supplier at a cost of $4.50 for a set of twelve buttons. A division of Clothes, Inc., called the Button Division, has just begun producing a similar button which can be used by the Sweater Division. Current per unit cost data for the button produced by the Button Division are as follows:




Direct material





Direct labor





Variable manufacturing overhead





Fixed manufacturing overhead





Variable selling expenses





Fixed selling expenses


Variable selling expenses would not be incurred on inside transfers.


     a.     What is the minimum transfer price that the Button Division should charge the Sweater Division for each set of buttons?

     b.     What is the maximum transfer price that the Sweater Division should be willing to pay for each set of buttons?

196.     For each of the following transfer price descriptions or operating situations, tell which of      the general methods of transfer pricing it is probably categorized as:

     a.     Bargaining between selling and buying units

     b.     Budgeted costs

     c.     145% of full costs

     d.     Internal product transfers are required if goods are available internally

     e.     Manufacturing plus marketing plus distribution plus customer service costs

     f.     Prices listed in a trade journal

     g.     Selling price less normal sales commissions

     h.     Variable manufacturing cost plus a mark-up

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