Question

The following selected data pertain to the Argent Division for last year:

Sales      $1,000,000          

Variable costs    $616,000             

Traceable fixed costs      $150,000             

Average invested capital               $1,300,000          

Imputed interest rate     15           %

Required:

1. How much is the residual income?

____$

2. How much is the return on investment? Enter your answer as a percentage, rounded to two decimal places. For example, the decimal value .03827 would be entered as "3.83" percent.

____%v

2.)

Manifold, Inc., is a multinational company with divisions around the world. Division X in the United States purchases a part from Division Z in China. There is no outside market for the part. The part is sold for $20 and normally receives a 35 percent markup on cost.

What is the transfer price using the resale price method? (Round the answer to two decimal places.)

a.$10.91

b.$14.81

c.$18.51

d.$11.11

Answer 1

Solution

Argent Division

1. Determination of residual income:

Residual income = operating income – minimum expected return

Minimum expected return = average invested capital x imputed interest rate

Minimum expected return = $1,300,000 x 15% = $195,000

Operating income = sales – variable costs – traceable fixed costs

= $1,000,000 - $616,000 - $150,000 = $234,000

Residual income = 234,000 – 195,000 = $39,000

Hence, residual income = $39,000

2. Return on investment = (operating income/average invested assets) x 100

= (234,000/1,300,000) x 100 = 18%

Manifold Inc

Determination of transfer price using the resale price method:

Selling price = $20

Mark up = 35%

Cost plus markup = selling price

Assuming cost = 100, then markup is 35 and selling price = 135

So, if selling price = $20, then cost = 20/135% = $14.81

Hence, the transfer price using the resale price method = $14.81