P1.C.2 Responsibility Centers & Reporting Segments

Question 1

Degree of operating leverage (DOL) Formula

P1.C.2 Responsibility Centers & Reporting Segments

Answer 1

= contribution margin / operating income

= % change in operating income / % change in sales

Determines how responsive or volatile changes in operating income to change in sales

Question 2

What are different types of Fixed costs?

P1.C.2 Responsibility Centers & Reporting Segments

Answer 2

Traceable fixed costs: avoidable & incurred by segment

Common fixed costs: uncontrollable & incurred by 2+ segments/departments.

Stand-alone: based on proportionate usage of cost driver

Incremental: ranked as primary & secondary users

Question 3

What are the Methods of Transfer Pricing?

P1.C.2 Responsibility Centers & Reporting Segments

Answer 3

1. Market Price: most efficient and preferred
2. Negotiated Price: negotiated between buyer & seller
3. Variable Cost: makes sense when excess capacity is available
4. Full Cost: variable costs & allocated share of fixed costs
5. Dual Pricing: rare method. Seller & buyer have different prices

Question 4

Opportunity Costs & Capacity Usage

P1.C.2 Responsibility Centers & Reporting Segments

Answer 4

Seller is at full capacity

1. Selling internally > opportunity costs of lost sales: buyer purchase at market price.

Seller has excess capacity

1. Transfer price: variable or market

Question 5

Short Term Profitability Measurement

P1.C.2 Responsibility Centers & Reporting Segments

Answer 5

The contribution margin is the most important in the short term because it tells which products will be the most profitable.

Question 6

Transfer Pricing Objectives

P1.C.2 Responsibility Centers & Reporting Segments

Answer 6

1. Goal congruence: must be advantageous to company as a whole
2. Performance evaluation: must help in evaluating sub-units
3. Sub-unit autonomy: encourage sub-unit autonomy in decision making
4. Managerial effort: must motivate managers to exert a high degree of effort.