Any accounting majors here. I need help on 2 questions for my Managerial Accounting class. Please answer if you are able to. Jezakallah.
AIP 7.3
A Canadian wholesaler of Mexican crafts is considering importing rugs
handwoven in southern Mexico using natural dyes. The rugs cost an
average $250 Canadian including transportation and handling. The
wholesaler plans to sell them in Canada for $300 Canadian. Therefore
the profit per rug should be $50 Canadian. The wholesaler’s cost of
capital is 10% annually. The wholesaler estimates an ROI on the
project of ($50)/$250, or 20%. The residual income is estimated to
be $50 – (0.10)($250), or $25 Canadian per Rug.
What is wrong with the use of ROI and residual income in this
analysis?
AIP 7.11
US Pumps is a multidivisional firm that manufactures and installs chemical piping and pump systems. Its valve division makes a single standardized valve. The valve division and installation division currently are involved in a transfer-pricing dispute. Last year, half of the valve division’s output was sold to the installation division for $40 and the remaining half was sold to outsiders for $60.
The existing transfer price of $40 per pump has been set through a negotiation process between the two divisions and with the involvement of senior management. The installation division has received a bid from an outside value manufacturer to supply it with an equivalent valve for $35 each.
The valve’s division’s manager has argues that if it is forced to meet the external price of $35 it will l ose money on internal sales.
The operating data for the last year for the valve division follow:
Analyze the situation and recommend a course of action. What should the installation division managers do? What should the valve division managers do? In your opinion, what should the US Pumps senior manager do?
AIP 7.3
A Canadian wholesaler of Mexican crafts is considering importing rugs
handwoven in southern Mexico using natural dyes. The rugs cost an
average $250 Canadian including transportation and handling. The
wholesaler plans to sell them in Canada for $300 Canadian. Therefore
the profit per rug should be $50 Canadian.
Not sure what kind of reply you require. But for a start, discount rate is not risk adjusted. There is no detail in the question relating to investment in non-current assets.
There is no information regarding the use of either the ROI or RI calculated. Care would need to be taken to ensure that you are comparing apples with apples.
Provide more information and you might get a better quality answer.
I suppose that the wrong thing is that you apply RI and ROI to a product level. These metrics are used at corporate / divisional level.
At product level you should use metrics such as gross or net profit margin or contribution to sales ratio.
Thank you guys, well that's what the question is asking..what is wrong with that scenario? All i came up with is International Transfer pricing considerations, international tax onsiderations.
