Figure 12-3Grey Inc Centra Has Capacity to Make 700,000 Boxes Per Year

question 10

Multiple Choice

Figure 12-3Grey Inc. has many divisions that are evaluated on the basis of ROI. One division, Centra, makes boxes. A second division, Mantra, makes chocolates and needs 80,000 boxes per year. Centra incurs the following costs for one box:
$\begin{array}{ll}\text { Direct materials } & \$ 0.35 \\\text { Direct labor } & \$ 0.60 \\\text { Variable overhead } & \$ 0.40 \\\text { Fixed overhead } & \$ 0.13 \\\text { Total } & \$ 1.48\end{array}$ Centra has capacity to make 700,000 boxes per year. Mantra currently buys its boxes from an outside supplier for $1.80 each (the same price that Centra receives) .
-Refer to Figure 12-3. Assume that Grey Inc. allows division managers to negotiate transfer price. Centra is producing 600,000 boxes. If Centra and Mantra agree to transfer boxes, what is the ceiling of the bargaining range and which division sets it?

• A) $1.48; Centra
• B) $1.35; Centra
• C) $1.80; Mantra
• D) $1.35; Mantra
• E) $1.80; Centra

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Definitions:

Goodwill

An intangible asset that represents the excess value paid over the fair market value of an acquired company's net assets.

Equity Method

A financial recording method where investments in other firms are first noted at their purchase price and later modified to reflect the investor's portion of the investee's earnings or losses.

Common Stock

Equity ownership in a corporation, giving holders voting rights and a share of the company’s profits through dividends.

Goodwill

An intangible asset representing the value of a company's brand, customer relationships, and other non-physical assets that contribute to earnings.