Business & Finance homework help. P 4–6: University Physician Compensation
Physicians practicing in Eastern University’s hospital have the following compensation agreement. Each doctor bills the patient (or Blue Cross Blue Shield) for his or her services. The doctor pays for all direct expenses incurred in the clinic, including nurses, medical malpractice insurance, secretaries, supplies, and equipment. Each doctor has a stated salary target (e.g., $100,000). For patient fees collected over the salary target, less expenses, the doctor retains 30 percent of the additional net fees. For example, if $150,000 is billed and collected from patients, and expenses of $40,000 are paid, then the doctor retains $3,000 of the excess net fees [30 percent of ($150,000 – $40,000 – $100,000)] and Eastern University receives $7,000. If $120,000 of fees are collected and $40,000 of expenses are incurred, the physician’s net cash flow is $80,000 and Eastern University receives none of the fees.
Required: Critically evaluate the existing compensation plan and recommend any changes
P 4–10: Sales Commissions
Sue Koehler manages a revenue center of a large national manufacturer that sells office furniture to local businesses in Detroit. She has decision rights over pricing. Her compensation is a fixed wage of $23,000 per year plus 2 percent of her office’s total sales. Critically evaluate the organizational architecture of Koehler’s revenue center.
P 5–2: Phipps Electronics
Phipps manufactures circuit boards in Division Low in a country with a 30 percent income tax rate and transfers them to Division High in a country with a 40 percent income tax. An import duty of 15 percent of the transfer price is paid on all imported products. The import duty is not deductible in computing taxable income. The circuit boards’ full cost is $1,000 and variable cost is $700; they are sold by Division High for $1,200. The tax authorities in both countries allow firms to use either variable cost or full cost as the transfer price.
Required: Analyze the effect of full-cost and variable-cost transfer pricing methods on Phipps’ cash flows
P 5–15: Warm Boots Warm Boots manufactures and sells a patented ski boot with 9-volt batteries designed to keep a skier’s feet warm even when the outside temperature reaches –10 °Celsius. Warm Boots is organized into three divisions: Administration (accounting, finance, human resources, CEO, and CFO), Manufacturing, and Marketing and Sales. To promote cost efficiency, Manufacturing is treated as a cost center, where its manager is evaluated and paid a bonus based on minimizing the actual average cost
Responsibility Accounting and Transfer Pricing 201
of manufacturing boots in the week. The manager of Manufacturing has the discretion to choose its production level. Marketing and Sales (M&S) is treated as a profit center, where its profits are computed as the sales revenue it generates less the manufacturing cost of the boots. The manufacturing cost of the boots is the number of boots sold in the week times the actual average cost of manufacturing the boots in that week. The manager of M&S has the discretion to set the price per pair of boots and is paid a bonus based on M&S reported profits. The following table summarizes how price and total cost varies with the number of boots produced and sold PER WEEK. “Total Cost” includes both fixed and variable cost where the fixed cost is the annual fixed cost divided by 52 (the number of weeks in the year).
Required: a. As the head of Manufacturing, how many boots will you manufacture if given the discretion to set production levels? Show calculations to support your answer. b. If you managed the M&S Division of Warm Boots, and given the production level (and its resulting average cost) chosen by the Manufacturing manager in part a, what price (and quantity level) would you choose for a pair of boots that maximizes your bonus? Show calculations to support your answer. c. Given the decisions of the Manufacturing and M&S managers in parts (a) and (b), is the firm maximizing profits? Explain why profits are or are not being maximized.