1 answer

Midwest Entertainment has four operating divisions: Bus Charters, Lodging, Concerts, and Ticket S...

Question:

Midwest Entertainment has four operating divisions: Bus Charters, Lodging, Concerts, and Ticket Services. Each division is a separate segment for financial reporting purposes. Revenues and costs related to outside transactions were as follows for the past year (dollars in thousands):

Bus Charters Lodging Concerts Ticket Services
Revenues $ 11,700 $ 5,400 $ 4,490 $ 1,750
Costs 7,900 3,530 3,380 1,650

Bus Charters Division participates in a frequent guest program with Lodging Division. During the past year, Bus Charters reported that it traded lodging award coupons for travel that had a retail value of $1.3 million, assuming that the travel was redeemed at full fares. Concerts Division offered 20 percent discounts to Midwest’s bus passengers and lodging guests. These discounts to bus passengers were estimated to have a retail value of $360,000. Midwest's lodging guests redeemed $140,000 in concert discount coupons. Midwest’s hotels also provided rooms for Bus Charters’s employees (drivers and guides). The value of the rooms for the year was $640,000.

Ticket Services Division sold chartered tours for Bus Charters valued at $200,000 for the year. This service for intracompany lodging was valued at $100,000. It also sold concert tickets for Concerts; tickets for intracompany concert admission were valued at $55,000.

While preparing all of these data for financial statement presentation, Lodging Division’s controller stated that the value of the bus coupons should be based on their differential and opportunity costs, not on the full fare. This argument was supported because travel coupons are usually allocated to seats that would otherwise be empty or that are restricted similar to those on discount tickets. If the differential and opportunity costs were used for this transfer price, the value would be $250,000 instead of $1.3 million. Bus Charters’s controller made a similar argument concerning the concert discount coupons. If the differential cost basis were used for the concert coupons, the transfer price would be $55,000 instead of the $360,000.

Midwest reports assets in each division as follows (dollars in thousands):

Bus Charters $ 48,500
Lodging 19,150
Concerts 15,600
Ticket Services 3,250

Required:

a. Using the retail values for transfer pricing for segment reporting purposes, what are the operating profits for each Midwest division? (Enter your answers in thousands of dollars.)

b. What are the operating profits for each Midwest division using the differential cost basis for pricing transfers? (Enter your answers in thousands of dollars.)

c. Rank each division by ROI using the transfer pricing methods in requirements (a) and (b). (Round your answers to 2 decimal places.)


Answers

a Segment Reporting -Midwest Entertainment
Figure "000"
Bus Charter Lodging Concerts Ticket Services
Outside Revenue 11700 5400 4490 1750
Hotel award coupons 1300
Concert Discounts-bus 360
Concert discounts-lodging 140
Crew Lodging 640
Ticket Commission
Bus 200
Lodging 100
Concerts 55
Total Revenue 13000 6040 4990 2105
Outside Costs 7900 3530 3380 1650
Hotel award coupons 1300
Concert Discounts-bus 360
Concert discounts-lodging 140
Crew Lodging 640
Ticket Commission
Bus 200
Lodging 100
Concerts 55
Total Costs 9100 5070 3435 1650
Operating Profits 3900 970 1555 455
b Adjust the operating profits in requirement a for the changed transfer prices
Operating Profits-a 3900 970 1555 455
Hotel awards
1300 retail value-250 differential cost -1050 1050
Concert discounts
360 retail value-55 differential cost 305 -305
Operating profits-b 3155 2020 1250 455
c Dividing the operating profits in requirement a and b by division assets which are given in the problem we get
For a Ranking
Ticket Services 455/3250 14% 1
Concerts 1555/15600 9.96% 2
Bus 3900/48500 8.04% 3
Lodging 970/19150 5.06% 4
For b Ranking
Ticket Services 455/3250 14% 1
Concerts 1250/15600 8.01% 3
Bus 3155/48500 6.50% 4
Lodging 2020/19150 10.55% 2
.

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