Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 34

Segment Reporting

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	$12,250	$5,300	$4,450	$1,600
Costs	7,850	3,550	3,300	1,500

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 $350,000. Midwest’s lodging guests redeemed $150,000 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 $650,000.

The 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 $50,000.

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 $50,000 instead of the $350,000.

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

Bus Charters	$47,750
Lodging	19,250
Concerts	16,050
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?

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b. What are the operating profits for each Midwest division using the differential cost basis for pricing transfers?

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c. Rank each division by ROI using the transfer pricing methods in (a) and (b). What difference does the transfer pricing system have on the rankings?

Step 1 of 4

Segment Reporting: Midwest Entertainment.

a.?($ thousands)

	Bus Charters				Lodging				Concerts				Ticket Services
Outside revenue		$12,250				$5,300				$4,450				$1,600
Hotel award coupons		1,300
Concert discounts (bus)										350
Concert discounts (Lodging)										150
Crew lodging						650
Ticket commissions:
?Bus														200
?Lodging														100
?Concerts														50
Total revenues		$13,550				$5,950				$4,950				$1,950
Outside costs		$7,850				$3,550				$3,300				$1,500
Hotel award coupons						1,300
Concert discounts (bus)		350
Concert discounts (Lodging)						150
Crew lodging		650
Ticket commissions:
?Bus		200
?Lodging						100
?Concerts										50
Total costs		$9,050				$5,100				$3,350				$1,500
Operating profits		$4,500				$?850				$1,600				$?450