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.)

Answer 1

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