Exam 21: Transfer Pricing and Multinational Management Control Systems

A benefit of decentralization should be increased motivation of subunit managers.

Bedtime Bedding Ltd.manufactures pillows.The Cover Division makes covers, and the Assembly Division makes the finished products.The covers can be sold separately for $5.00.The pillows sell for $6.00.The information related to manufacturing for the most recent year is as follows: Required: Compute the operating income for each division and the company as a whole.Use market value as the transfer price.Are all managers happy with this concept? Explain.

Answer the following question(s)using the information below.Delta Footwear Ltd.manufactures only one type of sandal and has two divisions, the Sole Division, and the Assembly Division.The Sole Division manufactures soles for the Assembly Division, which completes the sandal and sells it to retailers.The Sole Division "sells" soles to the Assembly Division.The market price for the Assembly Division to purchase a pair of soles is $18.(Ignore changes in inventory.)The per unit fixed costs are based on a production of 50,000 pairs of sandals.Sole's costs per pair of soles are: Assembly's costs per completed pair of sandals are: -What is the market-based transfer price per pair of soles from the Sole Division to the Assembly Division?

Use the information below to answer the following question(s).Crush Company makes internal transfers at 180% of full cost.The Soda Refining division purchases 30,000 containers of carbonated water per day, on average, from a local supplier, who delivers the water for $30 per container via an external shipper.In order to reduce costs the company located an independent producer in Manitoba who is willing to sell 30,000 containers at $20 each, delivered to Crush Company's shipping division in Manitoba.The company's Shipping Division in Manitoba can ship the 30,000 containers at a variable cost of $2.50 per container and a full cost, based on practical capacity, of $4.00 per container.When the company's Manitoba shipping division ships for external customers is charges $6.00 per container. -What is the daily operating advantage (disadvantage)of purchasing the water from the independent producer and using the company's Manitoba shipping department, assuming the shipping department is currently shipping 50,000 containers per day for external customers?

Market price is the only price that a firm should use when transferring goods from one subunit to another subunit.

Discuss the possible problems a corporation might have if its operations are totally decentralized.

A benefit of using a market-based transfer price is that the

Bradford Manufacturing Ltd.manufactures custom metal perforating and fabricating.Its Fabricating Division can transfer the perforated metal components to Bradford's Automotive Division or it can sell its products on the external market.Fabricating currently produces and sells 350,000 units per year to the external market at an average price of $38 per unit.Variable costs of production average $22.50 and fixed costs of $6.50/unit.Fabricating incurs $2.50 of variable selling costs on external sales.Fixed costs are based on the practical capacity of the plant which is 400,000 per year.The Automotive Division is interested in acquiring up to 50,000 units per year.Required: a.From the standpoint of Bradford Manufacturing Ltd., should the units be transferred? Determine the financial benefit or cost of your recommendation. b.Using the general guidelines for transfer pricing, what is the minimum transfer price Fabricating should accept? c.What is the range of acceptable transfer prices? d.Now assume that demand in the external market for the components is expected to increase by 8%.The Automotive Division has negotiated with an external supplier to supply 50,000 units at a price of $34.50/unit.However, if the Automotive Division reduces its volume below the 50,000 unit volume, it must pay $39 per unit.What is the optimum sourcing arrangement for the company? 1)Source all 50,000 components externally.2)Source all 50,000 components internally.3)Transfer the excess capacity of 22,000 and outsource the remaining required 28,000 externally.

All of the following are general methods for determining transfer prices EXCEPT

Payne Ltd.has two divisions.The Compound Division makes QZ54, an industrial compound, which is then transferred to the Processing Division.The Processing Division further processes the QZ54 and sells the final product to customers at $87/kg.Capacity in the Compound Division is 800,000 kg.QZ54 can be obtained on the external market at $50/kg Data regarding the costs per kilogram in each division are presented below: *In the Compound Division the variable overhead is 80% of the total, and in Processing variable overhead represents 65% of the total.Fixed overhead rates are based on capacity of 800,000 kg.in each division.In addition to the manufacturing costs, the Compound Division would incur $2 per kilogram of selling costs which would be avoided on internal transfers.Similarly the Processing Division would avoid $3/kg.of ordering costs on internal purchases.Required: a.Calculate the operating incomes for each division assuming 800,000 kg.of QZ54 are transferred and the company uses a market transfer price. b.Calculate the operating incomes for each division assuming 800,000 kg.of QZ54 are transferred and the company uses a transfer pricing policy based on 125% of absorption manufacturing cost. c.Comment on your calculations in a and b in terms of the respective division managers preferences. d.Should the company transfer its 800,000 kg.assuming the Compound Division can sell all of its output on the external market?

Answer the following question(s)using the information below.Easy Fit Ltd.manufactures heating, ventilation, and air conditioning (HVAC)equipment.The Manufacturing Division creates parts; and, the Assembly Division builds and sells the equipment.The Manufacturing Division "sells" furnace parts packages to the Assembly Division.The market price for the Assembly Division to purchase a mini furnace is $3,500.The fixed costs for the Manufacturing Division are assumed to be the same over the range of 2,000-5,000 units.The fixed costs for the Assembly Division are assumed to be $40.00 per unit at 5,000 units.Manufacturing costs per furnace are: Assembly's costs per completed furnace are: -If the Assembly Division sells 1,000 furnaces at a price of $3,500 per unit to customers, what is the company's operating income?

Use the information below to answer the following question(s).Soft Cushion Company is highly decentralized.Each division is empowered to make its own sales decisions.The Assembly Division can purchase cushion stuffing from the Production Division or from external suppliers.The Production Division has been the major supplier of stuffing in recent years.The Assembly Division has announced that two external suppliers will be used to purchase the stuffing at $20 per kilogram for the next year.The Production Division recently increased its unit price to $40.The manager of the Production Division presented the following information; variable cost $32, fixed cost $8, to top management in order to attempt to force the Assembly Division to purchase the stuffing internally.The Assembly Division purchases 20,000 kg per month. -The general guideline for determining the minimum transfer price is

Use the information below to answer the following question(s).The Burnaby Division of Columbia Ltd.produces and sells component parts.Its variable costs per unit are $80 for direct materials, $32 for direct labour and $18 for variable factory overhead.It currently can sell it components on the outside market at a price of $165/unit.Fixed overhead costs are $22 per unit based on a denominator volume of 180,000 units. -The Surrey Division of Columbia Ltd.has approached the Burnaby Division and requested that it supply 25,000 units of the component at a transfer price of $150.Assuming Burnaby Division has no idle capacity, what is the minimum transfer price the Burnaby Division should agree to accept?

Centralia Components Ltd.manufactures cable assemblies used in transportation, recreational products and medical industries .The capacity of the Manufacturing Division is currently 200,000 units and it sells 160,000 units to the outside market at an average price of $96/unit.Cost to manufacture the cable assemblies are $42 variable and $8 fixed.Fixed costs per unit are based on its normal volume of 160,000 units.Centralia's Mobility Division uses cable assemblies in the manufacture of wheelchairs.It has offered to buy 25,000 units from the Manufacturing Division at $48 per unit.Calculate the operating income of the Manufacturing Division with and without the offer from the Mobility Division.Should the Manufacturing Division management accept the offer?

Answer the following question(s)using the information below: Greenlawn Ltd.has two divisions, Distribution and Production.The company's primary product is fertilizer.Each division's costs are provided below: The Distribution Division has been operating at a capacity of 4,000,000 kilograms a week and usually purchases 2,000,000 kilograms from the Production Division and 2,000,000 kilograms from other suppliers at $0.45 per kilogram. -Assume 100,000 kilograms are transferred from the Production Division to the Distribution Division for a transfer price of $0.40 per kilogram.The Distribution Division sells the 100,000 kilograms at a price of $0.55 each to customers.What is the company's operating income?

Which of the following is NOT a responsibility centre within an organization, whether centralized or decentralized?

Use the information below to answer the following question(s).Soft Cushion Company is highly decentralized.Each division is empowered to make its own sales decisions.The Assembly Division can purchase cushion stuffing from the Production Division or from external suppliers.The Production Division has been the major supplier of stuffing in recent years.The Assembly Division has announced that two external suppliers will be used to purchase the stuffing at $20 per kilogram for the next year.The Production Division recently increased its unit price to $40.The manager of the Production Division presented the following information; variable cost $32, fixed cost $8, to top management in order to attempt to force the Assembly Division to purchase the stuffing internally.The Assembly Division purchases 20,000 kg per month. -The seller of product A has idle capacity and has no alternative use for the excess capacity.The seller can sell each unit at $10.Outlay cost is $2.What is the opportunity cost of selling internally?

For each of the following activities, characteristics, and applications, tell whether they are primarily labelled as being found in a centralized organization, a decentralized organization, or both types of organizations. A)both B)centralization C)decentralization -Maximization of benefits over costs.

Motivation is the desire to attain a selected goal combined with the resulting drive or pursuit toward that goal.

An important advantage of decentralized operations is that it improves corporate control.