Exam 21: Transfer Pricing and Multinational Management Control Systems

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 -Greater responsiveness to user needs.

River Road Paint Company has two divisions. The Production Division produces base colours used by the Mixing Division. In 2015 the Production Division had external sales of 200,000 units at $8.00 per unit; and, transferred 60,000 units to the Mixing Division. The variable costs in the Production Division were $5 per unit and the fixed costs were $520,000 based on a practical capacity of 260,000 units. The Mixing Division sells its finished product to customers for $11.20 per unit. The Mixing Division had variable costs of $2.50 per unit and the annual fixed costs were $150,000. There were no beginning or ending inventories during the year. Required: Prepare the general journal entry for the transfer assuming that a dual pricing arrangement has been agreed to that requires the Mixing Department to pay the variable cost and the Production Department to receive the market price.

The president of Silicon Company has just returned from a week of professional development courses and is very excited that she will not have to change the organization from a centralized structure to a decentralized structure just to have responsibility centres. However, she is somewhat confused about how responsibility centres relate to centralized organizations where a few managers have most of the authority. Required: Explain how a centralized organization might allow for responsibility centres.

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 -Maximization of benefits over costs.

Better Food Company recently acquired an olive oil processing company that has an annual capacity of 2,000,000 litres and that processed and sold 1,400,000 litres last year at a market price of $4 per litre. The purpose of the acquisition was to furnish oil for the Cooking Division. The Cooking Division needs 800,000 litres of oil per year. It has been purchasing oil from suppliers at the market price. Production costs at capacity of the olive oil company, now a division, are as follows: Management is trying to decide what transfer price to use for sales from the newly acquired company to the Cooking Division. The manager of the Olive Oil Division argues that $4, the market price, is appropriate. The manager of the Cooking Division argues that the cost of $2.14 should be used, or perhaps a lower price as fixed overhead cost should not be relevant. Any output of the Olive Oil Division not sold to the Cooking Division can be sold to outsiders for $4 per litre. Required: a. Compute the operating income for the Olive Oil Division using a transfer price of $4. b. Compute the operating income for the Olive Oil Division using a transfer price of $2.14. c. What transfer price(s) do you recommend? Justify your answer.

For each of the following transfer price descriptions or operating situations, tell which of the general methods of transfer pricing it is most appropriate. -Budgeted costs

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 -Minimization of duplicate functions.

Stavanger Ltd. is a Canadian company with a fully owned subsidiary in Ireland. The Irish subsidiary produces a component for off shore gas compressors that are sold in Canada. The components have a variable cost of 1,700 Euros and a full cost of 2,100 Euros. The 2,000 components required can be purchased in Canada for $3,500. Assume the minimum transfer price allowed by the Canadian tax authorities is the variable cost and the maximum is the market value. Also assume operating income in each country is equal to taxable income. One Euro is worth $1.45 Canadian. The marginal tax rate in Canada is 25% and in Ireland 12.5%. Required: a. What transfer price should be set for Stavanger Ltd. to minimize its total income taxes? Show your calculations. b. If Stavanger Ltd. desires to minimize its total income taxes, calculate the amount of tax liability in each country in Canadian dollars.

For each of the following transfer price descriptions or operating situations, tell which of the general methods of transfer pricing it is most appropriate. -Selling price less normal sales commissions

A market is said to be perfectly-competitive when

Sportswear Ltd. manufactures socks. The Athletic Division sells its socks for $6 a pair to outsiders. Socks have manufacturing variable and fixed costs of $2.50 and $1.50, respectively. The division's total fixed manufacturing costs are $105,000 at the normal volume of 70,000 units. The European Division has offered to buy 15,000 socks at the full cost of $4. The Athletic Division has excess capacity and the 15,000 units can be produced without interfering with the current outside sales of 70,000. The 85,000 volume is within the division's relevant operating range. Explain whether the Athletic Division should accept the offer.

Walton Industries has two divisions: Machining and Assembly. The Assembly Division is looking to source 20,000 units annually of specialized component product from Machining Division. The special components have variable costs of $260 per unit in variable production costs. The Machine Products Division has a bid from an outside supplier of $445 per unit. However, to meet the requirements of the Assembly Division, Machining would have to cut back production of an existing product. This product sells for $565 per unit, and requires $369 per unit in variable production costs. Packaging and shipping costs of the existing product are $12 per unit, but these would be slashed by 75% for the specialized component for Assembly. Machining currently sells 120,000 units of the existing product and this volume would have to be reduced by 25% to meet the Assembly Division's demand. Required: Should the transfer take place, and if so, what would be the range of acceptable transfer prices?

Hendricks Ltd. of Calgary manufactures and sells computers. The Manufacturing Division is located in China and transfers 75% of its output to the Assembly Division in the Philippines. The balance of the product is sold in the local market at 2,100 yuan/unit. The Philippines division sells 20% of its output in the local market at 31,500 pesos/unit, with the balance shipped to Calgary. The Calgary operation packages the units and sells the final product at $1,900 Canadian per unit. The following budget data are available: Exchange rates are: $1 Canadian = 7 yuan and $1 Canadian = 45 pesos Tax rates are 45% in China, 20% in the Philippines and 40% in Canada. Income taxes are not included in the calculation of cost-based transfer prices. Assume that Hendricks does not pay Canadian tax on amounts already taxed in foreign jurisdictions. Take each calculation to 2 decimal places. Required: The company has determined that it may transfer units at 250% of variable cost or at market and comply with all existing tax legislation. Which transfer pricing method should the company pursue? Support your recommendation with appropriate calculations.

For each of the following transfer price descriptions or operating situations, tell which of the general methods of transfer pricing it is most appropriate. -Prices listed in a trade journal

The Transportation Division of Petrolia Paint Company can purchase paint from an independent producer at $12.60 per litre. The company has three divisions: Production, Transportation, and Paint. The company's Transportation Division is currently buying paint from the Paint Division for $24 per litre. Transfer prices are based on 125 percent of full cost. Which of the following would occur if the company uses dual pricing to record the Transportation Division purchases of paint from the Paint Division?

The Assembly Division of Canadian Car Company has offered to purchase 90,000 batteries from the Electrical Division for $104 per unit. At a normal volume of 250,000 batteries per year, production costs per battery are as follows: The Electrical Division has been selling 250,000 batteries per year to outside buyers at $136 each. Capacity is 350,000 batteries per year. The Assembly Division has been buying batteries from outside sources for $130 each. Required: a. Should the Electrical Division manager accept the offer as is, make a counter offer, or reject the offer? Explain. b. From the company's perspective, will the internal sales be of any benefit? Explain

Sandra's Sheet Metal Company has two divisions. The Raw Material Division prepares sheet metal at its warehouse facility. The Fabrication Division prepares the cut sheet metal into finished products for the air conditioning industry. No inventories exist in either division at the beginning of 2015. During the year, the Raw Material Division prepared 450,000 square metres of sheet metal at a cost of $1,800,000. All the sheet metal was transferred to the Fabrication Division, where additional operating costs of $1.50 per square metre were incurred. The 450,000 square metres of finished fabricated sheet metal products were sold for $3,875,000. Required: a. Determine the operating income for each division if the transfer price from Raw Material to Fabrication is at a cost of $4 per square metre. b. Determine the operating income for each division if the transfer price is $5 per square metre. c. Since the Raw Materials Division sells all of its sheet metal internally to the Fabrication Division, does the Raw Materials manager care what price is selected? Why? Should the Raw Materials Division be a cost center or a profit center under the circumstances?

A company has two divisions. The Bottle Division produces products that have variable costs of $3 per unit. For the current year, sales were 150,000 to outsiders at $5 per unit and 40,000 units to the Mixing Division at 140 percent of variable costs. Under a dual transfer pricing system, the Mixing Division pays only the variable cost per unit. The fixed costs of Bottle Division were $125,000 per year. Mixing sells its finished products to outside customers for $11.50 per unit. Mixing has variable costs of $2.50 per unit in addition to the costs from Bottle. The annual fixed costs of Mixing were $85,000. There were no beginning or ending inventories during the year. Required: What are the operating incomes of the two divisions and the company as a whole for the year? Explain why the company operating income is less than the sum of the two divisions' total income.

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?

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 -Gathering information may be very expensive.