Exam 22: Management Control Systems, Transfer Pricing, and Multinational Considerations

One advantage of prorating the difference between a maximum and minimum transfer price of a product to be moved between divisions is that it saves the cost of objective audits of transfer pricing.

Briefly describe the conditions that should be met for market-based transfer pricing to lead to optimal decision making among subunits of a large organization.

A company has a plant in a high tax jurisdiction that produces products for a facility in a low tax jurisdiction. Suggest a strategy, including transfer prices, which will result in the lowest tax for the overall corporation.

Axelia Corporation has two divisions, Refining and Extraction. The company's primary product is Luboil Oil. Each division's costs are provided below: The Refining Division has been operating at a capacity of 40,300 barrels a day and usually purchases 25,400 barrels of oil from the Extraction Division and 15,100 barrels from other suppliers at $64 per barrel. What is the transfer price per barrel from the Extraction Division to the Refining Division, assuming the method used to place a value on each barrel of oil is 120% of full costs?

Incongruent decision making occurs when individuals and groups work toward achieving the organization's goals even if departmental performance is adversely affected.

DesMoines Valley Company has two divisions, Computer Services and Consultancy Services. In addition to their external customers, each division performs work for the other division. The external fees earned by each division in 20X5 were $200,000 for Computer Services and $350,000 for Consultancy Services. Computer Services worked 3,000 hours for Consultancy Services, who, in turn, worked 1,200 hours for Computer Services. The total costs of external services performed by Computer Services were $110,000 and $240,000 by Consultancy Services. Required: a.Determine the operating income for each division and for the company as a whole if the transfer price from Computer Services to Consultancy Services is $15 per hour and the transfer price from Consultancy Services to Computer Services is $12.50 per hour. b.Determine the operating income for each division and for the company as a whole if the transfer price between divisions is $17 per hour. c.What are the operating income results for each division and for the company as a whole if the two divisions net the hours worked for each other and charge $12.50 per hour for the one with the excess? Which division manager prefers this arrangement?

Olive Branch Company recently acquired an olive oil processing company that has an annual capacity of 2,000,000 liters and that processed and sold 1,400,000 liters last year at a market price of $4 per liter. The purpose of the acquisition was to furnish oil for the Cooking Division. The Cooking Division needs 800,000 liters 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, since fixed overhead cost should be recomputed with the larger volume. Any output of the Olive Oil Division not sold to the Cooking Division can be sold to outsiders for $4 per liter. 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 $2.20. c.What transfer price(s) do you recommend? Compute the operating income for the Olive Oil Division using your recommendation.

Which of the following is a disadvantage of dual pricing?

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

Management control systems utilize information gathered within a company and from external sources so as to aid management with their planning and control decision making.

For each of the following Balanced Scorecard measures, identify which of the four perspectives (Financial, Customer, Internal Business Process, or Learning and Growth) the measure best represents. ________a.On-time delivery of gasoline from refineries to retail stations ________b.Customer satisfaction ________c.Common stock price ________d.Return on investment ________e.Market share ________f.Number of days lost to accidents ________g.Employee satisfaction ________h.Friendliness of employees ________i.Repeat purchases ________j.Cash flow from operations

Which of the following taxes does transfer pricing affect?

In markets that are not perfectly competitive, ________.

Which of the following is a responsibility center to measure the revenues and costs of subunits in centralized or decentralized companies?

If the distress price is used as the transfer price, ________.

The River Falls Company has two divisions. The Cutting Division prepares timber at its sawmills. The Coating Division prepares the cut lumber into finished wood for the furniture industry. No inventories exist in either division at the beginning of 20X5. During the year, the Cutting Division prepared 60,000 cords of wood at a cost of $720,000. All the lumber was transferred to the Coating Division, where additional operating costs of $5 per cord were incurred. The 600,000 boardfeet of finished wood were sold for $2,500,000. Required: a.Determine the operating income for each division if the transfer price from Cutting to Coating is at cost - $12 a cord. b.Determine the operating income for each division if the transfer price is $9 per cord. c.Since the Cutting Division sells all of its wood internally to the Coating Division, does the manager care what price is selected? Why? Should the Cutting Division be a cost center or a profit center under the circumstances?

Division A sells ground veal internally to Division B, which in turn, produces veal burgers that sell for $19 per pound. Division A incurs costs of $1.25 per pound while Division B incurs additional costs of $6.50 per pound. Which of the following formulas correctly reflects the company's operating income per pound?

The management accounting systems, which provide information about the firm's costs, revenues, and income.

A company may choose to keep one set of accounting records for tax reporting and a second set for internal management reporting.

Decentralization in multinational companies may lead to lack of control.