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

The transfer price creates revenues for the selling subunit and costs for the buying subunit affecting each subunit's operating income.

Soft Cushion Company is highly decentralized. Each division is empowered to make its own sales decisions. The Assembly Division can purchase stuffing, a key component, 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 $40 per pound for the next year. The Production Division recently increased its unit price to $58. The manager of the Production Division presented the following information - variable cost $40 and fixed cost $8 -to top management in order to attempt to force the Assembly Division to purchase the stuffing internally. The Assembly Division purchases 20,600 pounds of stuffing per month. What would be the monthly operating advantage (disadvantage) of purchasing the goods internally, assuming the external supplier increased its price to $82 per pound and the Production Division is able to utilize the facilities for other operations, resulting in a monthly cash-operating savings of $34 per pound?

Both the market-based transfer pricing approach and cost-based methods are useful for evaluating subunit performance.

Decisions regarding sources of long-term financing are best made at subunit level as the subunit has local knowledge and can leverage it in negotiations.

The Microchip Division of Silicon Computers produces computer chips that are sold to the Personal Computer Division and to outsiders. Operating data for the Microchip Division for 20X5 are as follows: The Personal Computer Division has just received an offer from an outside supplier to furnish chips at $8.90 each. The manager of Microchip Division is not willing to meet the $8.90 price. She argues that it costs her $9.00 to produce and sell each chip. Sales to outside customers are at a maximum of 200,000 chips. Required: a.Verify the Microchip Division's $9.00 unit cost figure. b.Should the Microchip Division meet the outside price of $8.90? Explain. c.Could the $8.60 price be met and still show a profit for the Microchip Division sales to the Personal Computer Division? Show computations.

Transfer-pricing systems enable managers to focus on maximizing the performance of their subunits.

Crush Company makes internal transfers at 155% of full cost. The Soda Refining Division purchases 41,000 containers of carbonated water per day, on average, from a local supplier, who delivers the water for $58 per container via an external shipper. To reduce costs, the company located an independent supplier in Illinois who is willing to sell 41,000 containers at $38 each, delivered to Crush Company's Shipping Division in Missouri. The company's Shipping Division in Missouri has excess capacity and can ship the 41,000 containers at a variable cost of $12.50 per container. What is the total cost of purchasing the water from the Illinois supplier and shipping it to the Soda Division?

Effective management control systems should also motivate managers and other employees.

What does Section 482 of the U.S. Internal Revenue Code govern?

For each of the following activities, characteristics, and applications, identify whether they can be found in a centralized organization, a decentralized organization, or both types of organizations. ________a.Freedom for managers at lower organizational levels to make decisions ________b.Gathering information may be very expensive ________c.Greater responsiveness to user needs ________d.Have few interdependencies among divisions ________e.Maximum constraints and minimum freedom for managers at lowest levels ________f.Maximization of benefits over costs ________g.Minimization of duplicate functions ________h.Minimum of suboptimization ________i.Multiple responsibility centers with various reporting units ________j.Profit centers

When companies do not want to use market prices or find it too costly, they typically use ________ prices, even though suboptimal decisions may occur.

Timekeeper Corporation has two divisions, Distribution and Manufacturing. The company's primary product is high-end watches. Each division's costs are provided below: The Distribution Division has been operating at a capacity of 4,010,000 units a week and usually purchases 2,005,000 units from the Manufacturing Division and 2,005,000 units from other suppliers at $15.00 per unit. What is the transfer price per watch from the Manufacturing Division to the Distribution Division, assuming the method used to place a value on each transfer is 125% of full costs?

In a management control system, which of the following is described as the extent to which managers strive or endeavor in order to achieve a goal?

A perfectly competitive market exists when which of the following conditions are present?

Plish Company manufactures only one type of washing machine and has two divisions, the Compressor Division, and the Fabrication Division. The Compressor Division manufactures compressors for the Fabrication Division, which completes the washing machine and sells it to retailers. The Compressor Division "sells" compressors to the Fabrication Division. The market price for the Fabrication Division to purchase a compressor is $42.00. (Ignore changes in inventory.) The fixed costs for the Compressor Division are assumed to be the same over the range of 12,000-17,000 units. The fixed costs for the Fabrication Division are assumed to be $8.00 per unit at 17,000 units. Assume the transfer price for a compressor is 145% of total costs of the Compressor Division and 1500 of the compressors are produced and transferred to the Fabrication Division. The Compressor Division's operating income is ________.

Which of the following is not a benefit of decentralization?

Effort in terms of management control systems is defined in terms of physical exertion such as a worker producing at a faster rate.

For each of the following, identify whether it BEST relates to market-based, cost-based, negotiated, or all types of transfer pricing. ________a.Bargaining between selling and buying units ________b.Budgeted costs ________c.145% of full costs ________d.Internal product transfers are required if goods are available internally ________e.Manufacturing costs plus marketing costs plus distribution costs plus customer service costs ________f.Prices listed in a trade journal ________g.Selling price less normal sales commissions ________h.Variable manufacturing cost plus a markup

Management control systems is designed only for top level managers and is not applicable to line managers.

Which of the following helps in avoiding costly transfer-pricing disputes between taxpayers and tax authorities?