Exam 21: Transfer Pricing and Multinational Management Control Systems

Use the information below to answer the following question(s).Blackoil Corp.has two divisions, Refining and Production.The company's primary product is Clean Oil.Each division's costs are provided below: The Production Division is able to sell the oil to other areas for $24 per litre.The Refining Division has been operating at a capacity of 80,000 litres a day, using oil from the Production Division and oil purchased from other suppliers.The Refining Division usually purchases 50,000 litres of oil, on average, from the Production Division and 30,000 litres, on average, from other suppliers at $40/litre. -What is the transfer price per litre from production to refining if the market price method of pricing is used?

The degree of freedom to make decisions is known as decentralization.

Subunits X and Y determined the price for interdepartmental services during the last monthly meeting, using the selling prices charged to outside parties.This is an example of

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.

Discuss some of the recent legislation and frameworks relating to assurance and internal controls.

For each of the following transfer price descriptions or operating situations, tell which of the general methods of transfer pricing it is most appropriate. A)any method B)negotiated C)cost-based D)market-based -Prices listed in a trade journal

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 idle capacity, what is the transfer price the Burnaby Division should agree to accept?

Products transferred between subunits within an organization are considered intermediate products.

Answer the following question(s)using the information below.Cool Air Ltd.manufactures only one type of air conditioner and has two divisions, the Compressor Division, and the Assembly Division.The Compressor Division manufactures compressors for the Assembly Division, which completes the air conditioner and sells them to retailers.The Compressor Division "sells" compressors to the Assembly Division.The market price for the Assembly Division to purchase a compressor is $77.(Ignore changes in inventory.)The fixed costs for the Compressor Division are assumed to be the same over the range of 5,000-10,000 units.The fixed costs for the Assembly Division are assumed to be $15.00 per unit at 10,000 units.Compressor's costs per compressor are: Assembly's costs per completed air conditioner are: -What is the transfer price per compressor from the Compressor Division to the Assembly Division if the method used to place a value on each compressor is 150% of variable costs?

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 total cost to Crush Company if the carbonated water is purchased from the local supplier?

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?

Briefly describe the arm's length principle and how it applies to transfers among international divisions.

For each of the following transfer price descriptions or operating situations, tell which of the general methods of transfer pricing it is most appropriate. A)any method B)negotiated C)cost-based D)market-based -145% of full costs

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. -Under what conditions would transferring products or services at market prices lead to optimal decisions within the organization?

For each of the following transfer price descriptions or operating situations, tell which of the general methods of transfer pricing it is most appropriate. A)any method B)negotiated C)cost-based D)market-based -Budgeted costs

Suboptimal decision making is also called congruent decision making.

Some companies use dual pricing, using two separate transfer-pricing methods to price each interdivisional transaction.

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 -Minimum of sub optimal decision making.

An advantage of decentralization is that it

Mar Company has two decentralized divisions, X and Y.Division X has been purchasing certain component parts from Division Y at $75 per unit.Because Division Y plans to raise the price to $100 per unit, Division X desires to purchase these parts from external suppliers for $75 per unit.The following information is available: Division Y annual production If Division X buys from an external supplier, the facilities Division Y uses to manufacture these parts will be idle.Assuming Division Y's fixed costs cannot be avoided, what is the result if Mar requires Division X to buy from Division Y at a transfer price of $100 per unit?