Exam 21: Transfer Pricing and Multinational Management Control Systems

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 profit foregone by the seller if the products or services are transferred internally instead of selling them externally are called

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 -Multiple responsibility centres with various reporting units.

An informal management control systems includes specific rules, procedures, and performance measures.

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 2018.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?

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: -Assume the transfer price for a pair of soles is 150% of total costs of the Sole Division and 40,000 of soles are produced and transferred to the Assembly Division.The Sole Division's operating income is

Management control systems motivate managers and other employees to exert effort through a variety of rewards tied to the achievement of goals.

Tech Clothing Ltd.manufactures t-shirts.The Athletic Division sells its t-shirts for $9 to outsiders.T-shirts have manufacturing variable and fixed costs of $2.75 and $0.75, respectively.The division's total fixed manufacturing costs are $37,500 at the normal volume of 50,000 units.The Mountain Wear Division has offered to buy 5,000 t-shirts at the full cost of $3.50.They can sell the shirts for $10.The Athletic Division does not have excess capacity but could produce the 5,000 t-shirts using overtime.This would increase variable costs by $0.25 per unit and fixed costs by $6,250.Required: Determine the effect on corporate operating income if the Athletic division:

Additional factors that arise in multinational transfer pricing include tariffs and customs duties levied on imports of products into a country.

Alsation Ltd.has two divisions:.The Machining Division prepares the raw materials into component parts, and the Assembly Division assembles the components into finished product.No inventories exist in either division at the beginning of the year.During the year the Machining Division prepared 80,000 square metres of sheet metal at a cost of $480,000.All production was transferred to the Assembly Division where the metal was converted into 80,000 units of finished product at an additional costs of $5 per unit.The 80,000 units were sold for $2,000,000.Required: a.Determine the operating income for each division if the transfer price from Machining to Assembly is at cost. b.Determine the operating income for each division if the transfer price is $5/square metre. c.Since the Machining Division has all of its sales internally to the Assembly Division, does the manager care what price is selected? Why? Should the Machining Division be a cost centre or a profit centre under the circumstances?

Market-based transfer prices are generally accepted by tax authorities because they represent arm's length prices.

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: -If the Assembly Division sells 1,000 air conditioners at a price of $750.00 per air conditioner to customers, what is the company's operating income?

What are some of the factors, other than income taxation, that companies should consider when setting international transfer prices?

Provide a complete definition of a management control system.

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 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?

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. -What is the transfer price per kilogram from the Production Division to the Distribution Division, assuming the method used to place a value on each kilogram of fertilizer is 160% of variable 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. -The Production Division has no alternative use for the facilities used to manufacture the stuffing.What is the monthly operating income advantage (disadvantage)if the goods are purchased internally?

Clark Industries Ltd.manufactures monochromators that are used in a variety of applications.The Monochromator Division (M Division)sells its monochromators both internally and externally.It is operating at 80% of its 250,000 unit capacity and internal sales account for approximately 20% of its current sales volume.Internally the monochromators are transferred into the Aerospace Division (A Division)at a transfer price of $11,250 each.Variable production costs are the same for internal and external sales.The income statement for the M Division is presented below: The A Division uses one component in the production of its final product that sells for $75,000/unit.Other variable costs in the A Division are 40% of sales.and fixed costs per unit at its current capacity of 40,000 units are $17,250.The Aerospace Division is operating at its full capacity of 40,000 units and is evaluating whether it should invest to increase capacity.The investment would cost $900,000,000 and would have a useful life of 3 years.The equipment could be sold for $800,000 at the end of its useful life.For tax purposes it would be sold on January 1 of year 4.The machine would be used to manufacture a variation of its current product with the same transfer price.This new product would sell for $68,000 per unit.The variable cost ratio will be 45% of the selling price.The additional capacity of the new machine would be 14,000 units.It would qualify for a 30% CCA rate and the company would continue to have assets in the pool.Required: a.Evaluate the current transfer pricing policy from the standpoint of each division manager as well as the company as a whole. b.Using net present value (NPV)analysis, would the A Division manager want to invest in the new equipment if the required rate of return is 12% and the tax rate is 25%? c.If the investment is evaluated from a corporate perspective using NPV analysis and the 12% discount rate, does the decision change? Explain.

Briefly explain each of the three general methods used to determine a transfer price.

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.

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: 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.