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. A)both B)centralization C)decentralization -Have few interdependencies among divisions.

A Canadian company has subsidiaries in France, England, Canada, and in the USA.The company is somewhat vertically-integrated in that the Canadian subsidiary sells some of its output to the USA subsidiary which further processes the material.If the market is fully-competitive, which price is best for goal congruence?

River Road Paint Company has two divisions.The Production Division produces base colours used by the Mixing Division.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.

Examples of market-based transfer prices include variable manufacturing costs, full manufacturing costs, and full product costs.

Answer the following question(s)using the information below.Beta Shoe Ltd.manufactures only one type of shoe and has two divisions, the Sole Division, and the Assembly Division.The Sole Division manufactures soles for the Assembly Division, which completes the shoe 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 $20.(Ignore changes in inventory.)The per unit fixed costs are based on a production of 60,000 pairs of shoes.Sole's costs per pair of soles are: Assembly's costs per completed pair of shoes are: -Assume the transfer price for a pair of soles is 180% 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

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. -When the vendor division receives full cost plus a mark-up, and the buying division pays the market price, this is referred to as

If the product sold between divisions has no intermediate market, the opportunity cost of supplying the product internally is the variable cost of the product.

Use the information below to answer the following question(s).Bon Accord uses two divisions in the production of soybean burgers.Division A sells soybean paste internally to Division B, which, in turn, produces soybean burgers that sell for $5 per kilogram.Division A incurs costs of $0.75 per kilogram, while Division B incurs additional costs of $2.50 per kilogram. -What is Bon Accord's operating income per kilogram?

Explain what transfer prices are, and what are the four criteria used to evaluate them?

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 -Bargaining between selling and buying units

A product is know as ________ when it is transferred from one subunit to another subunit in the same organization.

In a time of distress prices, which of the following is TRUE?

The Home Office Company makes all types of office desks.The Computer Desk Division is currently producing 10,000 desks per year with a capacity of 15,000.The variable costs assigned to each desk are $300 and annual fixed costs of the division are $900,000.The computer desks sell for $400.The Executive Division wants to buy 5,000 desks at $280 for its custom office design business.The Computer Desk manager refuses the order because the price is below variable cost.The Executive manager argues that the order should be accepted because it will lower the fixed cost per desk from $90 to $60 and will take the division to its capacity, thereby causing operations to be at their most efficient level.Required: a.Should the order from Executive Division be accepted by Computer Desk? Explain why or why not. b.From the perspective of the Computer Desk Division and the company, should the order be accepted if the Executive Division plans on selling the chairs in the outside market for $420 after incurring additional costs of $100 per desk? c.What action should the company president take?

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 market-based transfer price per compressor from the Compressor Division to the Assembly Division?

The Brownshoe Company has three specialized divisions.The Casual Shoe Division has asked the Sole Division to supply it with a large quantity of soles.The Sole Division is currently at capacity.The Sole Division sells soles outside for $5.00 each.The Casual Shoe Division, which is operating at 50 percent capacity, has offered to pay $4.00 per sole.The Sole Division has a variable cost of $3.60 per sole.The Casual Shoe Division has the following cost structure: The manager of Casual Shoe believes that the $4 price from Sole is necessary if the division is to compete in the market for casual shoes.Required: a.As manager of Sole Division, would you recommend that your division supply the soles to Casual Shoe? Why? b.Would it be desirable for the division to supply Casual Shoe with the soles for $4 assuming the Sole Division had excess capacity? Why? c.What would be the corporate position assuming the Sole Division has excess capacity?

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 -Maximum constraints and minimum freedom for managers at lowest levels.

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 assuming the method used is 175% 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. -Cash outflows that are directly associated with the production and transfer of the products and services are called

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 -Selling price less normal sales commissions

When demand outstrips supply, market prices may drop below historical averages.These prices are known as distress prices.