Exam 21: Transfer Pricing and Multinational Management Control Systems

Informal management control systems include

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: -What is the transfer price per pair of sandals from the Sole Division to the Assembly Division if the transfer price per pair of soles is 125% of full costs?

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 Division A's operating income per kilogram assuming the transfer price of the soybean paste is set at $1.25 per kilogram?

Xenon Autocar Company manufactures automobiles.The Fastback Car Division sells its cars for $50,000 each to the general public.The fastback cars have manufacturing costs of $25,000 each for variable and $15,000 each for fixed costs.The division's total fixed manufacturing costs are $75,000,000 at the normal volume of 5,000 units.The Coupe Car Division has been unable to meet the demand for its cars this year.It has offered to buy 1,000 cars from the Fastback Car Division at the full cost of $40,000.The Fastback Car Division has excess capacity and the 1,000 units can be produced without interfering with the current outside sales of 5,000.The 6,000 volume is within the division's relevant operating range.Explain whether the Fastback Car Division should accept the offer.

Empire Ltd.has two divisions.Division C is located in Canada where the income tax rate is 40%.Division K is located in Korea where the income tax rate is 30%.Division C produces an intermediate product at a variable cost of $100 per unit and transfers the product to Division K where it is finished and sold for $500 per unit.Variable costs in Division K are $80 per unit.Fixed costs are $75,000 per year in Division C and $90,000 per year in Division K.Assume 1,000 units are produced and transferred annually and the minimum transfer price allowed by the Canadian tax authorities is the variable cost.Also assume operating income in each country is equal to taxable income.Required: a.What transfer price should be set for Empire to minimize its total income taxes? Show your calculations. b.If Empire desires to minimize its total income taxes, calculate the amount of tax liability in each country.

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: -What is the transfer price per pair of sandals from the Sole Division to the Assembly Division if the method used to place a value on each pair of soles 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 incremental cost of purchasing the water from the independent producer and shipping it to the Soda Division if the company's Manitoba shipping division has idle capacity?

A decentralized organizational structure may result in duplication of activities.

Vancouver Valley Ltd.has two divisions, Computer Services and Management Advisory Services.In addition to its external customers, each division performs work for the other division.The external fees earned by each division in the past year were $200,000 for Computer Services and $350,000 for Management Advisory Services.Computer Services worked 3,000 hours for Management Advisory Services and Management Advisory Services in turn worked 1,200 hours for Computer Services.The total costs of external services performed were $110,000 by Computer Services, and $240,000 by Management Advisory 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 Management Advisory Services is $15 per hour and the transfer price from Management Advisory 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 from each to the other is $15 per hour. c.What are the operating income results for each division and for the company as a whole if the two divisions net their hours worked for each other and charge $12.50 per hour for the one with the excess? Which division manager prefers this arrangement?

A management control system is a means of gathering and using information to aid and coordinate the process of making planning and control decisions throughout the organization, and to guide employee behaviour.

Negotiated transfer prices are always transacted at the top management levels.

The goal of a management control system is to improve the collective decisions in an organization in an economically feasible way.

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.

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 companies are unable to choose a transfer-pricing method which meets the requirements of the divisions concerned, they may use

Transfer prices among divisions within Canada are irrelevant.Do you agree with this statement? Explain.

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: -What is the transfer price per pair of soles from the Sole Division to the Assembly Division if the method used to place a value on each pair of soles is 180% of variable costs?

Tech Clothing Ltd.manufactures socks.The Athletic Division sells its socks for $13 a pair to outsiders.Socks have manufacturing variable and fixed costs of $3.50 and $1.25, respectively.The division's total fixed manufacturing costs are $62,500 at the normal volume of 50,000 units.The Mountain Wear Division has offered to buy 5,000 pairs of socks at the full cost of $4.75.They can sell the socks for $15.The Athletic Division does not have excess capacity but could produce the 5,000 pairs of socks using overtime.This would increase variable costs by $0.75 per unit and fixed costs by $8,900.Required: Determine the effect on corporate operating income if the Athletic division:

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.The Burnaby Division will save $3 per unit of direct materials costs for the components manufactured for the Surrey Division.Assuming Burnaby Division has idle capacity, what is the minimum transfer price the Burnaby Division should agree to accept?

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 Refining Division's operating income if 150 litres of oil are sold at $110 /litre and 200 litres are transferred in? Assume the transfer price is based on 175% of variable costs.

The choice of a transfer-pricing method has minimal effect on the allocation of company-wide operating income among divisions.