Exam 21: Transfer Pricing and Multinational Management Control Systems

Dominion Ltd.has two divisions.Division C is located in Canada where the income tax rate is 40%.Division I is located in Ireland where the income tax rate is 20%.Division C produces an intermediate product at a variable cost of $90 per unit and transfers the product to Division I where it is finished and sold for $400 per unit.Variable costs in Division I are $60 per unit.Fixed costs are $75,000 per year in Division C and $20,000 per year in Division I.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: -If the Assembly Division sells 100,000 pairs of sandals at a price of $35 a pair to customers, what is the company's operating income?

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. -In analyzing transfer prices

There is seldom a single transfer price that simultaneously meets the criteria of goal congruence, management effort, and subunit autonomy.

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

Under distress pricing conditions, long run average prices may be used in setting transfer prices.Such actions negatively affect the supplying division.

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 -Greater responsiveness to user needs.

Companies may approach tax authorities to obtain an Advanced Transfer Price Arrangement to ascertain if a proposed transfer pricing arrangement is acceptable.

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. -What would be the monthly operating advantage (disadvantage)of purchasing the goods internally assuming the external supplier increased its price to $50 per kilogram and the Production Division is able to utilize facilities for other operations, resulting in a monthly cash-operating savings of $30 per kilogram?

The degree of freedom to make decisions is

What is the role of unused capacity within the selling division in the determination of a negotiated transfer price to another division?

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 transfer price would likely be used, given Canada Revenue Agency's published policy on transfer pricing?

No matter how low the transfer price, the manager of the selling division should sell the division's product to other company divisions in the interests of overall company profitability.

All of the following criteria may be used to choose a transfer-pricing method EXCEPT

A company has a plant in a high tax jurisdiction that produces products for a facility in a low tax jurisdiction.Suggest a strategy, including transfer prices, which will result in the lowest tax for the overall corporation.

Full-cost transfer prices are adequate and lead to goal congruence for decisions that require knowledge of short-run variable 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: -If the Assembly Division sells 100,000 pairs of shoes at a price of $60 a pair to customers, what is the company's operating income?

Better Food Company recently acquired an olive oil processing company that has an annual capacity of 2,000,000 litres and that processed and sold 1,400,000 litres last year at a market price of $4 per litre.The purpose of the acquisition was to furnish oil for the Cooking Division.The Cooking Division needs 800,000 litres of oil per year.It has been purchasing oil from suppliers at the market price.Production costs at capacity of the olive oil company, now a division, are as follows: Management is trying to decide what transfer price to use for sales from the newly acquired company to the Cooking Division.The manager of the Olive Oil Division argues that $4, the market price, is appropriate.The manager of the Cooking Division argues that the cost of $2.14 should be used, or perhaps a lower price as fixed overhead cost should not be relevant.Any output of the Olive Oil Division not sold to the Cooking Division can be sold to outsiders for $4 per litre.Required: a.Compute the operating income for the Olive Oil Division using a transfer price of $4. b.Compute the operating income for the Olive Oil Division using a transfer price of $2.14. c.What transfer price(s)do you recommend? Justify your answer.

Answer the following question(s)using the information below.Easy Fit Ltd.manufactures heating, ventilation, and air conditioning (HVAC)equipment.The Manufacturing Division creates parts; and, the Assembly Division builds and sells the equipment.The Manufacturing Division "sells" furnace parts packages to the Assembly Division.The market price for the Assembly Division to purchase a mini furnace is $3,500.The fixed costs for the Manufacturing Division are assumed to be the same over the range of 2,000-5,000 units.The fixed costs for the Assembly Division are assumed to be $40.00 per unit at 5,000 units.Manufacturing costs per furnace are: Assembly's costs per completed furnace are: -Which of the following is an advantage of an Advance Transfer Price Arrangement (APA)?

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 market-based transfer price per pair of soles from the Sole Division to the Assembly Division?