Exam 22: Management Control Systems, Transfer Pricing, and Multinational Considerations

Transferring products or services at market prices generally leads to optimal decisions when:

Dual pricing reduces the goal-congruence problem associated with a pure cost-based transfer-pricing method.

Dual pricing is NOT widely used in practice because:

The benefits of a decentralized organization are greater when a company:

A benefit of decentralization is that it creates better responsiveness to local needs.

The degree of freedom to make decisions is:

Discuss the possible problems a corporation might have if its operations are totally decentralized.

Effort is defined as achievement of a goal.

Better Food Company recently acquired an olive oil processing company that has an annual capacity of 2,000,000 liters and that processed and sold 1,400,000 liters last year at a market price of $4 per liter. The purpose of the acquisition was to furnish oil for the Cooking Division. The Cooking Division needs 800,000 liters 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, since fixed overhead cost should be recomputed with the larger volume. Any output of the Olive Oil Division not sold to the Cooking Division can be sold to outsiders for $4 per liter. 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? Compute the operating income for the Olive Oil Division using your recommendation.

Answer the following questions using the information below: Calculate the Division operating income for the AlphaShoe Company which 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 $40. (Ignore changes in inventory.)The fixed costs for the Sole Division are assumed to be the same over the range of 40,000-100,000 units. The fixed costs for the Assembly Division are assumed to be $14 per pair at 100,000 units. -If the Assembly Division sells 100,000 pairs of shoes at a price of $120 a pair to customers, what is the operating income of both divisions together?

A well-designed management control system obtains all of its information from within the company.

Tax considerations should play no part in determining a transfer price between international divisions of a firm.

Which of the following transfer-pricing methods preserves sub-unit autonomy?

For each of the following statements regarding the satisfaction of transfer pricing criteria, identify whether you would expect the transfer pricing method to meet the criteria. Provide a yes, no, or sometimes for each situation.

It is possible to increase the overall after-tax profit of a multinational corporation by adjusting transfer prices.

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

Motivation is the desire to attain a selected goal combined with the resulting drive or pursuit toward that goal.

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. To reduce costs, the company located an independent supplier in Missouri who is willing to sell 30,000 containers at $20 each, delivered to Crush Company's Shipping Division in Missouri. The company's Shipping Division in Missouri has excess capacity and can ship the 30,000 containers at a variable cost of $2.50 per container. What is the total cost to Crush Company if the carbonated water is purchased from the local supplier?

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

The costs used in cost-based transfer prices can only be budgeted costs.