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

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.

Crush Company makes internal transfers at 160% of full cost. The Soda Refining Division purchases 40,000 containers of carbonated water per day, on average, from a local supplier, who delivers the water for $40 per container via an external shipper. To reduce costs, the company located an independent supplier in Illinois who is willing to sell 40,000 containers at $30 each, delivered to Crush Company's Shipping Division in Missouri. The company's Shipping Division in Missouri has excess capacity and can ship the 40,000 containers at a variable cost of $4.50 per container. What is the total cost of purchasing the water from the Illinois supplier and shipping it to the Soda Division?

Surveys indicate that decisions made most frequently at the corporate level are related to sources of supplies and products to manufacture.

A transfer-pricing method leads to goal congruence when managers:

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. -Calculate and compare the difference in overall corporate net income between Scenario A and Scenario B if the Assembly Division sells 100,000 pairs of shoes for $120 per pair to customers.

A benefit of using a market-based transfer price is the:

Copperstone Company has two divisions. The Bottle Division produces products that have variable costs of $3 per unit. Its 20X5 sales were 150,000 to outsiders at $5 per unit and 40,000 units to the Mixing Division at 140% of variable costs. Under a dual transfer-pricing system, the Mixing Division pays only the variable cost per unit. The fixed costs of the Bottle Division are $125,000 per year. Mixing sells its finished products to outside customers for $11.50 per unit. Mixing has variable costs of $2.50 per unit in addition to the costs from the Bottle Division. The annual fixed costs of Mixing were $85,000. There were no beginning or ending inventories during the year. Required: What are the operating incomes of the two divisions and the company as a whole for the year? Explain why the company's operating income is less than the sum of the two divisions' total income.

A DISADVANTAGE of a negotiated transfer price is that:

In analyzing transfer prices, the:

A perfectly competitive market exists when there is a homogeneous product with buying prices equal to selling prices and no individual buyers or sellers can affect those prices by their own actions.

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

For each of the following, identify whether it BEST relates to market-based, cost-based, negotiated, or all types of transfer pricing.

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

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 20X8. During the year, the Raw Material Division prepared 450,000 square feet 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 foot were incurred. The 450,000 square feet 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 foot. b. Determine the operating income for each division if the transfer price is $5 per square foot. 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?

The minimum transfer price equals:

The Micro Division of Silicon Computers produces computer chips that are sold to the Personal Computer Division and to outsiders. Operating data for the Micro Division for 20X5 are as follows: The Personal Computer Division has just received an offer from an outside supplier to furnish chips at $8.60 each. The manager of Micro Division is not willing to meet the $8.60 price. She argues that it costs her $9.00 to produce and sell each chip. Sales to outside customers are at a maximum of 200,000 chips. Required: a. Verify the Micro Division's $9.00 unit cost figure. b. Should the Micro Division meet the outside price of $8.60? Explain. c. Could the $8.60 price be met and still show a profit for the Micro Division sales to the Personal Computer Division? Show computations.

Soft Cushion Company is highly decentralized. Each division is empowered to make its own sales decisions. The Assembly Division can purchase stuffing, a key component, 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 pound 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 and fixed cost $8 t o top management in order to attempt to force the Assembly Division to purchase the stuffing internally. The Assembly Division purchases 20,000 pounds of stuffing 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 pound and the Production Division is able to utilize the facilities for other operations, resulting in a monthly cash-operating savings of $30 per pound?

DesMoines Valley Company has two divisions, Computer Services and Management Advisory Services. In addition to their external customers, each division performs work for the other division. The external fees earned by each division in 20X5 were $200,000 for Computer Services and $350,000 for Management Advisory Services. Computer Services worked 3,000 hours for Management Advisory Services, who, in turn, worked 1,200 hours for Computer Services. The total costs of external services performed by Computer Services were $110,000 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 between divisions 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 the hours worked for each other and charge $12.50 per hour for the one with the excess? Which division manager prefers this arrangement?

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

Bedtime Bedding Company manufactures pillows. The Cover Division makes covers and the Assembly Division makes the finished products. The covers can be sold separately for $5.00. The pillows sell for $6.00. The information related to manufacturing for the most recent year is as follows: Required: Compute the operating income for each division and the company as a whole. Use market value as the transfer price. Are all managers happy with this concept? Explain.