Exam 23: Transfer Pricing and Multinational Management Control Systems

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. -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?

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

What are some of the factors, other than income taxation, that companies should consider when setting international transfer prices?

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?

The president of Silicon Company has just returned from a week of professional development courses and is very excited that she will not have to change the organization from a centralized structure to a decentralized structure just to have responsibility centres. However, she is somewhat confused about how responsibility centres relate to centralized organizations where a few managers have most of the authority. Required: Explain how a centralized organization might allow for responsibility centres.

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

Department A charges Department B $1,350 for copying services provided. The $1,350 is considered a transfer price.

The price one subunit of an organization charges for a product or service supplied to another subunit of the same organization is called

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 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 essence of decentralization is the freedom for managers at lower levels of the organization to make decisions.

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 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 $7 per pair at 100,000 units. 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 operating income of both divisions together?

Management control systems reflect only financial data.

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 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.

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. -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 B's operating income per kilogram assuming the transfer price of the soybean paste is set at $1.25 per kilogram?

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?

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

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 transfer the product to Division K where it is finished and sold for $500 per unit. Variable costs in Division K is $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 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.

The degree of freedom to make decisions is

Global Giant, a multinational corporation, has a producing subsidiary in a low tax rate country and a marketing subsidiary in a high tax country. If Global Giant wants to minimize its worldwide tax liability, we would expect Global Giant to

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?