Exam 23: Transfer Pricing and Multinational Management Control Systems

Management control systems collect which type of data?

Subunits X and Y determined the price for interdepartmental services during the last monthly meeting, using the selling prices charged to outside parties. This is an example of

Clark Industries Ltd. manufactures monochromators that are used in a variety of applications. The Monchromator Division (M Division) sells its monochromators both internally and externally. It is operating at 80% of its 250,000 unit capacity and internal sales account for approximately 20% of its current sales volume. Internally the monochromators are transferred into the Aerospace Division (A Division) at a transfer price of $11,250 each. Variable production costs are the same for internal and external sales. The income statement for the M Division is presented below: The A Division uses one component in the production of its final product that sells for $75,000/unit. Other variable costs in the A Division are 40% of sales. and fixed costs per unit at its current capacity of 40,000 units are $17,250. The Aerospace Division is operating at its full capacity of40,000 units and is evaluating whether it should invest to increase capacity. The investment would cost $900,000,000 and would have a useful life of 3 years. The equipment could be sold for $800,000 at the end of its useful life. For tax purposes it would be sold on January 1 of year 4. The machine would be used to manufacture a variation of its current product. This new product would sell for $68,000 per unit. The variable cost ratio would be higher at 45%. The additional capacity of the new machine would be 14,000 units. It would qualify for a 30% CCA rate and the company would continue to have assets in the pool. Required: a. Evaluate the current transfer pricing policy from the standpoint of each division manager as well as the company as a whole. b. Using net present value (NPV) analysis, would the A Division manager want to invest in the new equipment if the required rate of return is 12% and the tax rate is 25%? c. If the investment is evaluated from a corporate perspective using NPV analysis and the 12% discount rate, does the decision change? Explain.

When the vendor division receives full cost plus a mark-up, and the buying division pays the market price, this is referred to as

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.

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 Production Division's operating income per 200 litres of oil reported under the 175% of variable costs method?

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 by Computer Services were $110,000 and $240,000 by Management Advisory Services respectively. 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?

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. Freedom for managers at lower organizational levels to make decisions. b. Gathering information may be very expensive. c. Greater responsiveness to user needs. d. Have few interdependencies among divisions. e. Maximum constraints and minimum freedom for managers at lowest levels. f. Maximization of benefits over costs. g. Minimization of duplicate functions. h. Minimum of sub optimization. i. Multiple responsibility centres with various reporting units. j. Profit centres

One benefit of centralization is an increase in development of an experienced pool of management talent to fill higher-level management positions.

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 transfer price per litre from production to refining if the market price method of pricing is used?

The seller of product A has idle capacity and has no alternative use for the excess capacity. The seller can sell each unit at $10. Outlay cost is $2. What is the opportunity cost of selling internally?

If the product sold between divisions has no intermediate market, the opportunity cost of supplying the product internally is the variable cost of the product.

The general guideline for determining the minimum transfer price is

Opportunity costs represent the cash flows directly associated with the production and transfer of the products and services.

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 transfer price per litre from the Production Division to the Refining Division assuming the method is 120% of full costs?

Which of the following is NOT a responsibility centre within an organization, whether centralized or decentralized?

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

In analyzing transfer prices

Some companies use dual pricing, using two separate transfer-pricing methods to price each interdivisional transaction.