Exam 19: Management Control Systems, Transfer Pricing and Multinational Considerations

For each of the following activities,characteristics,and applications,identify whether they can be found in a centralised organisation,a decentralised organisation,or both types of organisations. a.Freedom for managers at lower organisational 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.Maximisation of benefits over costs g.Minimisation of duplicate functions h.Minimum of suboptimisation i.Multiple responsibility centres with various reporting units j.Profit centres

Achievement of a goal is the definition of 'effort'.

Answer the following questions using the information below: Calculate the Division operating profit for the Cool Air Company which manufactures only one type of air conditioner and has two divisions: the Compressor Division and the Assembly Division.The Compressor Division manufactures compressors for the Assembly Division,which completes the air conditioner and sells it to retailers.The Compressor Division 'sells' compressors to the Assembly Division.The market price for the Assembly Division to purchase a compressor is $77.(Ignore changes in inventory. )The fixed costs for the Compressor Division are assumed to be the same over the range of 5000-10 000 units.The fixed costs for the Assembly Division are assumed to be $15.00 per unit at 10 000 units. Compressor's costs per compressor are: Direct materials \ 34.00 Direct labour \ 14.50 Variable overhead \ 6.00 Division fixed costs \ 15.00 Assembly's costs per completed air conditioner are: Direct materials \ 300.00 Direct labour \ 125.00 Variable overhead \ 40.00 Division fixed costs \ 15.00 -Assume the transfer price for a compressor is 150% of total costs of the Compressor Division and 1000 of the compressors are produced and transferred to the Assembly Division.The Compressor Division's operating profit is:

One major advantage of negotiated transfer pricing is that it can be done with little time or effort.

Answer the following questions using the information below: The Betashoe Company manufactures shoes.It has two divisions: the Sole Division and the Assembly Division.The Sole Division manufactures soles for the Assembly Division,which completes the manufacturing of the shoes and sells the completed product to retailers.The Sole Division 'sells' pairs of 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 of shoes at 100 000 units. Costs per pair of soles are: Direct materials \ 4 Direct labour \ 3 Variable overhead \ 2 Division fixed costs \ 1 Assembly's costs per completed pair of shoes are: Direct materials \ 6 Direct labour \ 2 Variable overhead \ 1 Division fixed costs \ 7 -What is the market-based transfer price per pair of soles from the Sole Division to the Assembly Division?

Area(s)which is/are usually appropriate for decentralised decision making is/are:

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

Answer the following questions using the information below: Calculate the Division operating profit for the Don's Cricket Bat Company which manufactures cricket bats.It has two divisions: the Bat Blade Division and the Assembly Division.The Bat Blade Division manufactures blades for the Assembly Division,which splices handles to the blades and sells the completed bats to retailers.The Bat Blade Division 'sells' blades to the Assembly Division.The market price for the Assembly Division to purchase a blade is $40.(Ignore changes in inventory. )The fixed costs for the Bat Blade Division are assumed to be the same over the range of 20 000-50 000 units.The fixed costs for the Assembly Division are assumed to be $14 per bat at 50 000 units. Costs per blade are: Direct materials \ 8 Direct labour \ 6 Variable overhead \ 4 Division fixed costs \ 2 Assembly's costs per completed bat are: Direct materials \ 12 Direct labour \ 4 Variable overhead \ 1 Division fixed costs \ 14 -What is the operating profit of both divisions together if the Assembly Division sells 50 000 blades at a price of $120 a pair to customers?

Answer the following questions using the information below: Calculate the Division operating profit for the Don's Cricket Bat Company which manufactures cricket bats.It has two divisions: the Bat Blade Division and the Assembly Division.The Bat Blade Division manufactures blades for the Assembly Division,which splices handles to the blades and sells the completed bats to retailers.The Bat Blade Division 'sells' blades to the Assembly Division.The market price for the Assembly Division to purchase a blade is $40.(Ignore changes in inventory. )The fixed costs for the Bat Blade Division are assumed to be the same over the range of 20 000-50 000 units.The fixed costs for the Assembly Division are assumed to be $14 per bat at 50 000 units. Costs per blade are: Direct materials \ 8 Direct labour \ 6 Variable overhead \ 4 Division fixed costs \ 2 Assembly's costs per completed bat are: Direct materials \ 12 Direct labour \ 4 Variable overhead \ 1 Division fixed costs \ 14 -What is the transfer price per blade from the Bat Blade Division to the Assembly Division if the method used to place a value on each blade is 180% of variable costs?

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

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

South Sydney Consultants has two divisions: Accountancy Services and Legal Advisory Services.In addition to their external customers,each division performs work for the other division.The external fees earned by each division in 2017 were $2 000 000 for Accountancy Services and $3 500 000 for Legal Advisory Services.Accountancy Services worked 3000 hours for Legal Advisory Services,who in turn,worked 1200 hours for Accountancy Services.The total costs of external services performed by Accountancy Services were $1 100 000 and $2 400 000 by Legal Advisory Services. Required: a.Determine the operating profit for each division and for the company as a whole if the transfer price from Accountancy Services to Legal Advisory Services is $150 per hour and the transfer price from Legal Advisory Services to Accountancy Services is $125 per hour. b.Determine the operating profit for each division and for the company as a whole if the transfer price between divisions is $150 per hour. c.What are the operating profit results for each division and for the company as a whole if the two divisions net the hours worked for each other and charge $125 per hour for the one with the excess? Which division manager prefers this arrangement? _____________________________________________________________________________________________ _____________________________________________________________________________________________

Adelaide Better Foods 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: Direct materials per litre \ 1.00 Direct processing labour 0.50 Variable processing overhead 0.24 Fixed processing overhead Total \ 2.14 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 litre. Required: a.Compute the operating profit for the Olive Oil Division using a transfer price of $4. b.Compute the operating profit for the Olive Oil Division using a transfer price of $2.14. c.What transfer price(s)do you recommend? Compute the operating profit for the Olive Oil Division using your recommendation. _____________________________________________________________________________________________ _____________________________________________________________________________________________

Answer the following questions using the information below: Calculate the Division operating profit for the Cool Air Company which manufactures only one type of air conditioner and has two divisions: the Compressor Division and the Assembly Division.The Compressor Division manufactures compressors for the Assembly Division,which completes the air conditioner and sells it to retailers.The Compressor Division 'sells' compressors to the Assembly Division.The market price for the Assembly Division to purchase a compressor is $77.(Ignore changes in inventory. )The fixed costs for the Compressor Division are assumed to be the same over the range of 5000-10 000 units.The fixed costs for the Assembly Division are assumed to be $15.00 per unit at 10 000 units. Compressor's costs per compressor are: Direct materials \ 34.00 Direct labour \ 14.50 Variable overhead \ 6.00 Division fixed costs \ 15.00 Assembly's costs per completed air conditioner are: Direct materials \ 300.00 Direct labour \ 125.00 Variable overhead \ 40.00 Division fixed costs \ 15.00 -What is the transfer price per compressor from the Compressor Division to the Assembly Division if the transfer price per compressor is 110% of full costs?

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

Market-based transfer prices are ideal in perfectly competitive markets when there is idle capacity in the selling division.

Management control systems motivate managers and other employees to exert effort through a variety of rewards tied to the achievement of goals.

Answer the following questions using the information below: The Betashoe Company manufactures shoes.It has two divisions: the Sole Division and the Assembly Division.The Sole Division manufactures soles for the Assembly Division,which completes the manufacturing of the shoes and sells the completed product to retailers.The Sole Division 'sells' pairs of 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 of shoes at 100 000 units. Costs per pair of soles are: Direct materials \ 4 Direct labour \ 3 Variable overhead \ 2 Division fixed costs \ 1 Assembly's costs per completed pair of shoes are: Direct materials \ 6 Direct labour \ 2 Variable overhead \ 1 Division fixed costs \ 7 -Calculate and compare the difference in overall corporate net profit between Scenario A and Scenario B if the Assembly Division sells 100 000 pairs of shoes for $60 per pair to customers. Scenario A: Negotiated transfer price of $15 per pair of soles Scenario B: Market-based transfer price

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 minimise its worldwide tax liability,we would expect Global Giant to:

Penrith Chocolate Company makes internal transfers at 180% of full cost.The Dairy Milk Division purchases 3000 litres of milk per day,on average,from a local supplier who delivers the milk for $3 per litre via an external shipper.To reduce costs,the company located an independent supplier in Tasmania who is willing to sell 3000 litres at $2 each,delivered to Penrith Chocolate Company's Shipping Division in Penrith.The company's Shipping Division has excess capacity and can ship the 3000 litres at a variable cost of $0.25 per litre.What is the total cost to Penrith Chocolate Company if the milk is purchased from the local supplier?