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

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. a.Market-based transfer pricing achieves goal congruence. b.Cost-based transfer pricing achieves goal congruence. c.Negotiated transfer pricing achieves goal congruence. d.Market-based transfer pricing motivates management effort. e.Cost-based transfer pricing motivates management effort. f.Negotiated transfer pricing motivates management effort. g.Market-based transfer pricing is useful for evaluating subunit performance. h.Cost-based transfer pricing is useful for evaluating subunit performance. i.Negotiated transfer pricing is useful for evaluating subunit performance. j.Market-based transfer pricing preserves subunit autonomy. k.Cost-based transfer pricing preserves subunit autonomy. l.Negotiated transfer pricing preserves subunit autonomy.

WestOZ Aluminium Company has two divisions.The Refining Division processes bauxite into alumina for the Smelting Division to convert into aluminium.No inventories exist in either division at the beginning of 2017.During the year,the Refining Division produced 45 000 tonnes of alumina at a cost of $18 000 000.All the alumina was transferred to the Smelting Division,where additional operating costs of $150 per tonne were incurred.The 45 000 tonnes of alumina produced 22 500 tonnes of finished ingots of aluminium which were sold for $38 750 000. Required: a.Determine the operating profit for each division if the transfer price from Refining to Smelting is at a cost of $400 per tonne. b.Determine the operating profit for each division if the transfer price is $500 per tonne. c.Since the Refining Division sells all of its alumina internally to the Smelting Division,does the Refining manager care what price is selected? Why? Should the Refining Division be a cost centre or a profit centre under the circumstances? _____________________________________________________________________________________________ _____________________________________________________________________________________________

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

Why is dual pricing not widely used in practice?

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

Which of the following transfer-pricing methods preserves subunit autonomy?

The formal management control system includes:

Barossa Bicycle Company makes bicycles.The Frame Division manufactures the frames and the Assembly Division makes the finished bicycles.The frames can be sold separately for $500.The bicycles sell for $750.The information related to manufacturing for 2017 is as follows: Frame Division manufacturing costs \ 12000000 Sales of frames by Frame Division 8000000 Market value of frames transferred to Assembly 12000000 Sales of bicycles by Assembly Division 14400000 Additional manufacturing costs of Assembly Division 3000000 Required: Calculate the operating profit for each division and the company as a whole.Use market value as the transfer price.Will all of the managers be happy with this concept? Explain. _____________________________________________________________________________________________ ____________________________________________________________________________________________

Cost-based transfer prices are helpful when:

Bathurst Company's CEO has just returned from a series of professional development courses and is very excited that she can have responsibility centres with the organisation's system of centralised structure.However,she is somewhat confused about how responsibility centres relate to centralised organisations where a few managers have most of the authority. Required: Explain how a centralised organisation might allow for responsibility centres. _____________________________________________________________________________________________ _____________________________________________________________________________________________

Transfer prices should be judged by whether they promote:

What is the term used to describe the situation when a manager's decision,which benefits one subunit,is more than offset by the costs to the organisation as a whole?

Which of the following transfer-pricing methods always achieves goal congruence?

Goal congruence exists when individuals work toward achieving one goal,and groups work toward achieving a different goal.

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 -Calculate and compare the difference in overall corporate net profit between Scenario A and Scenario B if the Assembly Division sells 50 000 blades for $120 each to customers. Scenario A: Negotiated transfer price of $15 per blade Scenario B: Market-based transfer price

Wentworth Company has two divisions.The Bottle Division produces products that have variable costs of $3 per unit.Its 2010 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 was no beginning or ending inventories during the year. Required: What are the operating profits of the two divisions and the company as a whole for the year? Explain why the company's operating profit is less than the sum of the two divisions' total profits. _____________________________________________________________________________________________ ____________________________________________________________________________________________

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.

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.

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 method used to place a value on each compressor is 150% of variable costs?

Market price is the only price a firm should use when transferring goods from one subunit to another subunit.