Exam 21: Transfer Pricing and Multinational Management Control Systems

Sales between multi-national corporation subunits are termed arm's-length transactions.

All of the following are general methods for determining transfer prices EXCEPT

The profit foregone by the seller if the products or services are transferred internally instead of selling them externally are called

Answer the following question(s)using the information below. Cool Air Ltd.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 them 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 5,000-10,000 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: Assembly's costs per completed air conditioner are: -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?

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

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

Discuss the possible problems a corporation might have if its operations are totally decentralized.

The Canada Revenue Agency has adopted International Financial Reporting Standards as the framework for transfer pricing regulations.

Examples of market-based transfer prices include variable manufacturing costs,full manufacturing costs,and full product costs.

Subunit managers are better informed about their suppliers than top management is.

A benefit of decentralization should be increased motivation of subunit managers.

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

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?

A management control system should have all of the following characteristics,EXCEPT

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

Dual pricing is widely used as it reduces the goal-congruence problems associated with a pure cost-plus based transfer-pricing method.

The general guideline for setting a minimum transfer price adds the full cost plus the opportunity cost to arrive at the minimum transfer price.

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?

A company has two divisions.The Bottle Division produces products that have variable costs of $3 per unit.For the current year,sales were 150,000 to outsiders at $5 per unit and 40,000 units to the Mixing Division at 140 percent of variable costs.Under a dual transfer pricing system,the Mixing Division pays only the variable cost per unit.The fixed costs of Bottle Division were $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 Bottle.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 operating income is less than the sum of the two divisions' total income.

River Road Paint Company has two divisions.The Production Division produces base colours used by the Mixing Division.In 2015 the Production Division had external sales of 200,000 units at $8.00 per unit;and,transferred 60,000 units to the Mixing Division.The variable costs in the Production Division were $5 per unit and the fixed costs were $520,000 based on a practical capacity of 260,000 units.The Mixing Division sells its finished product to customers for $11.20 per unit.The Mixing Division had variable costs of $2.50 per unit and the annual fixed costs were $150,000.There were no beginning or ending inventories during the year. Required: Prepare the general journal entry for the transfer assuming that a dual pricing arrangement has been agreed to that requires the Mixing Department to pay the variable cost and the Production Department to receive the market price.