Exam 21: Transfer Pricing and Multinational Management Control Systems

The Home Office Company makes all types of office desks.The Computer Desk Division is currently producing 10,000 desks per year with a capacity of 15,000.The variable costs assigned to each desk are $300 and annual fixed costs of the division are $900,000.The computer desks sell for $400. The Executive Division wants to buy 5,000 desks at $280 for its custom office design business.The Computer Desk manager refuses the order because the price is below variable cost.The Executive manager argues that the order should be accepted because it will lower the fixed cost per desk from $90 to $60 and will take the division to its capacity,thereby causing operations to be at their most efficient level. Required: a.Should the order from Executive Division be accepted by Computer Desk? Explain why or why not. b.From the perspective of the Computer Desk Division and the company,should the order be accepted if the Executive Division plans on selling the chairs in the outside market for $420 after incurring additional costs of $100 per desk? c.What action should the company president take?

What is the purpose of the internal control system within an organization?

Answer the following question(s)using the information below: Greenlawn Ltd.has two divisions,Distribution and Production.The company's primary product is fertilizer.Each division's costs are provided below: The Distribution Division has been operating at a capacity of 4,000,000 kilograms a week and usually purchases 2,000,000 kilograms from the Production Division and 2,000,000 kilograms from other suppliers at $0.45 per kilogram. -What is the transfer price per kilogram from the Production Division to the Distribution Division,assuming the method used to place a value on each kilogram of fertilizer is 160% of variable costs?

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?

A company has a plant in a high tax jurisdiction that produces products for a facility in a low tax jurisdiction.Suggest a strategy,including transfer prices,which will result in the lowest tax for the overall corporation.

The Mill Flow Company has two divisions.The Cutting Division prepares timber at its sawmills.The Assembly Division prepares the cut lumber into finished wood for the furniture industry.No inventories exist in either division at the beginning of the year.During the year,the Cutting Division prepared 60,000 cords of wood at a cost of $660,000.All the lumber was transferred to the Assembly Division,where additional operating costs of $6 per cord were incurred.The 60,000 cords of finished wood were sold for $2,500,000. Required: a.Determine the operating income for each division if the transfer price from Cutting to Assembly is at cost. b.Determine the operating income for each division if the transfer price is $9 per cord. c.Since the Cutting Division sells all of its wood internally to the Assembly Division,does the manager care what price is selected? Why? Should the Cutting Division be a cost centre or a profit centre under the circumstances?

Use the information below to answer the following question(s). The Burnaby Division of Columbia Ltd.produces and sells component parts.Its variable costs per unit are $80 for direct materials,$32 for direct labour and $18 for variable factory overhead.It currently can sell it components on the outside market at a price of $165/unit.Fixed overhead costs are $22 per unit based on a denominator volume of 180,000 units. -The Surrey Division of Columbia Ltd.has approached the Burnaby Division and requested that it supply 25,000 units of the component at a transfer price of $150.Assuming Burnaby Division has idle capacity,what is the transfer price the Burnaby Division should agree to accept?

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: -What is the transfer price per pair of soles from the Sole Division to the Assembly Division if the method used to place a value on each pair of soles is 180% of variable costs?

Answer the following question(s)using the information below. Easy Fit Ltd.manufactures heating,ventilation,and air conditioning (HVAC)equipment.The Manufacturing Division creates parts;and,the Assembly Division builds and sells the equipment.The Manufacturing Division "sells" furnace parts packages to the Assembly Division.The market price for the Assembly Division to purchase a mini furnace is $3,500.The fixed costs for the Manufacturing Division are assumed to be the same over the range of 2,000-5,000 units.The fixed costs for the Assembly Division are assumed to be $40.00 per unit at 5,000 units. Manufacturing costs per furnace are: Assembly's costs per completed furnace are: -Which of the following is an advantage of an Advance Transfer Price Arrangement (APA)?

Goal congruence occurs when managers act in their own best interest at the expense of the organization.

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

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?

Use the information below to answer the following question(s). 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 can ship the 30,000 containers at a variable cost of $2.50 per container and a full cost,based on practical capacity,of $4.00 per container.When the company's Manitoba shipping division ships for external customers is charges $6.00 per container. -What is the total incremental cost of purchasing the water from the independent producer and shipping it to the Soda Division if the company's Manitoba shipping division has idle capacity?

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: -If the Assembly Division sells 1,000 air conditioners at a price of $750.00 per air conditioner to customers,what is the company's operating income?

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

Products transferred between subunits within an organization are considered intermediate products.

An important advantage of decentralized operations is that it improves corporate control.

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

Better Food 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: 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 as fixed overhead cost should not be relevant.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 income for the Olive Oil Division using a transfer price of $4. b.Compute the operating income for the Olive Oil Division using a transfer price of $2.14. c.What transfer price(s)do you recommend? Justify your answer.

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: -What is the transfer price per pair of shoes from the Sole Division to the Assembly Division if the transfer price per pair of soles is 125% of full costs?