Exam 21: Transfer Pricing and Multinational Management Control Systems

Management control systems reflect only financial data.

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 degree of freedom to make decisions is known as decentralization.

Hendricks Ltd.of Calgary manufactures and sells computers.The Manufacturing Division is located in China and transfers 75% of its output to the Assembly Division in the Philippines.The balance of the product is sold in the local market at 2,100 yuan/unit.The Philippines division sells 20% of its output in the local market at 31,500 pesos/unit,with the balance shipped to Calgary.The Calgary operation packages the units and sells the final product at $1,900 Canadian per unit. The following budget data are available: Exchange rates are: $1 Canadian = 7 yuan and $1 Canadian = 45 pesos Tax rates are 45% in China,20% in the Philippines and 40% in Canada.Income taxes are not included in the calculation of cost-based transfer prices.Assume that Hendricks does not pay Canadian tax on amounts already taxed in foreign jurisdictions.Take each calculation to 2 decimal places. Required: The company has determined that it may transfer units at 250% of variable cost or at market and comply with all existing tax legislation.Which transfer pricing method should the company pursue? Support your recommendation with appropriate calculations.

A management control system would include both formal as well as informal control mechanisms.

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 market-based transfer price per pair of soles from the Sole Division to the Assembly Division?

The seller of product A has no idle capacity and can sell all it can produce at $20 per unit.Outlay cost is $4.What is the opportunity cost assuming the seller sells internally?

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

Which of the following statements is FALSE?

Use the information below to answer the following question(s). Soft Cushion Company is highly decentralized.Each division is empowered to make its own sales decisions.The Assembly Division can purchase cushion stuffing from the Production Division or from external suppliers.The Production Division has been the major supplier of stuffing in recent years.The Assembly Division has announced that two external suppliers will be used to purchase the stuffing at $20 per kilogram for the next year.The Production Division recently increased its unit price to $40.The manager of the Production Division presented the following information;variable cost $32,fixed cost $8,to top management in order to attempt to force the Assembly Division to purchase the stuffing internally.The Assembly Division purchases 20,000 kg per month. -What is the monthly operating advantage (disadvantage)of purchasing the goods internally assuming the Production Division is able to utilize the facilities for other operations resulting in monthly cash-operating savings of $40,000?

Use the information below to answer the following question(s). Soft Cushion Company is highly decentralized.Each division is empowered to make its own sales decisions.The Assembly Division can purchase cushion stuffing from the Production Division or from external suppliers.The Production Division has been the major supplier of stuffing in recent years.The Assembly Division has announced that two external suppliers will be used to purchase the stuffing at $20 per kilogram for the next year.The Production Division recently increased its unit price to $40.The manager of the Production Division presented the following information;variable cost $32,fixed cost $8,to top management in order to attempt to force the Assembly Division to purchase the stuffing internally.The Assembly Division purchases 20,000 kg per month. -What would be the monthly operating advantage (disadvantage)of purchasing the goods internally assuming the external supplier increased its price to $50 per kilogram and the Production Division is able to utilize facilities for other operations,resulting in a monthly cash-operating savings of $30 per kilogram?

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

The price one subunit of an organization charges for a product or service supplied to another subunit of the same organization is called

Stavanger Ltd.is a Canadian company with a fully owned subsidiary in Ireland.The Irish subsidiary produces a component for off shore gas compressors that are sold in Canada.The components have a variable cost of 1,700 Euros and a full cost of 2,100 Euros.The 2,000 components required can be purchased in Canada for $3,500.Assume the minimum transfer price allowed by the Canadian tax authorities is the variable cost and the maximum is the market value.Also assume operating income in each country is equal to taxable income.One Euro is worth $1.45 Canadian.The marginal tax rate in Canada is 25% and in Ireland 12.5%. Required: a.What transfer price should be set for Stavanger Ltd.to minimize its total income taxes? Show your calculations. b.If Stavanger Ltd.desires to minimize its total income taxes,calculate the amount of tax liability in each country in Canadian dollars.

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

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.The Burnaby Division will save $3 per unit of direct materials costs for the components manufactured for the Surrey Division.Assuming Burnaby Division has no idle capacity,what is the minimum transfer price the Burnaby Division should agree to accept?

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

What is the daily operating advantage (disadvantage)of purchasing the water from the independent producer and using the company's Manitoba shipping department,assuming the shipping department is currently shipping 50,000 containers per day for external customers?

The Brownshoe Company has three specialized divisions.The Casual Shoe Division has asked the Sole Division to supply it with a large quantity of soles.The Sole Division is currently at capacity.The Sole Division sells soles outside for $5.00 each.The Casual Shoe Division,which is operating at 50 percent capacity,has offered to pay $4.00 per sole.The Sole Division has a variable cost of $3.60 per sole.The Casual Shoe Division has the following cost structure: The manager of Casual Shoe believes that the $4 price from Sole is necessary if the division is to compete in the market for casual shoes. Required: a.As manager of Sole Division,would you recommend that your division supply the soles to Casual Shoe? Why? b.Would it be desirable for the division to supply Casual Shoe with the soles for $4 assuming the Sole Division had excess capacity? Why? c.What would be the corporate position assuming the Sole Division has excess capacity?

The Micro Division of Silicon Computers produces computer chips that are sold to the Personal Computer Division and to outsiders.Operating data for the Micro Division are as follows: The Personal Computer Division has just received an offer from an outside supplier to furnish chips at $8.60 each.The manager of Micro Division is not willing to meet the $8.60 price.She argues that it costs her $9.00 to produce and sell each chip.Sales to outside customers are at a maximum of 200,000 chips. Required: a.Verify the Micro Division's $9.00 unit cost figure. b.Should the Micro Division meet the outside price of $8.60? Explain on a per unit basis. c.Prepare a Micro Division income statement for the sale to the Personal Computer Division assuming that the unit selling price of $8.60 is agreed.Comment on the allocation of fixed costs.