Exam 21: Transfer Pricing and Multinational Management Control Systems

Under distress pricing conditions,long run average prices may be used in setting transfer prices.Such actions negatively affect the supplying division.

Sonora Manufacturing Inc.designs and builds off-road vehicles.The Frame Division builds frames that are used by the Assembly Division,and also sells frames externally to companies that produce vehicles such as golf carts.The Frame Division has an annual practical capacity of 5,000 units;a theoretical capacity of 7,300 units;and,a master-budget capacity of 4,000 units.The master-budget capacity is composed of 2,500 units produced for internal requirements,and the remainder sold externally for $800 per unit.The Frame Division has $150,000 of fixed costs.The variable costs for the units produced for internal purposes are $900 per unit,and for external sales $475.Sonora Manufacturing Inc.company policy is that internal transfers are to be done at full cost. The Frame Division has been approached by a golf cart manufacturer who has offered to purchase 3,000 frames as a one-time special order for $650 per unit.This is an all or none order. The Assembly Division can contract out the production of frames for $1,050 per unit. Required: a.Determine Frame Division's full cost per unit for the frames produced for internal use and the frames that a produced for external sales.Justify your choice of denominator activity level when calculating the fixed cost per unit. b.Using the general guidelines for transfer pricing,what is the minimum transfer price the Frame Division should accept? Hint: There will be separate minimum transfer prices for the existing external customers and the one-time special order. c.From a corporate point of view should the one-time special offer be accepted.Justify your answer on quantitative and qualitative considerations.

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 price is best for goal congruence?

In a time of distress prices,which of the following is TRUE?

The choice of a transfer-pricing method has minimal effect on the allocation of company-wide operating income among divisions.

When the intermediate market is perfectly competitive,interdependencies of subunits are minimal,and there are additional costs to the corporation as a whole then using the market price as the transfer price results in optimal decision making.

Physical exertion and mental action towards a goal can best be described as

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

There is seldom a single transfer price that simultaneously meets the criteria of goal congruence,management effort,and subunit autonomy.

Full-cost transfer prices will maximize overall corporate income when transferring products from divisions operating

A product is know as ________ when it is transferred from one subunit to another subunit in the same organization.

Full-cost transfer prices are adequate and lead to goal congruence for decisions that require knowledge of short-run variable costs.

A market is said to be perfectly-competitive when

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 no idle capacity,what is the minimum transfer price the Burnaby Division should agree to accept?

Management control systems collect which type of data?

In analyzing transfer prices

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: -If the Assembly Division sells 1,000 furnaces at a price of $3,500 per unit to customers,what is the company's operating income?

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 transfer price per compressor is 110% of full 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 production to refining if the market price method of pricing is used?

Briefly describe the conditions that should be met for market-based transfer pricing to lead to optimal decision making among subunits of a large organization.