Exam 21: Transfer Pricing and Multinational Management Control Systems

Global Giant,a multinational corporation,has a producing subsidiary in a low tax rate country and a marketing subsidiary in a high tax country.If Global Giant wants to minimize its worldwide tax liability,we would expect Global Giant to

Use the information below to answer the following question(s). Bon Accord uses two divisions in the production of soybean burgers.Division A sells soybean paste internally to Division B,which,in turn,produces soybean burgers that sell for $5 per kilogram.Division A incurs costs of $0.75 per kilogram,while Division B incurs additional costs of $2.50 per kilogram. -What is Division A's operating income per kilogram assuming the transfer price of the soybean paste is set at $1.25 per kilogram?

The Assembly Division of Canadian Car Company has offered to purchase 90,000 batteries from the Electrical Division for $104 per unit.At a normal volume of 250,000 batteries per year,production costs per battery are as follows: The Electrical Division has been selling 250,000 batteries per year to outside buyers at $136 each.Capacity is 350,000 batteries per year.The Assembly Division has been buying batteries from outside sources for $130 each. Required: a.Should the Electrical Division manager accept the offer as is,make a counter offer,or reject the offer? Explain. b.From the company's perspective,will the internal sales be of any benefit? Explain

Under what conditions would transferring products or services at market prices lead to optimal decisions within the organization?

When companies are unable to choose a transfer-pricing method which meets the requirements of the divisions concerned,they may use

An advantage of decentralization is that it

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

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: -Assume the transfer price for a pair of soles is 180% of total costs of the Sole Division and 40,000 of soles are produced and transferred to the Assembly Division.The Sole Division's operating income is

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. -The Production Division has no alternative use for the facilities used to manufacture the stuffing.What is the monthly operating income advantage (disadvantage)if the goods are purchased internally?

Sandra's Sheet Metal Company has two divisions.The Raw Material Division prepares sheet metal at its warehouse facility.The Fabrication Division prepares the cut sheet metal into finished products for the air conditioning industry.No inventories exist in either division at the beginning of 2015.During the year,the Raw Material Division prepared 450,000 square metres of sheet metal at a cost of $1,800,000.All the sheet metal was transferred to the Fabrication Division,where additional operating costs of $1.50 per square metre were incurred.The 450,000 square metres of finished fabricated sheet metal products were sold for $3,875,000. Required: a.Determine the operating income for each division if the transfer price from Raw Material to Fabrication is at a cost of $4 per square metre. b.Determine the operating income for each division if the transfer price is $5 per square metre. c.Since the Raw Materials Division sells all of its sheet metal internally to the Fabrication Division,does the Raw Materials manager care what price is selected? Why? Should the Raw Materials Division be a cost center or a profit center under the circumstances?

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 Refining Division's operating income if 150 litres of oil are sold at $110 /litre and 200 litres are transferred in? Assume the transfer price is based on 175% 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 assuming the method used is 175% of variable costs?

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 market-based transfer price per compressor from the Compressor Division to the Assembly Division?

Clark Industries Ltd.manufactures monochromators that are used in a variety of applications.The Monochromator Division (M Division)sells its monochromators both internally and externally.It is operating at 80% of its 250,000 unit capacity and internal sales account for approximately 20% of its current sales volume.Internally the monochromators are transferred into the Aerospace Division (A Division)at a transfer price of $11,250 each.Variable production costs are the same for internal and external sales. The income statement for the M Division is presented below: The A Division uses one component in the production of its final product that sells for $75,000/unit.Other variable costs in the A Division are 40% of sales.and fixed costs per unit at its current capacity of 40,000 units are $17,250. The Aerospace Division is operating at its full capacity of 40,000 units and is evaluating whether it should invest to increase capacity.The investment would cost $900,000,000 and would have a useful life of 3 years.The equipment could be sold for $800,000 at the end of its useful life.For tax purposes it would be sold on January 1 of year 4.The machine would be used to manufacture a variation of its current product with the same transfer price.This new product would sell for $68,000 per unit.The variable cost ratio will be 45% of the selling price.The additional capacity of the new machine would be 14,000 units.It would qualify for a 30% CCA rate and the company would continue to have assets in the pool. Required: a.Evaluate the current transfer pricing policy from the standpoint of each division manager as well as the company as a whole. b.Using net present value (NPV)analysis,would the A Division manager want to invest in the new equipment if the required rate of return is 12% and the tax rate is 25%? c.If the investment is evaluated from a corporate perspective using NPV analysis and the 12% discount rate,does the decision change? Explain.

The degree of freedom to make decisions is

Payne Ltd.has two divisions.The Compound Division makes QZ54,an industrial compound,which is then transferred to the Processing Division.The Processing Division further processes the QZ54 and sells the final product to customers at $87/kg.Capacity in the Compound Division is 800,000 kg.QZ54 can be obtained on the external market at $50/kg Data regarding the costs per kilogram in each division are presented below: *In the Compound Division the variable overhead is 80% of the total,and in Processing variable overhead represents 65% of the total.Fixed overhead rates are based on capacity of 800,000 kg.in each division. In addition to the manufacturing costs,the Compound Division would incur $2 per kilogram of selling costs which would be avoided on internal transfers.Similarly the Processing Division would avoid $3/kg.of ordering costs on internal purchases. Required: a.Calculate the operating incomes for each division assuming 800,000 kg.of QZ54 are transferred and the company uses a market transfer price. b.Calculate the operating incomes for each division assuming 800,000 kg.of QZ54 are transferred and the company uses a transfer pricing policy based on 125% of absorption manufacturing cost. c.Comment on your calculations in a and b in terms of the respective division managers preferences. d.Should the company transfer its 800,000 kg.assuming the Compound Division can sell all of its output on the external market?

When industry has excess capacity,market prices may drop sizably below their historical average.If this drop is temporary,it is called

A management control system is a means of gathering and using information to aid and coordinate the process of making planning and control decisions throughout the organization,and to guide employee behaviour.

Centralia Components Ltd.manufactures cable assemblies used in transportation,recreational products and medical industries .The capacity of the Manufacturing Division is currently 200,000 units and it sells 160,000 units to the outside market at an average price of $96/unit.Cost to manufacture the cable assemblies are $42 variable and $8 fixed.Fixed costs per unit are based on its normal volume of 160,000 units. Centralia's Mobility Division uses cable assemblies in the manufacture of wheelchairs.It has offered to buy 25,000 units from the Manufacturing Division at $48 per unit.Calculate the operating income of the Manufacturing Division with and without the offer from the Mobility Division.Should the Manufacturing Division management accept the offer?

The costs,as opposed to benefits,of decentralization include all of the following,except