Exam 21: Transfer Pricing and Multinational Management Control Systems

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.The Burnaby Division will save $3 per unit of direct materials costs for the components manufactured for the Surrey Division.Assuming Burnaby Division has idle capacity,what is the minimum transfer price the Burnaby Division should agree to accept?

Bedtime Bedding Ltd.manufactures pillows.The Cover Division makes covers,and the Assembly Division makes the finished products.The covers can be sold separately for $5.00.The pillows sell for $6.00.The information related to manufacturing for the most recent year is as follows: Required: Compute the operating income for each division and the company as a whole.Use market value as the transfer price.Are all managers happy with this concept? Explain.

Opportunity costs represent the cash flows directly associated with the production and transfer of the products and services.

A transfer pricing method should lead to which of the following results?

Transfer prices among divisions within Canada are irrelevant.Do you agree with this statement? Explain.

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?

In the short run,the manager of the supplier division should meet the distress price as long as it exceeds the incremental costs of supplying the product or service.

One reason companies use full-cost transfer pricing is that it provides relevant costs for

The president of Silicon Company has just returned from a week of professional development courses and is very excited that she will not have to change the organization from a centralized structure to a decentralized structure just to have responsibility centres.However,she is somewhat confused about how responsibility centres relate to centralized organizations where a few managers have most of the authority. Required: Explain how a centralized organization might allow for responsibility centres.

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 120% of full costs?

The general guideline for determining the minimum transfer price is

Additional factors that arise in multinational transfer pricing include tariffs and customs duties levied on imports of products into a country.

Empire Ltd.has two divisions.Division C is located in Canada where the income tax rate is 40%.Division K is located in Korea where the income tax rate is 30%.Division C produces an intermediate product at a variable cost of $100 per unit and transfers the product to Division K where it is finished and sold for $500 per unit.Variable costs in Division K are $80 per unit.Fixed costs are $75,000 per year in Division C and $90,000 per year in Division K.Assume 1,000 units are produced and transferred annually and the minimum transfer price allowed by the Canadian tax authorities is the variable cost.Also assume operating income in each country is equal to taxable income. Required: a.What transfer price should be set for Empire to minimize its total income taxes? Show your calculations. b.If Empire desires to minimize its total income taxes,calculate the amount of tax liability in each country.

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: -Assume the transfer price for a furnace is 130% of total costs of the Manufacturing Division and 5,000 of the furnaces are produced and transferred to the Assembly Division.The Manufacturing Division's operating income is

The resale price method of transfer pricing requires a company to

Xenon Autocar Company manufactures automobiles.The Fastback Car Division sells its cars for $50,000 each to the general public.The fastback cars have manufacturing costs of $25,000 each for variable and $15,000 each for fixed costs.The division's total fixed manufacturing costs are $75,000,000 at the normal volume of 5,000 units. The Coupe Car Division has been unable to meet the demand for its cars this year.It has offered to buy 1,000 cars from the Fastback Car Division at the full cost of $40,000.The Fastback Car Division has excess capacity and the 1,000 units can be produced without interfering with the current outside sales of 5,000.The 6,000 volume is within the division's relevant operating range. Explain whether the Fastback Car Division should accept the offer.

A decentralized organizational structure may result in duplication of activities.

What are some of the factors,other than income taxation,that companies should consider when setting international transfer prices?

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 cost to Crush Company if the carbonated water is purchased from the local supplier?

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. -Assume 100,000 kilograms are transferred from the Production Division to the Distribution Division for a transfer price of $0.40 per kilogram.The Distribution Division sells the 100,000 kilograms at a price of $0.55 each to customers.What is the company's operating income?