Exam 22: Management Control Systems, transfer Pricing, and Multinational Considerations

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.

In decentralized organizations,a manager might look to further the success of their subunit to the detriment of other subunits.Such behavior would be from which of the following results of decentralization?

Cost-based transfer prices are often used when markets for the product are not competitive or when the quality of the internal product is different from the externally available products.

Plish Company manufactures only one type of washing machine and has two divisions,the Compressor Division,and the Fabrication Division.The Compressor Division manufactures compressors for the Fabrication Division,which completes the washing machine and sells it to retailers.The Compressor Division "sells" compressors to the Fabrication Division.The market price for the Fabrication Division to purchase a compressor is $60.00.(Ignore changes in inventory. )The fixed costs for the Compressor Division are assumed to be the same over the range of 13,000-18,000 units.The fixed costs for the Fabrication Division are assumed to be $11.00 per unit at 18,000 units. If the Fabrication Division sells 1000 air conditioners at a price of $475.00 per washing machine to customers,what is the operating income of both divisions together?

Olive Branch Company recently acquired an olive oil processing company that has an annual capacity of 2,000,000 liters and that processed and sold 1,400,000 liters last year at a market price of $4 per liter.The purpose of the acquisition was to furnish oil for the Cooking Division.The Cooking Division needs 800,000 liters 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,since fixed overhead cost should be recomputed with the larger volume.Any output of the Olive Oil Division not sold to the Cooking Division can be sold to outsiders for $4 per liter. 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 $2.20. c.What transfer price(s)do you recommend? Compute the operating income for the Olive Oil Division using your recommendation.

A transfer price based on the full cost plus a markup may lead to suboptimal decisions because ________.

Which of the following transfer-pricing methods always achieves goal congruence?

A company may choose to keep one set of accounting records for tax reporting and a second set for internal management reporting.

The River Falls Company has two divisions.The Cutting Division prepares timber at its sawmills.The Coating Division prepares the cut lumber into finished wood for the furniture industry.No inventories exist in either division at the beginning of 20X5.During the year,the Cutting Division prepared 60,000 cords of wood at a cost of $720,000.All the lumber was transferred to the Coating Division,where additional operating costs of $5 per cord were incurred.The 600,000 boardfeet 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 Coating is at cost - $12 a cord. 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 Coating Division,does the manager care what price is selected? Why? Should the Cutting Division be a cost center or a profit center under the circumstances?

Transferring products internally at a market price leads to optimal decisions when all of the following conditions are prevalent except ________.