Case - Greetings Inc.: Transfer Pricing Issues

Answer each of the following questions.

1. Prepare for class discussion what you think were the critical challenges for Mr. Burns. Recognize that Wall Décor is a profit center and each Greetings store is a profi t center.

2. After lengthy and sometimes heated negotiations between Wall Décor and the store managers, a new transfer price was determined that calls for the stores and Wall Décor to split the profi ts on unframed prints 30/70 (30% to the store, 70% to Wall Décor) and the profi ts on framed prints 50/50. The following additional terms were also agreed to:

• "Profi ts" are defi ned as the store selling price less the ABC cost.
• Stores do not share the profi ts from related products with Wall Décor.
• Wall Décor will not seek to sell unframed and framed print items through anyone other than Greetings.
• Wall Décor will work to decrease costs.
• Greetings stores will not seek suppliers of prints other than Wall Décor.
• Stores will keep the selling price of framed prints as it was before the change in transfer price. On average, stores will decrease the selling price of unframed prints to $20, with an expected increase in volume to 100,000 prints.

Analyze how Wall Décor and the stores benefi ted from this new agreement. In your analysis, fi rst (a) compute the profi ts of the stores and Wall Décor using traditional amounts related to pricing, cost, and a 20% markup on Wall Décor costs. Next, (b) compute the profi ts of the stores and Wall Décor using the ABC cost and negotiated transfer price approach. Finally, (c) explain your fi ndings, linking the overall profits for stores and Wall Décor.

The following data apply to this analysis. (Round all calculations to three decimal places.)

3. Review the additional terms of the agreement listed in instruction 2 above. In each case, state whether the item is appropriate, unnecessary, ineffective, or potentially harmful to the overall company.

Attachment:- Case.rar