Ask Question, Ask an Expert


Ask Accounting Basics Expert

Coffee Maker's Incorporated (CMI).

Two divisions of the CMI are involved in a argument.  Division A purchases Part 101 and Division B purchases Part 201 from the third division, C. Both divisions require the parts for products which they assemble. Intercompany transactions have remained constant for several years.
In recent times, outside suppliers have lowered their prices, but Division C is not lowering its prices. Additionally, all division managers are feeling pressure to increase profit. Managers of divisions A and B will like flexibility to purchase parts they require from external parties to lower cost and increase profitability.

The present pattern is that Division A purchases 3,000 units of product part 101 from Division C (the supplying division) and another 1,000 units from external supplier. Market price for Part 101 is $900 per unit. Division B purchases 1,000 units of Part 201 from Division C and another 1,000 units from external supplier. Note that both divisions A and B purchase the required supplies from both internal source and an external source at the same time.

The managers for divisions A and B are preparing the new proposal for consideration.

• Division C would continue to produce Parts 101 and 201. All of its production would be sold to Divisions A and B. No other customers are likely to found for these products in short term given that supply is greater than demand in the market.

• Division C would manufacture 2,000 units of Part 101 for the Division A and 500 units of Part 201 for the Division B.

• Division A would buy 2,000 units of Part 101 from Division C and 2,000 units from the external supplier at $900 per unit.

• Division B would buy 500 units of Part 201 from Division C and 1,500 units from external supplier at $1,900 per unit.

Division  C Data 2012 Based on Current Agreement

Part                          101          201
Direct materials       $200         $300
Direct labor             $200         $300
Variable overhead    $300         $600
Transfer price        $1,000      $2,000
Annual Volume  3,000 units    1,000 units


• Compute the increase or decrease in profits for three divisions and company as a whole (four separate computations) if the agreement is enforced. Describe your thought process, comment on the situation, and make a suggestion based on computations you have made.

• Evaluate and discuss implications of the following transfer pricing policies:

Transfer price = cost plus a mark-up for the selling division
Transfer price = fair market value
Transfer price = price negotiated by the managers

• Why is transfer pricing such a important issue both from the financial and managerial perspective?

Modular Case Assignment Expectations

It is significant to answer problems as posed.  The discussion must be from 3 to 5 pages and written in a clear and concise manner. Support your discussion with references in APA format. You can use Excel or other compatible spreadsheet when computations are involved.
Approaches and objective of Transfer Pricing Policies

The fundamental purpose in setting transfer prices is to motivate managers to act in best interests of the organization, and not just their division. A good transfer price is one that encourages division managers to do whatever is in the best interest of the entire organization.
There are three main approaches to setting transfer prices, namely (1) negotiated transfer prices, (2) transfers at market price transfers, and (3) transfers at cost (or cost plus set profit) to the selling division.

The objectives of domestic transfer pricing include:

• Creating greater divisional autonomy.

• Providing greater motivation for managers.

• Enabling better performance evaluation.

• Establishing better goal congruence.

The purpose of international transfer pricing include:

• Lowering taxes, duties, and tariffs.

• Lowering foreign exchange risks.

• Improving competitive position.

• Improving relations with foreign governments.

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M92671

Have any Question? 

Related Questions in Accounting Basics

Indeed it can be said that newspapers are facing tough

Indeed it can be said that newspapers are facing tough times, and yes, the Internet can offer many things that papers cannot. Even so, the death of newspapers has been predicted by many for decades. Radio, TV and now the ...

Discussionpart 1 please respond the following question no

Discussion Part 1 please respond the following question no less then 350 words (original work, no plagiarism, 1 reference "free cash-flow valuations" please respond to the following: • Create an argument that use of the ...

District water company issued 10-year bonds with a face

District Water Company issued 10-year bonds with a face value of $100,000 and a stated interest rate of 8.0%. The bonds are dated April 1, 2016, and call for semiannual interest payments on each April 1 and October 1. Du ...

1 the manufacture of herbal health tonic is a competitive

1. The manufacture of herbal health tonic is a competitive industry. The manufacturing facilities have an annual output of 100,000 gallons. Operating costs are $2 per gallon. A 100,000 gallon capacity plant costs $500,00 ...

Assessment one - business research report proposal initial

Assessment One - Business Research Report Proposal: Initial Research Proposal The initial research proposal will consist of the following SIX (6) items: 1. Identify a business research topic 2. Define the research questi ...

What are the effects on equitiesfinancial statement effect

What are the effects on equities? Financial Statement Effect of Equity Securities Presented below is a situation involving equity securities: An equity security, whose fair value is currently less than cost, is classifie ...

Problem 1pringle corporation has been authorized to issue

Problem 1: Pringle Corporation has been authorized to issue 23,300 shares of $100 par value, 8%, noncumulative preferred stock and 1,007,600 shares of no-par common stock. The corporation assigned a $4 stated value to th ...

Accounting discussionbulldiscuss the advantages of

Accounting Discussion • Discuss the advantages of understanding accounting as it relates to your current or future position. (Consider careers in management, sales, business operations, finance, and business ownership.)

Accounting for gov amp not for profit1 explain in 2-4

ACCOUNTING FOR GOV & NOT FOR PROFIT 1. Explain in 2-4 sentences the difference between government Agency funds and Fiduciary funds. 2. What information is or is not required to be reported in the RSI for pension plans un ...

Modified accrual accounting and general fund itemscomplete

Modified Accrual Accounting and General Fund Items Complete the following questions based on the Chapter 4 material: • Outline revenue recognition criteria under modified accrual accounting. Include specific requirements ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

WalMart Identification of theory and critical discussion

Drawing on the prescribed text and/or relevant academic literature, produce a paper which discusses the nature of group

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro