Discuss the short-term and long-term issues

Reference no: EM132985120

Question

Amber Company has three divisions which operate as autonomous profit centres. The Bubbles Division manufactures premium soap which it sells to external customers for $4 per cake. Its main raw materials are caustic soda, which it purchases from the Chemo Division, and glycerine, which it purchases from the Oils Division.

The Chemo Division manufactures a high grade caustic soda for internal transfer, and also sells this to external customers at a rate of $4 per kg. There is an established market for caustic soda, and the Chemo Division can sell all the caustic soda that it can manufacture.

The Oils Division also operates in a well- developed competitive market. It currently sells its glycerine for $6 per litre. However, the external market is limited, so the Oils Division operates with excess capacity. Currently, about 70 percent of the output of Glycerine is sold to the Bubbles Division.

The following costs relate to the two products that are transferred:

	Oils Division Glycerine Per litre	Chemo Division Caustic Soda Per kg
Direct material	$ 2.50	$1.00
Direct labour	0.40	0.50
Variable overhead	0.60	0.40
Fixed overhead	1.50	1.40
Total Cost	$5.00	$3.30

Required:
a) State the general transfer pricing rule, and use it to calculate transfer prices for the Chemo Division and the Oils Division.

b) Bubbles Division has just discovered that it can purchase glycerine from an overseas source at $3.90 per litre, and has told the Oils Division that unless it lowers its transfer price, it will no longer purchase its product. The manager of the Oils Division has said that he cannot supply glycerine at this price, as he needs to cover his overheads and meet his profit target

Discuss the short-term and long-term issues that need to be considered by these two divisions, and by the company as a whole in resolving this issue.

c) "There is no need to use transfer pricing systems in divisionalised companies, as these only result in internal transactions which cancel each other out."

Do you agree with this statement? Provide arguments to explain your answer.

Reference no: EM132985120

Questions Cloud

Outline of a hr data analytics project plan : What would an outline of a HR data analytics project plan look like (which items should it contain)?

What amount of maintenance services total cost is allocated : What amount of Maintenance Services total cost is allocated to the Covering Department? Round to closest whole number (no cents).

Preparing interview questions for a female candidate : You have been given the task of Preparing interview questions for a female candidate who has applied for the role of Project Manager in rural Alberta.

What is the amount of the firms ebit : The selling, gemneral and administrative expenses of $225,260; depreciation of 351,510; cost of goods sold of $158,426. What is the amount of the firms EBIT?

Discuss the short-term and long-term issues : Discuss the short-term and long-term issues that need to be considered by these two divisions, and by the company as a whole in resolving this issue

What is the exception to the employment-at-will doctrine : What is the exception to the employment-at-will doctrine often found in employee handbooks or materials?

CIS 462 Disaster Recovery Plan Assignment : CIS 462 Security Strategy and Policy Assignment - Term Paper - Disaster Recovery Plan, Strayer University, USA - Provide an overview of the organization

Why do you think the timing of labor legislation in america : 1.Why do you think the timing of labor legislation in America (beginning with the Railway Labor Act and National Labor Relations Act, and working forward) was a

Determine the strike vote outcome under each time value : The typical an employee in unionized, Cast the votes according to your results and determine the strike vote outcome under each time value of money possibility.

User Account

All Pages