Reference no: EM132757251
Questions -
Problem 1 (WHITECOTTON) - Avery Company has two divisions, Polk and Bishop. Polk produces an item that Bishop could use in its production. Bishop currently is purchasing 25,000 units from an outside supplier for P24 per unit. Polk is currently operating at less than its full capacity of 600,000 units and has variable costs of P12 per unit. The full cost to manufacture the unit is P18. Polk currently sells 450,000 units at a selling price of P25.50 per unit.
a. What will be the effect on Avery Company's operating profit if the transfer is made internally?
b. What is the minimum transfer price from Polk's perspective?
c. What is the maximum transfer price from Bishop's perspective?
Problem 2 (WHITECOTTON) - Sandy Company has two divisions, Huron and Cortez. Huron produces an item that Cortez could use in its production. Cortez currently is purchasing 50,000 units from an outside supplier for P24 per unit. Huron is currently operating at full capacity of 600,000 units and has variable costs of P13.50 per unit. The full cost to manufacture the unit is P19.50. Huron currently sells 600,000 units at a selling price of P25.50 per unit.
a. What will be the effect on Sandy Company's operating profit if the transfer is made internally?
b. What is the minimum transfer price from Huron's perspective?
c. What is the maximum transfer price from Cortez' perspective?
Problem 3 (WHITECOTTON) - Washington Company has two divisions, Jefferson and Adams. Jefferson produces an item that Adams could use in its production. Adams currently is purchasing 100,000 units from an outside supplier for P78.40 per unit. Jefferson is currently operating at full capacity of 900,000 units and has variable costs of P46.40 per unit. The full cost to manufacture the unit is P59.20. Jefferson currently sells 900,000 units at a selling price of P86.40 per unit.
a. What will be the effect on Washington Company's operating profit if the transfer is made internally?
b. What will be the change in profits for Jefferson if the transfer price is P67.20 per unit?
c. What will be the change in profits for Adams if the transfer price is P67.20 per unit?
Problem 4 (WHITECOTTON) - Sugar Company has two divisions, Lenox and Berkshire. Lenox produces an item that Berkshire could use in its production. Berkshire currently is purchasing 100,000 units from an outside supplier for P43 per unit. Lenox is currently operating at full capacity of 750,000 units and has variable costs of P28 per unit. The full cost to manufacture the unit is P35. Lenox currently sells 750,000 units at a selling price of P44 per unit.
a. What will be the effect on Sugar Company's operating profit if the transfer is made internally?
b. What will be the change in profits for Lenox if the transfer price is P40 per unit?
c. What will be the change in profits for Berkshire if the transfer price is P40 per unit?
Problem 5 (AGAMATA) - Lancelot Corporation has two divisions. Manila Division and Pasig Division. Manila Division produces product Cream with the following data:
Unit sales price P120
Production cost per unit:
Materials 10
Direct labor 15
Variable overhead 20
Fixed overhead (based on normal capacity of 40,000 units) 10
Marketing and general expenses:
Variable 6
Fixed 4
Maximum capacity 50,000 units
Units sold to outside customers 40,000 units
Pasig Division, a newly established division, needs 5,000 units of Product Cream. An outside supplier which produces Cream with comparable quality as that of Manila Division has quoted Pasig Division to supply the 5,000 units for P70. Pasig Division would sell product Cream to its customers for P120 after incurring marketing and packaging costs of P20 per unit. Manila Division would not incur any variable marketing expense if the 5,000 units are sold to Pasig Division.
Pasig Division would use P200,000 incremental average assets for the production and sale of 5,000 units of product Cream. Manila Division uses an average of P2,000,000 in assets to produce Cream and generate an income of P1,200,000 from its customers.
Required:
1. For the 5,000 units to be ordered by Pasig Division, determine the ROI for Manila Division, Pasig Division, and Lancelot Corporation, assuming:
a. An inter-divisional transfer price of P45.
b. An inter-divisional transfer price of P70.
c. Pasig Division buy from an outside supplier of P70.
2. For Lancelot Corporation, how much is the net advantage (disadvantage) if Pasig Division buys the 5,000 units from Manila Division rather from an outside supplier?
3. What would be the minimum transfer price between Manila and Pasig Division?
4. What would be the minimum transfer price assuming Manila Division is already operating at maximum capacity?
Problem 6 Multinational Transfer Pricing. (AGAMATA) - AFB Corporation maintains different related corporations all over the world. One of its divisions is located in Indonesia while the other is in the Philippines.
The Indonesian Division is in need of a part, with part code labelled as "X44", now being produced by the Philippine Division. The Indonesian Division is presently purchasing the said part from a local supplier. Relevant data are as follows:
PHIL Division IND Division Local IND Supplier
Unit sales price P40 P120 P55
Other unit variable production cost 21 32 ?
Shipping costs if the part is shipped 15
Tax rate 40% 20%
Required:
Determine the consolidated profit after tax of AFB Corporation based on the following decision alternatives:
1. The transfer price is at market and the shipping cost is shouldered by the selling division.
2. The transfer price is at market and the shipping cost is shouldered by the buying division.
3. The transfer price is at cost and the shipping cost is shouldered by the selling division.
4. The transfer price is at cost and the shipping cost is shouldered by the buying division.
5. The Indonesian Division buys from the local supplier and the Philippine Division sells its produce in the domestic market.
Problem 7 (HILTON) - Clearview Window Company manufactures windows for the home-building industry. The window frames are produced in the Frame Division. The frames are then transferred to the Glass Division, where the glass and hardware are installed. The company's best-selling product is a 1000 mm x 1250 mm, doublepaned operable window.
The Frame Division also can sell frames directly to custom homebuilders, who install the glass and hardware. The sales price for a frame is P 80. The Glass Division sells its finished windows for P 190. The markets for both frames and finished windows exhibit perfect competition.
The standard variable cost of the window is detailed as follows:
Frame Division Glass Division
Direct material P 15 P 30 *
Direct labor 10 15
Variable overhead 30 30
Total P 55 P 75
* Not including the transfer price for the frame.
Required:
1. Assume that there is no excess capacity in the Frame Division.
a. Use the general rule to compute the transfer price for window frames.
b. Calculate the transfer price if it is based on standard variable cost with a 10 percent markup.
2. Assume that there is excess capacity in the Frame Division:
a. Use the general rule to compute the transfer price for window frames.
b. Explain why your answers to requirements (1a) and (2a) differ:
c. Suppose the predetermined fixed-overhead rate in the Frame Division is 125 percent of direct labor cost. Calculate the transfer price if it is based on standard full cost plus a 10 percent markup.
d. Assume the transfer price established in requirement (2c) is used. The Glass Division has been approached by the U.S. Army with a special order for 1,000 windows at P 145. From the perspective of Clearview Window Company as a whole, should the special order be accepted or rejected? Why?
e. Assume the same facts as in requirement (2d). Will an autonomous Glass Division manager accept or reject the special order? Why?
f. Comment on any ethical issues you see in the questions raised in requirements (2d) and (2e).
3. Comment on the use of full cost as the basis for setting transfer prices.
Problem 8 (HILTON) - Cortez Enterprises has two divisions: Birmingham and Manchester. Birmingham currently sells a diode reducer to manufacturers of aircraft navigation systems for P 775 per unit. Variable costs amount to P 500, and demand for this product currently exceeds the division's ability to supply the marketplace.
Despite this situation, Cortez is considering another use for the diode reducer, namely, integration into a satellite positioning system that would be made by Manchester. The positioning system has an anticipated selling price of P 1,400 and requires an additional P 670 of variable manufacturing costs. A transfer price of P 750 has been established for the diode reducer.
Top management is anxious to introduce the positioning system; however, unless the transfer is made, an introduction will not be possible because of the difficulty of obtaining needed diode reducers. Birmingham and Manchester are in the process of recovering from previous financial problems, and neither division can afford any future losses. The company uses responsibility accounting and ROI in measuring divisional performance, and awards bonuses to divisional management.
Required:
1. How would Birmingham's divisional manager likely react to the decision to transfer diode reducers to Manchester? Show computations to support your answer.
2. How would Manchester's divisional management likely react to the P 750 transfer price? Show computations to support your answer.
3. Assume that a lower transfer price is desired. Should top management lower the price or should the price be lowered by other means? Explain.
4. From a contribution margin perspective, does Cortez benefit more if it sells the diode reducers externally or transfers the reducers to Manchester? By how much?
Problem 9 (HILTON) - Alpha Communications, Inc., which produces telecommunications equipment in the United States, has a very strong local market for its circuit board. The variable production cost is P130, and the company can sell its entire supply domestically for $170. The U.S. tax rate is 40 percent.
Alternatively, Alpha can ship the circuit board to its division in Germany, to be used in a product that the German division will distribute throughout Europe. Information about the German product and the division's operating environment follows.
Selling Price of final product: P360
Shipping fees to import circuit board: P20
Labor, overhead, and additional material costs of final product: P115
Import duties levied on circuit board (to be paid by the German division): 10% of transfer price
German tax rate: 60%
Assume that U.S. and German tax authorities allow a transfer price for the circuit board set at either U.S. variable manufacturing cost or the U.S. market price. Alpha's management is in the process of exploring which transfer price is better for the firm as a whole.
Required:
1. Compute overall company profitability per unit if all are transferred and U.S. variable manufacturing cost is used as the transfer price. Show separate calculations for the U.S. operation and the German division.
2. Repeat requirement (1), assuming the se of the U.S. market price as the transfer price. Which of the two transfer prices is better for the firm?
3. Assume the German division can obtain the circuit board in Germany for P155.
a. If you were the head of the German division, would you rather do business with your U.S. division or buy the circuit board locally? Why?
b. Rather than proceed with the transfer, is it in the best interest of Alpha to sell its goods domestically and allow the German division to acquire the circuit board in Germany? Why? Show computations to support your answer.
4. Generally speaking, when tax rates differ between countries, what strategy should a company use in setting its transfer prices?
Problem 10 (HILTON) - Pretoria Consolidated Resource Company (PCRC) has several divisions. However, only two divisions transfer products to other divisions. The Mining Division refines toldine, which is then transferred to the Metals Division. The toldine is processed into an alloy by the Metals Division, and the alloy is sold to customers at a price of P150 per unit. The Mining Division is currently required by PCRC to transfer its total yearly output of 500,000 units of toldine to the Metals Division at a total actual manufacturing cost plus 10 pecent. Unlimited quantities of toldine can be purchased and sold on the open market at P90 per unit. While the Mining Division could sell all the toldine it produces at P90 per unit in the open market, it would incur a variable selling cost of P5 per unit.
Jacob Ncube, manager of the Mining Division, is unhappy with having to transfer the entire output of toldine to the Metals Division at 110 percent of cost. In a meeting with the management of PCRC, he said, "Why should my division be required to sell toldine to the Metals Division at less than Market Price? For the year ended in May, Metals' contribution margin was P24 Million on sales of 500,000 units, while Mining's contribution was only P7 Million on the transfer of the same number of units. My division is subsidizing the profitability of the Metals Division. We should be allowed to charge the market price for toldine when transferring to the Metals Division."
The following table shows the detailed unit cost structure for both the Mining and Metals divisions during the most recent year.
Mining Metals Division Division
Transfer Price from Mining Division -- P 66
Direct material P 12 6
Direct Labor 16 20
Manufacturing overhead 32* 25**
Total cost per unit P60 P 117
*Manufacturing-overhead cost in the Mining Division is 25 percent fixed and 75 percent variable.
**Manufacturing-overhead cost in the Metals Division is 60 percent fixed and 40 percent variable.
Required:
1. Explain why transfer prices based on total actual costs are not appropriate as the basis for divisional performance measurement.
2. Using the market price as transfer price, determine the contribution margin for both the Mining Division and the Metals Division
3. If Pretoria Consolidated Resources Company were to institute the use of negotiated transfer prices and allow divisions to buy and sell on the open market, determine the price range for toldine that would be acceptable to the both the Mining Division and the Metals Division. Explain your answer.
4. Use the general transfer-pricing rule to compute the lowest transfer price that would be acceptable to the Mining Division. Is your answer consistent with your conclusion in requirement (3)? Explain.
5. Identify which one of the three types of transfer prices (cost-based, market-based, or negotiated) is most likely to elicit desirable management behavior at PCRC. Explain your answer.