Reference no: EM132069318

Question: PART B: Transfer Pricing and Variances

Greta Company produces cars. Two of the profit centers, Tires center and Assembly center, were in conflict over the price of tires. External suppliers of tires offered Carla, the manager of the Assembly center, the same type and quality of tire for $100. Carla used to buy these tires internally for $130 each.

Kamal the CEO of the company called for a meeting with the managers of both centers in order to solve the issue. Dani the manager of the Tires Centre explained that the tires produced by his department have been a market leader for the past 30 years and are distributed by the company worldwide."

Tires Center: Cost per tire

	$
Direct materials	38
Direct labor	25
Variable overheads	8
Fixed overheads	16
Total cost	87

Carla answered that the external suppliers offered the same specifications and quality for a $30 less, and that she should be able to buy them internally at least at the same price.

Required: Kamal wishes to assess the situation prior to finalizing his recommendations as he plans to present his findings during next week board meeting. As a consultant, he asked you to:

1. Discuss the transfer pricing and elaborate on whether the Assembly Centre should buy tires from inside or outside the firm. Show your workings (130 words)

2. Based on your answer and analysis in the previous requirement, provide a proper transfer price. Justify your answer.(100 words)

3. The Tires Centre had a capacity of 80,000 tires per year, and the Assembly Centre use around 180,000 tires per year. The Tires center could sell all of its production externally for $130, based on these circumstances provide a recommendation for Greta Company whether these two centers should buy/sell internally or externally. Justify your answer. (50 words)

4. Explain why setting transfer prices by Greta can be controversial when a product is being transferred between two profit centers. (130 words)

5. The Accountant of Greta Company provided you the following information concerning another department, that produces milk and yogurt.