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Instructions:
Module 3: Case Study
ASSIGNMENT ON TRANSFER PRICING AND RESPONSIBILITY CENTERS
Coffee Makers, Inc. is a company that specializes in the production of coffee.
A dispute has erupted between three CMI divisions. Part 101 is purchased by Division A, and Part 201 is purchased by Division B from a third division, C. Both divisions require the components for the products they assemble. For several years, the intercompany transactions have remained consistent.
Outside suppliers have recently reduced their prices, but Division C refuses to follow suit. Furthermore, all division managers are under pressure to boost profits. Managers in divisions A and B would like the ability to purchase parts from third parties at a lower cost in order to boost profits.
The current pattern is as follows:
Division A buys 2,700 units of product part 101 from Division C (the supplying division) and 1,300 units from a third party.
Division B buys 1,100 Part 201 units from Division C and another 700 from an outside supplier.
It’s worth noting that divisions A and B buy supplies from both an internal and an external source at the same time.
A new proposal is being prepared by the managers of divisions A and B for consideration.
Parts 101 and 201 will continue to be produced by Division C. Divisions A and B will receive all of its output. Given that supply exceeds demand in the market, no other customers are likely to be found for these products in the near future.
Division A will purchase 2,000 units of Part 101 from Division C at the current transfer price, as well as 2,000 units from an external supplier for $900 per unit.
Division B will purchase 900 units of Part 201 from Division C at the current transfer price, as well as 900 units from an external supplier for $1,800 each.
Based on the Current Agreement, Division C Data
Part 101 201
2,700 1,100 annual volume (units)
$1,000 per unit for transfer
$2,000
$700 $1,200 in variable expenses per unit
Division C has a fixed overhead of $1,200,000.
Assignment of a Case
Required:
Calculations
To calculate the difference between the current situation and the proposal for Divisions A and B, set up a table similar to the one below.
A Division
Proposal for the Present Situation
Total Purchases No. of Units Purchase Price
Number of Units
Total Purchases Purchase Price
Purchases made internally 2,700 $ 2,000 $ Purchases made externally 1,300 $
2,000
Part 101’s total cost
$
$
Calculate the operating income for Division C under the current agreement and the proposed agreement using the savings to Div. A $ method.
Is it a good idea to revise the agreement? Computes should be used to back up your answer.
Keep in mind
Write a four- or five-paragraph memo to the division manager outlining the findings. Begin with an introduction and conclude with a suggestion. There should be a heading for each of the four or five paragraphs.
a brief essay
An introduction should come first, followed by a summary or conclusion. Make use of headings.
Consider the following transfer pricing policies and their implications:
Cost plus a mark-up for the selling division equals the transfer price.
The transfer price is equal to the fair market value.
The transfer price is the price agreed upon by the managers.
Why is transfer pricing such a big deal from both a financial and a management standpoint?
Expectations for the Assignment
Each entry should consist of two files: (1) an Excel spreadsheet and (2) a Word document. The memo appears first in the Word document, followed by a short essay. Assume a savvy business audience and adhere to the required format and length. Businesspeople are busy, and they expect information to be presented in a clear and concise manner.
Reference
Reading Requirements
The role of responsibility accounting and responsibility centers is discussed in this module. Explore these topics in greater depth while keeping the six goals in mind. To learn more about each topic, click on one of the three arrows below:
Make Sure You’ve Got It
Examine your comprehension to ensure that you have a firm grasp on the background information. If you’re having trouble grasping the concepts, go back over some of the material or look at the optional resource for more examples. To check your progress, click on the quiz icon to take a 20-question true-or-false self-study quiz. If you’re not happy with your grade, go over some of the material again. Review the materials listed under optional reading at the bottom of this page for more in-depth information.
Last Thoughts
A responsibility center is a part or subunit of a business for which a manager is in charge. A logical source for determining responsibility centers is the company’s detailed organization chart. Departments within a company are the most common responsibility centers.
The manager of a responsibility center is referred to as a cost center when he or she can only control costs. The responsibility center is known as a profit center when a manager can control both costs and revenues. An investment center is a responsibility center where a manager has authority and responsibility for costs, revenues, and investments.
Because of the existence of responsibility centers, an internal price must be established for the transfer of parts, goods, and services between units and responsibility centers. Transfer prices are contentious because management intervenes by enacting policies that impact a responsibility center’s or unit’s revenue.
Additional considerations apply when transferring between international jurisdictions. Pricing strategies are influenced not only by accounting rules, but also by income taxation and duties. Most countries have regulations in place to help prevent people from using this pricing method to avoid paying taxes or engage in other unethical or illegal activities.
Reading (Optional)
Refer to Dr. Walther’s accounting text and videos for more information.
L. Walther Reporting to Support Managerial Decisions (Chapter 23).
ATTRIBUTIONS AND LICENSES
RUBRIC |
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Excellent Quality 95-100%
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Introduction
45-41 points The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned. |
Literature Support 91-84 points The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned. |
Methodology 58-53 points Content is well-organized with headings for each slide and bulleted lists to group related material as needed. Use of font, color, graphics, effects, etc. to enhance readability and presentation content is excellent. Length requirements of 10 slides/pages or less is met. |
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Average Score 50-85% |
40-38 points More depth/detail for the background and significance is needed, or the research detail is not clear. No search history information is provided. |
83-76 points Review of relevant theoretical literature is evident, but there is little integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are included. Summary of information presented is included. Conclusion may not contain a biblical integration. |
52-49 points Content is somewhat organized, but no structure is apparent. The use of font, color, graphics, effects, etc. is occasionally detracting to the presentation content. Length requirements may not be met. |
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Poor Quality 0-45% |
37-1 points The background and/or significance are missing. No search history information is provided. |
75-1 points Review of relevant theoretical literature is evident, but there is no integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are not included in the summary of information presented. Conclusion does not contain a biblical integration. |
48-1 points There is no clear or logical organizational structure. No logical sequence is apparent. The use of font, color, graphics, effects etc. is often detracting to the presentation content. Length requirements may not be met |
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RESPONSIBILITY CENTERS AND TRANSFER PRICING |
RESPONSIBILITY CENTERS AND TRANSFER PRICING