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Transfer Pricing Essay

1244 words - 5 pages

THE UNIVERSITY OF NEW SOUTH WALES SCHOOL OF ACCOUNTING ACCT2522 Management Accounting 1 Session 1, 2011 Tutorial Week 8 - Transfer pricing Tutorial Questions Overall Theme In previous weeks we have focused our attention on the use of management accounting information for costing purposes (e.g. ABC), processes improvement (e.g. ABM, process analysis), and for budget control (standard cost analysis). This week we switch our attention to another aspect of management accounting by exploring the concept of responsibility accounting. We look at how management accounting system can be designed to encourage desirable (goal-congruent) managerial behaviour and to reflect the autonomous nature of ...view middle of the document...

13 Exercise 13.14 Exercise 13.15 Tutorial Questions (must be prepared prior to the tutorial) Question 1: Mowen et. al. 2010; Problem 13.28 (requirements 1 to 3 only) Additional question: The manager of the Industrial division has indicated that an outside supplier has offered to produce the subassembly for $200 per unit. He offers to pay variable cost plus a lump sum of $125,000 to help cover the fixed costs and provide the Metal Fabrication division with some profit. What are the maximum transfer price and the minimum transfer price? Do you think that manager of the Metal Fabrication division should accept this offer? Explain your answer. Question 2: (Adapted from Langfield Smith (2009) problem 12.45) Dragoon Ltd has two manufacturing divisions: • • Costa Division Margarita Division

The Costa Division produces electric motors, 20% of which are sold to the Margarita Division of Dragoon. The remainder are sold to outside customers. Dragoon regards both divisions as investment centres and allows division managers to choose their sources of sales and supply. Corporate policy requires that all interdivisional sales and purchases be made at a transfer price based on standard variable cost. Costa Division’s estimated sales and standard cost data for the year ending 31 December, based on capacity of 100,000 units are as follows: To Margarita Division $ 450,000 (450,000) (150,000) (150,000) 20,000 To Outside Customers $ 4,000,000 (1,800,000) (600,000) 1,600,000 80,000

Sales Variable costs Fixed costs Profit/(loss) Units of Sales

2

Margarita Division uses the electric motors to manufacture “R2B2”, a product with confidential military application (i.e. no one knows that R2B2 really is!). Further, R2B2 has the following cost structure: ($) Selling price per unit 120 Variable cost per unit 10* Fixed cost (per year) 300,000 Annual demand 20,000 (*variable cost per unit excludes the cost of electric motor) Required 1. Assuming that Costa sells 80,000 units of electric motor to outside customers, while transferring 20,000 units to Margarita Division using variable costs, calculate the profit for Costa Division, Margarita Division, and Dragoon Ltd. (Assume also that the only products manufactured by Dragoon Ltd are the electric motors and R2B2). 2. Costa Division receives a special order to sell 20,000 units that it currently sells to Margarita Division to a new customer at a price of $37.50 per unit. Margarita can purchase its requirements from an outside supplier at a price of $42.50 per unit. Assume that Costa Division desires to maximise its profits. a. Will Costa take on the new customer and drop its sales to Margarita? Explain your answer. b. Calculate the profit for Costa Division, Margarita Division, and Dragoon Ltd, assuming that Costa Division has taken up the opportunity to sell 20,000 units to a new...

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