Transfer Pricing and Responsibility Centers
Coffee Maker’s Incorporated (CMI)
Two divisions of a CMI are involved in a dispute. Division A purchases Part 101 and Division B purchases Part 201 from a third division, C. Both divisions need the parts for products that they assemble. The intercompany transactions have remained constant for several years.
Recently, outside suppliers have lowered their prices, but Division C is not lowering its prices. In addition, all division managers are feeling the pressure to increase profit. Managers of divisions A and B would like the flexibility to purchase the parts they need from external parties to lower cost and increase profitability.
The current pattern is that Division A purchases 3,000 units of product part 101 from Division C (the supplying division) and another 1,000 units from an external supplier. The market price for Part 101 is $900 per unit. Division B purchases 1,000 units of Part 201 from Division C and another 500 units from an external supplier. Note that both divisions A and B purchase the needed supplies from both the internal source and an external source at the same time.
The managers for divisions A and B are preparing a new proposal for consideration.
•Division C will continue to produce Parts 101 and 201. All of its production will be sold to Divisions A and B. No other customers are likely to be found for these products in the short term, given that supply is greater than demand in the market.
•Division C will manufacture 2,000 units of Part 101 for the Division A and 500 units of Part 201 for the Division B.
•Division A will buy 2,000 units of Part 101 from Division C and 2,000 units from an external supplier at $900 per unit.
•Division B will buy 500 units of Part 201 from Division C and 1,000 units from an external supplier at $1,900 per unit.
Division C Data 2014 Based on the Current Agreement
Part 101 201
Direct materials $200 $300
Direct labor $200 $300
Variable overhead $300 $600
Transfer price $1,000 $2,000
Annual volume 3,000 units 1,000 units
Computations (use Excel)
•Set up a table similar the one below to compute the difference between the current situation and the proposal for Divisions A and B. Design a different table for Division C.
Current Situation Proposal
No. of Units Purchase Price Total Purchases No. of Units Purchase Price Total Purchases
Internal purchases 3,000 $ 2,000 $
External purchases 1,000 2,000
Total cost for part 101 $ $
Savings to Div. A $
•Summarize the financial effects for the three divisions and the company as a whole in another table.
Memo (use Word)
Write a 4- or 5-paragraph memo to the division manager explaining the analysis performed. Start with an introduction and end with a recommendation. Each of the four or five paragraphs should have a heading.
Short Essay (use Word) Start with an introduction and end with a summary or conclusion. Use headings.
•Evaluate and discuss the implications of the following transfer pricing policies:
Transfer price = cost plus a mark-up for the selling division
Transfer price = fair market value
Transfer price = price negotiated by the managers
Why is transfer pricing such a significant issue both from a financial and managerial perspective?
Each submission should include two files: (1) An Excel file; and (2) A Word document. The Word document shows the memo first and short essay last. Assume a knowledgeable business audience and use required format and length. Individuals in business are busy and want information presented in an organized and concise manner.
Module 3 – SLP Writer: please write 2 pages for this assignment, you have case 1 and case 2 slp to help write this case 3 assignment
Transfer Pricing and Responsibility Centers
Third part of the presentation. See background information for the module one SLP.
Include the following items in your presentation.
•The organization is currently centralized, but is reviewing options to put a decentralized structure in place.
•You are asked to comment on responsibility centers and their functions.
•Cost centers can be a drain on an organization. Do you have any thoughts about limiting the number of cost centers and control costs? Present specific ideas.
SLP Assignment Expectations
Submit a Power Point presentation or a Word Document. A Power Presentation should have no more than six slides and a Word document cannot exceed two pages. Use words, tables, and graphs to make a succinct presentation. Document all sources and provide links at the end. It is acceptable to add another slide or page to list the sources.
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