TRANSFER PRICING AND RESPONSIBILITY CENTERS
Module 3 C ase TR ANSFE R P R IC IN G A ND R ESPO NSIB IL IT Y C EN TE R S Case A ssig nm en t 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 1 01 201 D ire ct m ate ria ls $200 $300 Listen Dire ct la bor $200 $300 V aria ble o ve rh ead $300 $600 T ra nsfe r p ric e $1,0 00 $2,0 00 A nnual vo lu m e 3,0 00 u nits 1 ,0 00 u nits Required:
Computations (use Excel) Set up a table similar the one below to compute the dif ference between the current situation and the proposal for Divisions A and B. Design a dif ferent table for Division C. Div is io n A C urre nt S itu atio n Pro posa l N o. o f U nits P urc h ase P ric e To ta l P urc h ase s N o. o f U nits P urc h ase P ric e To ta l P urc h ase s In te rn al p urc h ase s 3,0 00 $ 2,0 00 $ E xte rn al purc h ase s 1,0 00 2,0 00 To ta l co st fo r p art 1 01 $ $ S avin gs to D iv. A $ Summarize the financial ef fects for the three divisions and the company as a whole in another table. Memo (use Word) Write a 4 or 5paragraph 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 W ord) Start with an introduction and end with a summary or conclusion. Use headings. Evaluate and discuss the implications of the following transfer pricing policies: Priv a cy P o lic y | C on ta ct T ransfer price = cost plus a markup 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?
Assig nm en t E xp ecta tio ns Each submission should include two files: (1) An Excel file; and (2) A W ord 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.