Cmi Project Essay

2131 WordsJun 21, 20139 Pages
Dated: June 19, 2013 To: Paul Singer, President From: Eric Hunter, Corporate Controller Subject: Analysis of Company’s Current Situation Dear Paul, After our meeting and analyzing the facts and figures available thoroughly, I came across the following short term as well as long term issues: 1. Short term issues: 1.1. Requirement to increase the transfer price of carburetors to $ 500 1.2. Impacts of Carburetor Production discontinuance on Engine Division(ED) 2. Long term issues: 2.1. Performance and Organization structure of Division - Profit centers or cost center 2.2. Transfer pricing guidelines needed to be revisited 2.3. Implication of Tax and duties and compliance issues 2.4. ED Capacity constraints Following are my…show more content…
Therefore, each division should be autonomous in its decision making. This, however, is not the case with our company. As a matter of fact, the corporate office is influencing and forcing divisions to make the buy and sell decisions from each other at the instructed price of 1.25 times of full production costs. To be a true profit center, the divisions should have the authority to determine and negotiate prices of their products either based on market or through internal resources to ensure profitability. In addition, to be able to ensure operational excellence, managing the costs such as production cost, administrative and selling overheads, should be a priority. The intervention from the corporate office is rather a de-motivating factor for ED when the division is not allowed to sell at the market price and it cannot sell disregarding the internal clients in the market to be profitable. On the other hand SD was taking the benefit of this low transfer price from ED and a high transfer out price to ID, thus reporting a ROI of 15%. When analyzing based on the market prices, we noted that SD is in fact not contributing to the corporate profitability. That is another shortcoming that the decisions of both divisions are affected; one is considering dumping a product having high contribution margins, while the other is

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