Homework Help is Here – Start Your Trial Now!
Business
Accounting
A Multinational company is organized into several divisions. One of the divisions is Information Technology (IT) division which provides consultancy services to its clients as well as to the other divisions of the firm. The consultants in the IT divisions always work in a team of three professional consultants on each day of consulting assignment. The external clients are charged a fee at the rate of $3,000 for each consulting day. The fee represents the cost plus 150% profit mark up. The break-up of cost involved in the consultancy fee is estimated at 70% as being variable and the balance is fixed. The textiles division of the consultancy firm which has undertaken a big assignment requires the services of two teams of IT consultants to work five days in a week for a period of 48 weeks. While the director of the textile division intends to negotiate the transfer price for the consultancy work, the director of IT division proposes to charge the textile division at $3,000 per consulting day. In respect of the consulting work of the textile division, IT division will be able to reduce the variable costs by & $150 per consulting day. This is possible in all cases of internal consultations because of the use of specialized equipment.

A Multinational company is organized into several divisions. One of the divisions is Information Technology (IT) division which provides consultancy services to its clients as well as to the other divisions of the firm. The consultants in the IT divisions always work in a team of three professional consultants on each day of consulting assignment. The external clients are charged a fee at the rate of $3,000 for each consulting day. The fee represents the cost plus 150% profit mark up. The break-up of cost involved in the consultancy fee is estimated at 70% as being variable and the balance is fixed. The textiles division of the consultancy firm which has undertaken a big assignment requires the services of two teams of IT consultants to work five days in a week for a period of 48 weeks. While the director of the textile division intends to negotiate the transfer price for the consultancy work, the director of IT division proposes to charge the textile division at $3,000 per consulting day. In respect of the consulting work of the textile division, IT division will be able to reduce the variable costs by & $150 per consulting day. This is possible in all cases of internal consultations because of the use of specialized equipment.

Cornerstones of Cost Management (Cornerstones Series)
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter10: Decentralization: Responsibility Accounting, Performance Evaluation, And Transfer Pricing
Section: Chapter Questions
Problem 4CE
See similar textbooks
icon
Related questions
Question
A Multinational company is organized into several divisions. One of the divisions is Information Technology (IT) division which provides consultancy services to its clients as well as to the other divisions of the firm. The consultants in the IT divisions always work in a team of three professional consultants on each day of consulting assignment. The external clients are charged a fee at the rate of $3,000 for each consulting day. The fee represents the cost plus 150% profit mark up. The break-up of cost involved in the consultancy fee is estimated at 70% as being variable and the balance is fixed. The textiles division of the consultancy firm which has undertaken a big assignment requires the services of two teams of IT consultants to work five days in a week for a period of 48 weeks. While the director of the textile division intends to negotiate the transfer price for the consultancy work, the director of IT division proposes to charge the textile division at $3,000 per consulting day. In respect of the consulting work of the textile division, IT division will be able to reduce the variable costs by & $150 per consulting day. This is possible in all cases of internal consultations because of the use of specialized equipment.
Transcribed Image Text:A Multinational company is organized into several divisions. One of the divisions is Information Technology (IT) division which provides consultancy services to its clients as well as to the other divisions of the firm. The consultants in the IT divisions always work in a team of three professional consultants on each day of consulting assignment. The external clients are charged a fee at the rate of $3,000 for each consulting day. The fee represents the cost plus 150% profit mark up. The break-up of cost involved in the consultancy fee is estimated at 70% as being variable and the balance is fixed. The textiles division of the consultancy firm which has undertaken a big assignment requires the services of two teams of IT consultants to work five days in a week for a period of 48 weeks. While the director of the textile division intends to negotiate the transfer price for the consultancy work, the director of IT division proposes to charge the textile division at $3,000 per consulting day. In respect of the consulting work of the textile division, IT division will be able to reduce the variable costs by & $150 per consulting day. This is possible in all cases of internal consultations because of the use of specialized equipment.
Required:- Explain the implications and set transfer prices per consulting day at which the IT division can provide consultancy services to the textiles division such that the profit of the multinational company as a whole is maximized in each of the following scenarios: i) Every team of the IT division is fully engaged during the 48 week period in providing consultancy services to external clients and that the IT division has no spare capacity of consultancy teams to take up the textiles division assignment. ii) IT division will be able to spare only one team of consultants to provide services to the textiles division during the 48 week period and all other teams are fully engaged in providing services to external clients. iii) A new external client has come forward to pay IT division a total fee of $ 1,632,000 for engaging the services of two teams of consultants during the aforesaid period of 48 weeks.
Transcribed Image Text:Required:- Explain the implications and set transfer prices per consulting day at which the IT division can provide consultancy services to the textiles division such that the profit of the multinational company as a whole is maximized in each of the following scenarios: i) Every team of the IT division is fully engaged during the 48 week period in providing consultancy services to external clients and that the IT division has no spare capacity of consultancy teams to take up the textiles division assignment. ii) IT division will be able to spare only one team of consultants to provide services to the textiles division during the 48 week period and all other teams are fully engaged in providing services to external clients. iii) A new external client has come forward to pay IT division a total fee of $ 1,632,000 for engaging the services of two teams of consultants during the aforesaid period of 48 weeks.
Expert Solution
steps

Step by step

Solved in 2 steps

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Knowledge Booster
Special order decisions
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
Cornerstones of Cost Management (Cornerstones Ser…
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Financial And Managerial Accounting
Financial And Managerial Accounting
Accounting
ISBN:
9781337902663
Author:
WARREN, Carl S.
Publisher:
Cengage Learning,
Managerial Accounting
Managerial Accounting
Accounting
ISBN:
9781337912020
Author:
Carl Warren, Ph.d. Cma William B. Tayler
Publisher:
South-Western College Pub
Managerial Accounting: The Cornerstone of Busines…
Managerial Accounting: The Cornerstone of Busines…
Accounting
ISBN:
9781337115773
Author:
Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:
Cengage Learning
SEE MORE TEXTBOOKS