Transfer pricing, goal congruence, ethics. Cocoa Mill Chocolates manufactures specialty chocolates and sells them to fine candy stores. The company operates two divisions, cocoa and candy, as decentralized entities. The cocoa division purchases raw cacao beans and processes them into cocoa powder. The candy division purchases cocoa powder and other ingredients and uses them to produce gourmet chocolates. The cocoa division is free to sell processed cocoa to outside buyers, and the candy division is free to purchase processed cocoa from other sources. Currently, however, the cocoa division sells all of its output to the candy division, and the candy division does not purchase materials from outside suppliers.
The processed cocoa is transferred from the cocoa division to the production division at 110% of full cost. The cocoa division purchases raw cacao beans for $4 per pound. The cocoa division uses 1.25 pounds of raw cacao beans to produce one pound of processed cocoa. The division’s other variable costs equal $1.25 per pound of output, and fixed costs at a monthly production level of 20,000 pounds of cocoa are $0.75 per pound. During the most recent month, 20,000 pounds of processed cocoa were transferred between the two divisions. The cocoa division’s capacity is 25,000 pounds of output.
With the increase in demand for dark chocolate, the candy production division expects to use 22,000 pounds of cocoa next month. Franklin Foods has offered to sell 2,000 pounds of cocoa next month to the candy production division for $7.50 per pound.
- A. Compute the transfer price per pound of processed cocoa. If each division is considered a profit center, would the candy production manager choose to purchase 2,000 pounds next month from Franklin Foods?
- B. What would be the cost to Cocoa Mill Chocolates if the 2,000 pounds had been produced by the cocoa division and transferred to the candy division? Is the external purchase in the best interest of Cocoa Mill Chocolates? What is the cause of this goal incongruence?
- C. The candy division manager suggests that $7.50 is now the market price for processed cocoa, and that this should be the new transfer price. Cocoa Mill’s corporate management tends to agree. The cocoa division manager is suspicious. Franklin’s prices have always been much higher than $7.50 per pound. Why the sudden price cut? After further investigation by the cocoa division manager, it is revealed that the $7.50 per pound price was a one-time-only offer made to the candy division due to excess inventory at Franklin.
Future orders would be priced at $8.00 per pound. Comment on the validity of the $7.50 per pound market price and the ethics of the candy manager. Would changing the transfer price to $7.50 matter to Cocoa Mill Chocolates?
Want to see the full answer?
Check out a sample textbook solutionChapter 22 Solutions
HORGREN'S COST ACCOUNTING
- Determining transfer pricing The Watkins Company is decentralized, and divisions are considered investment centers. Watkins specializes in sports equipment, and one division manufactures netting that is used for basketball hoops, soccer goals, and other sports equipment. The Netting Division reports the following information for a heavy-duty basketball hoop net: The Basketball Equipment Division can purchase a similar heavy-duty net from an outside vendor for $15. Requirements 1. Determine the negotiable range for the transfer price. 2. What is the minimum transfer price the Netting Division should consider if operating at capacity? Below capacity? 3. What is the maximum transfer price the Basketball Equipment Division should consider?arrow_forwardTechno Inc. has two divisions: Auxiliary Components and Audio Systems. Divisional managersare encouraged to maximize ROI and EVA. Managers are essentially free to determine whethergoods will be transferred internally and what the internal transfer prices will be. Headquartershas directed that all internal prices be expressed on a full cost-plus basis. The markup in the fullcost pricing arrangement, however, is left to the discretion of the divisional managers. Recently,the two divisional managers met to discuss a pricing agreement for a subwoofer that would besold with a personal computer system. Production of the subwoofers is at capacity. Subwooferscan be sold for $31 to outside customers. The Audio Systems Division can also buy the subwoofer from external sources for the same price; however, the manager of this division is hoping toobtain a price concession by buying internally. The full cost of manufacturing the subwoofer is$20. If the manager of the Auxiliary Components Division…arrow_forwardManagement of Great Springs Bottled Water Company has asked you, the controller, to develop a transfer pricing system for the company. The Transportation Department of the company sells all of its product to the Bottling Department of the company. Thus the Transportation Departments sales become the Bottling Departments cost of goods sold. In order to determine an optimal transfer pricing system, management would like you to demonstrate what an income statement would look like under a cost, market, and negotiated transfer pricing structure. These various transfer prices are listed as follows. Prepare an income statement for each of the transfer prices by filling in the missing numbers in the provided income statement based on each transfer price (thus four different income statements) and calculate the operating income/loss percentage. Prepare a brief summary of the results.arrow_forward
- Code Incorporated has three divisions (Entertainment, Plastics, and Video Card), each of which is considered an investment center for performance evaluation purposes. The Entertainment Division manufactures video arcade equipment using products produced by the other two divisions, as follows: 1. The Entertainment Division purchases plastic components from the Plastics Division that are considered unique (i.e., they are made exclusively for the Entertainment Division). In addition, the Plastics Division makes less-complex plastic components that it sells externally, to other producers. 2. The Entertainment Division purchases, for each unit it produces, a video card from Code's Video Card Division, which also sells this video card externally (to other producers). The per-unit manufacturing costs associated with each of the above two items, as incurred by the Plastic Components Division and the Video Card Division, respectively, are: Plastic Components Video Cards Direct…arrow_forwardGoodworks Software operates stores within five regions. Regional managers are held accountable for marketing, advertising, and sales decisions, and all costs incurred within their region. In addition, regional managers decide whether new stores will open, where the stores will be located, and whether the stores will lease or purchase the facilities. Store managers, in contrast, are accountable for marketing, advertising, and sales decisions, and costs incurred within their stores. Ideally, on the basis of this information, what type of responsibility center should the software company use to evaluate its regions and stores? (1) Regions; (2) Stores (1) Profit center; (2) Profit center (1) Profit center; (2) Revenue center (1) Investment center; (2) Cost center (1) Investment center; (2) Profit center (1) Profit center; (2) Cost centerarrow_forwardRisk sharing, incentives, benchmarking, multiple tasks. Wonkies, Inc. is a large company that owns fast-food restaurants, has a soft drink division, and a snack division. Wonkies, Inc. corporate management gives its division managers considerable operating and investment autonomy in running their divisions. Wonkies, Inc. is considering how it should compensate Mark Hamm, the general manager of the snack division.arrow_forward
- Cocoa Mill Chocolates manufactures specialty chocolates and sells them to fine candy stores. The company operates two divisions, cocoa and candy, as decentralized entities. The cocoa division purchases raw cacao beans and processes them into cocoa powder. The candy division purchases cocoa powder and other ingredients and uses them to produce gourmet chocolates. The cocoa division is free to sell processed cocoa to outside buyers, and the candy division is free to purchase processed cocoa from other sources. Currently, however, the cocoa division sells all of its output to the candy division, and the candy division does not purchase materials from outside suppliers. The processed cocoa is transferred from the cocoa division to the production division at 110% of full cost. The cocoa division purchases raw cacao beans for $4 per pound. The cocoa division uses 1.25 pounds of raw cacao beans to produce one pound of processed cocoa. The division’s other variable costs equal $1.25 per pound…arrow_forwardCocoa Mill Chocolates manufactures specialty chocolates and sells them to fine candy stores. The company operates two divisions, cocoa and candy, as decentralized entities. The cocoa division purchases raw cacao beans and processes them into cocoa powder. The candy division purchases cocoa powder and other ingredients and uses them to produce gourmet chocolates. The cocoa division is free to sell processed cocoa to outside buyers, and the candy division is free to purchase processed cocoa from other sources. Currently, however, the cocoa division sells all of its output to the candy division, and the candy division does not purchase materials from outside suppliers. The processed cocoa is transferred from the cocoa division to the production division at 110% of full cost. The cocoa division purchases raw cacao beans for $4 per pound. The cocoa division uses 1.25 pounds of raw cacao beans to produce one pound of processed cocoa. The division’s other variable costs equal $1.25 per pound…arrow_forwardCocoa Mill Chocolates manufactures specialty chocolates and sells them to fine candy stores. The company operates two divisions, cocoa and candy, as decentralized entities. The cocoa division purchases raw cacao beans and processes them into cocoa powder. The candy division purchases cocoa powder and other ingredients and uses them to produce gourmet chocolates. The cocoa division is free to sell processed cocoa to outside buyers, and the candy division is free to purchase processed cocoa from other sources. Currently, however, the cocoa division sells all of its output to the candy division, and the candy division does not purchase materials from outside suppliers. The processed cocoa is transferred from the cocoa division to the production division at 110% of full cost. The cocoa division purchases raw cacao beans for $4 per pound. The cocoa division uses 1.25 pounds of raw cacao beans to produce one pound of processed cocoa. The division’s other variable costs equal $1.25 per pound…arrow_forward
- Duncan’s Pizzas is a chain of pizza stores. Pizzas are made fresh in-store, and then delivered tocustomers by a fleet of drivers. The senior management team has identified the strategic priorities forthe business as on-time delivery and product quality. Question: If the company is successful in achieving challenging targets for these performance measures, willit also necessarily achieve high profitability? Explain your answer.arrow_forwardCost centers, profit centers, decentralization, transfer prices. Fenster Corporation manufactures windows with wood and metal frames. Fenster has three departments: glass, wood, and metal. The glass department makes the window glass and sends it to either the wood or metal department where the glass is framed. The window is then sold. Upper management sets the production schedules for the three departments and evaluates them on output quantity, cost variances, and product quality. 1. Are the three departments cost centers, revenue centers, or prot centers?2. Are the three departments centralized or decentralized?3. Can a centralized department be a prot center? Why or why not?4. Suppose the upper management of Fenster Corporation decides to let the three departments set their own production schedules, buy and sell products in the external market, and have the wood and metal departments negotiate with the glass department for the glass panes using a transfer price. a. Will this change…arrow_forwardLansing Electronics Inc. manufactures a variety of printers, scanners, and fax machines in itstwo divisions: the PSF Division and the Components Division. The Components Division produces electronic components that can be used by the PSF Division. All the components thisdivision produces can be sold to outside customers. However, from the beginning, nearly allof its output has been used internally. The current policy requires that all internal transfers ofcomponents be transferred at full cost.Recently, Cam DeVonn, the chief executive officer of Lansing Electronics, decided to investigate the transfer pricing policy. He was concerned that the current method of pricing internaltransfers might force decisions by divisional managers that would be suboptimal for the firm. Aspart of his inquiry, he gathered some information concerning Component Y34, which is usedby the PSF Division in its production of a basic scanner, Model SC67.The PSF Division sells 40,000 units of Model SC67 each year…arrow_forward
- Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubManagerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage LearningCornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning
- Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College