1.
Introduction: Transfer pricing is an accounting technique used to determine the price of goods or services when they are transferred and exchanged within the departments of a particular organization. Organizations apply the transfer pricing method to decrease the tax liability of the holding organization. Higher transfer prices are charged in countries where the tax rate is high, whereas lower transfers are charged in countries where the tax rate is low.
The alternative that should the manager of Division A choose to maximize the profit of the division.
2.
Introduction: Transfer pricing is an accounting technique used to determine the price of goods or services when they are transferred and exchanged within the departments of a particular organization. Organizations apply the transfer pricing method to decrease the tax liability of the holding organization. Higher transfer prices are charged in countries where the tax rate is high, whereas lower transfers are charged in countries where the tax rate is low.
The alternative that will generate maximum profits for the company as a whole.
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Chapter IE Solutions
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- General Transfer Pricing Rule Scottsdale Manufacturing is organized into two divisions:Fabrication and Assembly. Components transferred between the two divisions are recorded at a predetermined transfer price. Standard variable manufacturing cost per unit in the Fabrication Divisionis $500. At the present time, this division is working to capacity. Fabrication estimates that the unitsit produces could be sold on the external market for $650. The product under consideration is viewedas a commodity-type product, with no differentiating features or characteristics.Required1. What roles are played by transfer prices? That is, why are transfer prices needed?2. Use the general transfer pricing rule presented in the chapter to determine an appropriate transfer price.Why is the amount you calculated considered an appropriate transfer price?3. What if the Fabrication Division had excess capacity? How would this change the indicated transferprice? Why is the amount you determined considered an…arrow_forwardExercise 15-22 (Static) Basic Transfer Pricing Issues (LO 15-1) Philadelphia Supply Corporation (PSC) produces and distributes various products for the hospitality industry. It is organized in two divisions: Assembly and Packaging. The managers of both divisions are evaluated and compensated based on divisional income. Assembly only "sells" to Packaging. Packaging prepares the items for a particular customer (adding labels, logos, and so on), prepares them for delivery, and ships them to the customer. Information on revenues and costs for the latest quarter for each division follows. Production and sales quantities, measured in "standard units," were 3,000 units for the quarter. Sales revenue Direct materials Direct labor Variable overhead Fixed costs a. Current transfer price per unit h PSC's (the corporation's) decision e to search A local hotel is hosting a special convention next month and has asked for a special price for 500 units at a total price of $102,500. After hearing about…arrow_forwardProblem 15-49 (Algo) Segment Reporting (LO 15-5) Midwest Entertainment has four operating divisions: Bus Charters, Lodging, Concerts, and Ticket Services. Each division is a separate segment for financial reporting purposes. Revenues and costs related to outside transactions were as follows for the past year (dollars in thousands). BUS Charters $11,700 7,950 Ticket Revenues Costs Lodging Concerts Services $4,520 3,360 $5,400 3,550 $1,600 1,500 Bus Charters Division participates in a frequent guest program with Lodging Division. During the past year, Bus Charters reported that it traded lodging award coupons for travel that had a retail value of $1.3 million, assuming that the travel was redeemed at full fares. Concerts Division offered 20 percent discounts to Midwest's bus passengers and lodging guests. These discounts to bus passengers were estimated to have a retail value of $360,000. Midwest's lodging guests redeemed $130,000 in concert discount coupons. Midwest's hotels also…arrow_forward
- Assume you are the department B manager for Marleys Manufacturing. Marleys operates under a cost-based transfer structure. Assume you receive the majority of your raw materials from department A, which sells only o department B (they have no outside sales). After calculating the operating income in dollars and operating income in percentage, analyze the following financial information to determine costs that may need further investigation. (Hint: It may be helpful to perform a vertical analysis.)arrow_forwardChapter: Traditional performance measurement syatem & Transfer Price (Managerial Accounting) Q) Spark Ltd has two divisions, assembly and electrical. The assembly division transfers partially completed components to the electrical division at a predetermined transfer price. The assembly division’s standard variable production cost per unit is $550. This division has spare capacity, and itcould sell all its components to outside buyers at $680 per unit in a perfectly competitive market.Required:a) Determine a transfer price using the general rule.b) How would the transfer price change if the assembly division had no spare capacity? c) What transfer price would you recommend if there was no outside market for the transferred component and the assembly division had spare capacity? d) Explain how negotiation between the supplying and buying units may be used to set transfer prices. How does this relate to the general transfer pricing rule? (200 words)arrow_forwardExercise 11-13 (Algo) Transfer Pricing Situations [LO11-3] [The following information applies to the questions displayed below.] In each of the cases below, assume Division X has a product that can be sold either to outside customers or to Division Y of the same company for use in its production process. The managers of the divisions are evaluated based on their divisional profits. Case A B Division X: Capacity in units Number of units being sold to outside customers Selling price per unit to outside customers 95,000 95,000 96,000 79,000 $ 50 $ 30 Variable costs per unit Fixed costs per unit (based on capacity) Division Y: $ 28 $ 12 $ 6 $ 4 Number of units needed for production 17,000 17,000 Purchase price per unit now being paid to an outside supplier $ 43 $ 24 Exercise 11-13 (Algo) Part 2 Required: 2. Refer to the data in case B above. In this case, there will be no savings in variable selling costs on intracompany sales. a. What is the lowest acceptable transfer price from the…arrow_forward
- Transfer pricing Garcon Inc. manufactures electronic products, with two operating divisions, Consumer and Commercial. Condensed divisional income statements, which involve no intracompany transfers and which include a breakdown of expenses into variable and fixed components, are as follows: Garcon Inc.Divisional Income StatementsFor the Year Ended December 31, 20Y2 ConsumerDivision Commercial Division Total Sales: 14,400 units × $144 per unit $2,073,600 $2,073,600 21,600 units × $275 per unit $5,940,000 5,940,000 Total sales $2,073,600 $5,940,000 $8,013,600 Expenses: Variable: 14,400 units × $104 per unit $(1,497,600) $(1,497,600) 21,600 units × $193* per unit $(4,168,800) (4,168,800) Fixed (200,000) (520,000) (720,000) Total expenses $(1,697,600)…arrow_forwardG Group The G Group has a divisionalised structure. One of the divisions manufactures engines and one of the other divisions assembles motor cycles. The performance of the Divisional Managers, and consequently, their bonuses, is based on the return on capital employed (ROCE) of their individual divisions. Both of these divisions operate in highly competitive markets. Motor Cycle Division The motor cycles sell, on average, for £4,000 each. A key component in a motor cycle is the engine. Engines are readily available on the open market but the division currently buys 3,600 engines each year internally from the Engines Division for £1,375 per engine. Other variable costs in producing a motor cycle total £1,200. The manager has just received the following message from the manager of the Engines Division: Engine prices: due to recent cost increases the price per engine will now be £1,600. On receiving the message the manager of the Motor Cycle Division contacted several…arrow_forwardAPPLY THE CONCEPTS: Determining benefits of negotiated transfer price Assume that Selling Division and Buying Division are both owned by Overall Corporation. Selling Division sells a product that is used by Buying Division and outside customers. Selling Division has 18,000 units of excess capacity. Selling Division currently sells the product for $60 per unit and Buying Division currently buys 18,000 units of the product from an outside source for $60 per unit. Variable costs of the product are $12, of which $3 is the cost of selling the product to an outside customer. Using Selling price less avoidable costs as the minimum price, fill in the following formula for the desired transfer price: $fill in the blank 51adeff30f88fa7_1 < transfer price < $fill in the blank 51adeff30f88fa7_2. Using Variable costs as the minimum price, fill in the following formula for the desired transfer price: $fill in the blank 51adeff30f88fa7_3 < transfer price < $fill in the blank…arrow_forward
- APPLY THE CONCEPTS: Determining benefits of negotiated transfer price Assume that Selling Division and Buying Division are both owned by Overall Corporation. Selling Division sells a product that is used by Buying Division and outside customers. Selling Division has 35,000 units of excess capacity. Selling Division currently sells the product for $30 per unit and Buying Division currently buys 35,000 units of the product from an outside source for $30 per unit. Variable costs of the product are $6, of which $1.5 is the cost of selling the product to an outside customer. Using Selling price less avoidable costs as the minimum price, fill in the following formula for the desired transfer price: $ 28.5 ✔ 6 ✔ transfer price < $ 30 ✓. transfer price < $ 30 ✓. Using Variable costs as the minimum price, fill in the following formula for the desired transfer price: $ Assume there are no avoidable costs with an internal sale (variable costs equal $6) and that Buying Division buys 35,000 units…arrow_forwardHomework 1 In an effort to resolve the problem, the company wants to prepare an income statement segmented by division. Accordingly, the Accounting Department provided the following information: Sales Variable expenses as a percentage of sales. Traceable fixed expenses Required 1 Required 2A Required 28. Complete this question by entering your answers in the tabs below. Net operating income will East $ 392,000 Required: 1. Prepare a contribution format income statement segmented by divisions. 2-a. The Marketing Department believes increasing the West Division's monthly advertising by $28,000 will increase that division's sales by 16%. Assuming these estimates are accurate, how much would the company's net operating income increase (decrease) if the proposal is implemented? 2-b. Would you recommend the increased advertising? increase 52% by $ 299,000arrow_forwardQuestion Content Area Management 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 Department's sales become the Bottling Department's 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 below. Cost-based $0.62 Market-based $0.73 Negotiated $0.69 Gallons transferred 279,000 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 and calculate the operating income/loss percentage. Round your answers to the nearest whole number. Great Springs Bottled Water…arrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningManagerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage LearningPrinciples of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
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