09/10/12

BUSI 354 - Ch. 6

BUSI 354 - Ch. 6

HOME LEARN ABOUT INVESTING TAX PLANNING GUIDE CONTACT INFO

Transfer Pricing - Ch. 6 Assignment 4: Please complete Questions 5 & 6 of Case 6-1 on pages 175 & 176 of the Anthony & Govindarajan textbook . The assignment is due at the start of class on March 14th (201) or the start of class on March 15th(202). Business Unit Strategies - What is its mission? What is its competitive advantage? One of the important tasks for senior management is resource deployment. - That is, making decisions regarding the use of cash generated from business units to finance growth the growth of other units The BCG model of evaluating business units uses four mission categories: BUILD, HOLD, HARVEST, DIVEST HOLD = "STAR" DIVEST = "Dog" HARVEST = "CASH COW" BUILD = "?" Building is to increase market share: it is a high cash user coupled with low returns Holding is protecting the firm's market share and competitive advantage. This is where market share is growing and the product is producing high cash flow but we are still producing high cash outflows Harvesting is where market share is high and we are generating positive cash flows. There is little room for growth under this category Divesting is little growth, low cash flow, declining growth Experience curve - with greater market share, the cost per unit decreases predictably with the number of units produced over time Typically the market share leader will have the lowest costs to produce but the highest profits in the industry Industry Analysis - Factors in several outside threats to a company's competitive advantage Intensity of rivalries among competitors, bargaining power of customers, bargaining power of suppliers, threats from substitutes, threat of new entry Objectives of transfer pricings - If two or more profit centres are jointly responsible for product development, manufacturing and marketing, each should share in the revenue generated when the product is finally sold. The transfer price is the mechanism for distributing this revenue. The transfer price should be designed so that it accomplishes the following objectives: It should provide each business unit with relevant information it needs to determine the optimum trade-off between company costs and revenues. It should induce goal congruent decisions - that is, the system should be designed so that decisions that improve business unit profits will also improve the company's profits. It should help measure economic performance of the individual business unit and the system implemented should be simple and easy When profit centres of a company buy products from, and sell to, one another, two decisions must be made periodically for each product: 1 - Should the company produce the product inside the company or purchase it from an outside vendor? This is the sourcing decision 2 - If produced inside, at what price should the product be transferred between profit centres? This is the transfer price decision Case 6 - 1 - Part 1 Division A of Lambda Company manufactures product X, which is sold to Division B as a component of Product Y. Product Y is sold to Division C, which uses it to produce product Z. Product Z is sold to customers outside of the company. The intracompany pricing rule is that products are transferred between divisions at standard cost plus a 10% return on inventories and fixed assets. From the information provided below, calculate the transfer price for Products X,Y and the standard cost for Product Z.

www.ezinvestments.ca/chapter-6.php

1/4

09/10/12

BUSI 354 - Ch. 6

Case 6-1 Part 2 - Assume the same facts as stated in problem 1, except that the transfer price rules is as follows: Goods are transferred among divisions at the standard variable cost per unit transferred plus a monthly charge. This charge is equal to the fixed costs assigned to the product plus a 10 percent return on the average inventories and fixed assets assignable to each product. Calculate the transfer price for products X and Y and calculate the unit standard cost for Products Y and Z.

The present selling proce for Product Z is $28.00. Listed below is a series of possible price reductions by competition and the probable impact of these reductions on the volume of sales if Division C does not also reduce its price. Possible competitive Price: $27, 26, 25, 23, 22 Sales Volume if price of Product Z is maintained at $28: 9,000, 7,000, 5,000, 2,000, 0 Sales Volume if price of Product Z is reduced to competitive levels: 10,000, 10,000, 10,000, 10,000, 10,000

www.ezinvestments.ca/chapter-6.php

2/4

09/10/12

BUSI 354 - Ch. 6

Problem 1 - A company has two profit centres. Profit centre A produces an electronic component with the following costs: Variable production costs $60/unit Fixed costs $10/unit Profit centre A is operating at full capacity and sells all of its output to outside customers at $82/unit. Profit centre B currently purchases a similar component from an outside supplier. It has determined that the component produced by profit centre A could be used instead, with no adverse effect on the quality of the final product. What is the minimum transfer price at which profit centre A should agree to transfer the component? Answer: Variable Cost = $60 + Opportunity Cost ($22) = $82 Problem 2- TL Inc. has two divisions, D1 and D2. D1 can produce up to 2,000 units of product T97 per year. All 2,000 units can be sold at a market price of $88. D2 needs 300 units of T97 as a component for one of its products. Last year, D1 incurred the following unit costs for T97: Variable manufacturing costs Fixed manufacturing costs $37 $22

What is the minimum transfer price that would be acceptable for D1? Answer: Variable Cost $37 + Opportunity Cost ($51) = $88 Problem 3- SQ Inc. has two divisions, S1 and Q2. S1 can produce up to 2,000 units of product T97 per year. All 2,000 units can be sold at a market price of $88. Q2 needs 300 units of T97. On interdivisional variable sale cost can be avoided. Unit costs: Variable manufacturing costs Fixed manufacturing costs Variable selling cost $37 $22 $5

What is the minimum transfer price that would be acceptable for S1? Answer: Variable Cost $37 + Opportunity Cost ($46 (88-37-5) = $83 Problem 4 - SQ Inc. has two divisions, S1 and Q2. S1 can produce up to 2,000 units of T97 per year. 1,800 units can be sold at a market price of $88. Q2 needs 300 units. For interdivisional sales, variable selling cost can be avoided. Last year, S1 incurred the following unit costs: Variable manufacturing costs Fixed manufacturing costs Variable selling cost $37 $22 $5

What is the minimum transfer price per unit that would be acceptable for S1? Answer: Variable Cost ($37) + Opportunity Cost ($88 - $37 - $5 x 1/3) = $52.33 Problem 5 The California Instrument Company (CIC) consists of the Semiconductor Division and the Process-Control Division, each of which operates as an independent profit centre. The Semiconductor Division employs craftsmen who produce two different electronic components, the new high-performance Super-chip and an older product called Okay-chip. These two products have the following cost characteristics: Super-Chip
www.ezinvestments.ca/chapter-6.php

Okay-Chip
3/4

09/10/12

BUSI 354 - Ch. 6

Direct materials Direct manufacturing labour 2 hours X $14; 0.5 hours X 14 28

$2

$1

$7

Annual overhead in the Semiconductor Division totals $400,000, all fixed. Owing to the high skill level necessary for the craftsmen, the semiconductor divisions capacity is set at 50,000 hours per year. One customer orders a maximum of 15,000 Super-chips per year, at a price of $60 per chip. If CIC cannot meet this entire demand, the customer curtails its own production. The rest of the Semiconductors Divisions capacity is devoted to the Okay-chip, for which there is unlimited demand at $12 per chip. The Process-Control Division provides only one product, a process-control unit, with the following cost structure: Direct materials (circuit board) Direct manufacturing labour (5 hours x $10) $60 $50

Fixed overhead costs of the Process-Control Division are $80,000 per year. The current market price of the control unit is $132 per unit. A joint research project has just revealed that a single Super-chip could be substituted for the circuit board currently used to make the processcontrol unit. Using Super-chip would require an extra hour of labour per control unit for a new total of 6 hours per control unit.

REQUIRED
1. Calculate the contribution margin per hour of selling Super-chip and Okay-chip. If no transfers of Super-chip were made to the ProcessControl Division, how many Super-chips and Okay-chips should the Semiconductor Division sell? 2. The Process-Control Division expects to sell 5,000 control units this year. From the viewpoint of California Instruments as a whole, should 5,000 Super-chips be transferred to the Process-Control Division to replace circuit boards? Show all calculations. 3. If demand for the control units is sure to be 5,000 units, but its price is uncertain, what should the transfer price of Super-chip be to ensure that the division managers actions maximize operating income for CIC as a whole? (All other data are unchanged.) 4. If demand for the control unit is sure to be 12,000 units, but its price is uncertain, what should the transfer price of Super-chip be to ensure that the division managers actions maximize operating income for CIC as a whole? (All other data are unchanged.)

Transfer Pricing Answers.xls Size : 85.5 Kb Type : xls

www.ezinvestments.ca/chapter-6.php

4/4