Transfer Pricing and Responsibility Centers (Case Study Sample)
Accounting, Essay should be no more than 2 pages, Complete Excel spreadsheet calculations, 5 references, Master program, APA style with the appropriate tables
• Please use original writing (No Plagerism)
• Please use American URLs than can be easily verified on the web on the reference page.
• Please place page numbers of referenced material
• Please address the memo to CEO of Coffee Maker’s Incorporated (CMI)
Coffee Maker's Incorporated (CMI)
Two divisions of a CMI are involved in a dispute. Division A purchases Part 101 and Division B purchases Part 201 from a third division, C. Both divisions need the parts for products that they assemble. The intercompany transactions have remained constant for several years.
Recently, outside suppliers have lowered their prices, but Division C is not lowering its prices. In addition, all division managers are feeling the pressure to increase profit. Managers of divisions A and B would like the flexibility to purchase the parts they need from external parties to lower cost and increase profitability.
The current pattern is that Division A purchases 3,000 units of product part 101 from Division C (the supplying division) and another 1,000 units from an external supplier. The market price for Part 101 is $900 per unit. Division B purchases 1,000 units of Part 201 from Division C and another 500 units from an external supplier. Note that both divisions A and B purchase the needed supplies from both the internal source and an external source at the same time.
The managers for divisions A and B are preparing a new proposal for consideration.
• Division C will continue to produce Parts 101 and 201. All of its production will be sold to Divisions A and B. No other customers are likely to be found for these products in the short term, given that supply is greater than demand in the market.
• Division C will manufacture 2,000 units of Part 101 for the Division A and 500 units of Part 201 for the Division B.
• Division A will buy 2,000 units of Part 101 from Division C and 2,000 units from an external supplier at $900 per unit.
• Division B will buy 500 units of Part 201 from Division C and 1,000 units from an external supplier at $1,900 per unit.
Division C Data 2014 Based on the Current Agreement
Part 101 201
Direct materials $200 $300
Direct labor $200 $300
Variable overhead $300 $600
Transfer price $1,000 $2,000
Annual volume 3,000 units 1,000 units
Computations (use Excel)
• Set up a table similar the one below to compute the difference between the current situation and the proposal for Divisions A and B. Design a different table for Division C.
Current Situation Proposal
No. of Units Purchase Price Total Purchases No. of Units Purchase Price Total Purchases
Internal purchases 3,000 $ 2,000 $
External purchases 1,000 2,000
Total cost for part 101 $ $
Savings to Div. A $
• Summarize the financial effects for the three divisions and the company as a whole in another table.
Memo (use Word)
Write a 4- or 5-paragraph memo to the division manager explaining the analysis performed. Start with an introduction and end with a recommendation. Each of the four or five paragraphs should have a heading.
Short Essay (use Word) Start with an introduction and end with a summary or conclusion. Use headings.
• Evaluate and discuss the implications of the following transfer pricing policies:
Transfer price = cost plus a mark-up for the selling division
Transfer price = fair market value
Transfer price = price negotiated by the managers
Why is transfer pricing such a significant issue both from a financial and managerial perspective?
Each submission should include two files: (1) An Excel file; and (2) A Word document. The Word document shows the memo first and short essay last. Assume a knowledgeable business audience and use required format and length. Individuals in business are busy and want information presented in an organized and concise manner.
ACC501 MOD03- Transfer Pricing and Responsibility Centers
To: The CEO of Coffee Maker’s Incorporated (CMI)
Subject: Transfer pricing
The transfer price represents the pricing related to the transfer of products 101 and 201 to A and B respectively with supplies coming from division C. Unlike selling to outsiders the revenue associated with the transferred units will remain the company. In order to determine the most optimal price, the analysis will take into account the market value and transfer pricing based on the current agreement and proposed agreement. Division A initially procures 3,000 form C and 1,000 units externally but would now have access to 2,000 internally and 2,000 from external suppliers. In the case of Division B, 1000 were sourced internally, 1,000 externally, but under the proposal 500 units will be sourced internally and 1,500 units externally.
Under the current agreement, the company’s total costs for division A and B are both at $3,900,000 for each unit. This was then to be compared with the proposal to assess the possible changes in profits and cost savings. As such, the implications of the transfer pricing strategies will be the basis for making decision on whether to go ahead with the current strategy or accept the proposal. This includes changes in the three divisions alone and the overall changes in cost savings. The maximum payable transfer price by divisions is dependent on the supply price of the external suppliers (smccd.net, n.d.).
The dispute arising out of external suppliers offering lower prices than Division A affects the profitability of the company. Under the proposed agreement the profit reduces to $1,000,000 compared to the original agreement at $1,700,000 representing a $700,000 fall in profitability. Based on the assumption that the total costs first stays the same, the proposed agreement has better cost savings for Division A ad B, but losses in Division C. Overall, there is a positive effect of adopting the proposal.
Coffee Maker's Incorporated (CMI) proposed alternative is acceptable since the net effect is positive. Analysis on the likely changes in profitability between the two agreements was conducted with the aim of informing decisions. As such, there is no concern for ordering ...
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