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4 pages/β‰ˆ1100 words
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APA
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Accounting, Finance, SPSS
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Coursework
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English (U.S.)
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Topic:

Coffee Maker's Incorporated- Transfer Pricing and Responsibility Centers

Coursework Instructions:

TRANSFER PRICING AND RESPONSIBILITY CENTERS
Assignment Overview
Coffee Maker's Incorporated (CMI)
Three 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 refuses to do so. 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 at a lower cost and increase profitability.
The current pattern is that:
-Division A purchases 2,700 units of product part 101 from Division C (the supplying division) and another 1,300 units from an external supplier.
-Division B purchases 1,100 units of Part 201 from Division C and another 700 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 A will buy 2,000 units of Part 101 from Division C at the existing transfer price; and
2,000 units from an external supplier at the market price of $900 per unit.
-Division B will buy 900 units of Part 201 from Division C at the existing transfer price; and
900 units from an external supplier at $1,800 per unit.
Division C Data Based on the Current Agreement (TABLE IN IS THE WORD DOCUMENT)
Part 101 102
Annual volume (units) 2,700 1,000
Transfer price/unit $1,100 $2,100
Variable expenses/unit $750 $1,100
The fixed overhead for Division C is $1,200,000.
Case Assignment
Required:
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.
TABLE IS IN WORD DOCUMENT
-Compute the operating income for Division C under the current agreement and the proposed agreement.
-Is the revised agreement a good idea? Support your answer with computations.
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?
Assignment Expectations
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.

Coursework Sample Content Preview:

Coffee Maker's Incorporated- Transfer Pricing and Responsibility Centers
Student Name
University
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Professor Name
Date
Coffee Maker's Incorporated- Transfer Pricing and Responsibility Centers
Memorandum
Date: May 20, 2023
To: The Coffee Maker's Incorporated – Division C’s Manager
From: The Management Accountant
Subject: Analysis on the Difference between the Current Situation and the Proposal
Transfer pricing is essential in The Coffee Maker's Incorporated because it assists the firm in knowing whether every section achieves the organizational objectives. For this reason, divisions A and B would need your division to transfer products to them at lower prices to maximize their profits, as the company requires. Kumar et al. (2021) assert that business corporations negotiate transfer prices among themselves depending on their firms' policies. Therefore, you need to agree with the other divisions on the appropriate transfer prices to help you achieve the organizational objectives.
Analysis on the Difference between the Current Situation and the Proposal
From the income statements, your division would make an operating profit of $845,000 under the current situation and $400,000 under the proposal. The reason is that under the proposed idea, divisions A and B would reduce the units purchased from your division and buy the balances from an external source. Therefore, your division’s revenue decreases, lessening the operating profit by $445,000. Both divisions prefer to purchase from an outside source since it sells products to them at lower prices than your division.
Divisions A and B want to increase profits by purchasing the required parts at lower expenses. From the analysis, divisions A and B would save $140,000 and $60,000, respectively, under the proposal. Therefore, under the current situation, both divisions are losing. According to Sultan et al. (2021), firms reduce costs to increase their incomes. This technique is essential for divisions A and B since their sales prices and volumes remain constant, so they should stick to the proposal.
Whether the Proposed Agreement is a Good Idea
There are better ideas than the proposed agreement to your division. The reason is that under the idea, divisions A and B propose reducing the units they purchase from your division, hence your department’s sales decrease, lessening its operating profit. However, the proposed agreement is excellent for divisions A and B. Both divisions want to increase profits, purchasing the parts they require at lower expenses from an outside source and saving a few dollars. Yulia et al. (2019) admit that transfer pricing is complicated because its price can be lower or equal to the market price. Nevertheless, since your division’s transfer prices are higher than the outside source, your colleague managers from the other departments must buy from outside, making your division liable to fewer sales, hence lower profits.
Recommendation on what Division C should Do
Your division’s transfer price is higher than the selling price of the outside competitor. Therefore, you should change your strategy by decreasing the transfer prices to make divisions A and B buy all their parts fr...
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