ACC501 Case MOD 3 Transfer Pricing and Responsibility Centers

Trident University
Huey Watson
ACC501 Case MOD 3
Transfer Pricing and Responsibility Centers
Accounting for Decision Making
Dr. Ralph Ezelle
Date
MEMO
To: The CEO of Coffee Maker’s Incorporated (CMI)
From
Date
Subject: Transfer pricing
Introduction
Transfer prices are the prices or rates agreed between related parties for the transfer of goods or / and services and in this case there is transfer of goods among the divisions of the Coffee Maker's Incorporated (CMI) company. CMI has division A, B and C and both A and B buy from division C and externally. Division A purchases Part 101 and division B purchases Part 201 where the transfer prices are $ 1,000 and 2, 000. The market prices are used for the external purchases and are $ 900 for division A and $1,800 for division B.
Current agreement
Division A initially gets 2,700 from division C and 1,300 units externally where the internal purchases and external purchases were $2,700,000 and $1,170,000 respectively for a total $3,870,000. Division B gets 1,300 internally from Division C and 700 units externally while the internal purchases were $2,200,000 and external purchases were $1,260,000. Under the current agreement, division A has higher purchases of $410,000 compared to division B and the difference between the purchases in current situation and the proposal help determine the savings to division A and B. The transfer price affects the transactions that are carried out between entities and related persons at a different price than the market price, which also means that it is possible to transfer benefits or losses artificially from one business unit to another (Garrison, Noreen & Brewer, 2018).
Proposed agreement
Division A proposed gets 2,000 units from Division C (internal) and 2,000 from external suppliers and the total cost is $3,800,000. Under the new proposal for Division B there were 900 units sourced internally and 900 units from the external suppliers where the total cost for 201 is $3,420,000. For division B new proposal there are 900 units purchased internally and externally, but since the internal purchases are priced at $ 2,000 compared to $ 1,800 for the external purchases the total costs are higher. The outside suppliers offer lower compared to Division C, and the division has failed to reduce the prices. There are savings of $70,000 for division A and 40,000 for division B, while the additional costs of accepting the proposal is $260,000
Conclusion
After setting transfer pricing it is necessary to compare the costs and revenues when the market prices are considered. Accepting the new proposal will increase the company’s costs by $260,000 and the profits will also dec...