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
The managers for divisions A and B are preparing a new proposal for consideration.
Division C Data Based on the Current Agreement
Part101201Annual volume (units)2,7001,100Transfer price/unit$1,000$2,000Variable expenses/unit$700$1,200
The fixed overhead for Division C is $1,200,000.
Computations (use Excel)
Division ACurrent SituationProposalNo. of UnitsPurchase PriceTotal PurchasesNo. of UnitsPurchase PriceTotal PurchasesInternal purchases2,700$2,000$External purchases1,3002,000Total cost for Part 101$$Savings to Div. A$
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:
Why is transfer pricing such a significant issue both from a financial and managerial perspective?
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