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Explain why transfer prices based on total actual costs are not

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1. Explain why transfer prices based on total actual costs are not appropriate as the basis for divisional performance measurement.;2. Using the market price as the transfer price, determine the contribution margins for both the Mining division and the Metals division.;3. If Redstone Industrial Resources Company were to institute the use of negotiated transfer prices and allow division to buy and sell on the open market, determine the price range for toldine that would be acceptable to both the Mining Division and the Metals Division.;4. Use the general transfer pricing rule to compute the lowest transfer price that would be acceptable to the Mining Division. Is your answer consistent with your conclusion in #3?;5. Identify which one of the three types of transfer prices (cost-based, market-based, or negotiated) in most likely to elicit desirable management behavior at RIRC.;SEE ATTACHMENT;13-48;Redstone Industrial Resources Company (RIRC) has several divisions.;However, only two divisions transfer products to other divisions. The;Mining Division refines toldine, which is then transferred to Metals;Division. The toldine is processed into an alloy by the Metals Division;and the alloy is sold to the customers at a price of $450 per unit. The;Mining Division is currently required by RIRC to transfer its total;yearly output of 400,000 units of toldine to the Metals Division at;total actual manufacturing cost plus 10%. Unlimited quantities of;toldine can be purchased and sold on the open market at $270 per unit.;While the Mining Division could sell al the toldine it produces at $270;per unit on the open market, w would incur a variable selling cost of;$15 per unit.;Brian Jones, manager of the Mining Division, is unhappy with having to;transfer the entire output of toldine to the Metals Division at 110;percent of cost. In a meeting with the management of RIRC, he said;???Why should my division be required to sell toldine to the Metals;Division at less than market price? For the year just ended in May;Metal???s contribution margin was over $57 million on sales of 400,000;units, while Mining???s contribution was just over $15 million on the;transfer of the same number of units. My division is subsidizing the;profitability of the Metals Division. We should be allowed to charge the;market price for toldine when transferring to the Metals Division.???;The following table shows the detailed unit cost structure unit cost;structure for both the Mining and Metals divisions during the most;recent year.;Mining Division Metals Division;Transfer price from Mining Division - $198;Direct material $36 $ 18;Direct Labor $48 $ 60;Manufacturing overhead $96* $ 75**;Total Cost per Unit $180 $351;*Manufacturing overhead cost in the Mining Division is 25 percent fixed;and 75 percent variable.;**Manufacturing overhead cost in the Metals Division is 60 percent fixed;and 40 percent variable.;Explain why transfer prices based on total actual costs are not;appropriate as the basis for divisional performance measurement.;Using the market price as the transfer price, determine the contribution;margins for both the Mining division and the Metals division.;If Redstone Industrial Resources Company were to institute the use of;negotiated transfer prices and allow division to buy and sell on the;open market, determine the price range for toldine that would be;acceptable to both the Mining Division and the Metals Division.;Use the general transfer pricing rule to compute the lowest transfer;price that would be acceptable to the Mining Division. Is your answer;consistent with your conclusion in #3?;Identify which one of the three types of transfer prices (cost-based;market-based, or negotiated) in most likely to elicit desirable;management behavior at RIRC.

 

Paper#26131 | Written in 18-Jul-2015

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