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Question;136.What are the principal advantages and;disadvantages of using cost-based transfer prices? (Give a short explanation of;each item you list.);137.1. Provide a reason;why an organization might choose a particular transfer pricing alternative for;domestic transfers and a different transfer pricing alternative for;international transfers.;2.;Provide a reason why an organization may not want to use two different;transfer pricing systems, one for domestic transfers and another for;international transfers.;The text notes that there are various objectives of;transfer pricing. This raises the possibility of using multiple transfer;pricing systems. For example, an organization could use one transfer pricing;alternative for domestic transfers and another alternative for transnational;transfers.;Required;138.1. What are the primary advantages of using;market price as the transfer price? 2. What are the primary disadvantages of;using market price as the transfer price?;As;noted in the text, the use of market price can be used to set the transfer;price associated with interdivisional transfers of goods and services.;Required;139.1. Assume that there;are no alternative uses for Division P's facilities. Determine whether the;company as a whole will benefit if Division B purchases the product externally.;At what amount should the transfer price be set such that each divisional;manager, acting in the best interest of his or her own division, take actions;that are in the best interest of the company as a whole?;2. Assume;that Division P's facilities would not otherwise be idle if it didn't produce;the product for Division B. By not producing the product for Division B, the;freed-up facilities would be used to generate a net cash benefit of $1,800.;Should Division B purchase from suppliers? (Show calculations.);3. Assume;that for the foreseeable future there are no alternative uses for Division P's;facilities, and that the outside supplier's cost to Division B drops by $2.;Under this circumstance, should Division B purchase externally? At what amount;should the transfer price be set such that each divisional manager, acting in;the best interest of his or her division, would take actions that are in the;best interest of the company as a whole?;Assume;the following facts regarding a product that Division P can sell internally (to;Division B) or externally on the open market. Incremental cost to Division P;for each unit produced = $12. External purchase price, to be paid by Division B;= $13.50. Total units needed (annually) by Division B = 1,000.;Required;140.1. If Division B purchased the units externally;would the firm as a whole benefit or lose (in terms of a short-term financial;impact)? Show calculations.;2. Apply;the general transfer-pricing model to this situation. What is the minimum;transfer price indicated for each of the 1,000 units in question? Show;calculations.;3.;What is the likely consequence, from a;decision standpoint, if the transfer price is set at the amount stipulated by;the general transfer-pricing rule?;Assume;two divisions, P (producing) and B (buying) of a company are both treated as;investment centers for performance-evaluation purposes. Division B requires;1,000 units of product that it can either purchase externally on the open;market for $13.50 per unit, or obtain internally from Division P. The;incremental (out-of-pocket) costs to Division P are estimated at $12.00 per;unit. Because of spot shortages of this product in the open market, it is;sometimes possible for Division P to sell at a price higher than the normal;market price. Such is currently the case: Division P has an offer to sell 1,000;units at a gross selling price of $15.50 per unit. In addition to the normal;incremental production costs, Division P would have to pay an additional $0.50;sales commission cost for each unit sold externally.;Required;141.1. Assume that;Division P has limited capacity. Thus, for each unit it sells internally, it;loses the opportunity to sell that unit externally. Use the general;transfer-pricing rule to determine the minimum transfer price for;internal transfers of units, that Division P would charge Division B. From the;standpoint of Division P, why is the figure you calculated considered an;acceptable transfer price?;2. What;is the maximum transfer price that Division B would be willing to pay;per unit on any internal transfers?;3. If;top management of the company allows the managers of Divisions P and B to;negotiate a transfer price, what is the likely range of possible transfer;prices?;4. Assume;now that Division P has excess capacity. Use the general transfer-pricing rule;to determine the minimum transfer price that Division P would be willing;to accept from Division B for any internal transfers. Would this transfer price;motivate the correct economic decision (internal versus external transfer) from;the standpoint of the company as a whole? Explain.;5.;Given the situation described above in;(4), would top management of the company want the transfer to take place;internally? Why? (Show calculations, if appropriate.) How could top management;ensure that an internal transfer would take place?;Assume;two divisions of a company, P (producing) and B (buying), that are treated as;investment centers for performance-evaluation purposes. As the management;accountant, you've been asked to provide input to the determination of the;appropriate transfer price for an exchange of product between these;two;divisions. In case #1, Division P is experiencing a capacity constraint, while;in case #2 it is assumed that Division P has excess capacity. The incremental;production cost incurred by Division P, to the point of transfer, is $80.00 per;unit. Division P can sell its output externally for $120.00 per unit, less a;sales commission charge of $5.00 per unit. Currently, Division B is purchasing;the product from an external supplier at $120.00 per unit, plus a $3.00;transportation charge per unit.;Required


Paper#51017 | Written in 18-Jul-2015

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