388 Chapter 13
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Admin.
L/A
M/E
Proc.
Fin.
Direct costs
$ 2,130
$ 1,680
$ 2,370
$ 7,520
$ 7,200
Admin.
(2,677)
134
201
1,339
1,004
Legal/Acctg.
355
167
689
877
Maint./Eng.
192
274
(2,738)
904
1,369
$ 0
$ 0
$ 0
$10,452
$10,450
Factory overhead rates:
59. Allocation of computer services costs should be made on an “hours used” basis to
permit a more efficient use of company resources. The charging basis should en-
courage users to take advantage of the Computer Systems Department’s services
(CMA adapted)
60. a. Case 1 upper limit = $70
Case 2 upper limit = $57
Interpretation: When, as in both cases in this problem, the lower limit exceeds
b. Selling price = Variable cost + $12
c. Dual transfer prices for Case 1: Speaker’s selling price [from (b)] = $65 Sound
Speaker’s Division manager should demonstrate that the whole company will
be worse off if this is done based on the answer to (a):
61. a. Current external selling price, $10,464
Selling Division—fair value since most are produced and sold at this price ex-
ternally.
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Total variable production cost ($4,200) + 20% = $5,040
externally.
Buying Division—less than external purchase price, therefore it is more bene-
ficial to the bottom line of Ludmilla Company.
Total product ($6,000) cost + 20% = $7,200
division.
Bid price from external supplier ($9,280)
Selling Division—allows for some profit which is an incentive to sell internal-
b. Upper limit = $9,280
Lower limit = costs of $4,800 + Contribution margin of $5,664 = $10,464
not making the internal transfers.
62. a.
Roll-Em–On
SkyWheels
A/R (SW Div.)
640,000
Inventory
640,000
Intraco. Sales
640,000
A/P (REO Div.)
640,000
Worldly Travelers
Intraco. CGS 368,000
Roll-Em–On
SkyWheels
A/R (SW Div.)
359,200
Inventory
359,200
Intraco. Sales
359,200
A/P (REO Div.)
359,200
Worldly Travelers
Intraco. CGS
368,000
Finished Goods
368,000
c.
Roll-Em-On
SkyWheels
A/R (SW Div.)
272,000
Inventory
272,000
Intraco. Sales in
Excess of
Assigned Cost
368,000
A/P (REO Div.)
272,000
Intraco. Sales
640,000
390 Chapter 13
Worldly Travelers
d.
Roll-Em–On
SkyWheels
A/R (SW Div.)
368,000
Inventory
368,000
Intraco. Sales
368,000
A/P (REO Div.)
368,000
Worldly Travelers.
Intraco. CGS
368,000
Finished Goods
368,000
63. a.
Plain Cookies
Decorated Cookies
Company Total
Sales
To outsiders
$ 6,000
$ 3,200
$ 9,200
To other division
0
0
Variable costs:
Cookies
(1,500)
(1,600)
(3,100)
Other costs
(600)
(600)
Contribution margin
$ 4,500
$ 1,000
$ 5,500
Fixed costs
(300)
(500)
(800)
Segment margin
$ 4,200
$ 500
$ 4,700
Bonus (10%)
(420)
(50)
(470)
Operating income
$ 3,780
$ 450
$ 4,230
transfer price would be $2.
c. Transfer price of $0.50 per cookie
Plain Cookies
Decorated Cookies
Company Total
Sales
To outsiders
$ 6,000
$3,200
$ 9,200
To other division
400
0
Variable costs:
Cookies
(1,500)
(400)
(1,500)
Other costs
(400)
(600)
(1,000)
Contribution margin
$ 4,500
$2,200
$ 6,700
Fixed costs
(300)
(500)
(800)
Segment margin
$ 4,200
$1,700
$ 5,900
Bonus (10%)
(420)
(170)
(590)
Operating income
$ 3,780
$1,530
$ 5,310
Davis’s bonus increases by $120 because of the $1,200 cost savings from
buying cookies from Plain Cookies Division rather than from outside sup-
pliers (savings of $1.50 per cookie 800 decorated cookies).
Chapter 13 391
Cookie Delight’s segment margin increases by the same $1,200.
Linden’s bonus remains that same because the Plain Cookies Division
makes no additional money on the transfer of cookies to the Decorated
Cookies Division.
Transfer price of $2.00 per cookie
Plain Cookies
Decorated Cookies
Company Total
Sales
To outsiders
$ 6,000
$ 3,200
$ 9,200
To other division
1,600
0
Variable costs:
Cookies
(1,500)
(1,600)
(1,500)
Other costs
(400)
(600)
(1,000)
Contribution margin
$ 5,700
$ 1,000
$ 6,700
Fixed costs
(300)
(500)
(800)
Segment margin
$ 5,400
$ 500
$ 5,900
Bonus (10%)
(540)
(50)
(590)
Operating income
$ 4,860
$ 450
$ 5,310
Davis’s bonus remains at $50 because there is no cost savings from buying
Cookie Delight’s segment margin still increases by $1,200 because the
company’s cost per cookie is $0.50 rather than $2.00.
rated Cookies Division uses rather than buying them from the outside.
However, because of the bonus structure, Linden would prefer the $2 transfer
price while Davis would prefer the $0.50 transfer price. The optimum solution
64. a. To maximize short-run contribution margin, the Alberton Division should ac-
cept the contract from New London Company. This conclusion is supported
by the following calculations.
(1)
Alberton transfer to Summerside:
Transfer price (1,500 $1,500)
$ 2,250,000
Variable cost
Purch. from O’Leary (1,500 $600)
$900,000
Process by Alberton (1,500 $500)
750,000
(1,650,000)
Contribution Margin
$ 600,000
392 Chapter 13
(2)
Alberton accepts New London contract:
Selling price (1,750 $1,250)
$ 2,187,500
Variable cost
Purch. from O’Leary (1,750 × $500)
$875,000
Process by Alberton (1,750 $400)
700,000
(1,575,000)
Contribution Margin
$ 612,500
Conclusion:
Contribution margin from New London contract
$ 612,500
Contribution margin from Summerside sale
(600,000)
Difference in favor of New London contract
$ 12,500
lations.
Revenues and cost savings to Charlottetown Inc:
Sale: Alberton to New London (1,750 × $1,250)
$2,187,500
Sale: O’Leary to Montague (1,500 × $400)
600,000
Cost savings (variable costs avoided by not
not accepting the Summerside order)
O’Leary’s savings (1,500 × $300)
450,000
Alberton’s savings (1,500 × $500)
750,000
$ 3,987,500
Expenditures incurred by Charlottetown Inc.
Variable costs incurred for New London order
Alberton (1,750 × $400)
$ 700,000
O’Leary (1,750 × $250)
437,500
Variable cost incurred for purchase
Summerside from Montague (1,500 × $1,500)
2,250,000
Montague from O’Leary (1,500 × $200)
300,000
(3,687,500)
Positive contribution margin
$ 300,000
(CMA adapted)
65. a. Total EDP hours used = 1,220 + 650 + 190 = 2,060
Actual variable EDP costs =
$181,280
= $88 transfer price
Total EDP hours used
2,060
The $80 transfer price is inadequate because the EDP Department is left with a
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$600,000:
Lit.
FP
LC
Total
Administration ($900,000)
(10/18, 5/18, 3/18)
$ 500,000
$ 250,000
$150,000
$ 900,000
EDP-Fixed ($600,000)
(80/345,240/345,
25/345)
139,130
417,392
43,478
600,000
Total allocated
$ 639,130
$ 667,392
$193,478
$1,500,000
Transfer costs
97,600
52,000
15,200
164,800
Direct costs
400,000
510,000
680,000
1,590,000
Total
$1,136,730
$1,229,392
$888,678
$3,254,800
66. To achieve CarryOn!’s goals, the division manager should purchase the materials
three possible prices are as follows:
Koenig’s price
$8.00
HIDE’s price
9.00
Thompson’s price
7.00
CarryOn! Division should purchase from Thompson.
For CarryOn! Division to achieve the overall company goals, the following analy-
sis is required to compare the costs of the three bidders:
Koenig’s price
$8.00
HIDE’s price:
Sales price – Profit margin = $9.00 – (0.40 × $9.00)
5.40
Thompson’s price
$ 7.00
However, the profit margin of Barrows Chemical
should be deducted = $7.00 – (0.30 × $2.00)
(0.60)
6.40
its price to meet Thomson’s competition.
(CMA adapted)
67. a.
Regular selling price
$26.00
Regular selling price less variable selling and distribution
expenses ($26.00 – $2.40)
$23.60
Standard manufacturing cost plus 15%
($12.80 + $4.80) × 1.15
$20.24
Standard variable manufacturing cost plus 20%
($12.80 × 1.20)
$15.36
394 Chapter 13
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evaluated based on return on investment, and since each of these prices ex-
If, at some point, all existing capacity of Gondorf Division is being used, the
division’s manager would want the intercompany transfer price to generate the
same amount of profit as outside business to maximize division ROI.
Top management supports the continuation of the decentralized manage-
ment concept.
d. No, corporate management should not become involved in this controversy.
management who are accustomed to an autonomous working environment.
(CMA adapted)
68. a. The main advantage that I-O-WoW might have is a cost advantage. It is likely,
b. Because the division sells mainly internally, it would be possible to make the
I-O-WoW Division a cost center. Then, output of the division could be trans-
ferred to other internal divisions at full or variable cost. The other logical al-
the cost savings.
69. Each student will have a different answer. No solution is provided. URL
is http://www.ey.com/GL/en/Services/Tax/International-Tax/Transfer-Pricing-and
-Tax-Effective-Supply-Chain-Management/2011-Transfer-pricing-reference-guide
Reference Guide into search engine.)
70. Each student will have a different answer. No solution is provided.
71. Each student will have a different answer. No solution is provided. However, the
following may be helpful in the discussion.
Chapter 13 395
accessible website, in whole or in part.
Excerpted from Transfer Pricing in a Recession: What Companies Should Con-
sider (PricewaterhouseCoopers, 2009)
With rising unemployment comes reduced personal income taxes, and with re-
duced corporate profits come reduced corporate revenue. The global tax base has
decreased and probably will continue to shrink. Even in a recession, a discussion
by any politician of increased taxes is risky. More money is needed to keep fund-
A substantial increase in tax audits, including those focused on transfer pricing, is
expected. In addition to the increased number of audits expected globally, the dif-
ficulty and complexity of such audits are expected to increase as taxing authorities
continue to become more sophisticated and open to sharing taxpayer information.
table.
In such uncertain economic times, how should multinational companies approach
defending past transfer pricing policies including those established under advance
pricing agreements during robust economic times? How should companies pre-
quired supply chain modifications) will have significant implications for their abilities
to reduce costs and remain competitive.
From David D. Stewart, “Transfer Pricing Practitioners Find Challenges, Oppor-
is drawn from boom years, and you probably don’t want to benchmark your pric-
ing against that position or indeed you may not be able to,” Hasson said. “This
whole question of comparability has gotten a whole lot harder,” he added.
companies considering or in negotiations for an APA, Ossi explained that the
IRS’s APA office is open to a range of “techniques and refinements” employed in
396 Chapter 13
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that’s carved in stone at this point.”
72. Each student will have a different answer. No solution is provided. However, the fol-
(accessed 1/2/12).