Cortez enterprises has two divisions: birmingham and manchaster.

Birmingham currently sells a diode reducer to manufacturers of aircraft navigation
systems for $775per unit. Variable costs amount to %500 and demand for this
product currently exceeds the division’s ability to supply the marketplace.
Despite this situation, cortez is considering another use for the diode reducer,
namely, integration into a satellite positioning system that would be made by
manchester. The positioning system has an anticipated selling price of $1,400 and
requires an additional %670 of variable manufacturing costs. A transfer price of
$750 has been established for the diode reducer.
Top management is anxious to introduce the positioning system; however,
unless the transfer is made; an introduction will not be possible because of the
difficulty of obtaining needed diode reducers. Birmingham and Manchaster are in
the process of recovering from previous financial problems, and neither division can
afford any future losses. The company uses responsibility accounting and ROI in
measuring divisional performance and awards bonuses to divisional management.
1. How would Birmingham’s divisional manager likely react to the decision to
transfer diode reducers to Manchester? Show computations to support
your answer.
2. How would Manchester’s divisional management likely react to the $750
transfer price? Show computations to support your answer.
3. Assume that a lower transfer price is desired. Should top management
lower the price or should the price be lowered by another means? Explain.
4. From a contribution margin perspective, does Cortez benefit more if it sells
the diode reducers externally or transfers the reducers to Manchester? By
how much?

Problem -48
Alpha Communications. Inc, which produces telecommunications equipment in the
United States, has a very strong local market for its circuit board. The variable
production cost is $130, and the company can sell its entire supply domestically for
$ 170. The U.S tax rate is 40 percent.
Alternatively, Alpha can ship the circuit board to its division in Germany, to be used
in a product that the German division will distribute throughout Europe. Information
about the german product and the division’s operating environment follows.
Selling price of final product: $360
Shipping fees to import circuit board: $20
Labor, overhead, and additional material costs of final product: $115
Import duties levied on circuit board (to be paid by the German division): 10% of
transfer price

S variable manufacturing cost or the U. is it in the best interest of alpha to sell its goods domestically and allow the german division to acquire the circuit board in germany? Why? Show computations to support your answer. Build a spreadsheet: construct an excel spreadsheet to solve requirements (1) and (2) above.S variable manufacturing cost is used as the transfer price. Show how the solution will change if the following information changes: the U.S market price as the transfer price. if you were the head of the german division. Required: 1. assuming the use of the U. when tax rates differ between countries. Alpha’s management is in the process of exploring which transfer price is better for the firm as a whole. Assume that the German division can obtain the circuit board in germany for $155 a. Show separate caculations for the U. the German tax rate is 55 percent. what strategy should a company use in setting its transfer price? 5. Compute overalll company profitability per unit if all units are transferred and U.S operation and the german division.German tax rate: 60% Assume that U. would you rather do business with your U. and the import duties are 8 percent of transfer price. Which of the two transfer prices is better for the firm? 3. 4.S tax rate is 35 percent. . Generally speaking. 2.S division or buy the circuit board locally? Why? b.S and German tax authorities allow a transfer price for the circuit board set at either U. Repeat requirement (1) . Rather than proceed with the transfer.S market price.