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  • CH23-Managment Control System Transfer Pricing

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    amit
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    - The document discusses the operations of two divisions - a raw lumber division and a finished lumber division. It analyzes different transfer pricing options between the two divisions. - Key considerations are maximizing the overall company profit versus incentivizing individual division profits. Setting the transfer price at variable cost or market price are two options analyzed. - The optimal solution may be to set the transfer price at a level that balances the profitability of both divisions, such as 175% of full cost, to incentivize cooperation across divisions.

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    - The document discusses the operations of two divisions - a raw lumber division and a finished lumber division. It analyzes different transfer pricing options between the two divisions. - Key considerations are maximizing the overall company profit versus incentivizing individual division profits. Setting the transfer price at variable cost or market price are two options analyzed. - The optimal solution may be to set the transfer price at a level that balances the profitability of both divisions, such as 175% of full cost, to incentivize cooperation across divisions.

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    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
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    7 views7 pages

    CH23-Managment Control System Transfer Pricing

    Uploaded by

    amit
    - The document discusses the operations of two divisions - a raw lumber division and a finished lumber division. It analyzes different transfer pricing options between the two divisions. - Key considerations are maximizing the overall company profit versus incentivizing individual division profits. Setting the transfer price at variable cost or market price are two options analyzed. - The optimal solution may be to set the transfer price at a level that balances the profitability of both divisions, such as 175% of full cost, to incentivize cooperation across divisions.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
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    of 7

    Inputs

    Raw lumber cost for Raw lumber division/ unit $ 120.00


    Finsined lumber cost for Raw lumber division/ unit $ 145.00

    Raw Lumber devision


    Revenue
    Variable cot
    CM
    Fixed cost
    OI

    Finsished lumber deivision


    Revenue
    Variable cot
    CM
    Fixed cost
    OI
    Raw lumber SP/unit $ 170.00
    Finsished lumber SP/unit $ 370.00

    Minimum transfer price


    120
    Variable cost as Transfer price
    Sell Extrenally Sell Internally
    $ 170.00 $ 120.00
    $ 120.00 $ 120.00
    $ 50.00 $ -

    $ 50.00 $ -

    er deivision
    $ - $ 370.00
    $ - $ 265.00
    $ - $ 105.00

    $ - $ 105.00

    This is Best OI Raw lumber This in goal congruence alignment


    unit can get of Finished lumber devion with
    whole compmay as this will
    maximise the OI of the whole
    company
    But not in line with over all but will demotivate the Raw lumber
    compmay as they could dision as its OI is zero
    eqrn more
    Maximum transfer price
    170
    Variable cost as Transfer price
    Sell Internally
    $ 170.00
    $ 120.00
    $ 50.00

    $ 50.00

    $ 370.00
    $ 315.00
    $ 55.00

    $ 55.00

    This is best for Raw lumber as


    they can sell internally
    without reducing their OI and
    hnece in goal conruence

    This will reduce the OI of


    Finshed lumber but they will
    behappy paying upto this
    price as market price

    Finshed lumber would like to negatiate


    Inputs
    Variable cost ( $/ pound of cranberrie) $ 0.08
    Fixed cost ($/pund of cranberrie) $ 0.32
    Selling price ($/pound) $ 0.60

    Genral prodcution of Cranberri (pounds)n 520,000.00

    Harvesting divison
    Revenue
    Variable cot
    CM
    Fixed cost
    OI

    Processing divison
    Revenue
    Variable cot
    CM
    Fixed cost
    OI

    Combined OI
    Gallon/pound (gallon of Juice) input 0.5 Processing divison
    Variable cost ( $/ gallon)
    Fixed cost( $/ gallon)
    Selling price ( $/ gallon)

    Juice (gallon) 260,000.00

    Working as single dicision


    Minimum transfer price
    0.08
    Variable cost as Transfer price
    Sell Extrenally Sell Internally
    $ 312,000 $ 41,600
    $ 41,600 $ 41,600
    $ 270,400 $ -
    $ 166,400 $ 166,400
    $ 104,000 $ (166,400)

    $ - $ 624,000
    $ - $ 119,600
    $ - $ 504,400
    $ 130,000
    $ - $ 374,400

    $ 104,000 $ 208,000

    Incentive should be on combined


    OI
    $ 0.30
    $ 0.50
    $ 2.40

    175 % of full cost Market price


    0.7 0.6
    Variable cost as Transfer price Variable cost as Transfer price
    Sell Internally Sell Internally
    $ 364,000 $ 312,000
    $ 41,600 $ 41,600
    $ 322,400 $ 270,400
    $ 166,400 $ 166,400
    $ 156,000 $ 104,000

    $ 624,000 $ 624,000
    $ 442,000 $ 390,000
    $ 182,000 $ 234,000
    $ 130,000 $ 130,000
    $ 52,000 $ 104,000

    $ 208,000 $ 208,000

    This could be most liked by both as


    they will have same OI and anylinked
    OI based Bonus incentive
    Decentralised
    175 % of full cost
    0.7
    Variable cost as Transfer price
    Sell Internally
    $ 364,000
    $ 41,600
    $ 322,400
    $ 166,400
    $ 156,000

    $ 624,000
    $ 442,000
    $ 182,000
    $ 130,000
    $ 52,000

    $ 208,000

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