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Module 5 - BackgroundTransfer PricingApproaches and Purpose of Transfer Pricing PoliciesThe fundamental objective in setting transfer prices is to motivate managers to act in the best interests of the organization, and not just their division. A good transfer price is one that encourages division managers to do whatever is in the best interest of the entire organization.There are three primary approaches to setting transfer prices, namely (1) negotiated transfer prices, (2) transfers at market price transfers, and (3) transfers at cost (or cost plus set profit) to the selling division.The objectives of domestic transfer pricing include:?Creating greater divisional autonomy.?Providing greater motivation for managers.?Enabling better performance evaluation.?Establishing better goal congruence.The objectives of international transfer pricing include:?Lowering taxes, duties, and tariffs.?Lowering foreign exchange risks.?Improving competitive position.?Improving relations with foreign governments.Required Background MaterialBoyd, K. (2010, March 28). Management Accounting 16: Transfer Pricing [Video file] Retrieved from the playlist at , A. (2009). Transfer Pricing: A World of Pain. CFO. Retrieved from , l. (2012). Chapter Twenty-One. Budgeting: Planning for Success. Retrieved from ResourcesAgrawal, N. K. (2010). Management Accounting. Global Media, Dilhi, India. Read Chapter 7, Section 4 about transfer pricing. This resource is available in the University's Ebrary.Slideshare. (n.d.). Global Management Accounting. Retrieved from 5 - CaseTransfer PricingAssignment OverviewCoffee Maker's Incorporated (CMI)Two divisions of a CMI are involved in a dispute. Division A purchases Part 101 and Division B purchases Part 201 from a third division, C. Both divisions need the parts for products that they assemble. The intercompany transactions have remained constant for several years.Recently, outside suppliers have lowered their prices, but Division C is not lowering its prices. In addition, all division managers are feeling the pressure to increase profit. Managers of divisions A and B would like the flexibility to purchase the parts they need from external parties to lower cost and increase profitability.The current pattern is that Division A purchases 3,000 units of product part 101 from Division C (the supplying division) and another 1,500 units from an external supplier. The market price for Part 101 is $900 per unit. Division B purchases 1,000 units of Part 201 from Division C and another 500 units from an external supplier. Note that both divisions A and B purchase the needed supplies from both the internal source and an external source at the same time.The managers for divisions A and B are preparing a new proposal for consideration.?Division C will continue to produce Parts 101 and 201. All of its production will be sold to Divisions A and B. No other customers are likely to be found for these products in the short term, given that supply is greater than demand in the market.?Division C will manufacture 2,000 units of Part 101 for the Division A and 500 units of Part 201 for the Division B.?Division A will buy 2,000 units of Part 101 from Division C and 2,000 units from an external supplier at $900 per unit.?Division B will buy 500 units of Part 201 from Division C and 1,500 units from an external supplier at $1,900 per unit. Division C Data 2014 Based on the Current AgreementPart 101 201 Direct materials $200$300 Direct labor$200$300 Variable overhead$300$600 Transfer price$1,000$2,000 Annual volume3,000 units1,000 units Case AssignmentRequired:?Calculate the increase or decrease in profits for the three divisions and the company as a whole (four separate computations) if the agreement is enforced. Explain your thought process, comment on the situation, and make a suggestion based on the computations you have made.?Evaluate and discuss the implications of the following transfer pricing policies: ?Transfer price = cost plus a mark-up for the selling division?Transfer price = fair market value?Transfer price = price negotiated by the managers?Why is transfer pricing such a significant issue both from a financial and managerial perspective?Assignment ExpectationsIt is important to answer the questions as posed. The discussion should be 4 to 6 pages and written in a clear and concise manner. Support your discussion with references in APA format. You are encouraged to use Excel or other compatible spreadsheet when computations are involved.Module 5 - SLPTransfer PricingRatios are used for many purposes; performance measurement is one such application. However, not all performance measures are expressed as a ratio. Do some research on the Internet to learn about operating leverage, ROI, EVA, and another performance measure of your choice. You will note that there are variations in the computations of a particular measurement. Consistency in application is the key.Use information from the latest financial statement of your SLP company to compute the measuements you researched.Reflect on the advantages and disadvantages of these performance measures. Choose your preferred measure and explain your rationale.SLP Assignment ExpectationsAlways include the name of the organization(s), time period covered, and source of information. It is important to answer the questions as posed. The document should be 2 to 4 pages and written in a clear and concise manner. Don't forget to include tables as required. Support your discussion or tables with references in APA format. You are encouraged to use Excel or other compatible spreadsheet when computations are involved. You can turn in the spreadsheet instead of the Word document. The content should be equivalent to the page length suggested for a word processing document.Subscribe to TopicView: Threaded All Messages Unread Only Flagged OnlyApply Transfer pricing is an important topic from multiple perspectives. It is a global issue affecting taxation, financial results, performance evaluations, and managerial motivation. Ratios are based on the underlying financial information. Transfer pricing is a topic in itself, but it also affects popular financial measures such as EVA (economic value added).References:Hiemann, M. and Reichelstein, R. The Dual Role of Transfer Prices in Multinational Firms: Divisional Performance Measurement and Tax Optimization. The European Financial Review. . (2012). Transfer Pricing. Retrieved from Slideshare. (2011). Global Management Accounting. Retrieved from Based . (n.d.). Economic Value Added (EVA). Retrieved from : In this module, we’ll emphasize transfer pricing issues and measures for performance evaluations. Comment on the importance of these issues, how they are related, and why they are very important in the business environment. Above find some resources for some of these topics that you can use as a starting point. The links are not meant to provide any particular viewpoint but are a mix of resources viewed both from an accounting and a business perspective. Choose one or two topics for further investigation and share your knowledge with the class. Provide factual information (not merely opinions) backed up by current news, examples, or other interesting details. Your comments should be in your own words and include references in APA format, if applicable.Presence during both weeks of the module and a minimum of three postings are required, one original posting and two responses to colleagues. Minimum required participation does not guarantee a perfect score. ................
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