Solution Code: 1ADIE
This assignment falls under Management Accountingwhich was successfully solved by the assignment writing experts at My Assignment Services AU under assignment help service.
This is an assignment consisting of two parts , Part A and Part B.
Part A Report format is to be used for this part
Transfer pricing is used when products or services are transferred between different divisions of the same company.
Explain what a transfer price is. What are the different types of transfer prices that can be used ?
Why are these different types of transfer prices used? What are the purposes of using transfer
prices?
Part B This question is a practical question requiring answers to the questions at the end of the following information.
The Complete Mining and Manufacturing Company has several divisions and two of these are involved in the transfer of products.The Cleaning and Scraping Division produces raw Cruden and transfers it to the Processing Division where it is processed into an alloy.The Processing Division then sells it on the open market for $160 per unit .Currently the Complete Mining and Manufacturing Company requires all of the Cruden to be transferred from the Cleaning and Scraping Division to the Processing Division . Currently the Cleaning and Scraping Division produces 400,000 units per year and transfers it all to the Processing Division at total actual manufacturing cost plus 10% .
The Cruden can be purchased and sold on the open market for $95 and all that is sent to market can be sold on the market at this price.If the Cleaning and Scraping Division sells the Cruden on the open market it will incur a variable selling cost of $5 per unit .
The following details show the unit costs for the Cleaning and Scraping and Processing Divisions
Cleaning and Scraping Division Processing Division
Transfer price from Cleaning and Scraping $77
Direct material 18 5
Direct labour 12 10
Manufacturing overhead 40 25
Total cost per unit 70 117
Manufacturing overhead in Cleaning and Scraping is 25% fixed,75% variable
Manufacturing overhead in Processing is 60% fixed,40% variable
Required:
(a) Explain why transfer prices based on total actual costs are not appropriate as the basis fordivisional performance measurement
(b)Using the market price as the transfer price, calculate the contribution margin for both divisions.
(c) If the Complete Mining and Manufacturing Company were to institute the use of negotiatedtransfer prices and allow divisions to buy and sell on the open market determine the price rangefor Cruden that would be acceptable to both divisions.
(d)Use the general transfer pricing rule to compute the lowest transfer price that would beacceptable to the Cleaning and Scraping Division? Will this transfer price be the one that themanager of the Cleaning and Scraping Division prefers? Provide an explanation for your answerto this question.
The assignment file was solved by professionalstatistics assignment helpexperts and academic professionals at My Assignment Services AU. The solution file, as per the marking rubric, is of high quality and 100% original (as reported by Plagiarism). The assignment help was delivered to the student within the 2-3 days to submission.
Looking for a new solution for this exact same question? Our assignment help professionals can help you with that. With a clientele based in top Australian universities, My Assignment Services AU’s assignment writing service is aiding thousands of students to achieve good scores in their academics. OurBusiness Management System assignment experts are proficient with following the marking rubric and adhering to the referencing style guidelines.
Summary
Transfer price is considered to be a term which is used to describe the aspects of interdivision or intercompany pricing arrangement between the business organizations or entities relating to products, labors or services mainly related to non-market approach in determining the prices of services or product which are transferred from one department of the organization to another department. The important objectives of organization are to maintain a co-ordination between different divisional managers of organization and to increase the overall profit of organization. There are different types of transfer prices used in the organizations by divisional managers depending upon the circumstances, market forces and demand.
Introduction
The transfer prices are considered to be the values for intermediate services and products which are purchased from the independent division of companies. It is the internal prices of intermediate services and products which are created by the management of organization. It is also considered to be the price at which one company sells its products or services to its subsidiaries locating in any other country. It is also considered to be the price at which one division of an organization transacts labor or supplies with other department. It is used in organizations where the individual entities of large multi-international organizations are treated as separate entities. The transfer pricing is considered to be a major tool for avoidance of corporate taxes and it also impacts the purchasing behavior of subsidiaries. In the companies or organizations, it results in setting of prices among its divisions. Transfer price is also known as transfer cost
One of the important functions of transfer price is to maintain a co-ordination between the management of both purchasing and selling division of organization. The major reason for the need of transfer prices in large organizations is decentralized organizations having divisional managers which are considered to be responsible for the measurement of performance of divisions and their profit and cost.
The divisions within companies are mainly organized as profit or investment centers. In the profit centre, the managers of divisions in companies have the authority to decide about the whole operational activities of department and therefore the divisional managers are considered to be fully responsible for the profit of their divisions.
Body
Transfer Price is considered to be the price at which one division of an organization transacts labor or supplies with other department. It is used in organizations where the individual entities of large multi-international organizations are treated as separate entities.
Objectives of Transfer Price
Types of Transfer Price
There are different types of transfer prices that can be used in enterprises or organizations are explained below:
Reason of Using the types of Transfer Prices
Transfer prices are mainly related to non-market approach in determining the prices of services or product which are transferred from one department of the organization to another department. In spite of the pricing fixed by administration, the operations in companies are conducted on the market principles. The different types of transferring price are used because every division of organization can sell its services or products to customers located outside of the organization. The price of products which one department receives as income is also considered as an expense for other department of organization. Transfer price had created a conflict in the economic interest of different departments or divisions of organization. Therefore the different types of transfer prices are used by the management of organizations depending upon the requirement, situations, market forces and demand of the product.
Purpose of Using Transfer Price
The important purposes for instituting the scheme of transfer price in various organizations or company are:
Conclusion
Transfer Price is very important for organizations where there are various departments as it helps in deriving a price which is suitable for the profit or investment centre divisions. The divisional managers of organizations have the full authority relating to operational activities of department therefore the managers are considered fully responsible in determining the transfer price. Transfer price co-ordinates the managers so that they can perform efficiently and meet up with the objective of organizations.
Part B
In market, the cruden can be purchased and sold in the open market for $ 95 therefore the processing department can purchase cruden from market at $95 however the processing department can purchase the cruden from cleaning and scraping division at $ 77. So, it is profitable for the organization to purchase the crude internally as there is saving of $17 per cruder to the organization.
However fixed cost are the cost which are fixed in nature whether the product will be manufactured or not and variable cost varies with the production. Even the cruden will not be manufactured by the cleaning and scraping department, the fixed cost will be incurred. Fixed costs are fixed and it does not vary with the production. If the cruden will be transferred on full cost to the processing department then the fixed cost of cleaning and scraping department will become the variable cost of processing department therefore the transfer prices based upon total actual cost are not appropriate as the basis for divisional performance measurement.
Particulars | Cleaning & Scraping Dept Amount ($) | Cleaning & Scraping Dept Amount($) | Processing Dept Amount ($) | Processing Dept Amount ($) |
Revenue | 95 | 160 | ||
Variable Cost | ||||
Direct Material | 18 | 5 | ||
Direct Labor | 12 | 10 | ||
Variable Manufacturing Cost | 30 | 10 | ||
Transfer Price | - | 95 | ||
Total Variable Cost | (60) | (120) | ||
Contribution margin per unit (a) | 35 | 40 | ||
Total no of units (b) | 400000 | 400000 | ||
Total Contribution Margin (a*b) | 1,40,00,000 | 1,60,00,000 |
The Cleaning and Scraping division can sell all its product cruden in the open market as there is no excess capacity left to this division. As there is no extra capacity left in the department therefore the transfer price will be variable cost plus the opportunity cost for transferring the cruder to processing department.
The variable cost for Cleaning & Scraping division is $60 excluding the variable selling overhead and the opportunity cost for the department is ($95 - $60 -$5) i.e $30. Therefore the minimum transfer price which is acceptable is ($60 + $30) = $90.
This Management Accountingassignment sample was powered by the assignment writing experts of My Assignment Services AU. You can free download thisManagement Accounting assessment answer for reference. This solvedManagement Accounting assignment sample is only for reference purpose and not to be submitted to your university. For a fresh solution to this question, fill the form here and get our professional assignment help.
Trending now
The Student Corner
Subscribe to get updates, offers and assignment tips right in your inbox.
Popular Solutions
Popular Solutions
Request Callback
Doing your Assignment with our resources is simple, take Expert assistance to ensure HD Grades. Here you Go....