ACC560 Case 3 ANSWERS - Week 5 Case 3: Greetings Inc.:...

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Week 5 Case 3: Greetings Inc.: Transfer Pricing Issues Course: Managerial Accounting (ACC 560) 1. Answer: I think the critical challenges for Mr. Burns is to find a good solution to setting the proper transfer price so that Wall Decor can generate the highest rate of return possible, and the transfer price to each store can be reasonable according to each store’s external market conditions. That is, Mr. Burns must bring change to the company’s transfer prices and keep both the business units, Greeting stores and Wall Decor, focused on the success of the overall company. On the one hand, Mr. Burns’ biggest fear is that the business units will take a narrow focus and be concerned only about their individual situation and thus hurt the overall company profits. His greatest problem is to keep Wall Decor and the individual stores working together to maximize the profit of the overall company and remain innovative. If not, Wall Decor will seek to sell to competitors in an attempt to increase its return on investment. The result is that store competitors will be able to sell high-quality framed print items and increase competitive pressures on each Greetings store. On the contrary, if the price of framed prints gets too high, store managers will seek different suppliers. This could hurt Wall Decor because it could be left with excess capacity. On the other hand, if leadership continues to use a straight cost-plus approach, it may be an unfair evaluation of division performance, and, what’s more, cannot provide adequate incentive for Wall Decor to control costs. If leadership sets the transfer price at market price, it may lose store sales because of a lost competitive position. Thus, the transfer price must be flexible, and all parties must benefit and earn a fair return. This means setting the proper transfer price so both Greeting stores and Wall Decor to the transaction can win would be a challenging task for Mr. Burns. 1
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2. Answer: (a) Compute the profits of the stores and Wall Decor using traditional related to pricing, cost, and a 20% mark-up on Wall Decor costs. (a – 1) Compute the profit of the stores using traditional related to pricing, cost, and a 20% mark- up on Wall Decor costs Unframed print Steel-framed, no matting Wood-framed, with matting Total profits Average selling price by stores before transfer pricing study $21 $50 $70 Wall Decor cost (traditional) $17.36 $33.48 $48.10 Volume at traditional selling price 80,000 15,000 7,000 Wall Decor transfer price to store per unit (= Wall Decor cost per unit x 120% ) $20.832 (=$17.36x120%) $40.176 (=$33.48x120%) $57.720 (=$48.10x120%) Profit to store per unit ( = selling price per unit – transfer price per unit) $0.168 (= $21–$20.832) $9.824 (= $50–$40.176) $12.280 (= $70–$57.720) Store item profits (=profit
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This note was uploaded on 11/15/2011 for the course ACCOUNING ACC560 taught by Professor Loriperez during the Spring '11 term at Strayer.

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ACC560 Case 3 ANSWERS - Week 5 Case 3: Greetings Inc.:...

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