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Unformatted text preview: 22-30 (Cont'd.) 4. Problems which may arise if Oceanic Products uses the dual transfer-pricing system include:
a. b. c. It may reduce the incentives of the supplying division to control costs since every $1 of cost of the supplying division is transferred out to the buying division at $1.50. A dual transfer-pricing system does not provide clear signals to the individual divisions about the level of decentralization top management seeks. It insulates the Harvesting Division manager from the frictions of the marketplace because costs, not market prices, affect the revenues of the supplying division 22-31 (40 min.) Multinational transfer pricing, global tax minimization.
This is a two-country two-division transfer-pricing problem with two alternative transfer-pricing methods. Summary data in U.S. dollars are: Philippine Mining Division Variable costs: 4,000 pesos 40 = $100 per lb. of raw industrial diamonds Fixed costs: 8,000 pesos 40 = $200 per lb. of raw industrial diamonds U.S. Processing Division Variable costs = $200 per lb. of polished industrial diamonds Fixed costs = $600 per lb. of polished industrial diamonds The market price for raw industrial diamonds in the Philippines is 16,000 pesos 40 = $400 per lb. of raw industrial diamonds. 1. The transfer prices are: a. 300% of full costs Mining Division to Processing Division = 3.0 ($100 + $200) = $900 per lb. of raw industrial diamonds b. Market price Mining Division to Processing Division = $400 per lb. of raw industrial diamonds ...
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