Acct306 Homework Ch22

Acct306 Homework Ch22 - 22-1CHAPTER 22 MANAGEMENT CONTROL...

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Unformatted text preview: 22-1CHAPTER 22 MANAGEMENT CONTROL SYSTEMS, TRANSFER PRICING, AND MULTINATIONAL CONSIDERATIONS 22-30Effect of alternative transfer-pricing methods on division operating income. 1.Pounds of cranberries harvested 400,000 Gallons of juice processed (500 gals per 1,000 lbs.) 200,000 Revenues (200,000 gals. $2.10 per gal.) $420,000 Costs Harvesting Division Variable costs (400,000 lbs. $0.10 per lb.) $ 40,000 Fixed costs (400,000 lbs. $0.25 per lb.) 100,000 Total Harvesting Division costs 140,000 Processing Division Variable costs (200,000 gals. $0.20 per gal.) $ 40,000 Fixed costs (200,000 gals. $0.40 per gal.) 80,000 Total Processing Division costs 120,000 Total costs 260,000 Operating income $160,000 2. 200% of Full Costs Market Price Transfer price per pound (($0.10 + $0.25) 2; $0.60) $0.70 $0.60 1. Harvesting Division Revenues (400,000 lbs. $0.70; $0.60) $280,000 $240,000 Costs Division variable costs (400,000 lbs. $0.10 per lb.) 40,000 40,000 Division fixed costs (400,000 lbs. $0.25 per lb.) 100,000 100,000 Total division costs 140,000 140,000 Division operating income $140,000 $100,000 Harvesting Division manager's bonus (5% of operating income) $7,000 $5,000 2. Processing Division Revenues (200,000 gals. $2.10 per gal.) $420,000 $420,000 Costs Transferred-in costs 280,000 240,000 Division variable costs (200,000 gals. $0.20 per gal.) 40,000 40,000 Division fixed costs (200,000 gals. $0.40 per gal.) 80,000 80,000 Total division costs 400,000 360,000 Division operating income $ 20,000 $ 60,000 Processing Division managers bonus (5% of operating income) $ 1,000 $ 3,000 22-23. Bonus paid to division managers at 5% of division operating income is computed above and summarized below: Internal Transfers at 200% of Full Costs Internal Transfers at Market Prices Harvesting Division managers bonus (5% $140,000; 5% $100,000) $7,000 $5,000 Processing Division managers bonus (5% $20,000; 5% $60,000) $1,000 $3,000 The Harvesting Division manager will prefer to transfer at 200% of full costs because this method gives a higher bonus. The Processing Division manager will prefer transfer at market price for its higher resulting bonus. Crango may resolve or reduce transfer pricing conflicts by: Basing division managers bonuses on overall Crango profits in addition to division operating income. This will motivate each manager to consider what is best for Crango overall and not be concerned with the transfer price alone. Letting the two divisions negotiate the transfer price between themselves. However, this may result in constant re-negotiation between the two managers each accounting period. Using dual transfer prices However, a cost-based transfer price will not motivate cost control by the Harvesting Division manager. It will also insulate that division from the discipline of market prices. 22-322-31 Goal congruence problems with cost-plus transfer-pricing methods, dual pricing system (continuation of 22-30). pricing system (continuation of 22-30)....
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This note was uploaded on 03/14/2012 for the course ACCT 306 taught by Professor Donkovacic during the Spring '12 term at CSU San Marcos.

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Acct306 Homework Ch22 - 22-1CHAPTER 22 MANAGEMENT CONTROL...

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