Th e el ect ric al di vis io n m an ag er wi ll ha ve

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Th e El ect ric al Di vis io n m an ag er wi ll ha ve an in ce nti ve to ac ce pt th e sp eci al or de r sin ce
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Last updated November 2018 th e El ect ric al Di vis io n’s in cr e m en tal re ve nu e on th e sp eci al or de r ex ce ed s th e in cr e m en tal co st. A ny tra ns fer pri ce th at is be tw ee n $4 50 an
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Last updated November 2018 d $5 47 .5 0 wi ll all o w th e El ect ric al Di vis io n to m ak e a pr ofi t. PROBLEM 12.36 (25 minutes) Transfer pricing; negotiation; management incentives: manufacturer 1 The Sydney divisional manager may oppose the transfer. Currently, the division sells all the units it produces at $2325 each. The transfers to Adelaide are at a transfer price of $2250 per unit, so Sydney will suffer a $75 drop in sales revenue and profit on each unit that it sends to Adelaide. 2 Although Adelaide is receiving a $75 ‘price break’ on each unit purchased from Sydney, the $2250 transfer price would probably be deemed too high. The reason: Adelaide will lose $60 on each satellite positioning system produced and sold. Sales revenue $4200 Less: Variable manufacturing costs $2010 Transfer price paid to Sydney 2250 4260 Profit (loss) $ (60 ) 3 Although top management wants to introduce the positioning system, it should not lower the price to make the transfer attractive to Adelaide. Pegasus Technology Ltd (PTL) uses a responsibility accounting system, awarding bonuses based on divisional performance. Top management’s intervention and price- lowering decision would undermine the authority and autonomy of Sydney’s and Adelaide’s divisional managers. Ideally, the two divisional managers (or their representatives) should negotiate a mutually agreeable price.
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Last updated November 2018 4 PTL would benefit more if it sells the diode reducer externally and does not use the diode reducer to produce the positioning system. Observe that the transfer price is ignored in this evaluation—one that looks at the firm as a whole.
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Last updated November 2018 PROBLEM 12.37 (40 minutes) Transfer pricing; management behaviour: manufacturer 1 Transfer prices based on actual costs are not appropriate as a divisional performance measure because: they provide little incentive for the selling division to control manufacturing costs, because all costs incurred will be passed on to the buying division they create a need for extra analysis in performance evaluation, because the performance evaluation of the supply division's manager can be adversely affected by the decisions of the manager of the buying division. The amount transferred internally will affect the volume variance in the supply division if reduced internal demand increases excess capacity in the supply division. 2 Using the market price as the transfer price, the contribution margin for both the Mining Division and the Metals Division is calculated as follows: S e l l i n g p r i c e L e s s : V a r i a b l e c o s t s : D i r
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Last updated November 2018 e c t m a t e r i a l D i r e c t l a b o u r M a n u f a c t u r i n g o v e r h e a d T r a n s f
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Last updated November 2018 e r p r i c e U n i t c o n t r i b u t i o n m a r g i n V o l u m e T o t a l c o n t r i b u t i o n
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