divisional performance and transfer pricing
An opportunity cost is a benefit that is forgone as a result of taking a particular action. Able has spare capacity, therefore the marginalcosts to the group of Able making a unit is $35. This alternative use is equivalent to2,000kg of special ingredient Z and would earn a contribution of $6,000.There is no external demand. The conference paper by Johnson (2006, Review of Accounting Studies, forthcoming) develops an incomplete-contracting transfer pricing model with a number of novel features: taxation, sequential investments, and intangible assets being transferred. Different taxation rates in these countries allows themanipulation of profit through the use of transfer pricing. A cash cow is characterised by a relatively high market share in a low growth market and should generate significant cash flows. This is known as a 'block on the remittances of dividends' i.e. (a)Since Helpco Ltd has an external market,which is the opportunity foregone, the relevant transfer price would bethe external selling price of $15 per kg. (b) What would be the average annual RIwith and without the investment? Other management ratios Ã¢â¬â this could include measures such as sales per employee or square foot as well as industry specific ratios such as transport costs per mile, brewing costs per barrel, overheads per chargeable hour. If Division X is set up as a profit centre, a transfer price at full cost would not provide a fair way of measuring and assessing the division's performance. Start studying Divisional Performance Management and Transfer Pricing. Left to their owndevices then the managers would end up accepting the project giving only$12,000. Quality â€“ poor quality work in A will ultimately compromise the quality of the finished product. 2—Divisional management if residual income (RI) is used to evaluate divisional performance? The target capital structure is 60% equity and 40% debt. This alternative use is equivalent to2,000kg of special ingredient Z and would earn a contribution of $6,000.There is no external demand. The project would have a four-year life, and would makeprofits of $15,000 each year. Controllable profit is calculated in the same way as for ROI. The short-term opportunity cost to Division X of transferring units of X8 to Division Y is the marginal cost of production, $5. (10 marks) 2. Or, put another way, If Division X is set up as a profit centre, a transfer price at marginal cost would not provide a fair way of measuring and assessing the division's performance. Division A of Babbage Group had investments at the year end of $56million. Case 11-26 (Algo) Transfer Pricing; Divisional Performance (LO11-3] Weller Industries is a decentralized organization with six divisions. To appreciate fully the performance of a product, onehas to appreciate where the product stands in terms of the above matrix.A poor current cash flow may be acceptable from a product or serviceconsidered to be a 'Star'. In practice, an extremely important function of the transferpricing system is simply to assist in recording the movement of goodsand services. (b)In this situation Helpco has no alternativeopportunity for 3,000kg of its special ingredient Z. A multinational organisation, C plc, has 2 divisions each in adifferent country â€“ Divisions A and B. Illustration 4 - Taxation and transfer pricing. Created at 5/24/2012 4:44 PM by System Account, (GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London, Last modified at 5/25/2012 12:54 PM by System Account, explain the meaning of, and calculate from supplied data, return on investment (ROI) in the context of divisional performance appraisal, discuss the shortcomings and benefits of using ROI for divisional performance appraisal, explain the meaning of, and calculate from supplied data, residual income (RI) in the context of divisional performance appraisal, discuss the shortcomings and benefits of using RI for divisional performance appraisal, compare divisional performance using supplied data and recognise the problems that can arise from the comparison, explain, using simple numerical examples, the basis for setting a transfer price using variable cost, explain, using simple numerical examples, the basis for setting a transfer price using full cost, explain, using simple numerical examples, how transfer prices can distort the performance assessment of divisions and decisions made, including dysfunctional decision making. The division would not accept the investment since it would reduce the division's ROI. At this price, Division X would want to sell as many units aspossible to Division Y, and Division Y would buy as many units as itcould, subject to the limit on capacity or sales demand. However, in the exam you should use whatever figure is given to you. A country's government may impose restrictions on the transfer of profits from domestic subsidiaries to foreign multinationals. Study 12 Divisional performance measurement and transfer pricing flashcards from Daisie Lafford's class online, or in Brainscape's iPhone or Android app.
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