Case Assignment
Coffee Maker’s Incorporated (CMI)
Two divisions of a CMI are involved in a dispute. Division A purchases Part 101
and Division B purchases Part 201 from a third division, C. Both divisions need
the parts for products that they assemble. The intercompany transactions have
remained constant for several years.
Recently, outside suppliers have lowered their prices, but Division C is not
lowering its prices. In addition, all division managers are feeling the pressure to
increase profit. Managers of divisions A and B would like the flexibility to purchase
the parts they need from external parties to lower cost and increase profitability.
The current pattern is that Division A purchases 3,000 units of product part 101
from Division C (the supplying division) and another 1,000 units from an external
supplier. The market price for Part 101 is $900 per unit. Division B purchases
1,000 units of Part 201 from Division C and another 500 units from an external
supplier. Note that both divisions A and B purchase the needed supplies from
both the internal source and an external source at the same time.
The managers for divisions A and B are preparing a new proposal for
consideration.
Division C will continue to produce Parts 101 and 201. All of its production will
be sold to Divisions A and B. No other customers are likely to be found for
these products in the short term, given that supply is greater than demand in
the market.
Division C will manufacture 2,000 units of Part 101 for the Division A and 500
units of Part 201 for the Division B.
Division A will buy 2,000 units of Part 101 from Division C and 2,000 units from
an external supplier at $900 per unit.
Division B will buy 500 units of Part 201 from Division C and 1,000 units from
an external supplier at $1,900 per unit.
Division C Data 2014 Based on the Current Agreement
Listen
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Part 101 201
Direct materials $200 $300
Direct labor $200 $300
Variable overhead $300 $600
Transfer price $1,000 $2,000
Annual volume 3,000 units 1,000 units
Required:
Computations (use Excel)
Set up a table similar the one below to compute the difference between the
current situation and the proposal for Divisions A and B. Design a different
table for Division C.
Division A
Current Situation Proposal
No. of
Units
Purchase
Price
Total
Purchases
No. of
Units
Purchase
Price
Total
Purchases
Internal
purchases
3,000 $ 2,000 $
External
purchases
1,000 2,000
Total cost for
part 101
$ $
Savings to Div.
A
$
Summarize the financial effects for the three divisions and the company as a
whole in another table.
Memo (use Word)
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Write a 4- or 5-paragraph memo to the division manager explaining the analysis
performed. Start with an introduction and end with a recommendation. Each of
the four or five paragraphs should have a heading.
Short Essay (use Word) Start with an introduction and end with a summary or
conclusion. Use headings.
Evaluate and discuss the implications of the following transfer pricing policies:
Transfer price = cost plus a mark-up for the selling division
Transfer price = fair market value
Transfer price = price negotiated by the managers
Why is transfer pricing such a significant issue both from a financial and
managerial perspective?
Assignment Expectations
Each submission should include two files: (1) An Excel file; and (2) A Word
document. The Word document shows the memo first and short essay last.
Assume a knowledgeable business audience and use required format and
length. Individuals in business are busy and want information presented in an
organized and concise manner.
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