responsibility acctg, transfer pricing gp analysis

8/13/2019 Responsibility Acctg, Transfer Pricing GP Analysis

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MANAGEMENT ADVISORY SERVICES Responsibility Accounti

RETURN ON INVESTMENTReturn on Investment Computation"ase# on Operating Inco$e% T'e ollo(ing selecte# #ata pertain to t'e belt #i)ision o Allen Corp or last year*

Sales +,--.---A)erage operating assets +/--.---Net operating inco$e +0-.---Turno)er /,Mini$u$ re1uire# return /-2

3o( $uc' is t'e return on in)est$ent4 5M6a 7-2 c /-2b %82 # %,2

AIC!A. A#apte#

/ 3arstin Corporation 'as pro)i#e# t'e ollo(ing #ata*Sales +8/,.---Gross $argin 9-.---Net operating inco$e ,-.---Stoc:'ol#ers; e1uity


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Return on Investment # Residual Income # Units SoldKuestions %, t'ru %9 are base# on t'e ollo(ing inor$ation G & N


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I t'e applicable inco$e ta? rate an# aterta? (eig'te#a)erage cost o capital or eac'seg$ent are =-2 an# %-2. respecti)ely. t'e seg$ent (it' t'e 'ig'est econo$ic )alue a##e#5EVA6 is 5M6A Seg$ent A C Seg$ent C Glei$" Seg$ent " D Not #eter$inable ro$ t'is inor$ation

/= Assu$e A)ionics In#ustries reporte# at yearen# t'at operating inco$e beore ta?es or t'eyear e1uale# +/.7--.--- ongter$ #ebt issue# by A)ionics 'as a coupon rate e1ual to 82.an# its cost o e1uity is 02 T'e boo: )alue o t'e #ebt currently e1uals its air )alue. an# t'eboo: )alue o t'e e1uity capital or A)ionics is +


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=- T'e $ar:et )alue a##e# 5MVA6 isa +/.---.--- c +7--.---b +%.9/-.--- # +/0-.---

=% T'e total s'are'ol#er return isa /72 c %8892b /-2 # 72

SENSITIVIT, ANAL,SIS=/ Apple Di)ision o t'e A$erican >ruit Co 'a# t'e ollo(ing statistics or /--/*

Assets a)ailable or use +%.---.---Resi#ual inco$e %--.---Return on in)est$ent %,2

I e?penses increase# by +/-.--- in Apple Di)ision. 5E6a return on in)est$ent (oul# #ecrease c t'e target rate o return (oul# #ecreaseb resi#ual inco$e (oul# increase # asset turno)er (oul# #ecrease "ar iel#

== Di)ision A 'a# t'e ollo(ing inor$ation*Asset base in Di)ision A +0--.---Net inco$e in Di)ision A +%--.---Operating inco$e $argin or Di)ision A /-2Target ROI %,2eig'te#a)erage cost o capital %/2

I t'e asset base is #ecrease# by +/--.---. (it' no ot'er c'anges. t'e return on in)est$ent oDi)ision A (ill bea %---2 # 8/,2b %892 e /--2c 8---2 3 & M

Compre+ensiveKuestions =7 t'roug' =0 are base# on t'e ollo(ing inor$ation AOslo CoFs in#ustrial p'otoinis'ing #i)ision. R'o. incurre# t'e ollo(ing co%


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Kuestions =< t'roug' ,% are base# on t'e ollo(ing inor$ation Glei$

Seg$ent A Seg$ent " Seg$ent C Seg$ent D

Net inco$e + ,.--- + or seg$ent A. t'e $ini$u$ #ollar ROI isa +=-.--- c +7.0--b +8.9,- # +%/-.---

78 >or Seg$ent ". t'e $ini$u$ #ollar ROI isa +=-.--- c +7.0--b +8.9,- # +%/-.---

79 >or Seg$ent C. t'e $ini$u$ #ollar ROI isa +=-.--- c +7.0--b +8.9,- # +%/-.---

70 Assu$e t'at t'e $ini$u$ #ollar ROI is +8.9,- or Seg$ent C T'e $iROI isa /-2 c %,2b 82 # %-2

7


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Segment Margin,= Assu$e t'e ollo(ing inor$ation or a pro#uct line*

Sales re)enue +,--.---Variable $anuacturing costs %--.---Direct i?e# $anuacturing costs 9,.---Variable sellingBa#$inistrati)e costs ,-.---Direct i?e# sellingBa#$in costs 8-.---

'at is t'e seg$ent $argin o t'e pro#uct line4 5E6a +7--.--- # +/9,.---

b +=/,.--- e +/%,.---c +=,-.--- 3 & M

,7 T'e #ata a)ailable or t'e current year are gi)en belo(*

'ole Co Di) is ion % Di) is ion /

Variable $g cost o goo#s sol# + 7--.--- + //-.--- + 0-.---nallocate# costs 5eg. presi#entFs salary6 %--.--- >i?e# costs controllable by Di) Managers5eg. a#)er tising. engFg super) ision cos ts6 i?e# costs controllable by ot'ers 5eg.#epreciation. insurance6 %/-.--- 9-.--- ,-.---

sing t'e inor$ation presente# abo)e. t'e contribution by Di)ision % (as 5M6a +%i?e# actory o)er'ea# /,.--- ,,.---

Variance S&A e?pense %,.--- =-.--->i?e# S&A e?pense =,.--- 8-.---

Central corporate e?penses 5allocate#6 %/.---

'at is t'e total contribution to corporate proits generate# by Di)ision Acentral corporate e?penses4 5M6a +%0.--- c +=-.---b +/-.--- # +0-.---

Common "i(ed Costs,8 yons Co$pany consists o t(o #i)isions. A an# " yons Co$pany re

$argin o +,-.--- or Di)ision A. an# 'a# a contribution $argin ratio o('en sales in Di)ision " (ere +/--.--- Net inco$e or t'e co$pantraceable i?e# e?penses (ere +7-.--- yons Co$pany;s co$$on i?e# a +0,.--- c +7,.---b +9-.--- # +7-.---

Compan) Net Income,9 Re##ing Co$pany 'as t(o #i)isions (it' t'e ollo(ing seg$ent $argins

Nort'ern. +/--.---@ Sout'ern. +7--.--- Co$$on e?penses o t'e co'at is Re##ing Co$panyFs net inco$e4 5E6a +%,-.--- # +8,-.---b +,,-.--- e +=,-.---c +8--.---

Compre+ensiveKuestions ,0 & ,< are base# on t'e ollo(ing inor$ation "ar$ore Co$pany 'as t'e ollo(ing inor$ation pertaining to its t(o #i)isions

Di)ision A

Variable selling & a#$inistrati)e e?penses + =,.---Direct i?e# $anuacturing e?penses %9.,-- Sales %--.--- Direct i?e# sellingBa#$in E?penses %,.--- Variable $anuacturing e?penses /-.---

Co$$on e?penses are +%/.--- or %


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,


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Cost o sales


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Aa? 'as an opportunity to sell t'e abo)e /-.--- units to an outsi#e custo$er at a price o +9,per unit #uring /--- on a continuing basis "ra#ley can purc'ase its re1uire$ents ro$ anoutsi#e suppler at a price o +0, per unitAssu$ing t'at Aa? Di)ision #esires to $a?i$iLe its gross $argin. s'oul# Aa? ta:e on t'e ne(custo$er an# #rop its sales to "ra#ley or /---. an# ('y4a No. because t'e gross $argin o t'e corporation as a ('ole (oul# #ecrease by +/--.---b Yes. because Aa? Di)isionFs gross $argin (oul# increase by +=--.---c Yes. because Aa? #i)isionFs gross $argin (oul# increase by +8--.---# No. because "ra#ley Di)isionFs gross $argin (oul# #ecrease by +0--.---

Operating /it+ E(cess Capacit)Mini$u$ !rice97 3ouston Di)ision o Te?acon. Inc e?pects t'e ollo(ing result or /--7*

nits sales 9-.---nits selling price !%-nit )ariable cost ! 7Total i?e# costs !=--.---Total in)est$ent !,--.---

T'e $ini$u$ re1uire# ROI is %,2. an# #i)isions are e)aluate# on resi#ual inco$e A oreigncusto$er 'as approac'e# 3oustonFs $anager (it' an oer to buy %-.--- units at !9 eac' I3ouston accepts t'e or#er. it (oul# not lose any o t'e 9-.--- units at t'e regular priceAccepting t'e or#er (oul# increase i?e# costs by !%-.--- an# in)est$ent by !7-.---'at is t'e $ini$u$ price t'at 3ouston coul# accept or t'e or#er an# still $aintain its

e?pecte# resi#ual inco$e4A !,-- C!79," !,8- D !i?e# $anuacturing Variable selling >i?e# selling Variable G&A >i?e# G&A Total

Tople)el $anagers are trying to #eter$ine 'o( a transer price can be set oo t'e copper ittings ro$ t'e !lu$bing Di)ision to t'e "at'roo$ !ro#ucts Di)

C3IANG AI S3E COEGE


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99 A transer price base# on )ariable cost (ill be set at QQQQQQQQQQQ per unita +-,- c +-ro$ t'e point o )ie( o to Di)ision " s'oul# be price# no lo(er t'an* 5M6a +/9 c +/-

b +/


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Assu$e t'at t'e Carburetor Di)ision (oul# not incur any )ariable selling costs on units t'at aretranserre# internally 'at is t'e $a?i$u$ o t'e transer price range or a transer bet(eent'e t(o #i)isions4 5M6a +%-8 c +


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Kuestions 0< t'ru


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urt'er suppose t'at an outsi#e supplier is (illing to pro)i#e t'e a$p Di)ision

(it' basic posts at +%7, eac' I t'e a$p Di)ision 'a# c'osen to buy aloutsi#e supplier instea# o t'e !ost Di)ision. t'e c'ange in net operco$pany as a ('ole (oul# 'a)e been* 5D6a +%./,- #ecrease c +%.--- #ecreaseb +%-./,- increase # +%=.9,- #ecrease

Operating at Idle Capacit)Mini$u$ Transer !rice


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Ma?i$u$ Transer !ricei?e# $anuacturing o)er'ea# 0Variable selling e?penses %,>i?e# selling e?penses =

T'e units are nor$ally transerre# internally ro$ Di)ision J to Di)ision Y T'e units also $ay

be sol# e?ternally or +9- per unit T'e $ini$u$ proit le)el accepte# by t'e co$pany is a$ar:up o =- percent T'ere (ere no beginning or en#ing in)entoriesI t'e negotiate# price is use#. Di)ision JFs transer price s'oul# bea a $a?i$u$ o +9--- # a $ini$u$ o +7---b a $ini$u$ o +,%-- e a $ini$u$ o +7=--c a $a?i$u$ o +88=- 3 & M

Mini$u$ & Ma?i$u$ Transer !riceKuestions %-- & %-% are base# on t'e ollo(ing inor$ation G & N


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%-7A co$pany 'as t(o #i)isions. A an# ". eac' operate# as a proit center A c'arges " +=, perunit or eac' unit transerre# to " Ot'er #ata ollo(s*

AFs )ariable cost per unit +=-AFs i?e# costs %-.---AFs annual sales to " ,.--- unitsAFs sales to outsi#ers ,-.--- units

A is planning to raise its transer price to +,- per unit. Di)ision " can purc'ase units at +7-

eac' ro$ outsi#ers. but #oing so (oul# i#le AFs acilities no( co$$itte# to pro#ucing units or" Di)ision A cannot increase its sales to outsi#ers >ro$ t'e perspecti)e o t'e co$pany asa ('ole. ro$ ('o$ s'oul# Di)ision " ac1uire t'e units. assu$ing "Fs $ar:et is unaecte#45M6a Outsi#e )en#orsb Di)ision A. but only at t'e )ariable cost per unitc Di)ision A. but only until i?e# costs are co)ere#. t'en ro$ outsi#e )en#ors# Di)ision A. #espite t'e increase# transer price CIA %%0= IV,

Eect on !roitKuestions %-, & %-8 are base# on t'e ollo(ing inor$ation & 3 %-eAlcatraL Di)ision o JY Corp sells 0-.--- units o part J to t'e outsi#e $ar:et !art J sells or+7-. 'as a )ariable cost o +//. an# a i?e# cost per unit o +%- AlcatraL 'as a capacity to pro#uce%--.--- units per perio# Capone Di)ision currently purc'ases %-.--- units o part J ro$ AlcatraL

or +7- Capone 'as been approac'e# by an outsi#e supplier (illing to supply t'e parts or +=8

%-,'at is t'e eect on JY;s o)erall proit i AlcatraL RE>SES t'e outsi#e price an# Capone#eci#es to buy outsi#e4 5M6a no c'ange c +0-.--- #ecrease in JY proitsb +%7-.--- #ecrease in JY proits # +7-.--- increase in JY proits

%-8'at is t'e eect on JY;s o)erall proit i AlcatraL ACCE!TS t'e outsi#e price an# Caponecontinues to buy insi#e4 5M6a no c'ange c +0-.--- #ecrease in JY proitsb +%7-.--- #ecrease in JY proits # +7-.--- increase in JY proits

%-9Di)ision A $a:es a part (it' t'e ollo(ing c'aracteristics*

!ro#uction capacity in unitsSelling price to outsi#e custo$ersVariable cost per unitTotal i?e# costs

Di)ision ". anot'er #i)ision o t'e sa$e co$pany. (oul# li:e to purc'aspart eac' perio# ro$ Di)ision A Di)ision " is no( purc'asing t'ese p

supplier at a price o +/7 eac'

Suppose t'at Di)ision A 'as a$ple i#le capacity to 'an#le all o Di)ision "increase in i?e# costs an# (it'out cutting into sales to outsi#e custcontinues to purc'ase parts ro$ an outsi#e supplier rat'er t'en ro$ Di)as a ('ole (ill be* 5M6 a (orse o by +=-.--- eac' perio# c better o by +%,.--- b (orse o by +%-.--- eac' perio# # (orse o by +=,.---

International Trans%er .ricing%-03ancoc: Manuacturing 'as one plant locate# in Italy an# anot'er plan

T'e Italian plant $anuactures a co$ponent use# in a inis'e# pro#uct S plant Currently. t'e Italian plant is operating at 9, percent capacitta? rate is =/ percent@ in t'e S t'e corporate inco$e ta? rate is =, perc

T'e $ar:et price o t'e co$ponent is +%/- an# t'e Italian plantFs costsco$ponent are as ollo(s*

Direct $aterialsDirect labor Variable o)er'ea# >i?e# o)er'ea#

'ic' transer price (oul# be in t'e best interest o t'e o)erall corporatioa +8- c +9,b +,- # +%/-

C3IANG AI S3E COEGE


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%-i?e# o)er'ea# /,

%%-'at is t'e $ini$u$ transer price t'at t'e "elgiu$ #i)ision (oul# be (illing to accept4a +=, c +8-b +,, # +%--

%%%'at is t'e $a?i$u$ transer price t'at t'e S #i)ision (oul# be (illinga +=, c +8-b +,, # +%--

%%/'ic' transer price (oul# be in t'e best interest o t 'e o)erall corporatioa +=, c +8-b +,, # +%--

Kuestions %%= t'ru %%, are base# on t'e ollo(ing inor$ation

3a$pton Manuacturing 'as one plant locate# in "elgiu$ an# anot'er plant lo"elgiu$ plant $anuactures a co$ponent use# in a inis'e# pro#uct $anuplant Currently. t'e "elgiu$ plant is operating at 9- percent capacity In "erate is =- percent@ in t'e S t'e corporate inco$e ta? r ate is =, percent

T'e $ar:et price o t'e co$ponent is +%7- an# t'e "elgiu$ plantFs costsco$ponent are as ollo(s*

Direct $aterialsDirect labor Variable o)er'ea# >i?e# o)er'ea#

%%='at is t'e $ini$u$ transer price t'at t'e "elgiu$ #i)ision (oul# be (ill

a +%7- c +80b +97 # +78

%%7'at is t'e $a?i$u$ transer price t'at t'e S #i)ision (oul# be (illinga +%7- c +80b +97 # +78

%%,'ic' transer price (oul# be in t'e best interest o t 'e o)erall corporatioa +%7- c +80b +97 # +78

C3IANG AI S3E COEGE


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%/%T(o possible transer prices 5or 7.--- units6 are un#er consi#eration by t'e t(o #i)isions* +=,an# +7- Corporate proits (oul# be QQQQQQQ i +=, is selecte# as t'e transer price rat'ert'an +7-a +/-.--- larger c +/-.--- s$allerb +7-.--- larger # t'e sa$e

%//I a transer bet(een t'e t(o #i)isions is arrange# ne?t perio# at a price 5on 7.--- units osuper c'ips6 o +7-. total proits in t'e Co$puter C'ip #i)ision (illa rise by +/-.--- co$pare# to t'e prior perio#

b #rop by +7-.--- co$pare# to t'e prior perio#c #rop by +/-.--- co$pare# to t'e prior perio## rise by +0-.--- co$pare# to t'e prior perio#

%/=Assu$e. or t'is 1uestion only. t'at t'e Co$puter C'ip Di)ision is selling all t'at it can pro#uceto e?ternal buyers or +,- per unit 3o( (oul# o)erall corporate proits be aecte# i it sells7.--- units to t'e Co$puter Di)ision at +7,4 5Assu$e t'at t'e Co$puter Di)ision canpurc'ase t'e super c'ip ro$ an outsi#e supplier or +7,6a no eect c +/-.--- #ecreaseb +/-.--- increase # +legel or a price or

cus'ione# seat T'e ollo(ing con)ersation too: place about t'e price tocus'ione# seats*

>legel* Ho'n. (e can $a:e t'e necessary $o#iications to t'e cus'ione# s$aterials use# in your seat are slig'tly #ierent an# s'oul# cost about %-2 $in our #elu?e oice stool 3o(e)er. t'e labor ti$e s'oul# be t'e sa$abrication operation basically is t'e sa$e I (oul# price t'e seat at our regul=-2 $ar:upline* T'is is 'ig'er t'an I e?pecte# Russ. I (as t'in:ing t'at a goo# )ariable $anuacturing costs Ater all. your capacity costs (ill be incurre# reg>legel* Ho'n. IF$ at capacity "y $a:ing t'e cus'ion seats or you. IFll 'a)eo #elu?e oice stools O course. I can increase $y pro#uction o econo$labor ti$e ree# by not 'a)ing to abricate t'e ra$e or asse$ble t'e #elu?e st'e ra$e abrication an# asse$bly o t'e econo$y oice stool >ortunately.

orce bet(een t'ese t(o $o#els o stools (it'out any loss o eiciency As yC3IANG AI S3E COEGE


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not a easible alternati)e in our co$$unity IF# li:e to sell it to you at )ariable cost. but I 'a)ee?cess #e$an# or bot' pro#ucts I #onFt $in# c'anging $y pro#uct $i? to t'e econo$y $o#el i Iget a goo# return on t'e seats I $a:e or you 3ere are $y stan#ar# costs or t'e t(o stools an# asc'e#ule o $y $anuacturing o)er'ea#

line* I guess I see your point. Russ. but I #onFt (ant to price $ysel out o t'e $ar:et Maybe (es'oul# tal: to Corporate to see i t'ey can gi)e us any gui#ance

Oice Di)isionStan#ar# Costs an# !rices

Delu?e Oice Stool Econo$y Oice StoolRa( $aterials >ra$ing + 0%, + ra$e abrication 5,?+9,-BD36 =9, 5,?+9,-BD36 =9, Cus'ion abrication5,?+9,-BD36

=9,

Asse$blyW 5,?+9,-BD36 =9, 5=?+9,-BD36 //,Manuacturing

O)er'ea# 5%,D3?+%/8-BD36 %


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Ans/er 0e)

% A %% D /% D =% A 7% A

/ " %/ C // C =/ A 7/ "= " %= D /= " == " 7= C

7 " %7 C /7 " =7 " 77 A

, A %, C /, A =, D 7, C8 " %8 D /8 C =8 A 78 A

9 C %9 " /9 D =9 C 79 "0 " %0 D /0 " =0 C 70 C

responsibility acctg, transfer pricing gp analysis

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