transfer pricing , Managerial Accounting

Western States Supply, Inc. (WSS), consists of three divisions—California, Northwest, and Southwest—that operate as if they were independent companies. Each division has its own sales force and production facilities. Each division manager is responsible for sales, cost of operations, acquisition and financing of divisional assets, and working capital management. WSS corporate management evaluates the performance of each division and its managers on the basis of ROI.
Southwest has just been awarded a contract for a product that uses a component manufactured by outside suppliers as well as by Northwest, which is operating well below capacity. Southwest used a cost figure of $37 for the component in preparing its bid for the new product. Northwest supplied this cost figure in response to Southwest''s request for the average variable cost of the component; it represents the standard variable manufacturing cost and variable marketing costs.
Northwest''s regular selling price for the component that Southwest needs is $65. Northwest''s management indicated that it could supply Southwest the required quantities of the component at the regular selling price less variable selling and distribution expenses. Southwest management responded by offering to pay standard variable manufacturing cost plus 25 percent.
The two divisions have been unable to agree on a transfer price. Corporate management has never established a transfer price policy. The corporate controller suggested a price equal to the standard full manufacturing cost (that is, no selling and distribution expenses) plus a 20 percent markup. The two division managers rejected this price because each considered it grossly unfair.
The unit cost structure for the Northwest component and the suggested prices follow.

Required
a. Discuss the effect that each of the proposed prices could have on the attitude of Northwest''s management toward intracompany business.
b. Is the negotiation of a price between Northwest and Southwest a satisfactory method to solve the transfer price problem? Explain your answer.
c. Should WSS''s corporate management become involved in this transfer price controversy? Explain your answer.
Posted Date: 9/23/2012 12:40:09 AM | Location : United States







Related Discussions:- transfer pricing , Assignment Help, Ask Question on transfer pricing , Get Answer, Expert's Help, transfer pricing Discussions

Write discussion on transfer pricing
Your posts are moderated
Related Questions
So as to makes sure that the receivables are collected in occupied and on due date by the customers, prior information of their credit worthiness must be obtainable. This informati

Yolande Tzar came to Northern Ireland from Poland five years ago to study at university. After graduating she worked as a sales manager for a local company and saved her wages to b

Consortium Lending: As the financial needs of a single unit are more than a single bank can cater to, then more than one bank comes together to finance the unit jointly spreading

Describe the Principles of cost accounting Principles of cost accounting: The fundamental principles of costing are identical and are given below:   1. Cost is related to

in the past,the company had difficulties separating semi-variable costs between varible and fixed costs.the company''s varible cost per unit consists of the cost of patrol,maintena

Objectives of ratio analysis 1) Measuring the profitability: we can measure the profitability of the business by calculation gross profit net profit expenses ratio and other.

Use of Computer Systems in Linear Programming When a computer is to be used for linear programming there are a number of steps: (1) Development of the equations which descri

What are the Advantages of contributionmargin analysis the concept of contribution is variable aid to management in making managerial decisions . a few benefits resulting from

Why might managers favour this ABC system instead of the older system that allocated all MOH costs on the basis of direct? labour?

Computation of Working Capital Required 1. Operating Cycle Period = M+W+F+D-C     = 101.38 +2