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
Morrow Company applies overhead based on direct labor hours. At the beginning of the year, Morrow estimates overhead to be $620,000, machine hours to be 180,000, and direct labor h

What is Standard costing Standard cost is a predetermined cost. It is a determination in advance of production of what should be the cost. When standard costs are used for the

Inventory planning & control under uncertainty The basic EOQ model assumes that all the parameters (elements) in the model are certain (i.e. can be predicted precisely in advan

Strategy A business characteristically invests considerable time and money in developing or creating its strategy. Employees, harried with day-to-day tasks, sometimes fail to s

Objectives of the cost accounting The Objectives of the cost accounting are ascertain of costs, fixation of selling prices, proper recording and presentation of cost data to th

This is a most familiar form of medium term financing in obtaining plant and vehicles, machinery etc. In hire purchase transactions, the purchaser of goods will obtain the possessi

Definition of Cost reduction Cost reduction is planned positive approach to reducing expenditure. Cost reduction exercises are planned campaigns to cut expenditure. It is a con

QUESTION 1: P A RT A You are the Cost Accountant of an industrial concern and have been assigned the duty of preparing a cost accounting system. Initially it has been de

Account analysis (Inspection of accounts) method: This method requires that departmental managers and the accountant inspect each item of expenditure within the accounts for s

Selective Inventory Management The inventory of an industrial firm generally comprises thousands of items with diverse prices, usage and lead time, as well as procurement and/o