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
Bulk Agency Factoring : In this category factoring is essentially used as a method of financing book debts. In this sort of factoring the client continues to administer credit a

Compute the ending balance in the Work in Process inventory account. Assume that this balance consists entirely of goods started during the year. If $32,200 of this balance is dire

1. In order to boost the housing market throughout 2009 and into 2010, the federal government offered a tax credit to first-time home buyers and some repeat buyers.

What are the objectives of excellence teams and minicompanies? Did the companies achieve these objectives?estion #Minimum 100 words accepted#


Stock-out costs These are the opportunity costs of running out of stock. They comprise: 1) The costs of lost customer sales, and therefore lost contribution to fixed costs.

Alma and Associates, a new consulting service, recently received a bill for repairs on its computers totaling $2,350. Alma thinks it may have been overcharged and is trying to recr

Disadvantages of Simulation 1) Although all models are simplification of reality, they may still be complex and require a substantial amount of managerial and technical time.

the suitability of incremental budgeting to a stable and static environment

Determine important factors while praparing sales budget The possible factors to be taken into account while preparing a sales budget are discussed as follows: 1) Past sales