HI5017 Managerial Accounting Week 8 Tutorial Questions - Holmes University Australia

Question 1 HI5017 Managerial Accounting (Holmes UNI)

If the division does not have spare capacity then the transfer price would be set as the price at which an external buyer would pay for a component. As it's not possible to calculate the contribution foregone so therefore it is a wise choice to pay the selling division as they would have been paid if the components were bought from an outside buyer (Muhammadi, Ahmed and Habib, 2016). But it is necessary to deduct the cost savings of delivery and packaging cost if the component would have been sold to external buyers.

Question 2 HI5017 Managerial Accounting

The variable cost of making a component to the electrical division is $550 and the selling price to the outside market is $680 per unit. Transfer price refers to the transferring of goods from one department to another department within the company. From the given Question we get the details that Spark Ltd has 2 divisions, assembly and electrical. The assembly division transfers the goods to the electric division therefore we can determine that the assembly division is the seller and the electric division is the buyer.

a) Generally, the transfer price between the 2 departments can be determined by 2 methods, one where the transfer price is taken as the variable cost per unit to produce a component and the other is considering opportunity cost and adding it with the variable cost (Büttner and Thiemann, 2017). As we know that the assembly division can sell their components and the assembly division has excess capacity therefore the transfer price should be kept between the selling price and the variable cost.

Therefore the transfer price should be between $550 and $680

b) If the assembly division had no spare capacity then they would have to sell all their components to the electric division itself. This will change the transfer price. Therefore the new transfer price would be the market value of a component. The Assembly division is giving up their opportunity cost of selling it to outside buyers, so the opportunity cost should also be added to the variable cost in determining the new transfer price

Therefore the new transfer price = $550 + $130 =$680

c) If there was no outside market for the component then assembly division would not be able to sell the component. Therefore it’s imperative that they would have to sell the product to the electric division and the transfer price would be set at the variable cost of per component.

Therefore the transfer price = $550

d) In a company there are several divisions and the division may have to transfer goods among themselves. Therefore transfer pricing is very important for companies that have many departments. It is very important to decide a transfer price of a component concerning the divisional managers. The divisional managers are paid their bonus and judged according to their divisional profits. It's imperative that each divisional manager would like to increase their profitability. This leads us to the general principle of deciding the transfer price. The general price says that the transfer price should not be less than the marginal cost and if the component has external demand then the opportunity cost of the selling division should also be added because they are foregoing their profitability due to the buying division. If the opportunity cost is not added then the selling divisions profit would be understated and the buying divisions profit would be overstated.

Question 3

Analysis:

From the above calculation, we can conclude that the equipment division has been performing very well compared to the truck division. The ROI of equipment division is 6% compared to 4% of the truck department. The EVA (economic value added) is also higher for equipment. The EVA of truck division is negative which means that the invested capital has not given any economic value to the company from the truck division.

References

Büttner, T. and Thiemann, M., 2017. Breaking regime stability? The politicization of expertise in the OECD/G20 process on BEPS and the potential transformation of international taxation. Accounting, Economics, and Law: A Convivium, 7(1)

Muhammadi, A.H., Ahmed, Z. and Habib, A., 2016. Multinational transfer pricing of intangible assets: Indonesian tax auditors’ perspectives. Asian Review of Accounting.