The Duke Corporation bottles and sells various vegetable oils and preparations. It recently acquired a bottling...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
The Duke Corporation bottles and sells various vegetable oils and preparations. It recently acquired a bottling plant and has been operating it as a separate division within Duke. So far, the Bottle division has been selling all its output to the external market directly. Duke has another operating division, the Safflower Oil division, which uses bottles similar to the ones made by the Bottle division. Both divisions are considered to be profit centers. Duke is structured as a decentralized organization and the Management of Duke believes that decentralization has improved the performance of the company as a whole. However, there are always opportunities to improve. The Safflower division has been unprofitable for the last few periods. To promote synergy's, the divisional manager of Safflower division is thinking of asking the divisional manager of Bottle division to supply the needs of the Safflower division. Current data for the two divisions are given below. After some analysis, the Bottle division agreed that the internal selling price per unit will be at the Minimum Transfer Price. (Lower than for external sales). Capacity (Units) Current Sales (Units) Selling Price (average) per unit Variable Manufacturing Cost per unit Variable Selling Cost per unit for External Market Variable Selling Cost per unit if Sold Internally Fixed Costs Bottle Division Safflower Division $ $ 320,000 300,000 3.00 $ 1.80 $ 0.40 $ 0.20 $ $ 100,000.00 $ 80,000 80,000 12.00 9.00 2.00 116,000.00 The units are in dozens of bottles. The Safflower division's variable manufacturing costs include the price paid for bottles which is the same as the average selling price of the Bottle division. The manager of Safflower division believes that his division should get a discount on the price of the bottles if they are purchasing within the economic entity. The Divisional manager of Bottling has become aware that the divisional manager of the Safflower division will be approaching him to supply bottles to them. He is aware that the Safflower division requires about 80,000 dozen bottles. He discussed the issue with his marketing manager and the manager was of the opinion that Safflower should pay $3.00 per dozen bottles like everyone else. He indicated that their current sales projections were for sales of 300,000 dozen bottles. In order to meet the demand of Safflower they would have to give up sales to outside customer, which would negatively affect the division. He also stated that the Bottle division is not a charity whose role is to subsidize the weaker divisions, and more importantly, performance bonuses would be affected by this transaction. After the marketing manager left, the Divisional manager of Bottle Division thought about many issues. He considered the fact that the main purpose of his division was to maximize shareholder value. To do this he had to charge market after all his other customers were willing to pay $3.00 per dozen bottles, and in fact, the Divisions role was not to subsidize weaker divisions. Required The management team of the Duke has asked you to advise them regarding the appropriateness of the decision by the management of the Bottling Division A and the implications of the likely sourcing decision by the management of Safflower Division. Use the following case analysis format and section headings to address the requirements listed within each section. Point form is acceptable for the solution. 1. State and explain the issues faced by Duke Corporation. (4 Marks) 2. Alternatives: Identify the alternatives available to Duke. (2 Marks) 3. Data analysis: Prepare the appropriate transfer pricing analysis to assist Duke in determining the recommendation. HINT: Calculate Operating Incomes for both divisions under the scenario required. (6 Marks) 4. Analysis of alternatives and recommendation: Using the Data analysis in Part (3) above, make a recommendation for Duke Corporation. (2 Marks) The Duke Corporation bottles and sells various vegetable oils and preparations. It recently acquired a bottling plant and has been operating it as a separate division within Duke. So far, the Bottle division has been selling all its output to the external market directly. Duke has another operating division, the Safflower Oil division, which uses bottles similar to the ones made by the Bottle division. Both divisions are considered to be profit centers. Duke is structured as a decentralized organization and the Management of Duke believes that decentralization has improved the performance of the company as a whole. However, there are always opportunities to improve. The Safflower division has been unprofitable for the last few periods. To promote synergy's, the divisional manager of Safflower division is thinking of asking the divisional manager of Bottle division to supply the needs of the Safflower division. Current data for the two divisions are given below. After some analysis, the Bottle division agreed that the internal selling price per unit will be at the Minimum Transfer Price. (Lower than for external sales). Capacity (Units) Current Sales (Units) Selling Price (average) per unit Variable Manufacturing Cost per unit Variable Selling Cost per unit for External Market Variable Selling Cost per unit if Sold Internally Fixed Costs Bottle Division Safflower Division $ $ 320,000 300,000 3.00 $ 1.80 $ 0.40 $ 0.20 $ $ 100,000.00 $ 80,000 80,000 12.00 9.00 2.00 116,000.00 The units are in dozens of bottles. The Safflower division's variable manufacturing costs include the price paid for bottles which is the same as the average selling price of the Bottle division. The manager of Safflower division believes that his division should get a discount on the price of the bottles if they are purchasing within the economic entity. The Divisional manager of Bottling has become aware that the divisional manager of the Safflower division will be approaching him to supply bottles to them. He is aware that the Safflower division requires about 80,000 dozen bottles. He discussed the issue with his marketing manager and the manager was of the opinion that Safflower should pay $3.00 per dozen bottles like everyone else. He indicated that their current sales projections were for sales of 300,000 dozen bottles. In order to meet the demand of Safflower they would have to give up sales to outside customer, which would negatively affect the division. He also stated that the Bottle division is not a charity whose role is to subsidize the weaker divisions, and more importantly, performance bonuses would be affected by this transaction. After the marketing manager left, the Divisional manager of Bottle Division thought about many issues. He considered the fact that the main purpose of his division was to maximize shareholder value. To do this he had to charge market after all his other customers were willing to pay $3.00 per dozen bottles, and in fact, the Divisions role was not to subsidize weaker divisions. Required The management team of the Duke has asked you to advise them regarding the appropriateness of the decision by the management of the Bottling Division A and the implications of the likely sourcing decision by the management of Safflower Division. Use the following case analysis format and section headings to address the requirements listed within each section. Point form is acceptable for the solution. 1. State and explain the issues faced by Duke Corporation. (4 Marks) 2. Alternatives: Identify the alternatives available to Duke. (2 Marks) 3. Data analysis: Prepare the appropriate transfer pricing analysis to assist Duke in determining the recommendation. HINT: Calculate Operating Incomes for both divisions under the scenario required. (6 Marks) 4. Analysis of alternatives and recommendation: Using the Data analysis in Part (3) above, make a recommendation for Duke Corporation. (2 Marks)
Expert Answer:
Answer rating: 100% (QA)
1 The issues faced by Duke Corporation involve determining the appropriate transfer pricing for the Bottle Division and the Safflower Division The Bot... View the full answer
Related Book For
Business Statistics for Contemporary Decision Making
ISBN: 978-0470910184
6th Edition
Authors: Ken Black
Posted Date:
Students also viewed these accounting questions
-
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Googles ease of use and superior search results have propelled the search engine to its num- ber one status, ousting the early dominance of competitors such as WebCrawler and Infos- eek. Even later...
-
The Fisher Apparel Company balance sheet for the year ended 2006 is as follows: a. What is Fisher's investment in current assets? b. Determine Fisher's working capital investment. c. Determine...
-
Dalby Company has accumulated the following budget data for the year 2014. 1. Sales: 30,000 units, unit selling price $85. 2. Cost of one unit of finished goods: direct materials 2 pounds at $5 per...
-
An umbrella maker is deciding whether to concentrate on eastern or western Canada. To help decide, she randomly selects cities from both parts of the country, and obtains the corresponding annual...
-
Apply the lower of cost and net realizable value rule to the valuation of inventory. - If the market value of inventory has dropped below its original cost, IFRS and ASPE require a departure from the...
-
Labor costs of an auto repair mechanic are seldom based on actual hours worked. Instead, the amount paid a mechanic is based on an industry average of time estimated to complete a repair job. The...
-
Allied laboratories is combining some of its most common tests into one-price packages. One such package will contain three tests that have the following variable costs: Test A Test B Test C...
-
Your company is considering acquiring a private company (New Co., Inc.). The CFO has asked you to review the financial statements, look for key trends, and develop financial/operational questions to...
-
A businessisconsidering a proposal to install a new deviceintheir small factory. The device costs $23,000 and will save the business $400 per monthinexpenses. Assume that the device will last for 8...
-
Why do file servers within a local area network need to be physically secured?
-
_____ allows an individual to do poorly on one test but make up for that poor grade by doing exceptionally well on other tests.
-
List two aspects of the operations of a local area network that need to be monitored to ensure that data integrity within the network is maintained. Briefly explain why these two aspects need to be...
-
Briefly describe some guidelines that should be followed to reduce operator boredom in the design of keying tasks undertaken in the data preparation function.
-
Briefly describe the production control section's responsibilities with respect to receipt of input from and dispatch of output to external users of the information systems function.
-
An HR associate uses formal career planning resources as a career development tool. What does this include? Hosting team building activities with other organization Subsidizing tuition for employees
-
A Firm intends to invest some capital for a period of 15 years; the Firm's Management considers three Options, each consisting of purchasing a machinery of a specific brand, different for each...
-
During the 1990s, businesses were expected to show a lot of interest in Central and Eastern European countries. As new markets began to open, American businesspeople needed a better understanding of...
-
Sketch a scatter plot from the following data, and determine the equation of the regressionline. 140 119 103 91 65 29 24 46 70 8812 128 25 29
-
A business convention holds its registration on Wednesday morning from 9:00 A.M. until 12:00 noon. Past history has shown that registrant arrivals follow a Poisson distribution at an average rate of...
-
The following are the accounts of Creative Advertising, Inc., an agency that develops marketing materials for print, radio, and television. The agencys first year of operations ended on January 31,...
-
Southwest Airlines Co. is one of the most successful airlines in the United States. Its annual report contains this statement: We are a company of People, not Planes. That is what distinguishes us...
-
Costco Wholesale Corporation is Americas largest membership retail company. According to its letter to stockholders: Our mission is to bring quality goods and services to our members at the lowest...
Study smarter with the SolutionInn App