12.20Explain the significance of havingno spare capacityin a supplying unit when transfer prices are set using the general transfer pricing rule.

1

Why goal congruence important to an organisation's success? How can a responsibility accounting system fostergoal congruence?

2

Discuss the benefits and costs of decentralisation.

3

When developing financial performance reports in a decentralised organisation, a contribution margin format may be used. Explain the advantages of using this format for performance evaluation of units and managers.

4.

In groups, imagine you are the manager of a local Coles or Woolworths store.From the stores' perspective, come up with costs that are:

1. a)Attributable and controllable
2. b)Attributable but not controllable.
3. c)Not attributable (nor controllable)

12.40 Basic transfer pricing: manufacturer Dragoon has two manufacturing divisions: Costa Division Margarita Division. The Costa Division produces electric motors, 20 per cent of which are sold to the Margarita Division of Dragoon. The remainder are sold to outside customers. Dragoon regards both divisions as investment centres and allows division managers to choose their sources of sale and supply. Corporate policy requires that all interdivisional sales and purchases be made at a transfer price based on standard variable cost. Costa Division's estimated sales and standard cost data for the year ending 31 December, based on capacity of 100 ooo units, are as follows: To Margarita Division To outside customers Sales $ 450 000 $4 000 000 Variable costs (450 000) (1 800 000) Fixed costs (150 000) (600 000) Gross margin $(150 000) $1 600 000 Unit sales 20 000 80 000 Costa has an opportunity to sell the 20 ooo units that it currently sells to Margarita to a new outside customer at a price of $37.50 per unit. Margarita can purchase its requirements from an outside supplier at a price of $42.50 per unit. Required: 1 Assuming that Costa Division desires to maximise its profits, should Costa take on the new customer and drop its sales to Margarita? Explain your answer. 2 Assume, instead, that Dragoon permits division managers to negotiate the transfer price. The managers agree on a tentative transfer price of $37.50 per unit, to be reduced based on an equal sharing of the additional gross margin to Costa resulting from the sale to Margarita of 20 000 motors at $37.50 per unit. What would be the actual transfer price? 3 Assume now that Costa Division has an opportunity to sell the 20 000 motors that Margarita Division would buy to the same customers that are buying the other 80 ooo motors produced by Costa. Costa Division could sell all 100 000 motors to outside customers at a price of $50. What actions by each division manager are in the best interests of Dragoon Corporation? 4 Under the scenario described in requirement 3, use the general transfer pricing rule to calculate the transfer price that Costa Division should charge Margarita Division for motors. 5 Will the transfer price calculated in requirement 4 result in the most desirable outcome from the standpoint of Dragoon Corporation? Justify your answer.12.41 Multiple interdivisional transfers: accept or reject outside contract: manufacturer Rabbid Industries Ltd consists of three decentralised divisions: Brentwood Division. Crater Division and Doilar Division. The managing director of Pabbid Industries has given the managers of the three divisions the authority to decide whether to sell their products outside the company. or between themselves at a transfer price determined by the division managers. The external market for the company's products is very active and there are many competitors. so sales made internally or externally by the divisions will not affect market prices. Intermediate markets will always be available for Brentwood. Crater and Dollar to purchase their manufacturing needs or sell their product. Each division manager attempts to maximise his contribution margin at the current level of operating assets for the division. The manager of Crater Division is currently considering the following two orders: I Dollar Division needs 5000 units of' a motor that can be supplied by Crater Division. To manufacture these motors. Crater would purchase components from Brentwood Division at a transfer price of $900 per unit. Brentwaod's variable cost for these components is $450 per unit. Crater Division would further process these components at a variable cost of $750 per unit. I Eros Company wants to order 5500 motors from the Crater Division. This is a custom-built product and the price will be $1375 per unit. Crater would purchase components for these motors from Brentwood Division at a transfer price of $750 per unit. Brentwood's variable cost for these components is $375 per unit. Crater Division will further process these components at a variable cost of $600 per unit. . Crater Division's piant capacity is limited. and the company can accept either the Eros order or the Dollar order, but not both. The managing director of Rabbid Industries and the manager of Crater Division agree that it would not be beneficial to increase capacity. If Dollar Division cannot obtain the motors from Crater Division, it will purchase the motors from Frantic Company. which has offered to supply the same motors to Doilar Division at a price of $2 250 per unit. Frantic Company would also purchase 5000 components from Brentwood Division at a price of $600 for each of these motors. Brentwood's variable cost for these components is $300 per unit. Required: 1 if the manager of Crater Division wants to maximise the division's short-run contribution margin. determine whether Crater Division should: (a) sell motors to Dollar Division at the prevailing market price; or (b) accept the Eros Company order. 2 Independent of your answer to requirement I, assume that Crater Division decides to accept the Eros Company contract. Determine if this decision is in the best interests of Rabbid Industries