Conglomerate Co. owns businesses around the world. Two of its subsidiaries, Gold and

Jewelry, frequently do business together. Gold is a mining company that extracts gold

and sells it on a commodity exchange. Jewelry crafts high-end jewelry using a variety of

precious metals and gems.

Gold and Jewelry have always performed transactions at market price. Each company

is evaluated separately and there are no cost savings as a result of having the same

parent.

Scenario 2 -

1.

What is the transfer pricing strategy being used? Document your answer in the

space below.

2.

How does the strategy impact management and the company as a whole?

Document your answer in the space below.

3.

What advice would you give to the company? Document your answer in the space

below

DIY Furniture (DIY) sells a wide array of furniture at a variety of price points that are

attractive to a wide audience, from students furnishing their first apartment to

professionals remodelling a kitchen. The furniture is provided to the customer

unassembled at a lower cost than the more expensive assembled furniture from

competing furniture stores, and assembly instructions are included. To make assembly

easier, all hardware is provided and the furniture can be put together with minimal tools.

The hardware is often custom for this reason. There is currently some tension between

the bolts division and the retail division of DIY.

The bolts division makes a variety of bolts and nuts for the furniture. It is all custom and

specific to the needs of DIY. There is no external market. The retail division buys all

bolts from the bolt division. There is no external provider.

The CEO of DIY is new. At her former company, an electronics retailer, all divisions

were operated as profit centres and this really motivated management to increase the

overall profits of the company. She believes this is the best way to ensure costs are

kept low and revenues high. Upon starting at DIY, she changed the evaluation of each

department to that of a profit centre. As a result, bolts increased its transfer price to add

a 25% markup to cost.

Scenario 3 -

Required:

1.

What is the transfer pricing strategy being used? Document your answer in the

space below.

2.

How does the strategy impact management and the company as a whole?

Document your answer in the space below.

3.

What advice would you give to the company? Document your answer in the space

below