Need project report

60 . 100.00 1.000 w Corporate Tax paid by CECOC (TWO 000) Particulars TWO 1000 Sale Price per unit 90 Costpont (including Wharge) (140120*10-30) Pront per unit 120 $2.500 Total Profit for 5,00,000 units 60,000 1,500 Corporate Tax 0 25% 15,000 11,300 25,800 2.01,275 60,382.50 col,000 710) AOH Table Pro Jax Payable 30% thereon Local Purchases import from Foreign Subsidiary-Effect of Taxes and Custom Duty RTP SOUS-based Multinational Company engaged in manufacturing and marketing of Printers and Scanners. It has danes spreading across the world which either manufacture or sell Printers and Scanners using SCI's brand name. The Subsidiary of SCI buys an important component for the Printers and Scanners from the Chinese Subsidiary of the same Group The Indian Subsidiary buys 1,50.000 units of components p.a. from the Chinese Subsidiary at CNY (1) 30 per days a Total Customs Duty of 29.5% of value of the components purchased. Japanese NC which manufactures the same component which is used in the Printer and Scanners of SCI, has ching it in india and is ready to supply the same component to the Indian Subsidiary of SCI at 320 per unit. Solis camining the proposal of the Japanese Manufacturer and asked its Chinese Subsidiary to presents its views on this issu The Chinese Subsidiary has doned that will be able to sell 1,20,000 units of the components to a local Chinese Manufactum a ne same price, ie 30 per unit but it will incur an Excise Duty at 10% on Sales Value. Variable Cost per unit of manufacturi the component is 20 per unit. The Foxed Costs of the Subsidiaries will remain unchanged. 13.47 Transfer Pricing * 14,06,250 32,81,250 (56,25 x 5,000) 90 per unit Division Division X (Transferring Division) Division Y (Recipient Division) (c) Own Costs of the division: First 5,000 units 35,62,500 Additional 5.000 units * 3,37,500 (d) Transfer In Costs Not Applicable 2. Profit Statement of Divisions and the Company as a whole, at various output levels (amounts in (a) Quantity (units) 5,000 uts 10,000 uts 15,000 uts 20,000 uts 25,000 uts 30,000 uts (b) X's Revenue (a x 90) 4,50,000 9,00,000 13,50,000 27,00,000 22,50,000 18,00,000 X's Costs 5,62,500 9,00,000 12,37,500 22,50,000 19,12,500 15,75,000 (d) X's Profit (b-c) (1,12,500) Nil 4,50,000 1,12,500 3,37,500 2,25,000 (e) Y's Selling Price p.u 298.50 150.75 247.50 180.00 208.50 (O Ys Revenue (a xe) 19,68,750 29,85,000 37,12,500 45,22,500 45,00,000 41,70,000 (9) Y's Own Costs 14,06,250 16,87,500 19,68,750 28,12,500 25,31,250 (h) Y's Transfer in Costs (i.e. b) 22,50,000 4,50,000 9,00,000 13,50,000 27,00,000 22,50,000 18,00,000 () Y's Total Costs (9 + h) 18,56,250 25,87,500 33,18,750 47,81,250 40,50,000 0) Y's Profit (f-i) 55,12,500 1,12,500 3,97,500 3,93,750 (9,90,000) 1,20,000 (2,81,250) (k) Company Profit (d + j) NA 3,97,500 5,06,250 3,45,000 56,250 (5,40,000) 393.75 Company's Profit at this level (5,40,000) LOSS 33,97,500 3. Divisional and Company Decisions Division Maximum Divisional Profit Output Level X (Transferring) 34,50,000 30,000 units Y (Recipient) 3,97,500 10,000 units (a) Conflict: Based on divisional viewpoint, there is a conflict in decisions in as much that Division X will produce 30,000 units for internal transfer whereas Division Y will restrict output to 10,000 units only. (b) Company Angle: However, the Company's profits are maximized at 5,06,250 when the Sale Quantity is 15,000 units. If the Company is not organised on profit centre basis, it should operate at 15,000 units output level. RTP 3. Transfer Prices and effect on Divisional decisions - CVP Analysis Aipha and Beta are two divisions under the same group of Companies. The production capacity of Alpha is 4,000 kilolitres per month. However, due to external demand considerations, Alpha will be able to utilise 75% of its capacity per month during the year. It will sell one-third of its production to Beta and the balance quantity will be sold in the market. The Variable Cost is? 780 per kilolitre and the Fixed Cost is 2,40,000 per month. The current policy of the Group is to use Market Price as the Transfer Price between the two Divisions. Beta uses the output o Alpha as Raw Materials to produce a branded product which is sold in cans of 25 litre capacity at the rate of 40 per can. The Direct Production Costs are as under- 1. Raw Materials received from Alpha at a Transfer Price of 1 per litre. 2. Variable Costs amount to 6 per can. 3. Fixed Costs amount to 1,60,000 per month. Market Study has revealed that Beta can increase its sale of the branded product by 80% in volume if the Selling Pric reduced by 5 per Can. Alpha proposes that Beta should increase the sales to that extent. Required: 1. Calculate the monthly profit of Alpha and Beta separately and the Company as a whole, if (a) the Sales are at the pa level, and (b) the sales of Beta are increased in volume by 80% by reducing the Selling Price by 5 per can. 2. Recommend, with supporting calculations, a suitable Transfer Price which will be acceptable to Beta, so as to maint profit as originally envisaged. 13.15 Transfer Pricing 13.1.5 Market Price based Transfer Pricing Under this method, the Transfer Prices are based on Market Prices. The major merits of this method are - 1 Maximum Prices: In a competitive market, goods / Services cannot be transferred to its Users at a higher price. Hence, Market Prices constitute the basis for efficient production 2. Demand & Supply: Market Prices take into account, the forces of demand and supply. If Intermediate Products are freely saleable, in the long run, market prices will provide a good indicator of the overall efficiency of various divisions. 3. Opportunity Cost Recovery: Opportunity costs of Transferring Divisions are fully recovered. Hence, there is sufficient incentive for Internal Transfer, in case Transferring Divisions operate at full capacity. 4. Objective: Market Prices provide reliable measures of Divisional Income, because these prices are established independently, rather than by individuals who have an interest in the results. The major demerits of this method are - Availability of Market Prices: There may be difficulty in obtaining just / fair market prices. Sometimes, the Intermediate Product may not be saleable, in other cases direct market substitutes may not be available for products, which are manufactured only for internal consumption 2 Impact of S & D Costs: There may be difficulties in determining the elements of Selling and Distribution Costs such as Commission, Discounts, Advertisements and Sales Promotion, etc. so that necessary adjustment may be made in the market price to provide benefit of these expenses to the Recipient Division. 3. Unjust Enrichment: Market Prices lead to unjust enrichment of the Transferring Division, particularly if the former has sufficient spare capacity and the Intermediate Product is not freely saleable externally. 1. 2. 13.1.6 Negotiated or Bargained Transfer Pricing 1. Meaning: (a) Negotiated Transfer Pricing refers to the determination of Transfer Prices based on active participation, involvement, co-ordination and agreement of the Managers of the Transferring and Recipient Divisions. (b) In this method, each decentralised unit is considered as an independent unit. Such units decide the Transfer Price by negotiations or bargaining. (C) Divisional Managers have full freedom to purchase their requirement from outside Suppliers, if the prices quoted by the Transferring Division are not acceptable to them. Advantages: (a) Proper Decisions: Negotiated Prices lead to business-like attitude amongst divisions of the Company. The Buying Division may purchase from outside sources, if the outside prices are lower than the Internal Division's price. (b) Autonomy and Motivation Value: Buying and Selling Divisions are completely free to deal outside the Company. This promotes sub-unit autonomy and motivates Managers. (C) Optimality: Through properly directed negotiations, Managers can determine the appropriate Transfer Prices that satisfy the requirements of the Divisions and is in the best interest of the Company as a whole. 3. Limitations: M 03 (a) Sub-Optimal: The agreed Transfer Price may depend on the negotiating skills and bargaining powers of the Managers involved. The final result may not always be optimal. (b) Conflicts: Rather than agreement on Transfer Prices, negotiations can lead to conflict between divisions and may require top-management mediation. (C) No scope for Performance Evaluation: Transfer Prices dependent on Manager's negotiation skills will defeat the very purpose of performance evaluation. (d) Time and Cost: Negotiations are time-consuming for the Managers involved, particularly when the number of transactions and inter-dependencies are large. 4. Pre-conditions for Negotiated Transfer Pricing: For an effective system of transfer pricing - (a) Prices of all transfers in and out of a Profit Centre should be determined by negotiation between the buyer and the seller divisions. (b) Negotiations should have access to full data on alternative sources and markets, and to public and private information about market prices, (c) Buyers and Sellers should be completely free to deal outside the Company. 123 ca final Ooon Cantribution per unit of the Products Product 4.60 Producto 25 V60-0.50 518/60 1.50 NES 61/60 1.20 6-12/600 1.20 12.90 (1.10) Note sunce be Now The Last Dates ready been considered in the computation of Savings per unit, the Overtime Pemely incremental cost and hence relevant 2 Oheation based on effect of Overtime Works 1. Normal Time Work Both products and can be produced during normal time as cost of make is less than cost or by There 40 and 1.60 per unit, on own production Overtime Work The rest of overtime work differs for the products as under - Product Pam be produced during Overtime work, either in Department A or Department B or in both. There will be a sig oft 290 p., due to own production, even if Overtime work is involved in both Departments A and B. Product can be produced during Overtime work, either in Department A only (saving of 20.10) or in Department only (saving of 7 0.40), but not in both. If Overtime work is required in both departments for Product is better to sub-contract the same. 4. Computation of Ranking Priority (Savings per Labour Hour in Departments A and B) Particulars Product P Producto (a) Savings per unit, it made during normal time 1.60 4.60 (b) Hours required in Department A 18/60 hours 6/60 hours (c) Savings per hour in Department A = (a - b) 46 per hour *5.33 per hour (d) Ranking for production in Department A (e) Hours required in Department B 12/60 hours 12/60 hours (Savings per hour in Department B = ( ae) 323 per hour 8.00 per hour (9) Ranking for production in Department B 1 II Note: Since ranking priorities on the Key Factors are the same, the solution can be obtained as given below. In case of differing pronties on Multiple Key Factors, Linear Programming Techniques may be used for resource allocation. T II 5. Key Factor Allocation and Production Decision Particulars Department A Department B (a) Normal Time Available 600 hours 520 hours (b) Possible Overtime at 50% 300 hours 260 hours (c) Total Time Available (a + b) 900 hours 780 hours Time Allocation: (see Table below) Hours Utilised Hours Utilised Stage 1: Make - Normal Time P = 2500 units 2500 x 6/60 = 250 hours 2500x 12/60 = 500 hours Stage 2: Make - Normal Time Q= 100 units 100 x 18/60 = 30 hours (bal.fig.) = 20 hours Stage 3: Make -- Overtime in B Q=1067 units (bal. fig.) = 320 hours 1067x 12/60 = 213 hours Slage 4: Sub-contract Q = 833 units No further production possible since OT is involved in both Depts. A and B which is not economical Stage Explanation Product P has maximum preference for own production. Hence it will be produced first. Time utilised therefor 250 hours and 500 hours of Normal Time in A and B. Balance time left will be 350 hours in Department A and 2 hours in Department B. Least Normal Time available is 20 hours in Department B. This will be utilised in production of Q, equivalent to 2 12/60 hours = 100 units. This will utilise 100 units X 18/60 = 30 hours in Department A. Balance Normal Time is 320 hours in Department A. This will be utilised in production of Q, equal to 320 - 18/ hours = 1067 units. This will utilise 1067 x 12/60 = 213 hours (in Overtime) in Dept B. Since this is within 3 permissible overtime limit of 260 hours, this production is feasible. [Note: If available overtime is less than hours, production of Q will be restricted to that level.]