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ACC311: Strategic Management Accounting
Aye Co., which produces electronic equipment in its Country A subsidiary, has a very strong local market for its products. The variable production cost per unit is $260, and the subsidiary can sell its entire supply domestically at the price of $340. Country A's tax rate is at 40%. Alternatively, Aye Co. can ship these items to its subsidiary located in Country B, to be packaged with another product that the Country B subsidiary will distribute nationwide. Information about the Country B's bundled product and the subsidiary's operating environment are as follows: ice You can assume that Country A and B's tax authorities allow for a transfer price for the electronic equipment to be set at either: (i) Country A subsidiary's variable manufacturing cost; or (ii) (ii) Country A subsidiary's market price. Aye Co.'s top management is in the process of exploring a suitable transfer pricing policy for the company as a whole. (a) Based on available information, compute the Aye Co.'s overall profitability per unit if the internal transfer is made at: (i) Country A subsidiary's variable manufacturing cost; and (ii) Country A subsidiary's market price. Show your computations for Country A and B's operations separately. Advice, with clear explanations, Aye Co. on their transfer pricing policy. (14 marks) (b) A domestic external supplier has approached Country B's subsidiary to supply similar electronic equipment for $310 per unit. Evaluate the decision of whether to transfer the equipment from Country A or purchase from external supplier from the perspectives of: (i) The manager of Country B's subsidiary; and (ii) The top management of Aye Co. Advice Aye Co. on their corporate policies with respect to internal transfers. (14 marks) Aye Co., which produces electronic equipment in its Country A subsidiary, has a very strong local market for its products. The variable production cost per unit is $260, and the subsidiary can sell its entire supply domestically at the price of $340. Country A's tax rate is at 40%. Alternatively, Aye Co. can ship these items to its subsidiary located in Country B, to be packaged with another product that the Country B subsidiary will distribute nationwide. Information about the Country B's bundled product and the subsidiary's operating environment are as follows: ice You can assume that Country A and B's tax authorities allow for a transfer price for the electronic equipment to be set at either: (i) Country A subsidiary's variable manufacturing cost; or (ii) (ii) Country A subsidiary's market price. Aye Co.'s top management is in the process of exploring a suitable transfer pricing policy for the company as a whole. (a) Based on available information, compute the Aye Co.'s overall profitability per unit if the internal transfer is made at: (i) Country A subsidiary's variable manufacturing cost; and (ii) Country A subsidiary's market price. Show your computations for Country A and B's operations separately. Advice, with clear explanations, Aye Co. on their transfer pricing policy. (14 marks) (b) A domestic external supplier has approached Country B's subsidiary to supply similar electronic equipment for $310 per unit. Evaluate the decision of whether to transfer the equipment from Country A or purchase from external supplier from the perspectives of: (i) The manager of Country B's subsidiary; and (ii) The top management of Aye Co. Advice Aye Co. on their corporate policies with respect to internal transfers. (14 marks)
