QUESTION 5 (10 Marks - Suggested time 35 minutes) Consider the following information: Currently, all of the harvesting Division's output is converted into juice by the Processing Division, and the juice is sold to large beverage companies that produce juice blends for resale. The Processing Division has a yield of 500 litres (Ltr) of juice per 1,000 kilograms of fruit. There are no shipping or marketing cost savings when transferring fruit internally (as compared to acquiring fruit from external suppliers). Cost and market price data for the two divisions are as follows: 200% of Full Costs 0.70 Market Price 0.60 $ $ 280,000 240.000 Transfer price per kilo ((A$0.10 + A$0.25) x 2) Transfer price per kilo (A$0.60) 1. Harvesting Division Revenues (400,000 kg x A$0.70) Revenues (A$0.60) Costs Division variable costs (400,000 kg x A$0.10 per kg) Division fixed costs (400,000 kg x A$0.25 per kg) Total division costs Division operating profit Harvesting Division manager's bonus (5% of operating profit) 2. Processing Division Revenues (200,000 Ltr x A$2.10 per L) Costs Transferred-in costs Division variable costs (200,000 Ltr x A$0.20 per L) Division fixed costs (200,000 Ltr x A$0.40 per L). Total division costs Division operating profit Processing Division manager's bonus (5% of operating profit) 40,000 100.000 140.000 140.000 7,000 40,000 100.000 140.000 100.000 5,000 420,000 420,000 280,000 40,000 80.000 400.000 20.000 1,000 240,000 40,000 80.000 360,000 60.000 3,000 a) Discuss the goal congruence problem(s) that will arise if the company continues to mandate the use a transfer price of 200% of full cost. (4 marks - Suggested time 15 minutes) b) Discuss the implications of introducing each of the following transfer pricing methods; I. II. III. market price transfer pricing policy negotiated (between divisions) transfer pricing policy dual transfer pricing policy (i.e. transfers out of harvesting are made at 200% and transfers into processing are made at market price) (6 marks - Suggested time 20 minutes) (TOTAL 10 MARKS) QUESTION 5 (10 Marks - Suggested time 35 minutes) Consider the following information: Currently, all of the harvesting Division's output is converted into juice by the Processing Division, and the juice is sold to large beverage companies that produce juice blends for resale. The Processing Division has a yield of 500 litres (Ltr) of juice per 1,000 kilograms of fruit. There are no shipping or marketing cost savings when transferring fruit internally (as compared to acquiring fruit from external suppliers). Cost and market price data for the two divisions are as follows: 200% of Full Costs 0.70 Market Price 0.60 $ $ 280,000 240.000 Transfer price per kilo ((A$0.10 + A$0.25) x 2) Transfer price per kilo (A$0.60) 1. Harvesting Division Revenues (400,000 kg x A$0.70) Revenues (A$0.60) Costs Division variable costs (400,000 kg x A$0.10 per kg) Division fixed costs (400,000 kg x A$0.25 per kg) Total division costs Division operating profit Harvesting Division manager's bonus (5% of operating profit) 2. Processing Division Revenues (200,000 Ltr x A$2.10 per L) Costs Transferred-in costs Division variable costs (200,000 Ltr x A$0.20 per L) Division fixed costs (200,000 Ltr x A$0.40 per L). Total division costs Division operating profit Processing Division manager's bonus (5% of operating profit) 40,000 100.000 140.000 140.000 7,000 40,000 100.000 140.000 100.000 5,000 420,000 420,000 280,000 40,000 80.000 400.000 20.000 1,000 240,000 40,000 80.000 360,000 60.000 3,000 a) Discuss the goal congruence problem(s) that will arise if the company continues to mandate the use a transfer price of 200% of full cost. (4 marks - Suggested time 15 minutes) b) Discuss the implications of introducing each of the following transfer pricing methods; I. II. III. market price transfer pricing policy negotiated (between divisions) transfer pricing policy dual transfer pricing policy (i.e. transfers out of harvesting are made at 200% and transfers into processing are made at market price) (6 marks - Suggested time 20 minutes) (TOTAL 10 MARKS)
