Transfer Pricing and Responsibility Centers

Module 3 – CaseTransfer Pricing and Responsibility CentersAssignment OverviewCoffee Maker’s Incorporated (CMI)Three divisions of a CMI are involved in a dispute. Division A
purchases Part 101 and Division B purchases Part 201 from a third
division, C. Both divisions need the parts for products that they
assemble. The intercompany transactions have remained constant for
several years.Recently, outside suppliers have lowered their prices, but Division C
refuses to do so. In addition, all division managers are feeling the
pressure to increase profit. Managers of divisions A and B would like
the flexibility to purchase the parts they need from external parties at
a lower cost and increase profitability.The current pattern is thatDivision A purchases 2,700 units of product part 101 from Division C
(the supplying division) and another 1,300 units from an external
supplier.Division B purchases 1,100 units of Part 201 from Division C and another 700 units from an external supplier.Note that both divisions A and B purchase the needed supplies from
both the internal source and an external source at the same time.The managers for divisions A and B are preparing a new proposal for consideration.Division C will continue to produce Parts 101 and 201. All of its
production will be sold to Divisions A and B. No other customers are
likely to be found for these products in the short term, given that
supply is greater than demand in the market.Division A will buy 2,000 units of Part 101 from Division C at the existing transfer price; and2,000 units from an external supplier at the market price of $900 per unit.Division B will buy 900 units of Part 201 from Division C at the existing transfer price; and900 units from an external supplier at $1,800 per unit.Division C Data Based on the Current Agreement


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Annual volume (units)

Transfer price/unit

Variable expenses/unit

The fixed overhead for Division C is $1,200,000.Case AssignmentRequired:Computations (use Excel)Set up a table similar the one below to compute the difference
between the current situation and the proposal for Divisions A and B.

Division A

Current Situation

No. of Units
Purchase Price
Total Purchases
No. of Units
Purchase Price
Total Purchases

Internal purchases



External purchases


Total cost for Part 101



Savings to Div. A


Compute the operating income for Division C under the current agreement and the proposed agreement.Is the revised agreement a good idea? Support your answer with computations.Memo (use Word)Write a 4- or 5-paragraph memo to the division manager explaining the
analysis performed. Start with an introduction and end with a
recommendation. Each of the four or five paragraphs should have a
heading.Short Essay (use Word)Start with an introduction and end with a summary or conclusion. Use headings.Evaluate and discuss the implications of the following transfer pricing policies:Transfer price = cost plus a mark-up for the selling divisionTransfer price = fair market valueTransfer price = price negotiated by the managersWhy is transfer pricing such a significant issue both from a financial and managerial perspective?Assignment ExpectationsEach submission should include two files: (1) An Excel file and (2) a
Word document. The Word document shows the memo first and short essay
last. Assume a knowledgeable business audience and use required format
and length. Individuals in business are busy and want information
presented in an organized and concise manner.

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