Assignment: Coffee 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 that
- Division 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; and
- 2,000 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; and
- 900 units from an external supplier at $1,800 per unit.
Division C Data Based on the Current Agreement
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Part
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101
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201
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Annual volume (units)
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2,700
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1,100
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Transfer price/unit
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$1,000
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$2,000
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Variable expenses/unit
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$700
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$1,200
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The fixed overhead for Division C is $1,200,000.
Case Assignment
Required:
Computations (use Excel)
- Set up a table similar the one below to compute the difference between the current situation and the proposal for Divisions A and B.
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Division A
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Current Situation
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Proposal
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No. of Units
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Purchase Price
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Total Purchases
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No. of Units
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Purchase Price
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Total Purchases
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Internal purchases
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2,700
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$
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2,000
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$
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External purchases
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1,300
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2,000
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|
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Total cost for Part 101
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|
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$
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$
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Savings to Div. A
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|
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$
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- 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 division
- Transfer price = fair market value
- Transfer price = price negotiated by the managers
Why is transfer pricing such a significant issue both from a financial and managerial perspective?
Assignment Expectations
Each 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.
This is how I setup case 3:
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Coffee Makers International
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Income consideration statement
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For period ending 31 December 20XX
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Division A
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Current situation
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Proposal
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No. of units
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Purchase price
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Total Purchases
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No. of units
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Purchase price
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Total purchases
|
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Internal purchases
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27
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$ 10
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$ 270
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20
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$ 10
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$ 200
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External purchases
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13
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$ 9
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$ 117
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20
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$ 9
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$ 180
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Total cost for part 101
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$ 387
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$ 380
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Savings to Division A
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|
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$ 7
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Division B
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Current situation
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Proposal
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No. of units
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Purchase price
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Total Purchases
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No. of units
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Purchase price
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Total purchases
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Internal purchases
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11
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$ 20
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$ 220
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9
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$ 20
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$ 180
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External purchases
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7
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$ 18
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$ 126
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9
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$ 18
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$ 162
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Total cost for part 201
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$ 346
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$ 342
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Savings to Division B
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|
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$ 4
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Division C
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Current situation
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Proposal
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Part 101
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Part 201
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Total
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Part 101
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Part 201
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Total
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Transfer price per unit
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$ 10
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$ 20
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$ 10
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$ 20
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Variable expenses/unit
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$ 7
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$ 12
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$ 7
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$ 12
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Contribution margin/unit
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$ 3
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$ 8
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$ 3
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$ 8
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Annual volume (units)
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27
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11
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20
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9
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Total Contribution margin
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$ 81
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$ 88
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$ 169
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$ 60
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$ 72
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$ 132
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Fixed overhead
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|
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$ 120
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$ 120
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Operating income
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|
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$ 49
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$ 12
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Impact on Division C
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|
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$ (37)
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What is really cool is you have a template made at this point and can look at what happens if; 1) A and B buy everything from outside the company, 2) A and B buy everything from C at C's price, and 3) A and B buy everything from C at the market price. In short, this can give you an idea of what to recommend...
This is a general direction of how I would approach case 3:
1. Read the problem very carefully.
2. Determine Division A current costs.
3. Determine Division A proposed costs.
4. The difference between Proposed A and Current is the savings for A.
5. I would do the same for Division B.
6. Division C is a simple contribution margin problem.
7. The difference between the proposed and current operating income for C is the savings or loss.
8. Add savings A and savings B to the savings or loss for C may indicate the impact on the company as a whole
9. Voila!
Format your assignment according to the following formatting requirements:
1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
3. Also include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.