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Category > Accounting Posted 23 Dec 2017 My Price 10.00

Evaluate the implications of transfer pricing policies

I attached the full case i just need help in this question
Question 2

Evaluate the implications of the following transfer pricing policies on each of the three divisions:

Transfer price = absorption cost plus a 20% mark-up for the selling division

Transfer price = incremental cost per unit:

Transfer price = a negotiated price of £950 for Product X and £1,950 for product Y.

London plc Topic: Transfer Pricing, Negotiated Transfer Prices, Divisional Autonomy A mediator has been appointed by the head office of London plc to agree on the transfer price of products X and Y. London plc has one supplying division – Eastern Division, and two purchasing divisions – North Division and South Division. The original agreement was for the North Division to purchase X and the South Division to purchase Y from the Eastern division and the level of purchases to remain the same as the previous year. The mediator appointed by head office has only recently joined the company and is recently qualified. He has worked as the management accountant at another company but does not believe this helped him to get the job. Apparently this is the first time that a manager from head office has been asked to mediate in a dispute between divisions. Initially the mediator talked to the two purchasing divisions separately. The managers at the North Division gave details of current market prices for product X and argued that Eastern Division was not lowering its prices in line with other suppliers. North Division also complained about the new profit targets that have been set by the head office. Managers' were convinced that they must have the freedom to buy and sell outside the company if the outside prices are cheaper than internal prices. The managers at the South Division told a similar story. They gave details of how market prices had fluctuated in the last 6 months. Their conclusion was that market prices would continue to fall and therefore the Eastern Division must reduce its prices. Again managers also argued that they must have the freedom to buy and sell outside the company if the outside prices are lower than internal prices. Following a meeting with the Eastern Division, the mediating manager rejected all the claims raised by the two purchasing divisions and argued that the current arrangement had worked well and did not need changing. After returning to the head office the mediator wrote a short report summarising the details of the original agreement and a compromise proposal. Details of the original agreement The North Division purchases 3,000 units of product X from Eastern Division (the supplying division) and another 1,000 units from an external supplier. The market price for product X is £900 per unit. The South Division purchases 1,000 units of product Y from Eastern Division and another 1,000 units from an external supplier. Details of the revised proposal 1
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CourseLover
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Status NEW Posted 23 Dec 2017 07:12 AM My Price 10.00

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