Transfer Pricing of a Coffee Maker's Incorporated (CMI). Name: Professor: Paper: Date: Introduction Transfer Price is the price at which two or more divisions within a company transact. These transactions may be in terms of supplies or work force between related departments…
(Drury, 2004) These divisions are obligated to transact amongst themselves, the costs are decided by using a transfer. Even though the transfer prices may not differ much from the market prices, one of the divisions or the company as a whole in such a transaction go at a loss The buying divisions may buy for more than the principal market price or the selling division can sell below the market price, hence affecting their performance. This can either result into a loss or gain in any or all of the divisions. The company can also make a profit or a loss (Tully, 2012) Table1 of Supply Division C Quantity Manufactured Quantity supplied Current supply Price per unit Total Cost Proposed supply Price per unit Total Cost Supplier C part 101 2,000 3,000 $900 $2,700,000 2,000 $900 $1,800,000 Supplier C part 201 500 1,000 $900 $900,000 500 $1,900 $950,000 From the table 1: Division C will experience a loss, since it, supply of Part 101 reduces from a volume of $2,700,000 to $1,800,000. The transfer price is $2,000 while the market price for this part 101 is $900. Even though the total volume of supply of part 201 to Division B indicates a slight drop from the transfer price. The overall transaction for this division is a loss. Table2 for Buying Division A Quantity Bought Current purchase Price per unit Total Cost Proposed Purchases Price per unit Total Cost Supplier C part 101 3,000 $900 $2,700,000 2,000 $900 $1,800,000 External Supplier part 101 1,000 $900 $900,000 2,000 $900 $1,800,000 The buying division A will be in profit, because the price for the part A is $900. This price is less than the transfer price of $1,000. Even though the quantity supplied by Division C has reduced, they have increased their purchase volume from the external supply from 1,000 units to 2,000 units Table three for buying division B Quantity Bought Current Purchases Price per unit Total Cost Proposed Purchase Price per unit Total Cost Supplier C part 201 1,000 $900 $900,000 2,000 $900 $1,800,000 External Supplier part 201 1,000 $900 $900,000 1,500 $1,900 $2,850,000 Division B is a buying division will be in profit if the proposal is implemented. This is driven by two factors: they will have to buy more units both from division C and Externally at a price less than the transfer price. The transfer price is put at $2,000 while the market price for part 201 is $1,900. Profit will be $4,650,000-$1,800,000 =$3,250,000 Table 4 External Supplier Current supply Price per unit Total Cost Proposed supply Price per unit Total Cost Supplier part 101 to A 3,000 $900 $2,700,000 2,000 $900 $1,800,000 Supplier part 201 to B 1,000 $900 $900,000 1,500 $1,900 $2,850,000 From the above data, the company will make a loss since the overall increase in the external supply of both parts. The internal supplier namely the division C is disadvantaged in the new proposal. The total supply by this division will be a total 2,500 units, while external supplier will bring in 3,500 units. Division A: Buying division or downstream Part 101 Transfer cost = $1,000 Current Operation Units bought currently = (3,000 units from supplier C + 1,000 units from External supplier) = 4,000 units Unit cost = $ 900 Total cost = $ 900 X 4,000 = $36,000 ...
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of New Entrants 26 Bargaining Power of Suppliers 27 Conclusion 27 References 28 Part 1 Introduction This report describes the external operating environment of business and the effect it has on the performance of any organisation. To understand the dynamic business environment, the company must know the competitors, the customers and the markets where it intends to operate its business.
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