Calculate the operating profits for the Mining and Metals Divisions for the 4000
ID: 2482963 • Letter: C
Question
Calculate the operating profits for the Mining and Metals Divisions for the 400000 units of toi dim transferred under each of the following transfer-pricing methods: (a) market price, and (b) 110% of full manufacturing costs. suppose seculars rewards each division manager with a bonus, calculated as l%of divisional operating profit (if positive). What is the amount of bonus that will paid to jch division manager under each of the transfer-pricing methods in requirement 1? huh transfer-pricing method will each division manager prefer to use? hat arguments would Arturo Tauzin, manager of the Mining Division, make to support transfer-pricing method that he prefers?Explanation / Answer
1.
Method A
Method B
Internal Transfers at Market Prices
Internal Transfers at 110% of Full Costs
Mining Division
Revenues
90 * 400,000 units
€ 36,000,000.00
60 * 110% * 400,000 units
€ 26,400,000.00
Direct material
12 * 400,000 units
€ 4,800,000.00
12 * 400,000 units
€ 4,800,000.00
Direct manufacturing labor
16 * 400,000 units
€ 6,400,000.00
16 * 400,000 units
€ 6,400,000.00
Variable Manufacturing overhead costs
32 * 75% * 400,000 units
€ 9,600,000.00
32 * 75% * 400,000 units
€ 9,600,000.00
Fixed manufacturing overhead costs
32 * 25% * 400,000 units
€ 3,200,000.00
32 * 25% * 400,000 units
€ 3,200,000.00
Marketing and distribution costs
5 * 400,000 units
€ 2,000,000.00
Total division costs
€ 26,000,000.00
€ 24,000,000.00
Division operating income
€ 10,000,000.00
€ 2,400,000.00
Metals Division
Revenues
150 * 400,000 units
€ 60,000,000.00
150 * 400,000 units
€ 60,000,000.00
Transferred in costs
90 * 400,000 units
€ 36,000,000.00
60 * 110% * 400,000 units
€ 26,400,000.00
Direct material
6 * 400,000 units
€ 2,400,000.00
6 * 400,000 units
€ 2,400,000.00
Direct manufacturing labor
20 * 400,000 units
€ 8,000,000.00
20 * 400,000 units
€ 8,000,000.00
Variable Manufacturing overhead costs
25 * 40% * 400,000 units
€ 4,000,000.00
25 * 40% * 400,000 units
€ 4,000,000.00
Fixed manufacturing overhead costs
25 * 60% * 400,000 units
€ 6,000,000.00
25 * 60% * 400,000 units
€ 6,000,000.00
Purchasing costs
3 * 400,000 units
€ 1,200,000.00
Total division costs
€ 57,600,000.00
€ 46,800,000.00
Division operating income
€ 2,400,000.00
€ 13,200,000.00
2.
Method A
Method B
Internal Transfers at Market Prices
Internal Transfers at 110% of Full Costs
Mining Division
Division operating income
€ 10,000,000.00
€ 2,400,000.00
Manager's Bonus @ 1%
€ 100,000.00
€ 24,000.00
Metals Division
Division operating income
€ 2,400,000.00
€ 13,200,000.00
Manager's Bonus @ 1%
€ 24,000.00
€ 132,000.00
The Mining Division manager will prefer Method A (transfer at market prices) because this method gives $100,000 of bonus rather than $24,000 under Method B (transfers at 110% of full costs). The Metals Division manager will prefer Method B because this method gives $132,000 of bonus rather than $24,00 under Method A.
3.
The manager of the Mining Division, will appeal to the existence of a competitive market to price transfers at market prices. Using market prices for transfers in these conditions leads to goal congruence. Division managers acting in their own best interests make decisions that are also in the best interests of the company as a whole. Hayes will further argue that setting transfer prices based on cost will cause Hayes to pay no attention to controlling costs since all costs incurred will be recovered from the Metals Division at 110% of full costs.
Method A
Method B
Internal Transfers at Market Prices
Internal Transfers at 110% of Full Costs
Mining Division
Revenues
90 * 400,000 units
€ 36,000,000.00
60 * 110% * 400,000 units
€ 26,400,000.00
Direct material
12 * 400,000 units
€ 4,800,000.00
12 * 400,000 units
€ 4,800,000.00
Direct manufacturing labor
16 * 400,000 units
€ 6,400,000.00
16 * 400,000 units
€ 6,400,000.00
Variable Manufacturing overhead costs
32 * 75% * 400,000 units
€ 9,600,000.00
32 * 75% * 400,000 units
€ 9,600,000.00
Fixed manufacturing overhead costs
32 * 25% * 400,000 units
€ 3,200,000.00
32 * 25% * 400,000 units
€ 3,200,000.00
Marketing and distribution costs
5 * 400,000 units
€ 2,000,000.00
Total division costs
€ 26,000,000.00
€ 24,000,000.00
Division operating income
€ 10,000,000.00
€ 2,400,000.00
Metals Division
Revenues
150 * 400,000 units
€ 60,000,000.00
150 * 400,000 units
€ 60,000,000.00
Transferred in costs
90 * 400,000 units
€ 36,000,000.00
60 * 110% * 400,000 units
€ 26,400,000.00
Direct material
6 * 400,000 units
€ 2,400,000.00
6 * 400,000 units
€ 2,400,000.00
Direct manufacturing labor
20 * 400,000 units
€ 8,000,000.00
20 * 400,000 units
€ 8,000,000.00
Variable Manufacturing overhead costs
25 * 40% * 400,000 units
€ 4,000,000.00
25 * 40% * 400,000 units
€ 4,000,000.00
Fixed manufacturing overhead costs
25 * 60% * 400,000 units
€ 6,000,000.00
25 * 60% * 400,000 units
€ 6,000,000.00
Purchasing costs
3 * 400,000 units
€ 1,200,000.00
Total division costs
€ 57,600,000.00
€ 46,800,000.00
Division operating income
€ 2,400,000.00
€ 13,200,000.00
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