Acc202 Management Accounting - Free Assessment Answer
2.Which transfer price should Derwent Ltd select to minimise the total of company import duties and income taxes? Remember that the transfer price must be between the full manufacturing cost per unit of $800 and the market price of $950 of comparable imports into the USA. Explain your reasoning.
Answer:
Scenario 1a
Requirement 1
Australian division income
|
Transfer at |
Full manufacturing cost |
Market price of comparable imports |
|
Revenue |
$ 8,000,000.00 |
$ 9,500,000.00 |
|
Full manufacturing cost |
$ 8,000,000.00 |
$ 8,000,000.00 |
|
Operating income |
$ - |
$ 1,500,000.00 |
|
Income tax at 35% |
$ - |
$ 525,000.00 |
|
Operating income after tax |
$ - |
$ 975,000.00 |
U.S. Division
|
Transfer at |
Full manufacturing cost |
Market price of comparable imports |
|
Revenue |
$ 11,500,000.00 |
$ 11,500,000.00 |
|
Division Costs |
|
|
|
Transferred-in cost |
$ 8,000,000.00 |
$ 9,500,000.00 |
|
Import duty at15% |
$ 1,200,000.00 |
$ 1,425,000.00 |
|
Division Costs |
$ 9,200,000.00 |
$ 10,925,000.00 |
|
Operating income |
$ 2,300,000.00 |
$ 575,000.00 |
|
Income tax at 40% |
$ 920,000.00 |
$ 230,000.00 |
|
Operating income after tax |
$ 1,380,000.00 |
$ 345,000.00 |
Requirement 2
|
Transfer at |
Full manufacturing cost |
Market price of comparable imports |
|
Australian division |
|
|
|
Income tax at 35% |
$ - |
$ 525,000.00 |
|
U.S. Division |
|
|
|
Import duty at15% |
$ 1,200,000.00 |
$ 1,425,000.00 |
|
Income tax at 40% |
$ 920,000.00 |
$ 230,000.00 |
|
Total |
$ 2,120,000.00 |
$ 2,180,000.00 |
At transfer price of $800 i.e. full manufacturing cost company’s tax expenses are minimum hence company should choose this option.
Scenario 1b
Requirement 1
|
|
Austrian Division |
U.S. Division |
|
Revenue |
$ 9,000,000.00 |
$ 11,500,000.00 |
|
Division Costs |
|
|
|
Full manufacturing cost |
$ 8,000,000.00 |
|
|
Transferred-in cost |
|
$ 9,000,000.00 |
|
Import duty at 15% |
|
$ 1,350,000.00 |
|
Division Costs |
|
$ 10,350,000.00 |
|
Division operating income |
$ 1,000,000.00 |
$ 1,150,000.00 |
|
Income tax |
$ 350,000.00 |
$ 460,000.00 |
|
Division after-tax operating income |
$ 650,000.00 |
$ 690,000.00 |
Requirement 2
Transfer price calculated in requirement 2 of scenario 1a is full manufacturing cost i.e. $800. If divisional manager act autonomously then transfer price calculated in requirement 2 of scenario 1a will not be accepted by the Australian divisional manager because at this cost profits of the Australian division will become zero. In addition to this Australian division can make profits of $650000 by transferring B12 at transfer price 900 (requirement 1).
Hence transfer price calculated in requirement 2 of scenario 1awill not be taken into action by Australian divisional manager.
Requirement 3
Minimum transfer price at which Australian Divisional manager will agree
|
Variable cost per unit |
$ 550.00 |
|
Opportunity cost per unit |
$ 350.00 |
|
Minimum transfer price per unit |
$ 900.00 |
Calculation of total import duty and taxes under Transfer price $900 and transfer price calculated in requirement 2 of scenario 1a i.e. $800
|
Transfer at |
$800 |
$900 |
|
Australian division |
|
|
|
Income tax at 35% |
$ - |
$ 350,000.00 |
|
U.S. Division |
|
|
|
Import duty at15% |
$ 1,200,000.00 |
$ 1,350,000.00 |
|
Income tax at 40% |
$ 920,000.00 |
$ 460,000.00 |
|
Total |
$ 2,120,000.00 |
$ 2,160,000.00 |
Yes, at transfer price $900 company will pay more import duties and taxes by $40000 i.e. $2160000-$2120000.
Scenario 2
Calculation of contribution at different prices of tickets
|
Price |
$ 600 |
$ 1,350 |
|
Variable cost |
$ 65 |
$ 150 |
|
Contribution |
$ 535 |
$ 1,200 |
Contribution per ticket under price 1350 is higher.
Calculation of contribution can be earned at each price from each traveler type
|
|
Business traveler |
Pleasure traveler | ||
|
Price |
$ 600 |
$ 1,350 |
$ 600 |
$ 1,350 |
|
Tickets sold |
200 |
180 |
100 |
20 |
|
Contribution earned |
$ 120,000 |
$ 243,000 |
$ 60,000 |
$ 27,000 |
The organization could make higher profits by selling tickets to Business travelers at price $1350 and Pleasure travelers at price $600. Hence organization needs to apply a price discrimination scheme.
In the present case, Pleasure traveler stays at weekend to the destination however, the Business traveler does not stay at the destination for the weekend. Hence organization needs to apply a scheme in such a way so that traveler stays at weekend will charge with price $600 and other will charge with price $1350.
In accomplishing this objective organization could apply following scheme,
“Flat rate per ticket is $1350 and discount for traveler stays at weekend is $750.”
In this way, the organization becomes eligible to charge $600 from Pleasure traveler and $1350 from the Business traveler. It will result in a contribution of $303,000 i.e. $243000+$60000 to the organization.
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