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Thursday 2 October 2014

Transfer pricing case study

PART A: Transfer Pricing and Variances

Gamma Company produces cars. Two of the profit centers, Tires centre and Assembly centre, were in conflict over the price of tires. External suppliers of tires offered Rania, the manager of the Assembly centre, the same type and quality of tire for $200. Rania used to buy these tires internally for $300 each. 

 

Jamil the CEO of the company called for a meeting with the managers of both centers in order to solve the issue. Kamil the manager of the Tires Centre explained that:

"The tires we produce have been a trusted brand for over 60 years and are distributed by Gamma Company to members all over the globe. Our tires have long been recognized as a leading private brand since 1954."

 

Tires Center: Cost per tire

 

$

Direct materials

95

Direct labor

54

Variable overheads

25

Fixed overheads

36

Total cost

210

 

Rania answered that the external suppliers offered the same specifications and quality for a $100 less, and that she should be able to buy them internally at least at the same price.

 

Required:

The CEO wishes to more fully assess the situation prior to finalizing his recommendations. He plans to present the findings of his analysis at the next board meeting. Specifically, as a consultant, he asked you to:

 

  1. Advise and justify whether the Assembly Centre should to buy tires from inside or outside the firm. (130 words)

2.      Based on your answer in the previous requirement, provide and justify a proper transfer price. (130 words)

3.      The Tires Centre had a capacity of 40,000 tires per year, and the Assembly Centre use around 90,000 tires per year. The Tires centre could sell all of its production externally for $300. Based on these special circumstances provide a recommendation for Gamma Company whether these two centers should buy/sell internally or externally. Justify your answer. (50 words)

4.      Explain why setting transfer prices by Gamma can be controversial when a product is being transferred between two profit centers. (130 words)

5.      The Accountant of Gamma Company provided you the following information:

 

Required:

Discuss the performance of the company for the past year. Show your workings. (400 words)                        

      PART B: Controlling cash flow for business growth

Cash flow is of vital importance to the health of a business. One saying is: 'revenue is vanity, cash flow is sanity, but cash is king'. What this means is that whilst it may look better to have large inflows of revenue from sales, the most important focus for a business is cash flow.

Required:

Based on the case study answer the following questions:

1.      Describe what is meant by 'cash flow budget'. (130 words)

2.      Explain how a cash flow forecast can help a business now and in the future. Give examples. (100 words)

3.      Analyze why cash is considered to be more important to a business than revenue or profit. (250 words)

4.      Evaluate the importance of cash flow to a business of your choice. Explain how a recession would most likely affect this business. (170 words)

 
 
Warm regards,
 
mailurhomework team

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