Case AssignmentCoffee Maker’s Incorporated (CMI)Two divisions of a CMI are involved in a dispute. Division A purchases Part 101and Division B purchases Part 201 from a third division, C. Both divisions needthe parts for products that they assemble. The intercompany transactions haveremained constant for several years.Recently, outside suppliers have lowered their prices, but Division C is notlowering its prices. In addition, all division managers are feeling the pressure toincrease profit. Managers of divisions A and B would like the flexibility to purchasethe parts they need from external parties to lower cost and increase profitability.The current pattern is that Division A purchases 3,000 units of product part 101from Division C (the supplying division) and another 1,000 units from an externalsupplier. The market price for Part 101 is $900 per unit. Division B purchases1,000 units of Part 201 from Division C and another 500 units from an externalsupplier. Note that both divisions A and B purchase the needed supplies fromboth the internal source and an external source at the same time.The managers for divisions A and B are preparing a new proposal forconsideration.Division C will continue to produce Parts 101 and 201. All of its production willbe sold to Divisions A and B. No other customers are likely to be found forthese products in the short term, given that supply is greater than demand inthe market.Division C will manufacture 2,000 units of Part 101 for the Division A and 500units of Part 201 for the Division B.Division A will buy 2,000 units of Part 101 from Division C and 2,000 units froman external supplier at $900 per unit.Division B will buy 500 units of Part 201 from Division C and 1,000 units froman external supplier at $1,900 per unit.Division C Data 2014 Based on the Current AgreementListenhttps://tlc.trident.edu/content/enforced/77248-ACC501-AUG2016FT-1/…1 of 3 9/3/2016 5:17 PMPart 101 201Direct materials $200 $300Direct labor $200 $300Variable overhead $300 $600Transfer price $1,000 $2,000Annual volume 3,000 units 1,000 unitsRequired:Computations (use Excel)Set up a table similar the one below to compute the difference between thecurrent situation and the proposal for Divisions A and B. Design a differenttable for Division C.Division ACurrent Situation ProposalNo. ofUnitsPurchasePriceTotalPurchasesNo. ofUnitsPurchasePriceTotalPurchasesInternalpurchases3,000 $ 2,000 $Externalpurchases1,000 2,000Total cost forpart 101$ $Savings to Div.A$Summarize the financial effects for the three divisions and the company as awhole in another table.Memo (use Word)https://tlc.trident.edu/content/enforced/77248-ACC501-AUG2016FT-1/…2 of 3 9/3/2016 5:17 PMPrivacy Policy | ContactWrite a 4- or 5-paragraph memo to the division manager explaining the analysisperformed. Start with an introduction and end with a recommendation. Each ofthe four or five paragraphs should have a heading.Short Essay (use Word) Start with an introduction and end with a summary orconclusion. Use headings.Evaluate and discuss the implications of the following transfer pricing policies:Transfer price = cost plus a mark-up for the selling divisionTransfer price = fair market valueTransfer price = price negotiated by the managersWhy is transfer pricing such a significant issue both from a financial andmanagerial perspective?Assignment ExpectationsEach submission should include two files: (1) An Excel file; and (2) A Worddocument. The Word document shows the memo first and short essay last.Assume a knowledgeable business audience and use required format andlength. Individuals in business are busy and want information presented in anorganized and concise manner.https://tlc.trident.edu/content/enforced/77248-ACC501-AUG2016FT-1/…3 of 3 9/3/2016 5:17 PM
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