Case Assignment: Coffee Makers Inc. Two Divisions

Case AssignmentCoffee Makers Incorporated Cmitwo Divisions Of A Cmi

Prepare an analysis involving division purchase decisions, transfer pricing, and their financial impacts. Create tables to compare current and proposed transactions for divisions A, B, and C. Write a memo analyzing the implications of different transfer pricing policies and their significance from a financial and managerial perspective. Include an evaluation of transfer price methods and their effects on decision-making and company performance. Submit both an Excel file with calculations and a Word document with the memo and an essay.

Paper For Above instruction

Introduction

In multi-divisional corporations, transfer pricing—the setting of prices for transactions between divisions—plays a critical role in shaping operational strategies, evaluating divisional performance, and aligning managerial incentives. This case examines the complexities faced by Coffee Makers Incorporated (CMI), where Division A and Division B purchase parts from Division C, and recent market shifts prompt reevaluation of internal purchase agreements. The analysis focuses on the financial implications of current and proposed transactions, the impact of different transfer pricing policies, and the strategic considerations for management.

Current Situation Analysis

Currently, Division A purchases 3,000 units of Part 101 from Division C at a transfer price of $1,000 per unit, but also acquires 1,000 units from an external supplier at $900 per unit. Similarly, Division B sources 1,000 units of Part 201 internally at $2,000 per unit and externally for 500 units at $1,900 per unit. The supply exceeds demand, and internal purchase prices influence profitability assessments. Division C produces all parts for internal divisions, withno other customer base in the short term, leading to considerations of production volume, cost recovery, and profit sharing.

Proposal and Financial Impact

The proposal suggests modifying purchase quantities and reducing internal procurement, allowing divisions A and B to buy more externally, with prices adjusting accordingly. For example, Division A would buy 2,000 units from Division C at the current transfer price, but also purchase 2,000 units externally at $900 each, lowering internal dependencies. Similarly, Division B would buy fewer units internally and more externally, with purchase prices tailored to market conditions. Analyzing these proposals using detailed tables reveals the cost differences and potential savings or increased expenses for each division involved.

Division C Analysis

For Division C, which manufactures 2,000 units of Part 101 and 500 units of Part 201, the current transfer prices and sales volumes impact overall profitability. The data indicates unit costs comprising direct materials, direct labor, variable overhead, and transfer prices, with production volumes influencing economies of scale and contribution margins. Reassessing these parameters in light of proposed changes provides insight into whether Division C can maintain profitability and competitive pricing while supporting internal divisions' needs.

Financial Summary and Organizational Implications

Summarizing the financial effects across divisions and the company as a whole involves creating comparative tables that highlight cost savings, increased expenses, and profit shifts resulting from the proposed changes. Considerations include how transfer prices influence division performance metrics, motivation, and overall corporate value. A shift to market-based or negotiated transfer prices might enhance transparency and fairness but could also induce conflicts or strategic misalignments.

Transfer Pricing Policies and Managerial Considerations

Different transfer pricing methods—cost-plus, market value, and negotiated prices—each have strategic implications. Cost-plus pricing provides simplicity and cost recovery assurance but may not reflect market realities, potentially leading to over- or under-internal charges. Market-based prices promote efficiency and external comparability but can be volatile and complex to implement. Negotiated prices offer flexibility but risk subjective judgment and potential conflict among managers. These policies influence divisional behavior, performance evaluation, and incentive alignment, making transfer pricing a pivotal issue for managerial decision-making and financial reporting.

Conclusion

The analysis underscores that the choice of transfer pricing policy significantly affects divisional performance, internal cooperation, and overall corporate profitability. A balanced approach, possibly combining market-based and negotiated pricing mechanisms, could optimize operational efficiency and align managerial incentives. Management should consider external market conditions, cost structures, and strategic objectives when designing transfer price policies to foster transparency, fairness, and sustainable growth.

References

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