Cortez enterprises has two divisions: birmingham and manchaster.

Birmingham currently sells a diode reducer to manufacturers of aircraft navigation

systems for $775per unit. Variable costs amount to %500 and demand for this
product currently exceeds the divisions ability to supply the marketplace.
Despite this situation, cortez is considering another use for the diode reducer,
namely, integration into a satellite positioning system that would be made by
manchester. The positioning system has an anticipated selling price of $1,400 and
requires an additional %670 of variable manufacturing costs. A transfer price of
$750 has been established for the diode reducer.
Top management is anxious to introduce the positioning system; however,
unless the transfer is made; an introduction will not be possible because of the
difficulty of obtaining needed diode reducers. Birmingham and Manchaster are in
the process of recovering from previous financial problems, and neither division can
afford any future losses. The company uses responsibility accounting and ROI in
measuring divisional performance and awards bonuses to divisional management.
Required:
1. How would Birminghams divisional manager likely react to the decision to
transfer diode reducers to Manchester? Show computations to support
your answer.
2. How would Manchesters divisional management likely react to the $750
transfer price? Show computations to support your answer.
3. Assume that a lower transfer price is desired. Should top management
lower the price or should the price be lowered by another means? Explain.
4. From a contribution margin perspective, does Cortez benefit more if it sells
the diode reducers externally or transfers the reducers to Manchester? By
how much?

Problem -48
Alpha Communications. Inc, which produces telecommunications equipment in the
United States, has a very strong local market for its circuit board. The variable
production cost is $130, and the company can sell its entire supply domestically for
$ 170. The U.S tax rate is 40 percent.
Alternatively, Alpha can ship the circuit board to its division in Germany, to be used
in a product that the German division will distribute throughout Europe. Information
about the german product and the divisions operating environment follows.
Selling price of final product: $360
Shipping fees to import circuit board: $20
Labor, overhead, and additional material costs of final product: $115
Import duties levied on circuit board (to be paid by the German division): 10% of
transfer price

German tax rate: 60%

Assume that U.S and German tax authorities allow a transfer price for the circuit
board set at either U.S variable manufacturing cost or the U.S market price. Alphas
management is in the process of exploring which transfer price is better for the firm
as a whole.
Required:
1. Compute overalll company profitability per unit if all units are transferred and
U.S variable manufacturing cost is used as the transfer price. Show separate
caculations for the U.S operation and the german division.
2. Repeat requirement (1) , assuming the use of the U.S market price as the
transfer price. Which of the two transfer prices is better for the firm?
3. Assume that the German division can obtain the circuit board in germany for
$155
a. if you were the head of the german division, would you rather do business
with your U.S division or buy the circuit board locally? Why?
b. Rather than proceed with the transfer, is it in the best interest of alpha to
sell its goods domestically and allow the german division to acquire the
circuit board in germany? Why? Show computations to support your
answer.
4. Generally speaking, when tax rates differ between countries, what strategy
should a company use in setting its transfer price?
5. Build a spreadsheet: construct an excel spreadsheet to solve requirements
(1) and (2) above. Show how the solution will change if the following
information changes: the U.S tax rate is 35 percent, the German tax rate is
55 percent, and the import duties are 8 percent of transfer price.