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Tutorial Document and Self Assessment Questions
Tutorial 2: Strategy Implementation – The Balanced Scorecard and Transfer pricing
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Aim
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Assess the relevance of scorecard approaches in strategic management and performance measurement. Understand the concept of transfer price |
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Reading |
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Self assessment (using the core text) |
Complete the multiple choice questions for chapter 18 and 22
Consider the end-of-chapter review questions for chapters 18 and 22
Attempt end-of-chapter exercise: 18.15 Ethic, transfer price and 18.19 (Solution in Appendix A) 22.13 and 22.14 Strategy and balanced scorecard ; (Solution in Appendix A) (The questions are very good examples relating to section b of your coursework. |
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Tutorial Activities and Questions |
Attempts 1)18.17, 18.18 and 18.19 – Effect of alternative transfer-pricing methods on divisional operation profit and goal congruence from Bhimani et al. In addition, calculate the budget profit and budgeted performance measures assuming the company used ROCE, ROI and RI. Assumed the company set it target return at 15%
2)XYX Question supplied below
3)Read Cravens, Karen S. “Examining the role of transfer pricing as a strategy for multinational firms.” International Business Review 6.2 (1997): 127-145 (supplied on canvas) and answers the following questions I. Discuss the objectives of international transfer pricing II. Explain the relationship between transfer pricing and corporate strategy III. Explain the importance of transfer pricing strategies for performance measurement in MNCs . |
2). XYZ a diversified group of company allows its divisional management some degree of freedom in managing their own business units.
Division H manufactures only one type of product, a chip, which it sells to external customers and also to division L, another member of the Group. Division L processes the chip further and sells it to external customers as a finished product. Due to the high quality of Division H’s chip, the current policy of the group is for H to transfer to Division L at the marginal cost of £7.5 per chip all the chips L needs and that L buys all the chips it requires from H.
Budgeted data taken from the group internal information system, for the divisions for the next year is as follows.
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Income Statement |
Division H |
Division L |
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Total Sales Value |
£190,000 |
£570,000 |
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Variable costs (per unit) |
£7.50 |
£14 |
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Fixed costs (controllable) |
£30,000 |
£200,000 |
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Capacity (units) |
20,000 |
20,000 |
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Budget Production / Sales (units) |
20,000 |
12,000 |
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Production transferred (units) |
12,000 |
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External market demand (units) |
14,000 |
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External market supplied (units) |
8,000 |
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Market Price |
£12.50 |
£47.50 |
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Capital Employed |
£100,000 |
£200,000 |
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The variable cost per unit of Division L shown above does not include the cost of the transferred components. Regarding Division H, of the budgeted production and sales, 12,000 units are transferred to Division L and as a result of the current capacity within Division H, only 8,000 units of the external demand can be satisfied.
Three measures are currently used to evaluate the performance of the divisional managers: Return on Investment (ROI), Residual Income (RI) and net profit margin in relation to sales. The company uses a target Return on Capital of 12% pa.
Required:
a) Based on the current practice, of pricing transfers at variable cost, calculate the budget profit and budgeted performance measures for H and L.
b) If the transfer price of the component is set by the manager of Division H at the current market price (£12.5) recalculate the budgeted performance measures for each division
c) Analyse the changes to the performance measures of the divisions as a result of altering the transfer price.
d) Discuss the advantages and disadvantages of decentralisation in organisations.
e) Discuss the implication of full autonomy with regards to the above calculations.
f) Indicate the principal methods of determining transfer prices in multinational corporations and indicate what effects these can have on sister-companies trading with each other when performance measurement is based on a profit centre or investment centre basis.