Coffee Maker’s Incorporated (CMI)

Coffee Maker’s Incorporated (CMI)Two divisions of a CMI are involved in a dispute. Division A purchases Part 101 and Division B purchases Part 201 from a third division, C. Both divisions need the parts for products that they assemble. The intercompany transactions have remained constant for several years.Recently, outside suppliers have lowered their prices, but Division C is not lowering its prices. In addition, all division managers are feeling the pressure to increase profit. Managers of divisions A and B would like the flexibility to purchase the 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 101 from Division C (the supplying division) and another 1,000 units from an external supplier. The market price for Part 101 is $900 per unit. Division B purchases 1,000 units of Part 201 from Division C and another 500 units from an external supplier. Note that both divisions A and B purchase the needed supplies from both the internal source and an external source at the same time.The managers for divisions A and B are preparing a new proposal for consideration.· Division C will continue to produce Parts 101 and 201. All of its production will be sold to Divisions A and B. No other customers are likely to be found for these products in the short term, given that supply is greater than demand in the market.· Division C will manufacture 2,000 units of Part 101 for the Division A and 500 units of Part 201 for the Division B.· Division A will buy 2,000 units of Part 101 from Division C and 2,000 units from an external supplier at $900 per unit.· Division B will buy 500 units of Part 201 from Division C and 1,000 units from an external supplier at $1,900 per unit.Division C Data 2014 Based on the Current AgreementPart101201Direct materials$200$300Direct labor$200$300Variable overhead$300$600Transfer price$1,000$2,000Annual volume3,000 units1,000 unitsRequired:Computations (use Excel)· Set up a table similar the one below to compute the difference between the current situation and the proposal for Divisions A and B. Design a different table for Division C.D$· Summarize the financial effects for the three divisions and the company as a whole in another table.Memo (use Word)Write a 4- or 5-paragraph memo to the division manager explaining the analysis performed. Start with an introduction and end with a recommendation. Each of the four or five paragraphs should have a heading.Short Essay (use Word)Start with an introduction and end with a summary or conclusion. 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 and managerial perspective?Assignment ExpectationsEach submission should include two files: (1) An Excel file; and (2) A Word document. The Word document shows the memo first and short essay last. Assume a knowledgeable business audience and use required format and length. Individuals in business are busy and want information presented in an organized and concise manner.

 

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