Kringly Corporation

Kringly Corporation

Introduction

Transfer price is the price that agree on two companies that belong to the same business group or one person. In the case of Kringly Corporation, it is a system by which goods are transferred within different division of the same company. The transactions are recorded in the accounting books of the company and based on the following, a transfer pridce is set by these divisions. Some companies use a method called transfer pricing (TP) to measure the performance of their divisions which consists of applying a price on product transfers between these divisions (Ching, 2010). The transfer pricing rules seek to prevent affiliates or related (parent and subsidiaries, for example) to manipulate prices under which exchange goods or services so as to increase their costs or deductions, or reduce your taxable income.

Discussion

The current situation reveals that Division A purchases 3,000 units of product 101 from Division C at a price of $1,000/unit, and 1000 units of product 101 from an external supplier at a price of $900/unit. Under the current scenario, the total costs for Division A comes out to be $3,900,000. Below table specifies the computations.

Cost for Division A (Current Scenario)

 

 

Division A costs under present situation

 

 

Units

Costs/Unit

Total Cost

 

 

3000 Units

$1,000

$3,000,000

(from Division C)

 

 

 

 

 

1000 Units

$900

$900,000

(From External Supplier)

 

 

 

Total Cost to Division A

 

$3,900,000

 

 

 

In the same way, Division B purchase from Division C, 2,000 units of product 201 for the price of $ 1,000/unit, and 2,000 units from an external supplier at the cost of $900/unit. Thus, the totral costs of the product to Division B comes out to be $ 3,900,000. The below table mentions the computations of these costs.

Cost for Division B (Current Scenario)

 

 

Division B costs under present situation

 

 

Units

Costs/Unit

Total Cost

 

 

3000 Units

$2,000

$2,000,000

(from Division C)

 

 

 

 

 

1000 Units

$1,900

$1,900,000

(From External Supplier)

 

 

 

Total Cost to Division B

 

$3,900,000

 

 

 

The case aentails that under the current scenario, the total cost comes out to be $3,800,000. As per the new proposed plan,the units bought by the Division will reduce to 2,000 units from Division C at a price of $1,000/unit, and the units bought from the external supplier increase to 2,000 units at a price of $900/unit. Under this plan, the total cost to Division A for product 101 comes out to be $3,800,000. The below table summarizes the computations of the same.

Cost for Division A (Proposed Solution)

 

 

Division A costs under proposed solution

 

 

Units

Costs/Unit

Total Cost

 

 

2000 Units

$1,000

$2,000,000

(from Division C)

 

 

 

 

 

2000 Units

$900

$1,800,000

(From ...