Module 5 Case: Transfer Pricing for Kringle Corporation



Module 5 Case: Transfer Pricing for Kringle Corporation

Question

Calculate the increase or decrease in profits for the three divisions and the company if the agreement is enforced. Comment on the situation and make a suggestion.

Introduction

Two divisions of a Kringle Corporation are involved in a dispute. Division A purchases part 101 and Division B purchases part 201 from a third division, C. Recently, outside suppliers has lowered their prices, but C Division 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 then need from external parties to lower cost and increase profitability.

Analysis

If new proposal is accepted, it would result in increasing the overall profit of Division A and Division B. However, profitability of Division C will decrease by 700,000 dollars. Table presented below shows that the profitability of Division A will increase by 100,000 dollars; profitability of Division B will increase by 50,000 dollars.

PROFIT COMPARISON

 

Existing Proposal

New Proposal

Change

Division A

$ 3,900,000 $ 3,800,000 $ 100,000

Division B

$ 3,900,000 $ 3,850,000 $ 50,000

Division C

$ 1,700,000 $ 1,000,000 $ (700,000)

Computation shows that major change by adoption of new policy will result in decreasing the profitability of Division from Part 201 sales to Division B. Overall decline by adoption of new proposal will result in decreasing the profits by 400,000 dollars that Division C generate from Division B. Similarly, policy adoption will result in decreasing the profits by 300,000 dollars that Division C generates from Division A.

DIVISION C: PROFIT COMPARISON

From

Existing Proposal

New Proposal

Change

Division A

$ 900,000 $ 600,000 $ (300,000)

Division B

$ 800,000 $ 400,000 $ (400,000)

Graph presented below shows the comparison of cost structure of all divisions under ...