Page 129 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes Joint Initiatives (Internal): Agreement between two or more organizations to set up and operate
Shared Services
Joint Venture: Two companies coming together for a common purpose

Lead Department: Organization consolidating and centralizing a business service that will be
shared by other organizations
Market Prices: Prices that are currently prevailing in the market

Near Shore: Work is carried out in a close location
Off-Shore: Work is carried out anywhere in the world that is not on-shore or near-shore
On Shore Location: Work is carried out in the same country but at a different location
Transfer Pricing: The monetary value at which transfer of goods and services from one profit
centre to another profit centre
Unitary Structure: Single organization consolidating and centralizing a business service

5.7 Review Questions

1. “Transfer pricing is confined to profit centers”. Do you agree, why?
2. Analyse the three general methods for determining transfer price.

3. “Company transfer pricing policies must satisfy dual objectives”, what are the objectives?
4. In transfer pricing, what is a common conflict between a division and the company as a
whole?
5. What are the potential merits of a dual (two way) transfer pricing system? What are its
limitations?
6. At the transfer point from division S to division P, a products variable cost is ` 1 and its
market value is ` 2. Division P’s variable cost of processing the product further is ` 1.25
and the selling price of the final product is ` 2.75.

Required:
(a) Prepare a tabulation of the contribution margin per unit for division P’s performance
and overall performance under two alternatives (a) processing further and (b) selling
to outsiders at the transfer point.

(b) As division P’s manager, what alternative would you use? Explain.
7. The Power Lite division of outside products manufactures batteries that it sells primarily
to the Lantern division for inclusion with that divisions main product. Last year 20 percent
of the batteries were sold to other companies at a price of ` 10 each. The remaining
batteries went to the Lantern division. Cost data for the year are presented for Power Lite:
Units produced 5,00,000

Manufacturing cost (`) 30,00,000
Marketing costs (`) 1,00,000

Administrative costs (`) 8,00,000

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