ACCT3203 - Managerial Accounting - Raw Material - Philippines - Accounting Assessment Answer

ACCT3203 - Managerial Accounting - Raw Material - Philippines - Accounting Assessment Answer

Task:

Minimum and maximum transfer prices, international issues 
Mimosa Company Ltd manufactures dashboard instruments for heavy construction machinery. The firm is based in Brisbane but operates several divisions in Australia, New Zealand, the Philippines, Malaysia, and Indonesia. The Wellington division manufactures complex electrical panels that are used in a variety of the firm’s instruments. There are two basic types of panels.

•  The high-density panel (HDP) is capable of many functions and is used in the sophisticated instruments, such as tachometers and pressure gauges.
•  The low-density panel (LDP) is much simpler and is used in less-complicated instruments.

Although there are minor differences among the different high-density panels, the basic manufacturing process and production costs are the same. The high-density panels require considerably more skilled labour than the low-density panels, but the unskilled labour needs are about the same. Moreover, the cost of direct materials in the high-density panel is much higher than that of the low-density panel. Production costs are summarised as follows. Note that all amounts are in Australian currency.

Unskilled labour    (0.5 hour @ $20)                                                                                      $10             $ 10
Skilled labour:     
LDP (0.5 hour @ $40)                                                                                                             20  
HDP (1.5 hours @ $40)                                                                                                           60
Raw material                                                                                                                            3                8
Purchased components                                                                                                           4                7
Variable overhead                                                                                                                    5               15
Total variable cost                                                                                                                    $42           $100

The annual fixed overhead in the Wellington division is $1 000 000. There is a limited supply of skilled labour available in the area, and the division must constrain its production to 40 000 hours of skilled labour each year. This has been a troublesome problem for Jane Davis, the division manager. The LDP line seems to have unlimited demand, with each LDP selling for $45. The business also has increased in recent years for the HDP, and Davis estimates the division could now sell anywhere up to 6 000 units per year at a price of $145. In the Philippines, Mimosa operates its Manila division. This division is a recent acquisition of Mimosa, and it was formerly a successful Philippines company. The division’s main product is a sophisticated tachometer used in heavy-duty cranes, bulldozers and backhoes. The instrument, designated as TCH–320, has the following production costs.

Required:

• i. Draw a simple diagram depicting the two divisions and the flow of their products. Also, show the two alternatives that the Manila division has in the production of its TCH 320.
• ii. From the perspective of Mimosa’s top management, should any of the TCH–320 units be produced using the HDP? If so, how many?
• iii. Suppose Wellington transfers 10 000 HDP units per year to Manila. From the perspective of Mimosa’s top management, what effect will the transfer price have on the company’s profit?
• iv. What is the minimum transfer price that the Wellington division would find acceptable for the HDP? Explain. 
• v. What is the maximum transfer price that the Manila division would find acceptable for the HDP? 
• vi. As the corporate controller for Mimosa, recommend a transfer price. Show all workings clearly.

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