Question

In: Accounting

Automotive Bearing Systems Inc. (ABS), with headquarters in Aurora, ON, manufactures bearing systems that are sold...

Automotive Bearing Systems Inc. (ABS), with headquarters in Aurora, ON, manufactures bearing systems that are sold to various car assembler plants. ABS has three divisions, each of which is located in a different country:

a. Argentinean Division—has the foundry and produces the different parts.

b. Brazilian Division—assembles the bearings, using the parts produced in the Argentinean Division.

c. Canadian Division—packages and distributes on a just in time schedule to all Canadian car assemblers plants of Honda and Ford.

Each division is run as a profit centre. The costs for the work done in each division that are associated with a box of bearings are as follows:

Argentine Division

Variable costs = 150 Pesos

Fixed costs = 270 Pesos

Brazilian Division

Variable costs = 90 Reales

Fixed costs = 150 Reales

Canadian Division

Variable costs = 25 CAD

Fixed costs = 50 CAD

Argentinean income tax rate on Argentine Division’s operating income 35%

Brazilian income tax rate on Brazilian Division’s operating income 25%

Canadian income tax rate on Canadian Division’s operating income 30%

Each box of bearings is sold to car assemblers in Canada for $700. Assume that the current foreign exchange rates are:            

1.67 Real = $1 Cdn.

3 Pesos = $1 Cdn.

Both the Argentinean and Brazilian Divisions sell part of their production under a private label. The Argentinean Division sells the bearing parts to an Argentine bearing manufacturer for 600 pesos. The Brazilian division sells the finished bearings to a Brazilian car assembler 585 Reales.

Required

1. Calculate the after-tax operating income per unit earned by each division under each of the following transfer pricing methods: (a) market price, (b) 150% of full costs, and (c) 300% of variable costs. (Income taxes are not included in the computation of the cost-based transfer prices.)

2. Which transfer pricing method(s) will maximize the net income of ABS, Inc.?

Solutions

Expert Solution

Statements showing calculating the Transfer price and profit margin of each division
Particulars Argentinean Division Brazilian Division Canadian Division
Variable cost 150 Pesos 90 Reales 25 CAD
Fixed Cost 270 Pesos 150 Reales 50 CAD
Total Cost 420 Pesos 240 Reales 75 CAD
Exchange rate 3 pesos for 1 CAD 1.67 reales for 1 CAD NA
Variable cost(CAD) 50 53.89 25
Fixed Cost(CAD) 90 91.62 50
Total Cost(CAD) 140 145.51 75
Method-1( Market price)
Particulars Argentinean Division Brazilian Division Canadian Division Total
Variable cost(CAD) 50 53.89 25.00
Fixed Cost(CAD) 90 91.62 50.00
Sub Total Cost(CAD) 140 145.51 75.00
Transfer price( market price)(CAD) 0 200.00 350.30
Total Cost(CAD) 140 345.51 425.30
Sales price(SP) 200 350.30 700.00
Tax rates 35% 0.25 0.30
Profit before tax(SP-TC) 60 4.79 274.70 339.49
Profit after Tax(PBT*(1-Tax rate)) 39 3.59 192.29 234.88
Method 2(150% of full cost)
Particulars Argentinean Division Brazilian Division Canadian Division Total
Variable cost(CAD) 50 53.89 25.00
Fixed Cost(CAD) 90 91.62 50.00
Sub Total Cost(CAD) 140 145.51 75.00
Transfer price( 150% of Total cost)(CAD) 0 210.00 533.26
Total Cost(CAD) 140 355.51 608.26
Sales price(SP) 210 533.26 700.00
Tax rates 35% 25% 30%
Profit before tax(SP-TC) 70 177.75 91.74 339.49
Profit after Tax(PBT*(1-Tax rate)) 45.5 133.32 64.22 243.03
Method 2(300% of Variable cost)
Particulars Argentinean Division Brazilian Division Canadian Division Total
Variable cost(CAD) 50 53.89 25.00
Fixed Cost(CAD) 90 91.62 50.00
Sub Total Cost(CAD) 140 145.51 75.00
Transfer price( 300% of variable cost)(CAD) 0 150.00 161.68
Total Cost(CAD) 140 295.51 236.68
Sales price(SP) 150 161.68 700.00
Tax rates 35% 25% 30%
Profit before tax(SP-TC) 10 -133.83 463.32 339.49
Profit after Tax(PBT*(1-Tax rate)) 6.5 -100.37 324.33 230.45
2). Profit after tax will be maximum in case of Second method i.e., $ 243.03

Related Solutions

Carlson Automotive Company manufactures fuel-injection systems. It manufactured and sold 60,000 units in 2018 and 64,000...
Carlson Automotive Company manufactures fuel-injection systems. It manufactured and sold 60,000 units in 2018 and 64,000 units in 2019 at $25 per unit. In 2018, the firm used 75,000 pounds of alloy TPX–45 at $7.20 per pound and used 10,000 direct labor hours at an hourly wage rate of $30. In 2019, the firm used 89,600 pounds of alloy TPX–45 at $6.80 per pound and used 10,847 direct labor hours at an hourly wage rate of $32. The total amount...
Automotive charging systems, Automotive starting systems (Canvas). Draw and label a starting and charging circuit.
Automotive charging systems, Automotive starting systems (Canvas). Draw and label a starting and charging circuit.
A bearing used in an automotive application is required to have a nominal inside diameter of...
A bearing used in an automotive application is required to have a nominal inside diameter of 1.5 inches. A random sample of 25 bearings is selected and the average inside diameter of these bearings is 1.4975 inches. Bearing diameter is known to be normally distributed with standard deviation 1inch. (a) Test the hypotheses 1.5 versus 1.5 using 0.01 The true mean hole diameter Entry field with correct answer significantly different from 1.5 in. at alpha equals 0.01. (b) What is...
Gordon Controls, Inc. Gordon Controls, Inc., provides control and automotive systems worldwide. The Controls Division offers...
Gordon Controls, Inc. Gordon Controls, Inc., provides control and automotive systems worldwide. The Controls Division offers mechanical and electrical systems that control energy use, air-conditioning, lighting, security, and fire safety for buildings. The company also provides on-site management and technical services for customers in a range of settings, including manufacturing installations, commercial buildings, government buildings, hospitals, and major sports complexes. While serving a full range of market sectors from manufacturers to educational institutions, Gordon Controls has developed a suite of...
On December 31, 2011, Fenton Company sold equipment to Denver Inc., accepting a $275,000 noninterest-bearing note...
On December 31, 2011, Fenton Company sold equipment to Denver Inc., accepting a $275,000 noninterest-bearing note receivable in full payment on December 31, 2014. Denver Inc., normally pays 12% for its borrowed funds. The equipment is carried in Fenton's perpetual inventory records at 65% of its cash selling price. 2. Prepare Fenton's journal entry on December 31, 2012, necessitated by this transaction. (Hint: Prepare an amortization schedule for the loan.)
E22-20 People Able Computer, Inc., with headquarters in San​ Francisco, manufactures and sells a desktop computer....
E22-20 People Able Computer, Inc., with headquarters in San​ Francisco, manufactures and sells a desktop computer. People Able has three divisions each of which is located in a different country. Each division is run as a profit center. Information on each division​ follows: The costs for the work done in each division for a single desktop computer are as​ follows: China division: Variable cost = 900 yuan Fixed cost = 1,500 yuan South Korea division: Variable cost = 286,000 won...
The comparative financial statements of Automotive Solutions Inc. are as follows. The market price of Automotive...
The comparative financial statements of Automotive Solutions Inc. are as follows. The market price of Automotive Solutions Inc. common stock was $60 on December 31, 20Y8. AUTOMOTIVE SOLUTIONS INC. Comparative Income Statement For the Years Ended December 31, 20Y8 and 20Y7     20Y8     20Y7 Sales $3,057,970 $2,817,460 Cost of goods sold (1,131,500) (1,040,980) Gross profit $1,926,470 $1,776,480 Selling expenses $(688,120) $(821,780) Administrative expenses (586,180) (482,630) Total operating expenses (1,274,300) (1,304,410) Operating income $652,170 $472,070 Other revenue and expense:     Other revenue 34,330...
The comparative financial statements of Automotive Solutions Inc. are as follows. The market price of Automotive...
The comparative financial statements of Automotive Solutions Inc. are as follows. The market price of Automotive Solutions Inc. common stock was $60 on December 31, 20Y8. AUTOMOTIVE SOLUTIONS INC. Comparative Income Statement For the Years Ended December 31, 20Y8 and 20Y7     20Y8     20Y7 Sales $3,057,970 $2,817,460 Cost of goods sold (1,131,500) (1,040,980) Gross profit $1,926,470 $1,776,480 Selling expenses $(688,120) $(821,780) Administrative expenses (586,180) (482,630) Total operating expenses (1,274,300) (1,304,410) Operating income $652,170 $472,070 Other revenue and expense:     Other revenue 34,330...
Birrell Scientific Inc. manufactures electronic products, with two operating divisions, the GPS Systems and Communication Systems...
Birrell Scientific Inc. manufactures electronic products, with two operating divisions, the GPS Systems and Communication Systems divisions. Condensed divisional income statements, which involve no intracompany transfers and which include a breakdown of expenses into variable and fixed components, are as follows: Birrell Scientific Inc. Divisional Income Statements For the Year Ended December 31, 20Y5 GPS Systems Division Communication Systems Division Total Sales: 95,000 units @ $60 per unit $5,700,000 $5,700,000 140,000 units @ $115 per unit $16,100,000 16,100,000 $5,700,000 $16,100,000...
Birrell Scientific Inc. manufactures electronic products, with two operating divisions, the GPS Systems and Communication Systems...
Birrell Scientific Inc. manufactures electronic products, with two operating divisions, the GPS Systems and Communication Systems divisions. Condensed divisional income statements, which involve no intracompany transfers and which include a breakdown of expenses into variable and fixed components, are as follows: Birrell Scientific Inc. Divisional Income Statements For the Year Ended December 31, 20Y5 GPS Systems Division Communication Systems Division Total Sales: 85,000 units @ $60 per unit $5,100,000 $5,100,000 140,000 units @ $115 per unit $16,100,000 16,100,000 $5,100,000 $16,100,000...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT