Management Accounting & Performance Evaluation

Running head: MANAGEMENT ACCOUNTING & PERFORMANCE EVALUATION
Management Accounting & Performance Evaluation
Name of the Student
Name of the University
Author Note:

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Management Accounting & Performance Evaluation
Table of Contents
Introduction......................................................................................................................................2
Discussion........................................................................................................................................2
Recommendation.............................................................................................................................5
Conclusion.......................................................................................................................................5
Reference.........................................................................................................................................7

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Management Accounting & Performance Evaluation
Introduction
The transfer pricing policy commands various methods or approaches taken by the
company in determining the price for the product and services for each divisions or department.
The price at which a department supplies goods or services to another department under the same
company, is called transfer pricing. In this report, the directors of CLUX has been planning to
expand the operation of the company along with the divisional managers by purchasing asset and
increasing the production capacity.
Discussion
The procedure whereby the goods and services are mutually transferred from one
department to another by distributing the revenue jointly is known as transfer pricing (Heimert
and Michaelson 2018). Usually the company uses the transfer pricing policy for saving taxes,
remittance of dividend, royalties, fees interest and loan (Contractor 2016).
The investment made by the company on the asset worth $500,000 will increase the
production capacity of Division 1 by 10000000 cans. The cans are produced by Division 1 and
then transferred to Division 2. The increase in the production capacity will not affect Division 2
apart from cost, since the demand for Division 2 remains unchanged. The extra production by D1
is assumed to be sold externally.
The opportunity cost is the cost that is incurred by not enjoying the benefit related with
the best alternative choice (Söderqvist et al. 2015). Hence, in the given case, if the company
transfers the products inter-divisional on the opportunity cost than D1 will not benefit
departmental sale, however, the benefits from the external sales are available to the division.