ACCT 701, Centennial College Assignment 3: Transfer Pricing Analysis

This document presents a solution to Assignment 3 for ACCT 701, focusing on transfer pricing within the Grecco Group of Companies. The assignment involves analyzing the costs and profitability of the Singh Corporation, which produces widgets used in vacuum cleaners. The solution includes an income statement analysis to determine the impact of a potential order from an Asian customer on Chiu Inc. The analysis considers variable and fixed costs, contribution margins, and net operating income to determine whether to accept or reject the customer's proposal. The solution also addresses the benefits of rejecting the order for both Chiu Inc. and the Singh Corporation, and explores the impact of varying widget costs on the company's profit or loss, considering market rates and the company's internal costs. The document provides detailed calculations and explanations to support the decision-making process related to transfer pricing and profitability.

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Accounting manager decision making

Running Head: Accounting manager decision making
Table of Contents
Question 1........................................................................................................................................3
Question 2........................................................................................................................................4
Question 3........................................................................................................................................5

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Question 1
Chiu Inc.
Particulars Amount ($)
Units $ 4,700.00
selling price $ 404.00
Total sales $ 1,898,800.00
Less: variable costs
Cost of the widget (189*4700) $ 888,300.00
Variable cost of the electronic parts (237*4700) $ 1,113,900.00
Total variable costs $ 2,002,200.00
Contribution per unit $ (103,400.00)
Less: Fixed Costs (89*4700/230000) $ 8,554.00
Net operating income per unit $ (111,954.00)
Chiu Inc.
Particulars Amount ($)
Units $ 4,700.00
selling price $ 576.00
Total sales $ 2,707,200.00
Less: variable costs
Cost of the widget (189*4700) $ 888,300.00
Variable cost of the electronic parts (237*4700) $ 1,113,900.00
Total variable costs $ 2,002,200.00
Contribution per unit $ 705,000.00
Less: Fixed Costs (89*4700/230000) $ 8,554.00
Net operating income per unit $ 696,446.00
Keeping the cost of the widget purchased from Singh Corporations at $189 and the fixed costs
according to the capacity of 4700 vacuum cleaners, From the above income statement it can be
observed that the proposal that the Asian Customer has provided is not fruitful from the point of

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view of the business as the Chiu Inc. would incur loss of $111954 in case it manufactures the
vacuum cleaners at $404. In case the company sells the vacuum cleaners at the original selling
price the company would earn a profit of $696446. Hence the decision Chiu would make is to
reject the proposal of the Asian customer. The price set by the Asian customer at $404 shall be
rejected.
Question 2
It would advantageous for the GGC as entire company to reject the order as it is beneficial for
both Chiu and the Singh Corporations. The price set by the Singh Corporation for the widget is
$189 and this creates an overall loss to the Chiu Corporation as the Asian customer is not willing
to pay more than $404. In such a scenario the Chiu shall reject the proposal of the Asian
customer however, in case the cost of the manufacturing of the widget, if can be reduced by the
Singh Corporation keeping the fixed costs and the variable costs same, the company can earn a
profit of $71346. In such a case the Singh Corporation would be having no profit at all. Due to
the idle capacity present at the end of the Singh Corporation the company can manufacture the
widgets at low cost comparatively and hence in case of the profit earned by the company entirely
will be beneficial for the parent company as a whole.
Singh Corporation Singh Corporation
Selling price per unit 189 Selling price per unit 150
Variable cost per unit 124 Variable cost per unit 124
Fixed cost per unit 26 Fixed cost per unit 26
Overall profit per unit 39 Overall profit per unit 0
Particulars Amount ($)
Units $ 4,700.00
selling price $ 404.00

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Total sales $ 1,898,800.00
Less: variable costs
Cost of the widget $ 705,000.00
Variable cost of the electronic parts $ 1,113,900.00
Total variable costs $ 1,818,900.00
Contribution per unit $ 79,900.00
Less: Fixed Costs $ 8554
Net operating income per unit $ 71346
Question 3
In case the Singh Corporation is not selling the widgets to the Chiu Inc. the company requires the
widgets from the other companies or the open market. The cost may be fluctuating and it needs
to be assumed accordingly. The cost of the widget shall be approximately 165 to earn the no
profit or loss situation by Chiu. The profit or loss impact on the Chiu cannot be calculated until it
purchases the widget to develop the vacuum cleaner. Overall as can be observed the market rate
would be more than the rate charged by the company. The loss would be incurred by the
company in case the cost of the widget is more than $165 per widget.