University Management Accounting Report: Pricing Strategies Analysis

This management accounting report analyzes two key scenarios: multinational transfer pricing and airline pricing. The first scenario explores how Derwent Limited can minimize import duties and income taxes through strategic transfer pricing, considering manufacturing costs and market prices. The analysis includes a table illustrating the impact of different transfer prices on profit and tax liabilities. The second scenario focuses on Eastcoast Airways, evaluating optimal pricing strategies for business and pleasure travelers to maximize contribution margin. The report recommends a price differentiation strategy and discusses the legality of such practices, while excluding irrelevant costs like allocated yearly lease costs and fuel costs. The report references several academic sources to support its findings.

Running head: MANAGEMENT ACCOUNTING
Management Accounting
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Table of Contents
Scenario 1a: Multinational transfer pricing, global tax minimisation.............................................2
Requirement 1:.............................................................................................................................2
Requirement 2:.............................................................................................................................2
Section 1b: Multinational transfer pricing, goal congruence...........................................................4
Requirement 1:.............................................................................................................................4
Requirement 2:.............................................................................................................................4
Requirement 3:.............................................................................................................................5
Scenario 2: Airline pricing...............................................................................................................5
References:......................................................................................................................................8

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Scenario 1a: Multinational transfer pricing, global tax minimisation
Requirement 1:
Requirement 2:
Certain methods are inherent for proceeding; however, the most important thing to be
taken into consideration is that the transfer price, which would reduce the overall import duties
of Derwent Limited would be either the overall manufacturing cost or the market price related to
comparable imports. Hence, a scenario is considered, in which the transfer price increases by $1

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each time, in which the overall manufacturing cost is $800 per unit. This would lead to certain
changes illustrated in the form of a table as follows:
For verifying the above solution, another consideration is made by changing the transfer
price from $800 to $950. This would result in certain changes for each unit as follows:
From the above table, it is evident that the decrease in total profit is exactly the difference
in after-tax operating incomes obtained in the first section. Therefore, Derwent Limited would
reduce income taxes and import duties through settlement if the transfer price at the minimal
level of $800, which is the overall manufacturing cost.

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Section 1b: Multinational transfer pricing, goal congruence
Requirement 1:
Requirement 2:
It has been evaluated the transfer of product at full manufacturing cost of the Australian
department reduces import duties. However, in such situation, there is no operating income for
the Australian division. However, the division intends to raise its profit level by acting
anonymously through sale of the product B12 in Australia (Fullerton, Kennedy and Widener
2014). This would lead to a profit of $650,000, if the product is sold locally, instead of
transferring the product at full manufacturing cost to the US division. Hence, the transfer price
computed in the first part would not lead to actions, which would be optimum for Derwent
Limited (Hopper and Bui 2016).

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Requirement 3:
The minimal transfer price, which the manager of the Australian division of Derwent
Limited could agree would lead to payment of additional $40,000 in import duties and taxes.
Scenario 2: Airline pricing
To,
The Directors of Eastcoast Airways,
Date: 20/05/2018
Subject: Airline pricing strategy

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In order to determine the best pricing strategy for Eastcoast Airways, the following
calculations are made based on the provided data:
According
to the above table, it
could be evaluated
that the
maximisation of contribution margin of Eastcoast Airways by charging $1,350 from each
business traveller and $1,350 from each pleasure traveller. Hence, price differentiation strategy is
suitable for the airline, as it would help in maximising its profit level (Otley 2016). However, to
choose between the alternative prices, the other provided costs like allocated yearly lease costs,
fuel costs, ground service costs and crew salaries of the flight are not taken into consideration,
since they are not relevant. This is because these prices would remain the same regardless of the
pricing strategy of Eastcoast Airways.
It has been observed that the business travellers intend to return in the same week, while
the pleasure travellers prefer to stay in the weekends. Hence, if the passengers choose a night
stay on Saturdays, they would be eligible for the S600 discount fare and thus, this would act in
the form of discrimination between the categories of the passengers. Such price discrimination is

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legal, since airlines are service firms instead of manufacturing firms and these practices are not
followed to eradicate competition from the sector (Quattrone 2016).

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References:
Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2014. Lean manufacturing and firm
performance: The incremental contribution of lean management accounting practices. Journal of
Operations Management, 32(7-8), pp.414-428.
Hopper, T. and Bui, B., 2016. Has management accounting research been critical?. Management
Accounting Research, 31, pp.10-30.
Otley, D., 2016. The contingency theory of management accounting and control: 1980–
2014. Management accounting research, 31, pp.45-62.
Quattrone, P., 2016. Management accounting goes digital: Will the move make it
wiser?. Management Accounting Research, 31, pp.118-122.