University Report: Management Accounting and Performance Evaluation

This report examines the transfer pricing policies of CLUX company, focusing on the impact of an asset investment on divisional performance. It analyzes how transfer pricing methods, specifically opportunity cost, affect profitability, return on investment (ROI), and residual income (RI). The report discusses the implications of inter-divisional transfers and external sales, evaluating how these strategies can benefit Division 1. It includes a revised budget for Division 1, detailing the financial impact of increased production capacity. The report concludes with recommendations for the directors of CLUX, suggesting the implementation of the asset purchase and opportunity cost transfer pricing to maximize profitability. The report highlights the importance of transfer pricing in optimizing company performance and provides insights into strategic decision-making for investment and divisional profit maximization.

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.

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Management Accounting & Performance Evaluation
The opportunity cost of the division is taken as the full cost of Division 1, since there is
no presence of the intermediate market. The profit of the division 1 is increased considerably
since the division is earning more by selling the remaining container externally while the inter-
divisional sale is done at opportunity cost which yields no profit to the division. Consequently,
the residual income of the division is also increased. This transfer pricing policy will benefit the
Division 1 since it is able to meet the more demand for containers in the external market and it
also increases the return on investment and residual income of the division, and improves the
profitability of the division.
Calculation of the Opportunity Cost
Production Capacity
500000
00
Total Cost
440000
0
Opportunity Cost 0.09
The transfer price decreased considerably by $0.09 from $0.12, when opportunity cost
method was used for inter-divisional transfer. This method will increase the profits of the
company, however, division 1 will not earn sufficient profit from this transfer pricing policy and
this will reduce their motivation since each division strives on the profit and the profit factor also

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Management Accounting & Performance Evaluation
induce employees to work hard and achieve some extra rewards (Husain and Yilmaz 2015).
However, the division is achieving benefits from the external markets as it is able to meet higher
demand of the containers.
Revised Budget for Division 1 (50000000 containers)
Production Capacity
5000000
0
Increase in Asset 500000
Total Asset 4500000
Variable Cost 2000000
Fixed Cost 2400000
Total Cost 4400000
Inter-divisional price at opportunity cost 0.09
Transfer price of selling containers to D2 3344000
Revenue from selling remaining container externally 3900000
Total Revenue 7244000
In the given case the company is planning on investing in asset that will increase the
production capacity and will cost the company $500,000. By selling the total production the
overall revenue will increase of the division will increase which will also increase the return on
investment. The above transfer pricing policy will benefit to Division 1, as the division is able to
produce more containers from the new asset and increase the profit margin of the division.
Recommendation
It is advisable to the directors of the CLUX company to execute the planning of
purchasing the asset specifically to increase the production of division 1 and sell the same to
divisions 2 and external markets. It has been analysed that Division 1 is not able to meet the
demand of external market and hence implementing the plan of acquiring new asset is advisable
along with opportunity cost transfer pricing policy will only help division 1 to earn profit from

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Management Accounting & Performance Evaluation
the external sales and also assist Division 2 to achieve containers at reduced cost, hence
increasing the overall profitability of the company.
Conclusion
The above report focuses on the importance of the transfer pricing policies and its
importance to the performance of the divisions and the company overall. While implementing
the policy in investment and divisional profits, key highlights were return on investment (ROI)
and residual incomes (RI) of the respective divisions. The report is concluded with
recommendations relating to circumstances in which such policy implementation can be
beneficial.

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Management Accounting & Performance Evaluation
Reference
Contractor, F.J., 2016. Tax avoidance by multinational companies: Methods, policies, and ethics.
Rutgers Business Review, 1(1).
Heimert, A.M. and Michaelson, T.J. eds., 2018. Guide to international transfer pricing: law, tax
planning and compliance strategies. Kluwer Law International BV.
Husain, S. and Yilmaz, E., 2015. The Transfer Pricing Problem in a Service Firm: A Case Study
on a Swedish Multinational Enterprise.
Söderqvist, T., Brinkhoff, P., Norberg, T., Rosén, L., Back, P.E. and Norrman, J., 2015. Cost-
benefit analysis as a part of sustainability assessment of remediation alternatives for
contaminated land. Journal of Environmental Management, 157, pp.267-278.