Management Accounting: Multinational Transfer Pricing and Pricing

This report delves into management accounting principles, specifically focusing on multinational transfer pricing and airline pricing strategies. It examines scenarios involving Derwent Ltd, analyzing how transfer prices impact after-tax operating profits in different divisions, considering factors like income tax rates and import duties. The report explores goal congruence in transfer pricing, assessing the acceptability of different transfer prices to divisional managers. Furthermore, it investigates airline pricing strategies for Eastcoast Airways, recommending a price differentiation strategy based on traveller type (pleasure vs. business) to maximize contribution margin, while also emphasizing that costs like fuel, lease, and salaries remain constant regardless of the pricing strategy adopted. The analysis provides insights into optimizing profitability through strategic pricing decisions in both multinational corporations and the airline industry.

Running head: MANAGEMENT ACCOUNTING
Management Accounting
Name of the Student:
Name of the University:
Author’s Note:
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Table of Contents
Scenario 1a: Multinational transfer pricing, global tax minimisation.............................................2
Question 1:...................................................................................................................................2
Question 2:...................................................................................................................................2
Scenario 1b: Multinational transfer pricing, goal congruence.........................................................4
Question 1:...................................................................................................................................4
Question 2:...................................................................................................................................4
Question 3:...................................................................................................................................5
Scenario 2: Airline pricing...............................................................................................................5
References:......................................................................................................................................8

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Scenario 1a: Multinational transfer pricing, global tax minimisation
Question 1:
Question 2:
There are certain ways to proceed; however, it is needed to take into consideration the
transfer price. As a result, the total import duties of Derwent Limited would be minimised. This
could be either one of the two ways, the total manufacturing cost or the market value of the
comparable exports. Therefore, a situation is taken into account by increasing the transfer price

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by $1 every time where the total manufacturing cost is $800 each unit. Due to this, there would
be various changes, which are depicted as follows:
In order to check the accuracy of the solution, another consideration is made where the
transfer price is changed to $950 from $800. Certain changes per unit are expected to occur,
which are represented as follows;
It is clearly evident from the above table that the total profit has declined by $60,000,
which is the difference obtained after computing the net income in the first solution. Hence, it is
necessary for Derwent Limited to minimise import duties as well as income taxes in the form of
settling the transfer price at $800, which is the total manufacturing expense.

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Scenario 1b: Multinational transfer pricing, goal congruence
Question 1:
Question 2:
If the product is transferred at the total manufacturing cost, the import duties of the
Australian department are reduced. In that case, the Australian division would not be able to
make any operating income. However, the intention of the department is to increase its profit
through the product sale of B12 in Australia. This is because the profit margin would be
increased to $650,000 by selling locally, which would not be possible, if it sold to the US
division at total manufacturing cost (Bromwich and Scapens 2016). Therefore, the transfer price
calculated in the first section might not help Derwent Limited in maintaining the optimum price.

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Question 3:
Based on the above tables, the minimum transfer price that is acceptable to the Australian
divisional manager of Derwent Limited might lead to excess payment of $40,000 as taxes and
import duties.
Scenario 2: Airline pricing
To,
The Directors of Eastcoast Airways,
Date: 22/05/2018
Subject: Airline pricing strategy

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For ascertaining the feasible pricing policy in the context of Eastcoast Airways, several
calculations are carried out depending on the data provided:
Based on the above table, it could be assessed that the contribution margin of Eastcoast
Airways could be increased by charging $600 from an individual pleasure traveller and $1,350
from a business traveller. Thus, it clearly lays out the fact that airline could be benefitted by
adopting the price differentiation strategy so as to increase its profit margin (Dekker 2016).
However, for selecting between the provided prices, the other costs are not taken into account, as
they are not relevant in this case. These costs are fuel costs, annual lease costs, ground service
costs and flight crew salaries. The prices of these items would not vary no matter whatever
pricing strategy is adopted (Hopper and Bui 2016).
The business travellers travel with a motive of returning in the same week, while the
pleasure travellers have the intention of staying in the weekends. Therefore, Eastcoast Airways
should charge $600 fare to those travellers only preferring to stay on the weekends. This would

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serve as price discrimination between the two passenger categories (Quattrone 2016). Moreover,
no objections could be raised regarding its legality, since Eastcoast Airways is a service
organisation and such policies are adopted not to eliminate rivalry from the industry.

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References:
Bromwich, M. and Scapens, R.W., 2016. Management accounting research: 25 years
on. Management Accounting Research, 31, pp.1-9.
Dekker, H.C., 2016. On the boundaries between intrafirm and interfirm management accounting
research. Management Accounting Research, 31, pp.86-99.
Hopper, T. and Bui, B., 2016. Has management accounting research been critical?. Management
Accounting Research, 31, pp.10-30.
Quattrone, P., 2016. Management accounting goes digital: Will the move make it
wiser?. Management Accounting Research, 31, pp.118-122.