Cmi Project
Dated: June 19, 2013
To: Paul Singer,
President
From: Eric Hunter,
Corporate Controller
Subject: Analysis of Company’s Current Situation
Dear Paul,
After our meeting and analyzing the facts and figures available thoroughly, I came across the following short term as well as long term issues:
1. Short term issues:
1.1. Requirement to increase the transfer price of carburetors to $ 500
1.2. Impacts of Carburetor Production discontinuance on Engine Division(ED)
2. Long term issues:
2.1. Performance and Organization structure of Division - Profit centers or cost center
2.2. Transfer pricing guidelines needed to be revisited
2.3. Implication of Tax and duties and compliance issues
2.4. ED Capacity constraints
Following are my recommendations:
1. The transfer price from ED to SD should be the market price of $500. Overall this transfer pricing policy will help to improve ROI from 11.4% to 15.7%.
2. ED must continue production of carburetor engines since the division has a great contribution margin based on machine hours as a driver.
3. SD should also charge ID based on the current market price i.e., $3,400, since it would help ID to increase sales volume in Europe through its price penetration strategy and also help the company to minimize tax and duties.
4. Transfer pricing guidelines are to be modified and implemented in its true spirits as a concurrent business environment dictates.
5. Measures should be taken to increase capacity of ED.
6. Focus on SDs profitability by reducing costs and setting up the right price.
Regards,
Erin Hunter
1.1 Increase the transfer price of carburetors
We should agree with Kevin’s proposal to increase the transfer price of carburetor engine from $ 400 to $ 500 per unit, which is the market price of such engine. The analysis was completed based on market price and it revealed that not only ED performs better; but ROI improves from 8.5 % to 13.5% as well as such a transfer pricing solution has a favorable impact on
To: Paul Singer,
President
From: Eric Hunter,
Corporate Controller
Subject: Analysis of Company’s Current Situation
Dear Paul,
After our meeting and analyzing the facts and figures available thoroughly, I came across the following short term as well as long term issues:
1. Short term issues:
1.1. Requirement to increase the transfer price of carburetors to $ 500
1.2. Impacts of Carburetor Production discontinuance on Engine Division(ED)
2. Long term issues:
2.1. Performance and Organization structure of Division - Profit centers or cost center
2.2. Transfer pricing guidelines needed to be revisited
2.3. Implication of Tax and duties and compliance issues
2.4. ED Capacity constraints
Following are my recommendations:
1. The transfer price from ED to SD should be the market price of $500. Overall this transfer pricing policy will help to improve ROI from 11.4% to 15.7%.
2. ED must continue production of carburetor engines since the division has a great contribution margin based on machine hours as a driver.
3. SD should also charge ID based on the current market price i.e., $3,400, since it would help ID to increase sales volume in Europe through its price penetration strategy and also help the company to minimize tax and duties.
4. Transfer pricing guidelines are to be modified and implemented in its true spirits as a concurrent business environment dictates.
5. Measures should be taken to increase capacity of ED.
6. Focus on SDs profitability by reducing costs and setting up the right price.
Regards,
Erin Hunter
1.1 Increase the transfer price of carburetors
We should agree with Kevin’s proposal to increase the transfer price of carburetor engine from $ 400 to $ 500 per unit, which is the market price of such engine. The analysis was completed based on market price and it revealed that not only ED performs better; but ROI improves from 8.5 % to 13.5% as well as such a transfer pricing solution has a favorable impact on