ACC311 AssignedQns Week2

ACC311: Strategic Management Accounting
July 2023 Semester
ASSIGNMENT FOR CLASS DISCUSSION – WEEK 2
1. July 2017 Semester Exam Q1 Part A
This question consists of two parts: Part A and B. You are required to answer both parts.
Dokka is a producer of bottled drinks. The company has two divisions: Division X and Division Y.
Division X manufactures plastic bottles. The plastic bottles are sold to both Division Y and external
customers. Division Y produces drinks and sells them to external customers in the bottles obtained
from Division X.
Division X Annual Budget Information $

Selling price per 100 bottles 13
Variable costs per bottle 0.04
Fixed costs 2,400,000
Net Assets 4,000,000
Production capacity 40,000,000 bottles

External demand 38,000,000 bottles
Demand from Division Y 20,000,000 bottles
Division Y Annual Budget Information $

Selling price per bottled drink 0.50
Variable costs per bottled drink (excluding the bottle) 0.15
Fixed costs 1,750,000
Net Assets 12,650,000
Sales volume 20,000,000 bottled drinks
Current Transfer Pricing Policy

Division X is required to satisfy the demand of Division Y before selling bottles to external customers.
The transfer price for bottles is full cost plus 20%. Full cost is computed based on production capacity.
Performance Targets
Divisional performance is assessed based on Return On Investment (ROI) and Residual Income (RI).
Divisional managers are awarded a bonus if they achieve the annual ROI target of 25%. Dokka has a
cost of capital of 7%.
Part A
Required:
(a) Prepare profit statements, in a variable costing format, for (i) Division X; (ii) Division Y; and (iii)
Dokka. Detail on your profit statements, where appropriate, separate line items for revenue
from external sales and revenue from inter-divisional transfers.
(b) Compute the ROI (rounded to 1 decimal place) and the RI for (i) Division X; (ii) Division Y; and
(iii) Dokka.
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July 2023 Semester
2. CIMA Adapted
Techno Inc. is a multinational computer manufacturer that has autonomous subsidiaries all over the
world. Two of the group’s subsidiaries are located in the United States (US) and Europe. The US
subsidiary manufactures computers using chips that are purchased from local companies. The
European subsidiary manufactures the exact same chips used by the US subsidiary. However, the
European subsidiary currently only sells its chips to other external companies in Europe.
US Subsidiary
This subsidiary buys the chips it needs from a local supplier at a negotiated price of $90 per chip. The
subsidiary’s production budget forecasts the need for 300,000 chips next year.
European Subsidiary
The production facilities of this subsidiary has an annual capacity to produce 800,000 chips. Partial
budget for the upcoming year is shown below:
Sales: 600,000 chips

Selling Price: $105/chip
Variable Costs: $60/chip
At the budgeted output of 600,000 chips, the fixed costs of the subsidiary amount to $20 million per
year. However, fixed costs will increase to $26 million if the production output exceeds 625,000 chips.
The subsidiary’s current external demand is 600,000 chips annually and the subsidiary has no other
uses for its spare capacity.
Group Directive
The CEO of the group has reviewed the budgets of the US and European subsidiaries, and decided that
the European subsidiary should supply chips to the US subsidiary to improve the profitability of the
group. In addition, she is toying with the idea of tying the compensation of the subsidiary managers
to the performance of their respective subsidiaries. She is, however, undecided on which performance
measure to use. There are two measures she is considering, and they are profit and return on assets
consumed (she defines annual fixed costs as ‘assets consumed’).
The European subsidiary’s manager has offered to supply the chips to the US subsidiary at a price of
$95 per chip. This price is based upon the European subsidiary earning the same contribution per chip
as it would from making external sales. The lower price is derived from the net effect of increased
delivery costs and reduced customer servicing costs.
Required:
(i) Assume that the European subsidiary supplies 300,000 chips to the US subsidiary at a transfer
price of $95 per chip. Calculate the impact of this transfer to the profits of (a) US subsidiary;
(b) European subsidiary; and (c) the group.
(ii) Compute the minimum transfer price per unit at which the European subsidiary would be
willing to transfer 300,000 chips to the US subsidiary if
(a) the manager of the European subsidiary is compensated based on the subsidiary’s profit,
and the current profit is $7million; and
(b) the manager of the European subsidiary is compensated based on the subsidiary’s return
on assets consumed, and this is currently 35%.
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July 2023 Semester
(iii) Advise the group CEO on issues raised by the group directive (including the implementation
of the proposed compensation scheme). Use your answers from part (i) and (ii), where
appropriate, to support your answer.
(iv) Explain how multinational companies can use transfer pricing to reduce their overall tax
liabilities. Discuss steps that tax authorities have taken to address manipulation of transfer
prices.
3. Jul 2019 Semester Exam Q1
Jupiter Pte Ltd (“JPL”) has two divisions - X and Y; which are supported by an Administrative (“Admin”)
division. The Admin division provides printing, filing and stationery services. Estimated information for
the year ending 20X9 is as follows.
(1)
Division X Division Y Admin Division

$m $m $m
Capital Employed 80 50 28
Profit (before Admin division costs) 20 16
Total Costs: 14
(2) A target of 15% Return On Investment (ROI) has been set for each division.
(3) An Activity-Based Costing (ABC) analysis has revealed the following for the Admin Division:
Service provided to: Cost Driver Division X Division Y Admin Division Cost ($m)
Sales No. of customers 20,000 10,000 3.6
Advertising No. of product types 16 24 4.8
Production No. of units 120,000 120,000 1.6
Human Resource No. of employees 1,600 400 4.0
(4) The cost of capital is 14%.
Required:
(a) Compute the ROI for Division X, Division Y and the Admin Division if JPL’s transfer pricing policy
is:
(i) To allocate total Admin cost on a 50/50 basis;

(ii) Total Admin cost to be distributed equally plus a profit mark-up of 30%; and
(iii) Total Admin cost to be charged on an activity-based costing approach.
(b) Discuss the implications of each transfer pricing policy in part (a) for the three divisions. How
would you advise JPL with respect to performance management?
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July 2023 Semester
(c) JPL has decided that transfer price from Admin Division to divisions X and Y should be set at
activity-based costs. An external company has approached Division X to offer their
administrative services (exactly the same services as those currently provided by Admin
Division) at a fee.
(i) Compute the maximum price that Division X will be willing to pay this external
company.
(ii) If the external company is willing to meet Division X’s price demand (as computed in
part (c)(i)), should JPL allow Division X to outsource their administrative requirements?
Explain and state any necessary assumptions.

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ACC311: Strategic Management Accounting

July 2023 Semester

ASSIGNMENT FOR CLASS DISCUSSION – WEEK 2

1. July 2017 Semester Exam Q1 Part A

Division X Annual Budget Information $

Production capacity 40,000,000 bottles

Division Y Annual Budget Information $

Sales volume 20,000,000 bottled drinks

Current Transfer Pricing Policy

Sales: 600,000 chips

3. Jul 2019 Semester Exam Q1

Division X Division Y Admin Division

(4) The cost of capital is 14%.

(i) To allocate total Admin cost on a 50/50 basis;

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