Transfer Pricing Policies and Financial Reporting Issues Simon Fraser University ACCOUNTING 3310

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MEMO TO: Jeff Wallace FROM: CPA RE: Transfer Pricing Policies and Financial Reporting Issues Transfer Pricing Policy In discussion with Edward Horton, the Circuit GM, there are some concerns rega... rding the transfer pricing policy and its impact on the division as a whole. Transfer pricing from a sellers perspective is to sell products at the highest transfer price possible. From a buyer’s perspective, the objective is to purchase products at the lowest transfer price possible. The issuing arising from transfer pricing is that the corporate cost allocation policy and management bonus policies are adversely. The issues are: - Circuit division forced to transfer products to the Electro and Consumer division at the minimum purchase price whereas sales to external parties would be at the market price (maximum purchase price). Since management bonuses are based on profitability, the Circuit division is at a disadvantage. Management would have no incentive to perform well - The corporate cost allocation do not represent the cost outputs from the Circuit division and negatively impacts the division’s profitability goals. This directly impacts management’s likelihood of receiving a bonus. The costs are evenly allocated across all three departments even though it may not be directly associated with the divisions. My recommendation would be to revalue and revamp Wallace’s cost allocation policy. Cost allocations should be directly related to the divisions. This way, each department would be motivated to plan and budget their departmental costs. As profit centers, each division will be more motivated to generate revenue. The cost and benefits of whether Wallace Inc should continue to transfer products or outsource the parts will be discussed below. Circuits – Outsource or In-House The Circuit division is currently supplying the Electronics and Consumer division with electronic circuits. Any excess is sold externally. Based on the financial statements up till September 2021, the circuit posting an operating loss. The issue is whether Wallace will be better off outsourcing the circuit parts from an external supplier instead. I’ve compared the cost of producing the circuit in-house vs. purchasing it externally in Exhibit 1. Based on the annual production capacity, the cost of purchasing externally is $2 more per unit. However, we also have to consider the additional salary cost of closing the division. The current circuit d [Show More]

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