A Multinational company is organized into several divisions. One of the divisions is Information Technology (IT) division which provides consultancy services to its clients as well as to the other divisions of the firm. The consultants in the IT divisions always work in a team of three professional consultants on each day of consulting assignment. The external clients are charged a fee at the rate of $3,000 for each consulting day. The fee represents the cost plus 150% profit mark up. The break-up of cost involved in the consultancy fee is estimated at 70% as being variable and the balance is fixed. The textiles division of the consultancy firm which has undertaken a big assignment requires the services of two teams of IT consultants to work five days in a week for a period of 48 weeks. While the director of the textile division intends to negotiate the transfer price for the consultancy work, the director of IT division proposes to charge the textile division at $3,000 per consulting day. In respect of the consulting work of the textile division, IT division will be able to reduce the variable costs by & $150 per consulting day. This is possible in all cases of internal consultations because of the use of specialized equipment.
A Multinational company is organized into several divisions. One of the divisions is Information Technology (IT) division which provides consultancy services to its clients as well as to the other divisions of the firm. The consultants in the IT divisions always work in a team of three professional consultants on each day of consulting assignment. The external clients are charged a fee at the rate of $3,000 for each consulting day. The fee represents the cost plus 150% profit mark up. The break-up of cost involved in the consultancy fee is estimated at 70% as being variable and the balance is fixed. The textiles division of the consultancy firm which has undertaken a big assignment requires the services of two teams of IT consultants to work five days in a week for a period of 48 weeks. While the director of the textile division intends to negotiate the transfer price for the consultancy work, the director of IT division proposes to charge the textile division at $3,000 per consulting day. In respect of the consulting work of the textile division, IT division will be able to reduce the variable costs by & $150 per consulting day. This is possible in all cases of internal consultations because of the use of specialized equipment.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:A Multinational company is organized into several divisions. One of the divisions is Information
Technology (IT) division which provides consultancy services to its clients as well as to the other
divisions of the firm. The consultants in the IT divisions always work in a team of three
professional consultants on each day of consulting assignment. The external clients are charged a
fee at the rate of $3,000 for each consulting day. The fee represents the cost plus 150% profit
mark up. The break-up of cost involved in the consultancy fee is estimated at 70% as being
variable and the balance is fixed.
The textiles division of the consultancy firm which has undertaken a big assignment requires the
services of two teams of IT consultants to work five days in a week for a period of 48 weeks. While
the director of the textile division intends to negotiate the transfer price for the consultancy work,
the director of IT division proposes to charge the textile division at $3,000 per consulting day.
In respect of the consulting work of the textile division, IT division will be able to reduce the
variable costs by & $150 per consulting day. This is possible in all cases of internal consultations
because of the use of specialized equipment.
Transcribed Image Text:Required:-
Explain the implications and set transfer prices per consulting day at which the IT division can
provide consultancy services to the textiles division such that the profit of the multinational
company as a whole is maximized in each of the following scenarios:
i) Every team of the IT division is fully engaged during the 48 week period in providing consultancy
services to external clients and that the IT division has no spare capacity of consultancy teams to
take up the textiles division assignment.
ii) IT division will be able to spare only one team of consultants to provide services to the textiles
division during the 48 week period and all other teams are fully engaged in providing services to
external clients.
iii) A new external client has come forward to pay IT division a total fee of $ 1,632,000 for
engaging the services of two teams of consultants during the aforesaid period of 48 weeks.
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