Assignment -
Scenario 1 - Multinational transfer pricing, goal congruence
Suppose that the Australian division could sell as many units of product B12 as it makes at $900 per unit in the US market, net of all marketing and distribution costs.
Required -
1. From the viewpoint of Derwent Ltd as a whole, would after-tax operating profit be maximised if it sold the 10,000 units of product B12 in Australia or in the USA? Show your calculations.
2. Suppose that division managers act autonomously to maximise their division's after-tax operating profit. Will the transfer price calculated in requirement 2 of Scenario 1a) result in the Australian division manager taking the actions determined to be optimal in requirement 1 of this exercise? Explain.
3. What is the minimum transfer price that the Australian division manager would agree to? Does this transfer price result in Derwent Ltd as a whole paying more import duty and taxes than in the answer to requirement 2 of Scenario 1a)? If so, by how much?
Scenario 2 - Airline pricing
The management of Eastcoast Airways is thinking about introducing a daily return-flight from Melbourne to the Gold Coast. You are the management accountant at Eastcoast Airways and are working with the marketing manager to recommend the price for a return ticket.
In researching the market, you and the marketing manager:
(1) Establish potential demand for the planned flight?
(2) Distinguish between business and pleasure travellers (pleasure travellers start their travel during one week, spend at least one weekend at their destination and return the following week or thereafter; business travellers usually start and complete their travel within the same work week, i.e. they do not stay over weekends).
(3) Estimate the effects of two different prices on the number of seats expected to be sold and the variable cost per ticket (see table below).
(4) Estimate from the records of similar flights that the fuel costs are likely to amount to $18,500.
(5) Allocate a total of $150 000 to the return flight in respect of aircraft-lease costs, ground services and flight crew salaries.
You present this information to the management team for discussion at the next management meeting.
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Max Number of seats Available (Number of seats expected to be sold at price charged)
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Price charged
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Variable cost per ticket
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Business
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Pleasure
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600
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$65
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225 (200)
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110 (100)
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1350
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150
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215 (180)
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25 (20)
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Required - Write a report to management recommending that they charge a single price or different prices to business travellers and pleasure travellers.
For the second option, recommend a way in which Eastcoast Airways might implement price discrimination, to ensure that business travellers and pleasure travellers each pay the price the airline seeks to charge. Support your recommendation with clear explanations and relevant calculations.