Professional Documents
Culture Documents
613
Mexican labor cheaper. As the controller, you will revise your estimates of labor costs in the maquiladora downward. The proposed new production facility will be more attractive. As a local labor union leader, you would be displeased by the potential devaluation. If Mexican wages go down relative to U.S. wages, Mexican labor will be relatively more attractive, and more jobs may be outsourced to Mexico. 11. Hedging is a way of insuring against gains and losses on foreign currency exchange. The company that imports the material may be afraid that the exchange rate will change in 90 days and that the home currency will weaken against the foreign currency. In that case, the company may hedge by purchasing a forward contract for the foreign currency, thereby locking in the exchange rate and
insuring against adverse exchange rate fluctuations. 12. Disagree. The manager of a subsidiary should not be evaluated on the basis of factors over which he or she has no control. These factors may include transfer prices, currency fluctuations, local taxes, and so on. The subsidiary manager should be evaluated on the basis of revenues and costs. Environmental factors that may affect the performance of divisional managers include economic, legal, political, social, and educational variables. Internal Revenue Code Section 482 outlines the transfer pricing methods acceptable for income tax purposes. The four acceptable methods are the comparable uncontrolled price method, the resale price method, the cost-plus method, and any method jointly acceptable to the IRS and the company.
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EXERCISES 181
Your friend will take the traditional accounting and business courses required for a major in accounting. Naturally, these would include international business courses, such as international accounting and international finance. In addition, she/he would be well advised to take classes relating to other cultures, including history, philosophy, literature, and foreign language(s). No individual class is critical; instead, it is the sum of the classes that is important. In other words, your friend will learn a little about other countries in each class. Over time, that little bit will add up, giving your friend the background to understand business practices overseas and to fit business transactions into a cultural context. Suppose your friend is just about to graduate and cannot afford to spend more time in college? Then she/he should do what all management accountants need to dostay up to date by reading books and articles in a variety of international business areas, including information systems, marketing, management, politics, and economics. Note to Instructors: Your students may want to read Daniel M. Hrisaks Global Challenges Call for More CMAs and CFMs, Strategic Finance (June 2001): pp. 4449.
182
1. e 2. b 3. d 4. c 5. a
183
1. e 2. c 3. d 4. b 5. a
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184
1. 2. $14,200,000 0.30 = $4,260,000 $4,260,000 9/12 0.10 = $319,500
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1. 2. $14,200,000 0.85 0.30 = $3,621,000 Savings = ($4,260,000 $3,621,000) + $319,500 = $639,000 + $319,500 = $958,500
186
Tariff savings = ($3,750,000 0.06 0.25) = $56,250 per year Because broken items will never be sold outside the foreign trade zone, Bulwar will not owe a tariff on them.
187
1. 2. 3. 70,100 pesos/10.9 = $6,431 70,100 pesos/11.4 = $6,149 There is an exchange gain of $282 ($6,431 $6,149).
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188
1. 2. 3. 4. 75,000/10.9 = $6,881 75,000/11.4 = $6,579 Exchange loss = $6,881 $6,579 = $302 Hedging contract = 75,000/11.1 = $6,757 Premium expense = $6,881 $6,757 = $124 Net savings = $302 $124 = $178
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189
1. The dollar weakened against the euro () from June 1 to September 1. On June 1, one dollar would buy 0.833 (1/1.20). On September 1, one dollar would buy 0.794 (1/1.26). On June 1, Basu would need $720,000 to pay for the purchase. 600,000 1.20 = $720,000 On September 1, Basu would need $756,000 to pay for the purchase. 600,000 1.26 = $756,000
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1810
There was an exchange loss of $36,000, calculated as follows: Liability in dollars on June 1 Payment in dollars on September 1 Exchange loss $ 720,000 (756,000) $ 36,000
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1811
1. Persephone Company engaged in a forward contract to buy Canadian dollars for U.S. dollars. In other words, on September 30, Persephone expects to pay 120,000 Canadian dollars. Therefore, it needs to exchange U.S. dollars for Canadian dollars on September 30. The forward contract allows it to buy the 120,000 Canadian dollars at a specified forward rate of Canadian dollars for U.S. dollars. Had Persephone Company expected to receive Canadian dollars from the Canadian company, it would have engaged in a forward contract to sell Canadian dollars on September 30 instead. 2. Because Persephone hedges all currency exchanges, the forward rate is the applicable exchange rate. Persephone will buy 120,000 Canadian dollars on September 30 for $92,308. 120,000/1.30 = Canadian $ 92,308
1812
You are delightedthe dollar has appreciated and now buys more euros than it did before. The car costs 90,000, which translates to $107,143 at the 0.84 to $1 rate (90,000/0.84 = $107,143). At the new exchange rate, only $102,273 (90,000/0.88) is required to purchase 90,000. Have a good trip!
1813
Market price Add: Shipping, duties Less: Marketing costs Transfer price $45.00 12.20 (4.50) $52.70
618
1814
$80 = Cost + 0.25 Cost $80 = 1.25 Cost Cost = $64 Therefore, the transfer price is $64
1815
1. Mexican divisions ROI = $150,000/$1,500,000 = 10.0% British divisions ROI = $230,000/$2,000,000 = 11.5% No, we cannot directly compare the two divisions ROIs without knowing more about the cultural and environmental factors faced by each.
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1816
1. The maximum transfer price is $200, because the Singapore plant could purchase the motor externally for that price. The minimum transfer price is $195, because that is equal to the total variable cost of $195. The environmental factor most important to this decision is the governmental prohibition against layoffs. This could turn direct labor into a strictly fixed cost. This particular prohibition is a serious one. Some Spanish plants have been virtually closed for years, yet the firms must continue to pay the workers because the government has refused permission to lay off the workers.
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1817
1. The comparable uncontrolled price method should be used because a market price exists. Market price Add: Shipping, duties Less: Marketing costs Transfer price $30.00 5.05 (4.00) $31.05
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1818
1. 2. 3. 4. c a b a 5. d 6. e 7. e
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PROBLEMS 1819
1. a. Factors that generally determine the degree of decentralization in an organization include the following: Physical proximity of the organizations divisions. Philosophy of top-level management to commit to delegating authority and allowing decentralized decision making. Importance, materiality, time constraints, and risk level of decisions. b. Benefits to be derived from decentralization include: Increased growth of the organization because decisions can be made by more individuals closer to the operations, thus reducing pressure on and allowing ample time for top-level management to deal with strategic and long-range planning issues. More flexibility and timelier decision making in a rapidly changing environment. c. Disadvantages of decentralization include: More control features required at company headquarters to monitor divisions/subsidiaries. Loss of some control as central authority is reduced. Greater pressure in allocating pooled resources. Duplication of support functions. 2. The factory currently owned and operated by LSI in Nuevo Laredo is a maquiladora. LSI is already well acquainted with the customs of doing business in Mexico and should have relatively little difficulty expanding its operations. The passage of the North American Free Trade Agreement makes LSIs expansion simpler by further easing Mexican laws governing foreign ownership. It also means that the current special U.S. customs treatment of reimported goods would continue. In general, NAFTA creates a more hospitable environment for U.S. companies expanding production in Mexico.
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1820
Alternative 1: Advantages: This alternative involves working with a well-understood process in a well-understood environment. Beryl is completely familiar with the legal and social environment in Minnesota. Morale may increase because all workers will receive the higher wages. The factory is already set up, suppliers are in line, and the company knows just how long it takes to produce the fax machines. Disadvantages: Additional workers who are not trained in Paladins process would need to be hired. Heavier use of plant facilities will wear out plant and equipment faster. The addition of a second shift may cause labor problems because those workers assigned to the second shift may want to work on the more desirable first shift. Alternative 2: Advantages: Wages are much lower in Mexico. The burgeoning Mexican market would provide demand for Paladins product. Production in Mexico would satisfy Mexican demands for locally produced goods. Disadvantages: Paladin has no experience in Mexico. There is considerable uncertainty regarding the training of Mexican workers and the start-up costs of building a new plant. Language and cultural differences may cause difficulties. Alternative 3: Advantages: Location of a new plant in a foreign trade zone would save on duty-related costs. There is no language difference in Dallas. The opening of a plant in the Southwest would give Paladin easier access to markets in the southern and southwestern United States. Wages would be lower than those in Minnesota. Disadvantages: The Dallas plant is a considerable distance from the Minnesota plant, requiring another layer of management. Beryl may find it difficult to run both plants herself.
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1821
1. Using the spot rates in effect on July 1, the following prices can be set in francs and yen: Swiss order: $64,000 1.2360 = 79,104 Swiss francs Japanese order: $124,000 117.70 = 14,594,800 yen 2. On October 1, the Swiss customer should pay Custom Shutters 79,104 Swiss francs. If the 90-day forward rate anticipated on July 1 holds, Custom Shutters will receive $62,831 (79,104/1.2590). On October 1, the Japanese customer should pay Custom Shutters 14,594,800 yen. If the 90-day forward rate anticipated on July 1 holds, Custom Shutters will receive $124,000. Will Lee actually receive $186,831 ($62,831 + $124,000) on October 1? We dont know. It depends on the exchange rates in effect on October 1. Currently, it is expected that the dollar will weaken against the Swiss franc and stay unchanged against the yen. However, this could change. If Lee is bothered by the uncertainty, he could hedge by locking in the exchange rates now. That would guarantee the $186,831 on October 1. He might want to do that since the anticipated trend is steadily upward for Swiss francs and the Swiss customer could very well pay late.
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1822
Your objective in meeting with the IRS representative is to demonstrate that the $10 transfer price negotiated between the European and U.S. divisions is acceptable under Internal Revenue Code Section 482. Comparable uncontrolled price method: Market price (U.S.) Add: Landing costs Less: Variable marketing costs Transfer price $14.00 2.50 (1.80) $14.70
Clearly, your problem is that the comparable uncontrolled price method gives a higher transfer price than the one negotiated. The problem with the above computation, of course, is that it assumes that you can sell additional units of the component for $14 within the United States. You cant. If there were a buyer for additional units at $14 per unit, the U.S. division would gladly sell them. As it is, the U.S. division has substantial excess capacity. The $10 transfer price covers all incremental costs of production plus the landing costs. Thus, a more valuable computation would be the following: Negotiated transfer price Less: Variable costs of production Landing costs Profit per unit $ 10.00 (7.00) (2.50) $ 0.50
You can also point out that there is a market for this component in Europe, and that given this fact, the negotiated transfer price has the feel of an arms-length transaction. That is, both the U.S. and the European divisions are acting in their own best interests.
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1823
1. Comparable uncontrolled price method: Market price Add: Shipping Less: Avoidable marketing cost Transfer price 2. Belgium $430 30 (40) $420 Canada $430 25 (40) $415
No, the IRS will have no problem with the $430 charged to the Belgian and Canadian divisions. This price exceeds the comparable uncontrolled price. One might wonder why Audio-Tech has set such a high transfer price to the foreign divisions. The reason is that both Canada and Belgium have higher corporate income tax rates than the United States. Therefore, Audio-Tech wants to take as much profit as possible in the United States and as little profit as possible in the two foreign countries. Currently, the tax departments in Canada and Belgium have not targeted transfer pricing as an important problem.
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1825
1. The price is unacceptable because it is less than the adjusted market price of $12.00 ($10 + $2.50 $0.50). By setting a transfer price lower than the IRS guideline, revenues recognized in the United States are lower than they should be, and less taxes are paid than required. The IRS could reallocate income (by requiring a transfer price of $12). If the transfer price were greater than $12, the IRS would have no concern, since the company would be paying more taxes than expected. Resale price Cost = 0.25(Resale price) $8.00 Cost = 0.25($8.00) Cost = $6.00 Thus, if the normal markup is 25 percent, the allowable cost without adjustment is $6.00. Adding to this the landing cost of $1.20, the allowable transfer price is $7.20. Thus, the price of $4.50 is certainly unacceptable as far as the U.S. taxing authorities would be concerned. The transfer price should be increased to $7.20. 3. Minimum: $6.00 + $2.00 $1.25 = $6.75 Maximum: $12.00 (local price for the European division) The maximum transfer price is less than the Internal Revenue Code Section 482 comparable uncontrolled price ($12.75 = $12.00 + $2.00 $1.25). If the joint benefit of $5.25 ($12.00 $6.75) is split equally, the transfer price would be $9.38 ($2.63 + $6.75). The company could justify the $9.38 transfer price by arguing that the company has idle capacity, which would otherwise produce no revenues. This argument would be strengthened if the buying division does not normally buy this component from the selling division or if the price concession is necessary to induce the internal acquisition. The presence of decentralized decision making could also strengthen the argument. If divisional managers are free to set prices and free to buy from whichever source is best and evidence exists that they do both, then the company could argue that the negotiated outcome is an arms-length transaction.
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