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ethics t r ans f er pricing the leipzig division of bohemia industries makes two com 737121

Ethics, t r ans f er pricing.

The Leipzig Division of Bohemia Industries makes two component parts, X23 and Y99. It supplies X23 to the Hanover Division to be used in the manufacture of car engines and supplies Y99 to the Bremen Division to be used in the manufacture of car gearboxes. The Leipzig Division is the only supplier of these specialised components. When transfers are

made in house, Bohemia Industries transfers products at full cost (calculated using an activ ity based cost system) plus 10%. The unit cost information for X23 and Y99 is as follows:

X23

Y99

Variable costs per unit

€11

€8

Allocated fixed costs per unit

€14

€7

The Hanover Division feels that the price for X23 is too high and has told Leipzig that it is trying to locate an outside vendor to supply the part at a lower price. Wilhelm von Kalkstein, Leipzig Division’s management accountant, calls Eberhard Dunkelmann, his assistant, into his office. ‘We can’t afford to lose the Hanover Division business. Our fixed costs won’t go away even if we stop supplying Hanover, and this means that the costs of supplying Y99 to Bremen will increase. Then they’ll start wanting to buy from outside. We’re seriously looking at possibly shutting down the entire division if we lose the Hanover business. See if you can find a different method of allocating fixed costs that will decrease X23’s transfer price to €23.65. I think Bremen will be willing to pay a somewhat higher price for Y99.’

Eberhard is uncomfortable making any changes because he knows that any other alloca tion method would violate corporate guidelines on overhead cost allocation. Still, he believes that changing the fixed cost allocations is in the best interest of Bohemia Industries. Eberhard is confused about what he should do.

Required

1 Calculate the transfer prices for X23 and Y99.

2 Calculate the fixed cost per unit that Eberhard would have to allocate to X23 to enable

Leipzig to transfer X23 at €23.65 per unit.

3 Evaluate whether Wilhelm von Kalkstein’s suggestion to Eberhard to change the fixed cost allocations is ethical. Would it be ethical for Eberhard to revise the fixed cost allocations at his boss’s urging? What steps should he take to resolve this situation?

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