Create an Account

Already have account?

Forgot Your Password ?

Home / Questions / Transfer Pricing Paramount Homes provides rental properties for tenants. Repair services f...

Transfer Pricing Paramount Homes provides rental properties for tenants. Repair services for the properties are provided by Paramount's subsidiary Quicker Repair

(Transfer Pricing) Paramount Homes provides rental properties for tenants. Repair services for the properties are provided by Paramount's subsidiary, Quicker Repair Co. Because virtually all of Quicker's sales are to Paramount and Paramount insists on prices that Quicker believes to be too low, Quicker is showing a loss in its management accounting reports. The latest report shows the following:

Sales

$1,000,000

Cost of sales

850,000

Gross profit (15%)

$150,000 (mark-up of 17.6%)

Overhead costs

120,000

Corporate costs recharged from parent

80,000

Net loss

$50,000

Quicker believes that if it charged market prices for the repairs it undertakes, prices would be 20% higher. Paramount does not accept this argument, as it routinely market tests Quicker's prices to ensure that the prices it pays are realistic and competitive. However, Paramount does accept that Quicker has to bear a share of corporate overheads which its competitors would not incur, and so may be disadvantaged. Paramount has suggested that the appropriate mark-up is on the cost of sales plus total overhead expenses.

What would be the effect of these two alternatives on Quicker's reported profits and what might be the likely motivational effects? What suggestions would you make?

Jun 19 2020 View more View Less

Answer (Solved)

question Subscribe To Get Solution

Related Questions