TRANSFER PRICING AND RESPONSIBILITY CENTERS Overview Coffee Maker's Incorporated (CMI) Three divisions of a CMI are involved in a dispute. Division A purchases Part 101 and Division B purchases Part 201 from a third division, C. Both divisions need the parts for products that they assemble. The intercompany transactions have remained constant for several years. Recently, outside suppliers have lowered their prices, but Division C refuses to do so. In addition, all division managers are feeling the pressure to increase profit. Managers of divisions A and B would like the flexibility to purchase the parts they need from external parties at a lower cost and increase profitability. The current pattern is that Division A purchases 2,700 units of product part 101 from Division C (the supplying division) and another 1,300 units from an external supplier. Division B purchases 1,100 units of Part 201 from Division C and another 700 units from an external supplier. Note that both divisions A and B purchase the needed supplies from both the internal source and an external source at the same time. The managers for divisions A and B are preparing a new proposal for consideration. Division C will continue to produce Parts 101 and 201. All of its production will be sold to Divisions A and B. No other customers are likely to be found for these products in the short term, given that supply is greater than demand in the market. Division A will buy 2,000 units of Part 101 from Division C at the existing transfer price; and 2,000 units from an external supplier at the market price of $900 per unit. Division B will buy 900 units of Part 201 from Division C at the existing transfer price; and 900 units from an external supplier at $1,800 per unit. Division C Data Based on the Current Agreement Part101201Annual volume (units)2,7001,100Transfer price/unit$1,000$2,000Variable expenses/unit$700$1,200 The fixed overhead for Division C is $1,200,000. Computations (use Excel) Set up a table similar the one below to compute the difference between the current situation and the proposal for Divisions A and B.  Division ACurrent SituationProposalNo. of UnitsPurchase PriceTotal PurchasesNo. of UnitsPurchase PriceTotal PurchasesInternal purchases2,700$2,000$External purchases1,3002,000Total cost for Part 101$$Savings to Div. A$ Compute the operating income for Division C under the current agreement and the proposed agreement. Is the revised agreement a good idea? Support your answer with computations. Memo (use Word) Write a memo to the division manager explaining the analysis performed. Start with an introduction and end with a recommendation. Each of the four or five paragraphs should have a heading. Short Essay (use Word) Start with an introduction and end with a summary or conclusion. Use headings. Evaluate and discuss the implications of the following transfer pricing policies: Transfer price = cost plus a mark-up for the selling division Transfer price = fair market value Transfer price = price negotiated by the managers Why is transfer pricing such a significant issue both from a financial and managerial perspective?

1-Omar, thanks for your contribution to this week's discussion; your assessments are correct. Salvatore (2012) believes that capital flow is one of the primary motivations for portfolio investment and a well-diversified portfolio, a well-known principle of risk diversification. This combination of assets will outperform a single asset if the returns do not move firmly together over time.Salvatore (2012) postulates that foreign assets are a good candidate for risk diversification due to the current economic climate because they do not move as carefully with domestic assets. One of the reasons is that domestic assets are subject to more regulations than foreign assets are. In addition to capital movements, Salvatore (2012) argues that financial capital flow can take advantage of different interest rates. For example, German bonds may offer higher interest rates for lenders in the US than lenders in Germany for US bonds, while Japanese bonds may offer lower rates for US borrowers for Japanese bonds. Please note that the exchange rate changes affect the returns that lenders expect to receive, and borrowers expect to pay on securities denominated in foreign currency. Based on your assessment of this week's discussion, the traditional strong link between economic growth and FDI means that the world economic meltdown of 2007 to 2009 decreased the appetite for new investments abroad?Reference Salvatore, D. (2012). Introduction to International Economics. 3rd Edition. John Wiley & Sons, Inc.2-Hi Professor and classmates,Global corporations are an imperative vehicle for the international flows of capital, labor, and technology. Having said that, we have two main types of foreign investments: portfolio investments and direct investments. Portfolio investments are purely financial assets that are denominated in a national currency; for example, bonds are financial instruments where an investor lends capital to get fixed payouts or a return at regular intervals and then receives the face value of the bond at a prespecified date. Further, stocks are financial instruments where an investor purchases equity, or a claim on the net worth of the firm. Portfolio or financial investments take place primarily through financial institutions such as banks and investment funds. On the other hand, Direct investments are real investments in factories, capital goods, land, and inventories where both capital and management are involved, and the investor retains control over use of the invested capital. Direct investment usually takes the form of a firm starting a subsidiary or taking control of another firm (Salvatore, 2013). For example, Honda Motors company is a Japanese automobile maker with headquarters in Japan. They decided to open a branch in North America, for instance, in the US. Now, they bought a piece of land in the US to build a manufacturing plant of Honda Civics and CR-Vs models. Also, if anyone would like to have ownership of this public traded company; he/she will have to go to a financial institution and buy stocks of such company. In my opinion, foreign direct investment helps a country economy. They create jobs, bring newer technologies, they attract talented individuals and they have career growth opportunities to many young professionals.ReferenceSalvatore, D. (2013). In International economics (pp. 367–370)., John Wiley & Sons3-Hello class!Foreign investment, basically, is putting resources into a nation other than your home one. It includes capital spilling out of one nation to another and outsiders having a possession intrigue or a state in the business. Unfamiliar speculation is for the most part observed as an impetus for monetary development and can be embraced by organizations, partnerships, and people. Speculators intrigued by unfamiliar venture for the most part take one of two ways: unfamiliar portfolio speculation or unfamiliar direct investment (Meng & Wincoop, 2020). Foreign portfolio investment (FPI) alludes to the acquisition of protections and other money related resources by financial specialists from another nation. Foreign direct investment (FDI) alludes to speculations made by an individual or firm in one nation in a business situated in another nation. Speculators can make unfamiliar direct interests in various manners. Some basic ones incorporate building up an auxiliary in another nation, gaining or converging with a current unfamiliar organization, or beginning a joint endeavor association with an unfamiliar organization. Foreign portfolio investment alludes to putting resources into the money related resources of a far off nation, for example, stocks or securities accessible on a trade (Hlaing & Kakinaka,, 2019). This kind of speculation is now and again saw less well than direct venture since portfolio speculations can be auctions off rapidly and are on occasion observed as transient endeavors to bring in cash, as opposed to a drawn out interest in the economy. Portfolio speculations regularly make some shorter memories outline for venture return than direct speculations. Similarly as with any value venture, unfamiliar portfolio speculators normally hope to rapidly understand a benefit on their ventures. Foreign direct investment includes setting up an immediate business enthusiasm for an outside nation, for example, purchasing or setting up an assembling business, building distribution centers, or purchasing structures. Unfamiliar direct venture will in general include building up all the more a significant, long haul enthusiasm for the economy of an outside nation. (Hlaing & Kakinaka,, 2019). Because of the fundamentally more elevated level of speculation required, unfamiliar direct speculation is typically embraced by worldwide organizations, enormous establishments, or investment firms. Unfamiliar direct speculation will in general be seen all the more well since they are viewed as long haul ventures, just as interests in the prosperity of the nation itself.Reference:Hlaing, S. W., & Kakinaka, M. (2019). Global uncertainty and capital flows: any difference between foreign direct investment and portfolio investment? Applied Economics Letters, 26(3), 202–209. https://doi.org/10.1080/13504851.2018.1458182Meng, G., & van Wincoop, E. (2020). A Decomposition of International Capital Flows. IMF Economic Review, 68(2), 362–389. https://doi.org/10.1057/s41308-019-00094-0