Evaluate and discuss whether Boeing could benefit by usingstandard costs. The discussion should include what factor(s)influenced your decision, the ramifications of costs, quantity, andvariances, and the ramifications of using standard costs in theinternational business environment.
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Case Study 3:
SSHA Holdings Pty Ltd owns two business units; Rotor Electricsin Nauru and Green Acres in Australia. Each business unit istreated as a profit center by SSHA Holdings. Rotor Electricsmanufactures electric motors in Nauru, which it sells in theInternational market for AUS$220 per unit. Green Acres Ltd. makesride-on mowers using electric motors similar to those manufacturedby Rotor Electrics Ltd. Currently, Green Acres buys these similarelectric motors from an Australian supplier (external supplier thatis not part of the SSHA Holdings group) for $220. Both companiespay 10% sales commission only when they sell their products toexternal customers.
The unit selling prices and relevant costs are given below.
| Rotor Electrics Amounts per motor | Green Acres Amounts per ride-on mower | |
Selling Price per unit | $220 | $2100 |
Production Cost per unit | $100 | $1100 (including the electric motors purchased at $220) |
Selling Expenses (10% sales commission) | $22 | $210 |
Requirements
1. Calculate the profits made by (1) Rotor Electrics businessunit (per motor), (2) Green Acres business unit (per refrigerator),and (3) SSHA Holdings Ltd (as a whole group), when Rotor Electricssells to external customers and Green Acres buys from an externalsupplier
2. SSHA Holdings management decides that Rotor Electrics mustsell its electric motors to Green Acres. The managing director isaware of the 20% tax rate in Nauru compared to Australiaâs 30% taxrate and decides to set a transfer price that will minimize SSHAHoldings overall income tax.
To achieve this tax minimization goal, the managing directorsets a transfer selling price of AUS$400 per motor for RotorElectrics to sell to Green Acres.
Using this new transfer selling price for Rotor Electrics,calculate the profits made by (1) Rotor Electrics business unit(per motor), (2) Green Acres business unit (per refrigerator), and(3) SSHA Holdings Ltd (as a whole group). You should ignore anyother transfer costs (such as exchange rate fluctuations) in youranswer.
3. The managing director cannot see why the current performancemeasures (Profit and Return on Investment) for each manager shouldbe changed (the managing director does not consider whether the newarrangement will affect bonuses or future promotion prospects forthe managers of each company). Using your answers to requirement 1and 2 above, explain;
a. Whether the Rotor Electrics manager and the Green Acresmanager would both support the decision to transfer the electricmotors from Rotor Electrics to Green Acres at AUS$400. Describe(using your calculations) the impact of the new transfer sellingprice on the performance for Rotor Electrics and for GreenAcres.
b. Whether the $400 transfer price is a goal congruent transferprice given the managing directorâs decision to retain the sameperformance measures.
c. Whether there is an alternative recommendation you would maketo the managing director using any of the information you haveprepared when answering requirements 1, 2, or 3
