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    AM Marketing Division

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    Note the following statements from the case (third paragraph, page 1) that should be changed.

    "After elimination of intracompany sales from the manufacturing divisions to AM Marketing, outside sales constituted almost one third of the manufacturing divisions' volume. Top management's goals was to increase to 50 percent the AM portion of outside sales dollars from the present level of 45.4545 percent".

    Please read the three attachments and answer the following questions:

    1. Calculate the sales, cost of sales and gross profit for the AM Marketing Division

    2a. Why was ROI based on beginning of the year assets?
    b. What was the connection with this policy and high year end inventories?
    c. How would you solve this issue?

    3a. Why does management want to increase to 50% the AM portion of outside sales from the present 45.45%?
    b. Why would plant managers rather sell to OEM's than transfer to AM Marketing?
    c. How do you suppose to solve this problem? Your discussion should explain how your proposal will give the managers of the other divisions an incentive to transfer to AM Marketing.

    4a. What was the transfer pricing policy?
    b. Recommend any changes with this policy. Provide reasons for your recommendation

    Please help me out answering these questions or part of these questions that would be great.


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    Solution Preview

    The response addresses the query posted in 1229 words with APA references

    //Transfer pricing policy, in the case of divisions treated as invest centers, is crucial for increasing the overall profitability of the company. In the following paragraphs, there will be a description of the transfer pricing policy of Tru-Fit Parts, Inc. with consideration of three manufacturing divisions and AM Marketing division. AM Marketing division of the company takes goods from three manufacturing divisions at the market price. There will also be a discussion on the company's policy regarding the calculation of Return on Investment (ROI) in order to show the increased performance of the company in the market. //

    Answer 1

    Sale of AM Marketing Division = $360,000,000 (Tru-Fit Parts, Inc.)

    Cost of goods sold of AM Marketing Division = $252,000,000

    Gross profit of AM Marketing Division = $108,000,000

    (Note: In the given case, there is no information regarding the cost of goods sold or gross profitability of divisions or the company as a whole. Hence, it is assumed that the gross profit rate will be around 30% for AM Marketing division.)

    Answer 2


    The ROI is based on the beginning of the year assets because the investment in assets during the year cannot result in the addition of high profitability. The investment during the current year will result in the addition of profitability in the next year. It is beneficial for the company to show the improved return on the investment because of eliminating the investment during the year to calculate the Return on Investment (ROI) (Tru-Fit Parts, Inc.)


    The connection with the policy of ROI, based on the beginning of the year assets and high year-end inventories, is to show the improved ROI because the high year-end inventories show the high profitability by lowering the cost of goods sold. The high ending inventory will reduce the cost of goods sold so as to show high ...

    Solution Summary

    AM marketing divisions are examined. Why management wants to increase to 50% the AM portion of outside sales from the present 45.45% is determined. The response addresses the query posted in 1229 words with APA references