Part A: Gamma Company

Part A: Gamma Company
Purchase dilemma by Assembly Centre
The only benefit the Tire Centre gets from selling to the Assembly is in incurring no supply expenses. Conversely, the Assembly Centre can source from external sources, maximizing their returns from favourable market prices from those offered by the Tire division; the Tire Centre's actual production cost of $210 is higher than the market price ($200).
Determining the transfer price
An appropriate transfer price is one that at least matches the marginal unit cost incurred by the transferring division and the same time be lower than the transfer-in net marginal revenue (King, 2009). From the Tire Centre's pricing, its marginal cost is $210 while its net marginal value has a ceiling set at $300. For the divisions to be able to negotiate a transfer price, the Assembly Centre net marginal revenue needs to be greater than $300.
Capacity assessment
There appears to be no scenario where the two Centres can trade from their price differences. Given that the Tire Centre can sell externally at optimal price, it serves the firm better when both buy/sell to the market. Regardless, the Tire Centre foes not have the capacity to transfer-in the total requirement of 90,000 of the Assembly Centre, which means it will still have to source for the extra 50,000 units.
Fixing transfer prices
There are three methods used to set transfer prices. The first method, the marked-based standard, is one where the transfer price is determined by the market price. In cases where this method is used, of the divisions may suffer if its marginal costs are not at market standards. The second method, the cost-based transfer, requires divisions to determine the transfer price based on fair price, a requirement that makes it almost impossible to use, unless there is intervention in negotiations by an executive like in the Gamma case. When negotiated, the transfer price is made by the negotiated transfer price method, which can or not be based on fair price (Bakker & Levey, 2011).
Company evaluation
The competitive effectiveness:
The sales (market) variance = (actual volume – planned volume) × planned price
The total sales (market) variance = 12*(5878-5775)
The sales (market) variance = $1232 (U)
The impact of the change in sales price:
The sales price variance = actual volume × (actual price - planned price)
The Total sales price variance = 5878*(11.8-12)
The sales (market) variance = $-818 (U)
The impact of the change in cheese sales volume:
The sales (market) variance = (actual volume – planned volume) × planned price
The cheese sales (market) variance = 10.84*(5360-5125)
The sales (market) variance = $2547.4 (U)
Change in Cheese price:
The sales price variance = actual volume × (actual price - planned price)
The Cheese sales price variance = 5360*(10.5-10.84)
The sales (market) variance = $-1822 (U)
The change in yoghurt sales volume:
The sales (market) variance = (actual volume – planned volume) × planned price
The cheese sales (market) variance = 20.8*(518-650)
The sales (market) variance = $-2746 (F)
The change in Yoghurt price:
The sales price variance = actual volume × (actual price - planned price)
The yoghurt sales price variance = 518*(25.5-20.8)
The sales (market) variance = $2435 (F)
The operating efficiency:
The impact of the change in raw materials:
Cheese dairy ingredients
The efficiency (quantity) variance = (actual volume - planned volume) × planned price
The efficiency (quantity) variance = 6.78*(4824-4100)
The efficiency (quantity) variance = $4908 (F)
The spending variance = (actual price - planned price) × actual volume
The spending variance = 4824*(5.5-6.78) = $-6174 (F)
Other ingredients
The efficiency (quantity) variance = (actual volume - planned volume) × planned price
The efficiency (quantity) variance = 3.6*(2412-5125)
The efficiency (quantity) variance = $ 1303 (F)
The spending variance = (actual price - planned price) × actual volume
The spending variance = 2412*(3.5-3.6) = $- 107 (F)
Yoghurt
Yoghurt dairy ingredients
The efficiency (quantity) variance = (actual volume - planned volume) × planned price
The efficiency (quantity) variance = 6*(362.2-585)
The efficiency (quantity) variance = $ -1337 (U)
The spending variance = (actual price - planned price) × actual volume
The spending variance = 362.2*(5-6) = $-362 (F)
Other ingredients
The efficiency (quantity) variance = (actual volume - planned volume) × planned price
The efficiency (quantity) variance = 16*(129.5-130)
The efficiency (quantity) variance = $-8 (U)
The spending variance = (actual price - planned price) × actual volume
The spending variance = 129.5*(14-16) = $- 259 (F)
Labor
The impact of the change in labor:
The efficiency (hours) variance = (actual hours - planned hours) × planned labor rate
The efficiency (hours) variance = 18.75*(41.44-52.16)
The efficiency (hours) variance = $-201 (F)
The spending variance = (actual labor rate - planned labor rate) × actual hours
The spending variance = 41.44*(25-18.75) = $259 (F)
Impact on other costs
Planned
Actual
 Variance
 
Other Costs
7860
7940
80
U
Supervision, energy, maintenance
1680
1750
70
U
Depreciation
2764
2915
151
F
Delivery expenses
1631
1643
12
F
Depreciation of trucks
3461
3656
195
F
Selling expenses
3662
3444
-218
U
Advertising
2530
2601
71
F
Administrative salaries and expenses
399
399
 
 -
Rent
517
617
100
F
Allocates central office expenses
26837
29312
2475
 F
Total

Part B: Cash flow analysis
Cash flow budget
The cash budget, the typical name for the cash flow analysis is a chronological plan for the various cash inflows and out flows by an organization over a determined time. Organizations prepare cash budgets over three, six and twelve months, depending on required precision of forecast (Needles, Powers & Crosson, 2014). The cash flow budget is the summary of all budgets since it is the monetary summary of revenue, operational and production activities. Thus, production, sales and operational forecasts must be determined together with administrative and delivery costs before the cash budget can be compiled. Sales and other income sources expected to be collected for the period are recorded under inflows whereas the production costs, processing and operating costs recorded under out flows. The balancing figure is thus the difference between the cash inflows and cash outflows, referred to as the net cash inflow.
Merits of cash flow forecasts
Cash flow forecasting is highly beneficial to a business organization. Business that forecast cash flows are able to have a deeper understanding of the cash cycles, allowing them to identify and plan for cash shortage periods (Needles, Powers & Crosson, 2014). Further, through cash flow forecasting businesses are able to identify patterns of cash flow cycle and make arrangements to increase working capital so as to avoid operational challenges or interruptions. Lastly, cash flow projection provides a basis for the formulation of credit policy. Firms are able to identify risk customers and low payment periods, improving financial planning and overall management.
Cash superiority over revenues and profits
Cash is superior to both revenues and profit in the operations of the business. Cash is the driving force that enables a business to carry out its normal operations, without which a business will collapse. Production, marketing activities, delivery costs, salaries, administrative costs among other operating costs are financed by cash, defining a company's core operations (Klemstine & Maher, 2014). Fundamentally, managers make decisions based on available cash, not profits or revenues.
Revenue is an important element to cash, but it does not necessarily equal to cash. Revenues refers to inflows from operations, which only after collection does it become cash. Additionally, revenue does not equal cash; loans and capital are part of a business cash balance that managers use to run a company ((Checkley, 2012). Further, expenses incurred in the generation of revenue are not considered when recognizing revenue. Therefore, using revenue would not represent a true measure of the company resources.
Similar to revenues, profits is basically an accounting metric. Profit is measured based on revenues and expenses incurred during a given period. This excludes pre-payments or accruals, which may not be useful for facilitating operations. Depreciations and debt or credit arrangements are ignored in profits, which may be far from the actual position. The only scenario where profit is comparable to cash is in a cash sales business. Even in such cases, it's not equal to cash; cash is the only accurate measure of liquidity (Jury, 2012).
Importance of cash flow (company of choice)
A firm that maintains a relatively high cash balance has less risk of encountering operational problems related with cash shortage. A large car manufacturer like Daimler making super brands like Freightliner, Mercedes, McLaren and Mitsubishi among others brands requires high capital to be able to maintain supplier obligations and maintain distribution networks (Daimler Annual Report 2013 pp. 36).
Daimler has debt obligations in loan facilities and notes payable that finance the company's asset acquisitions at the purchase. In order for the car maker to be able to make timely repayments, it must ensure it has sufficient funds to pay for interest and loan repayments at the scheduled time.
Since Diamler is a leading car exporter, recession would adversely affect its cash flow position. A global recession would reduce the demand on cars, as consumers disposable incomes are hit. An increase in interest rates would make borrowing for expansion difficult as well as affect loan schedule for existing debts, plunging the company into deeper financial problems




References
KING, E. A. (2009). Transfer pricing and corporate taxation: Problems, practical implications and proposed solutions. New York: Springer.
KLEMSTINE, C. F., & MAHER, M. W. (2014). Studies in Cash Flow Accounting and Analysis (RLE Accounting) Aspects of the Interface Between Managerial Planning, Reporting and Control and External Performance Measurement. Oxon, Routledge.
BAKKER, A., & LEVEY, M. M. (2011). Transfer pricing and dispute resolution: aligning strategy and execution. Amsterdam, the Netherlands, IBFD.
JURY, T. D. H. (2012). Cash flow analysis and forecasting the definitive guide to understanding and using published cash flow data. West Sussex [England], John Wiley & Sons.
STEFFAN, B. (2008). Essential management accounting how to maximise profit and boost financial performance. London, Kogan Page.
CHECKLEY, K. (2012). Cash Is Still King. Routledge.
DAIMLER. Annual Report 2013. Retrieved from http://www.daimler.com/Projects/c2c/channel/documents/2432177_Daimler_2013_Annual_Report.pdf
NEEDLES, B. E., POWERS, M., & CROSSON, S. V. (2014). Principles of accounting. Mason, OH, Cengage Learning.