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Management Accounting Question

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1. The US Division of Zenith Pharma manufactures drugs for treating depression. It is planning to sell one of its drugs, Optima, in the Asian market through a subsidiary and is deciding between two locations: Hong Kong and Dubai. Zenith Pharma expects to sell 10,000 units of the drug each year in the Asian market at a price of $100/unit. It costs Zenith $20 to produce one unit of this drug. If Zenith opens a subsidiary in Hong Kong, the US division will incur transportation costs of $100,000 to deliver the drugs to Hong Kong and the Hong Kong division would incur sales and distribution expenses of $150,000. If Zenith opens a subsidiary in Dubai, the US division will incur transportation costs of $50,000 to deliver the drugs to Dubai and the Dubai division would incur sales and distribution expenses of $250,000 Assume that corporate tax rate in Dubai is 10%, in Hong Kong is 25% and in the US is 20%. In addition, tax authorities in US, Dubai and Hong Kong will accept any transfer price between $40 and $80. To maximize after-tax consolidated income, where should Zenith Pharma open its subsidiary, what should it set as the transfer price for each unit of the drug and what would be its consolidated after-tax income? (Assume that profits earned by the subsidiary are not subject to any US taxes) 2. For the month of November, Seasonal Inc. expected to make and sell 1,000 spruce trees at a price of $100/tree. Seasonal Inc. budgeted the following costs for the month of November Direct Material Direct Labor Overhead Variable Cost/unit Fixed Cost/month $21 $19 $15 $15,000 Actual records for the month of November reveal the following information Revenues Direct Material Cost Direct Labor Cost Total Overhead Cost Profit No. of trees produced and sold $81,000 $13,600 $16,400 $24,000 27,000 900 a) Prepare static and flexible budgets for November b) What is the flexible budget variance and volume variance for Direct Material Cost and indicate if it is favorable or unfavorable

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