Exam 15: Transfer Pricing

Accutron, a large manufacturing company, has several autonomous divisions that sell their products in perfectly competitive external markets as well as internally to the other divisions of the company. Top management expects each of its divisional managers to take actions that will maximize the organization's goal as well as their own goals. Top management also promotes a sustained level of management effort of all of its divisional managers. Under these circumstances, for products exchanged between divisions, the transfer price that will generally lead to optimal decisions for Accutron would be a transfer price equal to the: (CIA adapted)

In interstate transactions, transfers can reduce an organization's tax liability when the selling division is in a lower tax jurisdiction than the buying division.

Hartland Company has used market price as its transfer price for the Sterling Division for many years with no problems. This year, because of changes in the economy, the demand for its final product has dropped along with the price. Required: Explain the problems of basing the transfer prices on distress market prices and possible solutions to the problems.

Finnish Corporation has a Supply Division that does work for other divisions in the company as well as for outside customers. The company's Custodial Products Division has asked the Supply Division to provide it with 10,000 special parts each year. The special parts would require $15.00 per unit in variable production costs. The Custodial Products Division has a bid from an outside supplier for the special parts at $29.00 per unit. In order to have time and space to produce the special parts, the Supply Division would have to cut back production of another product - the H56 that it is currently producing. The H56 sells for $32.00 per unit and requires $19.00 per unit in variable production costs. Packaging and shipping costs of the H56 are $3.00 per unit. Packaging and shipping costs for the new special part would be only $1.00 per unit. The Supply Division is currently producing and selling 40,000 units of the H56 each year. Production and sales of the H56 would drop by 20% if the new special part is produced for the Custodial Products Division. Required: (a) What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 10,000 special parts per year from the Supply Division to the Custodial Products Division? (b) Is it in the best interests of Finnish Corporation for this transfer to take place? Explain.

Which of the following statements is(are) false? (A) From an organization's viewpoint, transfer prices have no effect on total profits assuming the transfer occurs between two responsibility centers. (B) A transfer price is the value assigned to the transfer of goods or services between divisions within the same organization.

Which of the following is not an appropriate use of transfer pricing?

The Stake Division of the Outdoor Lumination Company produces stakes which can be sold to outside customers or transferred to the Solar Light Division of the Outdoor Lumination Company. Last year, the Solar Light Division bought 50,000 stakes from the Stake Division. The following data are available for last year's activities in the Stake Division: Capacity in units 400,000 stakes Quantity sold to outside customers 350,000 stakes Selling price per stake to outside customers \ 3.00 Total variable costs per stake \ 2.00 Fixed operating costs \ 200,000 In order to sell 50,000 stakes to the Solar Light Division, the Stake Division had to give up sales of 30,000 stakes to outside customers. That is, the Stake Division could sell 380,000 stakes each year to outside customers (rather than only 350,000 stakes as shown above) if it were not making sales to the Solar Light Division. - What is the lowest acceptable transfer price from the viewpoint of the selling division?

When the selling division in an internal transfer has unsatisfied demand from outside customers for the product that is being transferred, the lowest acceptable transfer price for the selling division is:

Division B has variable manufacturing costs of $50 per unit and fixed costs of $10 per unit. Assuming that Division B is operating significantly below capacity, what is the opportunity cost of an internal transfer when the market price is $75?

In general, if a potential transfer has no effect on divisional profits:

The Lock Division of Morgantown Corporation sells 80,000 units of part Z-25 to the outside market. Part Z-25 sells for $40, has a variable cost of $22, and a fixed cost per unit of $10. The Lock Division has a capacity to produce 100,000 units per period. The Cabinet Division currently purchases 10,000 units of part Z-25 from the Lock Division for $40. The Cabinet Division has been approached by an outside supplier willing to supply the parts for $36. What is the effect on Morgantown's overall profit if the Lock Division agrees to sell to the Cabinet Division at the outside supplier's price and the Cabinet Division continues to buy inside?

Trevor Company operates several investment centers. The manager of the Genesis Division expects the following results for the coming year: Sales (50,000 units at \ 20) \ 1,000,000 Variable costs 600,000 Contribution margin \ 400,000 Fixed costs 250,000 Profit \ 150,000 Included in the Genesis Division's variable cost is $7 for a component it buys from an outside supplier. One of these components is required in each unit of the Genesis Division's product. The manager of the Genesis Division has just found that she can buy the component from the Solar Division, another division of Trevor Company. The Solar Division sells 300,000 units of the component to outsiders at $8 and its variable cost is $4 per unit. The Solar Division offers to sell the component to Genesis at a price of $6. Solar is operating well below capacity. Required: (a) If Genesis accepts the offer, what will happen to the income of the Solar Division? (b) If Genesis accepts the offer, what will happen to the income of the Genesis Division? (c) If Genesis accepts the offer, what will happen to the income of the Trevor Company?

What is meant by a dual transfer pricing system? What are some advantages and disadvantages of it?

Altoona Corporation has two divisions, Hinges and Doors, which are both organized as profit centers. The Hinge Division produces and sells hinges to the Door Division and to outside customers. The Hinge Division has total costs of $35, $20 of which are variable. The Hinge Division is operating significantly below capacity and sells the hinges for $50. The Door Division has received an offer from an outsider vendor to supply all the hinges it needs (20,000 hinges) at a cost of $45. The manager of the Door Division is considering the offer but wants to approach the Hinge Division first. - What is the minimum transfer price from the Hinge Division to the Door Division?

Division A makes a part that it sells to customers outside of the company. Data concerning this part appear below: Selling price to outside customers \ 75 Variable cost per unit \ 50 Total fixed costs \ 400,000 Capacity in (units) 25,000 Division B of the same company would like to use the part manufactured by Division A in one of its products. Division B currently purchases a similar part made by an outside company for $70 per unit and would substitute the part made by Division A. Division B requires 5,000 units of the part each period. Division A can already sell all of the units it can produce on the outside market. What should be the lowest acceptable transfer price from the perspective of Division A?

Calvin Machinery Company manufactures heavy-duty equipment used in foundries, mining operations, and similar operations. The company is decentralized, with various division managers having control over capital investments and most production decisions. The Cylinder Division fabricates a component which is used by the Press Division in its production of metal presses. The Cylinder Division has been selling to the Press Division at a price of $3,000 per unit. Because of a cost increase, the Cylinder Division wants to increase its price to $3,200, even though the Press Division can still purchase an equivalent component externally for $3,000. The following information has been gathered regarding this issue: Press Division's annual purchases 100 units Cylinder Division's variable costs \ 2,400 per unit Cylinder Division's fixed costs \ 600 per unit Required: (support your answers with appropriate calculations) (a) If the Press Division buys its units externally, the Cylinder Division will have idle capacity for which there are no alternative uses. Will the company as a whole benefit if the Press Division purchases its units externally for $3,000 per unit? (b) If the Press Division buys its units externally, the Cylinder Division will have idle capacity which can be used to generate a positive cash flow of $40,000. Will the company as a whole benefit if the Press Division purchases its units externally for $3,000 per unit? (c) Refer to (b). Will your answer change if the price at which the Press Division can buy externally decreases to $2,700 per unit?

Transfer prices are used for all of the following except:

The Stake Division of the Outdoor Lumination Company produces stakes which can be sold to outside customers or transferred to the Solar Light Division of the Outdoor Lumination Company. Last year, the Solar Light Division bought 50,000 stakes from the Stake Division. The following data are available for last year's activities in the Stake Division: Capacity in units 400,000 stakes Quartity sold to outside customers 350,000 stakes Selling price per stake to outside customers \ 3.00 Total variable costs per stake \ 2.00 Fixed operating costs \ 200,000 In order to sell 50,000 stakes to the Solar Light Division, the Stake Division had to give up sales of 30,000 stakes to outside customers. That is, the Stake Division could sell 380,000 stakes each year to outside customers (rather than only 350,000 stakes as shown above) if it were not making sales to the Solar Light Division. - Suppose that last year an outside supplier would have been willing to provide the Solar Light Division with the basic stakes at $2.10 each. If the Solar Light Division had chosen to buy all of its stakes from the outside supplier instead of the Stake Division, the change in net operating income for the company as a whole would have been:

In general, the optimal transfer price for a division is the sum of its outlay costs and the opportunity cost of not transferring its goods to another division.

Given the following information for Camping Division: Selling price to outside customers \ 50 Variable cost per unit \ 30 Total fixed costs \ 400,000 Capacity in units 25,000 The Lantern Division would like to purchase internally from the Camping Division. The Lantern Division now purchases 5,000 units each period from outside suppliers at $49 per unit. The Camping Division has ample excess capacity to handle all of the Lantern Division's needs. What is the lowest price that the Camping Division could accept?