Exam 15: Transfer Pricing

A division can sell externally for $60 per unit. Its variable manufacturing costs are $35 per unit, and its variable marketing costs are $12 per unit. What is the optimal transfer price for transferring internally, assuming the division is operating at capacity?

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

Division A has variable manufacturing costs of $25 per unit and fixed costs of $5 per unit. Division A is operating at capacity. What is the opportunity cost of an internal transfer when the market price is $35?

Martin Company currently manufactures all component parts used in the manufacturing of various hand tools. The Extruding Division produces a steel handle used in three different tools. The budget for these handles is 120,000 units with the following unit cost: Direct materials \ 0.60 Direct labor 0.40 Variable overhead 0.10 Fixed overhead 0.20 Total unit cost \ 1.30 The Polishing Division purchases 20,000 handles from the Extruding Division and completes the hand tools. An outside supplier, Venture Steel, has offered to supply 20,000 units of the handle to the Polishing Division for $1.25 per unit. The Extruding Division currently has idle capacity that cannot be used. - What is the cost impact to Martin Company as a whole of purchasing from Venture Steel? (CMA adapted)

Division X of Operandi Corporation makes and sells a single product which is used by manufacturers of fork lift trucks. Currently, it sells 12,000 units per year to outside customers at $24 per unit. The annual capacity is 20,000 units and the variable costs to make each unit is $16. Division Y of Operandi Corporation would like to buy 10,000 units a year from Division X to use in its products. There would be no cost savings from transferring the units within the company rather than selling them on the outside market. What should be the lowest acceptable transfer price from the perspective of Division X?

You have been provided with the following information for Division X of a decentralized company: Selling price \ 90 Variable cost per unit 66 Fixed cost per unit 20 Sales volume (units) 22,500 Capacity (units) 25,000 Division Y of the same company would like to purchase all of its units internally. Division Y needs 6,000 units each period and currently pays $84 per unit to an outside firm. What is the lowest price that Division X could accept from Division Y? (Assume that Division Y wants to use a sole supplier and will not purchase less than 6,000 from a supplier.)

The Pillar Division of the Gothic Building Company produces basic pillars which can be sold to outside customers or sold to the Lantern Division of the Gothic Company. The Lantern Division wants to purchase 25,000 pillars from the Pillar Division. The following data are available for last year's activities of the Pillar Division: Capacity in units 300,000 pillars Selling price per pillar to outside customers \ 1.75 Variable costs per pillar \ 0.90 Fixed costs, total \ 150,000 The total fixed costs would be the same for all the alternatives considered. - Suppose the transfers of pillars to the Lantern Division would reduce sales to outside customers by 15,000 units. What is the lowest transfer price that would not reduce the profits of the Pillar Division?

Retro Rides, Incorporated, operates two divisions: (1) a Management Division that owns and manages classic automobile rentals in Miami, Florida and (2) a Repair Division that restores classic automobiles in Clearwater, Florida. The Repair Division works on classic motorcycles, as well as other classic automobiles. The Repair Division has an estimated variable cost of $28.50 per labor-hour and has a backlog of work for automobile restoration. They charge $48.00 per hour for labor, which is standard for this type of work. The Management Division complained that it could hire its own repair workers for $30.00 per hour, including leasing an adequate work area. - What is the minimum transfer price per hour that the Repair Division should obtain for its services, assuming it is operating at capacity?

The Measurement Division of Flow Company produces pumps which it sells for $20 each to outside customers. The Measurement Division's cost per pump, based on normal volume of 500,000 units per period, is shown below: Variable costs \ 12 Fixed overhead 3 Total \ 15 Flow has recently purchased a small company which makes sprinkler systems. This new company is presently purchasing 100,000 pumps each year from another manufacturer. Since the Measurement Division has a capacity of 600,000 pumps per year and is now selling only 500,000 pumps to outside customers, management would like the new Sprinkler Division to begin purchasing its pumps internally. The Sprinkler Division is now paying $20 per pump, less a 10% quantity discount. The Measurement Division could avoid $1 per unit in variable costs on any sales to the Sprinkler Division. Required: (a) Treating each division as an independent profit center, within what price range should the internal sales price fall? (b) Now assume that the Measurement Division is selling 600,000 pumps per year on the outside. Determine the appropriate transfer price. Show all computations.

Martin Company currently manufactures all component parts used in the manufacturing of various hand tools. The Extruding Division produces a steel handle used in three different tools. The budget for these handles is 120,000 units with the following unit cost:| Direct material \ 0.60 Direct labor 0.40 Variable overhead 0.10 Fixed overhead 0.20 Total unit cost \ 1.30 The Polishing Division purchases 20,000 handles from the Extruding Division and completes the hand tools. An outside supplier, Venture Steel, has offered to supply 20,000 units of the handle to the Polishing Division for $1.25 per unit. The Extruding Division currently has idle capacity that cannot be used. - If Martin Company would like to develop a range of transfer prices, what would be the minimum transfer price that the Extruding Division would be willing to accept?

Which of the following transfer pricing methods must be used in segment reporting by the oil and gas industry?

Salamander Company expects the following results in the coming period: Division A Division B Sales A: (10,000\times\ 160) \1 ,600,000 (\ 25,000\times\ 72) \ 1,800,000 Variable costs Contribution margin \ 240,000 \ 900,000 Fixed costs profit \8 0,000 \ 540,000 Included in Division A's costs are 10,000 units of a subcomponent purchased from an outside supplier for $45. The managers have recently initiated negotiations for Division B to supply the components to Division A. Division B has a total capacity of 40,000 units. Required: (a) Would the Salamander Company prefer the subcomponent used by A to be purchased internally from B or from the outside vendor? (b) What would be the maximum and minimum transfer prices?

The GAAP financial reporting rules for segments require that all companies use transfer prices based on market prices.

Veritron Division of Argos Incorporated has a capacity of 100,000 units and expects the following results for the year: Sales (90,000 units at \ 30) \ 2,700,000 Variable costs, at \ 20 1,800,000 Fixed costs Income Magnatron Division of Argos Incorporated currently purchases 20,000 units of a part for one of its products from an outside supplier at $32 per unit. Magnatron's manager believes she could use a minor variation of Veritron's product instead and offers to buy the units from Veritron for $26 per unit. Making the variation desired by Magnatron would cost Veritron an additional $5 per unit and would increase Veritron's annual cash fixed costs by $80,000. Veritron's manager agrees to the deal offered by Magnatron's manager. Required: (a) What is the effect of the deal on Magnatron's income? (b) What is the effect of the deal on Veritron's income? (c) What is the effect of the deal on the income of Argos Incorporated as a whole?

Shipping Industries is a decentralized company that evaluates its divisions based on ROI. The North Division has the capacity to produce 2,000 units of a component. The North Division's variable costs are $85 per unit and fixed costs are $70 per unit. The South Division can use the North Division's product as a component in one of its products. The South Division would incur $65 of variable costs to convert the component into its own product which sells for $310. Required (consider each question independently): (a) Assume the North Division can sell all that it produces for $185 each. The South Division needs 100 units. What is the appropriate transfer price? (b) Assume the North Division can sell 1,800 units at $265. Any excess capacity will be unused unless the units are purchased by the South Division (which can use up to 100 units). What are the minimum and maximum transfer prices?

Retro Rides, Incorporated, operates two divisions: (1) a Management Division that owns and manages classic automobile rentals in Miami, Florida and (2) a Repair Division that restores classic automobiles in Clearwater, Florida. The Repair Division works on classic motorcycles, as well as other classic automobiles. The Repair Division has an estimated variable cost of $28.50 per labor-hour and has a backlog of work for automobile restoration. They charge $48.00 per hour for labor, which is standard for this type of work. The Management Division complained that it could hire its own repair workers for $30.00 per hour, including leasing an adequate work area. - If the Repair Division had idle capacity, what is the minimum transfer price that the Repair Division should obtain?

The general principle on setting transfer prices that are in the organization's best interests is:

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 \ 40 Variable cost per unit \ 30 Total fixed costs \ 10,000 Capacity in units 20,000 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 $38 per unit and would substitute the part made by Division A. Division B requires 5,000 units of the part each period. Division A has ample capacity to produce the units for Division B without any increase in fixed costs and without impacting sales to outside customers. If Division A sells to Division B, the variable cost per unit would be $1 lower than when selling to outside customers. What should be the lowest acceptable transfer price from the perspective of Division A?

Division X has asked Division K of the Easton Company to supply it with 5,000 units of part L433 this year to use in one of its products. Division X has received a bid from an outside supplier for the parts at a price of $26.00 per unit. Division K has the capacity to produce 30,000 units of part L433 per year. Division K expects to sell 26,000 units of part L433 to outside customers this year at a price of $30.00 per unit. To fill the order from Division X, Division K would have to cut back its sales to outside customers. Division K produces part L433 at a variable cost of $21.00 per unit. The cost of packing and shipping the parts for outside customers is $2.00 per unit. These packing and shipping costs would not have to be incurred on sales of the parts to Division X. 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 5,000 parts this year from Division K to Division X? b. Is it in the best interest of the Easton Company overall for this transfer to take place? Explain.

The Hinges Division of Altoona Corporation sells 80,000 units of part Z-25 to the outside market. Part Z-25 sells for $40 and has a variable cost per unit of $22 and a fixed cost per unit of $10. The Hinges Division has a capacity to produce 100,000 units per period. The Door Division currently purchases 10,000 units of part Z-25 from the Hinges Division for $40. The Door Division has been approached by an outside supplier willing to supply the parts for $36. -If Altoona uses a negotiated transfer pricing system, what is the maximum transfer price that should be charged for this transaction?