Exam 15: Transfer Pricing

What are the limitations of market-based transfer prices?

Part 43X costs the Southern Division of Norris Corporation $26 to produce. Making up that cost are direct materials of $10, direct labor of $4, variable manufacturing overhead of $9, and fixed manufacturing overhead of $3. Southern Division sells Part 43X to other companies for $30. The Northern Division of Norris Corporation can use Part 43X in one of its products. The Southern Division has enough idle capacity to produce all of the units of Part 43X that the Northern Division would require. What is the lowest transfer price at which the Southern Division should be willing to sell Part 43X to the Northern Division?

When actual costs are used as the basis for a transfer, inefficiencies of the selling division are transferred to the buying division.

Transfer prices cannot be used for decision making, product costing, or performance evaluation.

Concrete Corporation has two producing centers, Contractor and Retailer. The Contractor Division has a variable cost of $12 for its products and a total fixed cost of $120,000. The Contractor Division also has idle capacity for up to 50,000 units per month. The Retailer Division would like to purchase 20,000 units of the Contractor Division's products per month but is unable to convince the Contractor Division to transfer units to the Retailer Division at $16 per unit. The Contractor Division has consistently argued that the market price of $20 is nonnegotiable. What is The Contractor Division's opportunity cost of not transferring units to the Retailer Division?

Table Lake Cruises, Incorporated, operates two divisions: (1) a Recreational Division that owns and manages charter boats on the lake and (2) a Repair Division that works on small gasoline crafts as well medium-size diesel engine boats. The Repair Division has an estimated variable cost of $45 per labor-hour and has a backlog of work for diesel engines. They charge $125 per hour for labor & overhead, which is standard for this type of work. The Recreational Division complained that it could hire its own repair workers for $85 per hour, including leasing an adequate work area. Required: (a) What is the minimum transfer price per hour that the Repair Division should obtain for its services, assuming it is operating at capacity? (b) What is the maximum transfer price per hour that the Recreational Division should pay? (c) If the Repair Division had idle capacity, what is the minimum transfer price that the Repair Division should obtain?

Transfer prices are not used to record the exchange between two cost centers within the same organization.

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 maximum transfer price per hour that the Management Division should pay?

You have been provided with the following information for the Wool Division of a decentralized company: Selling price \ 45 Variable cost per unit \ 33 Fixed cost per unit \ 12 Sales volume (units) 22,500 Capacity (units) 25,000 The Blanket Division would like to purchase all of its units internally. The Blanket Division needs 6,000 units each period and currently pays $42 per unit to an outside firm. Assuming that the Blanket Division wants to use a sole supplier and will not purchase less than 6,000 from a supplier, what is the lowest price that Wool Division should accept from the Blanket Division?

What are the principal items that must be disclosed about each segment and how does this differ if a company has significant foreign operations?

From an organization's viewpoint, transfer prices have no effect on total profits assuming the transfer occurs between two responsibility centers.

Why is transfer pricing only a concern for profit or investment centers and not for cost or revenue centers?

Top management intervention in settling transfer pricing disputes between two divisions should be avoided unless

What are the advantages and disadvantages of using a negotiated transfer price?

The transfer price that should be used by top management in evaluating whether a division should buy within the company or from an outside supplier is the:

Explain the general principle for determining the optimal transfer price.

The following costs exist for the Wiring Division of Coriander Corporation: Direct materials \ 67,500 Direct labor 45,000 Manufacturing overhead (25\% variable) 45,000 Operating expenses (30\% variable) 75,000 Output 30,000 units The output of the Wiring Division, which sells for $10 per unit externally, is used by the Electrical Harness Division. Required: Compute the transfer price for a unit of the Wiring Division's output using: a) market price. b) variable production cost plus 30%. c) absorption cost plus 25%. d) variable cost. e) total cost plus 10%.

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 there is ample capacity so that transfers of the pillars to the Lantern Division do not impact sales to outside customers. What is the lowest transfer price that would not reduce the profits of the Pillar Division?

Midland Incorporated has two divisions: Production and Marketing, which it treats as profit centers. Because the Production Division has no marketing capabilities, it does not have a traditional market price to consider and the company does not want to use negotiation. Required: Discuss the following cost-based transfer prices along with problems that might exist for each. a) Standard cost. b) Full absorption cost. c) Actual cost.

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 refuses to sell at the outside supplier's price and the Cabinet Division decides to buy outside?