Exam 15: Transfer Pricing

Veritron Division of Argos Inc.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 \ 200,000 Magnatron Division of Argos Inc.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 at $26.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.Find the effect of the deal on Magnatron's income.b.Find the effect of the deal on Veritron's income.c.Find the effect of the deal on the income of Argos Inc.as a whole.

What are the limitations of market-based transfer prices?

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

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

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 would be the profit impact to Altoona Corporation as a whole if the Door Division purchased the 20,000 hinges it needs from the outside vendor for $45?

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

The Alpha Division of a company,which is operating at capacity,produces and sells 1,000 units of a certain electronic component in a perfectly competitive market.Revenue and cost data are as follows: (CIA adapted) Sales \ 50,000 Variable costs 34,000 Fixed costs 12,000 The minimum transfer price that should be charged to the Beta Division of the same company for each component is:

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?

You have been provided with the following information for the Wool Division of a decentralized company: Selling price \ 46 Variable cost per unit 33 Fixed costper unit 12 Sales volume (units) 22,500 Capacity (units) 26,000 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.What is the lowest price that Wool Division could accept from the Blanket Division? 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 could accept from the Blanket Division?

Allentown Division of Sparks Inc.transfers its product to the Youngstown Division.The Youngstown Division can either buy the item internally or externally (cost = $73 each).The Allentown Division has just completed its annual cost update as follows: Direct material \ 25.00 Direct labor 18.00 Variable manufacturing 6.00 overhead Fixed manufacturing overhead 3.50 Variable selling expenses 4.00 Fixed selling and administrative expenses Total costs \ 65.00 Desired retum 14.00 Sales price \ 79.00 The Allentown Division is operating at 60 percent of its 400,000 unit capacity.Required: 1)What is the minimum transfer price the Allentown Division should charge for internal transfers? 2)What is the maximum price the Youngstown Division would be willing to pay? 3)Why should the Allentown Division reduce its price to the Youngstown Division?

Multinational firms often face conflicting pressures when developing transfer pricing policies.Tax avoidance results when:

You have been provided with the following information for Division X of a decentralized company: Selling price \ 90 Variable cost per unit 66 Fixed costper unit 20 Sales volume (units) 22,500 Capacity (units) 26,000 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. )

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

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

Which of the following is the most significant disadvantage of a cost-based transfer price? (CIA adapted)

An internal transfer between two divisions is in the best economic interest of the entire organization when:

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?

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

A division can sell externally for $40 per unit.Its variable manufacturing costs are $15 per unit,and its variable marketing costs are $6 per unit.What is the opportunity cost of transferring internally,assuming the division is operating at capacity?

Given the following data for Keyboard Division: Selling price to outside customers \ 25 Variable cost per unit 12 Fixed cost- Total 50,000 Capacity (in units) 125,000 The Computer Division would like to purchase 15,000 units each period from the Keyboard Division.The Keyboard Division has ample excess capacity to handle all of the Computer Division's needs.The Computer Division now purchases from an outside supplier at a price of $20.If the Keyboard Division refuses to accept an $18 price internally,the company,as a whole,will be worse off by: