Exam 15: Transfer Pricing

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.Last year,the Lantern Division bought all of its 25,000 pillars from Pillar at $1.50 each.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 \ 1.75 customers Variable costs per pillar \ 0.90 Fixed costs, total \ 150,000 The total fixed costs would be the same for all the alternatives considered below.Suppose the transfers of pillars to the Lantern Division cut into sales to outside customers by 15,000 units.What is the lowest transfer price that would not reduce the profits of the Pillar Division?

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

The Hinges Division of Altoona Corp.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 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?

When a perfect intermediate market exists,the optimal transfer price is the intermediate market price.

Briefly discuss some of the general issues of multinational transfer pricing.

The Raisin Division of Trail Mix Foods,Inc.had the following operating results last year: Sales (150,000 pounds of raisins) \ 60,000 Variable expenses 37,500 Contribution margin 22,500 Fixed expenses 12,000 Profit \ 10,500 Raisin expects identical operating results this year.The Raisin Division has the ability to produce and sell 200,000 pounds of raisins annually.Assume that the Peanut Division of Trail Mix Foods wants to purchase an additional 20,000 pounds of raisins from the Raisin Division.Raisin will be able to increase its profit by accepting any transfer price above:

Trevor Company operates several investment centers.The manager of the Genesis Division expects the following results for the coming year. Sales (60,000 units at \ 20) \ 1,000,000 Variable costs 600,000 Contribution margin \ 400,000 Fixed costs 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?

A perfect intermediate market exists if buyers can buy and sellers can sell outside of the organization.

If a transfer has no effect on divisional profit,risk-neutral managers will be indifferent between making the transfer or not.

Retro Rides Inc. ,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.The Repair division 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?

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.

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.

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?

SEMO Inc.has a division located in Spain and another in the U.S.The Spanish division produces a part needed for the product made by the U.S.division.There is substantial excess capacity in the Spanish division.The tax rate of the Spanish division is 35% and U.S.division tax rate is 30%.The part sells externally for $75 and the Spanish division's manufacturing costs are: Direct material \ 32 Direct labor 12 Variable overhead 6 Fixed overhead 19 Required: 1)What would be the lowest acceptable transfer price for the Spanish division? 2)What would be the highest acceptable transfer price for the U.S.division? 3)What would be the transfer price that would be the best for SEMO Inc.and why?

The Trevor Company operates several investment centers.The manager of the Genesis Division expects the following results for the coming year. Sales (60,000 units at \ 20) \ 1,000,000 Variable costs 600,000 Contribution margin \ 400,000 Fixed costs 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.Solar offers to sell the component to Genesis at a price of $6.Solar has a capacity of 330,000 units.Assume that Genesis wants to buy all of its needs from one source,so that Solar must supply all or none of the Genesis Division's need for 50,000 units.Required: a.Determine the change in income of the Solar Division of supplying the component to Genesis at $6 as opposed to not supplying Genesis.b.Determine the change in income of Trevor Company if Solar supplies Genesis at $6.

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

Retro Rides Inc. ,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.The Repair division 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?

Given the following data for Electrical Cord Division: Selling price to outside customers \ 40 Variable cost per unit 30 Fixed cost- Total 10,000 Capacity (in units) 2,000 Assume that Electrical Cord Division is selling all it can produce to outside customers.If it sells to the Appliance Division,$1 can be avoided in variable cost per unit.The Appliance Division is presently purchasing from an outside supplier at $38 per unit.From the point of view of the company as a whole,any sales to the Appliance Division should be priced at:

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.Last year,the Lantern Division bought all of its 25,000 pillars from Pillar at $1.50 each.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 \ 1.75 customers Variable costs per pillar \ 0.90 Fixed costs, total \ 150,000 The total fixed costs would be the same for all the alternatives considered below.Suppose the transfers of pillars to the Lantern Division cut into sales to outside customers by 15,000 units.Further suppose that an outside supplier is willing to provide the Lantern Division with basic pillars at $1.45 each.If the Lantern Division had chosen to buy all of its pillars from the outside supplier instead of the Pillar Division,the change in net operating income for the company as a whole would have been:

A transfer made at cost does not motivate the selling division to transfer its goods or services internally.