Exam 15: Transfer Pricing

A perfect intermediate market exists if buyers can buy and sellers can sell outside of the organization.A perfect market exists when buyers and sellers can have unlimited transactions with no impact on prices.

An appropriate transfer price between two divisions of The Stark Company can be determined from the following data: (CIA adapted) What is the natural bargaining range for the two divisions?

When actual costs are used as the basis for a transfer,inefficiencies of the selling division are transferred to the buying division.The selling division has no incentive to minimize the inefficiencies since they can all be passed on.

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

Given the following data for Division M: Division T would like to purchase 15,000 units each period from Division M.Division M has ample excess capacity to handle all of Division T's needs.Division T now purchases from an outside supplier at a price of $40.If Division M refuses to accept an $18 price internally,the company,as a whole,will be worse off by:

You have been provided with the following information for Division X of a decentralized company: Division W would like to purchase all of its units internally.Division W needs 6,000 units each period and currently pays $42 per unit to an outside firm.What is the lowest price that Division X could accept from Division W? Assume that Division W wants to use a sole supplier and will not purchase less than 6,000 from a supplier.

Parkside Inc.has several divisions that operate as decentralized profit centers.Parkside's Entertainment Division manufactures video arcade equipment using the products of two of Parkside's other divisions.The Plastics Division manufactures plastic components,one type that is made exclusively for the Entertainment Division,while other less complex components are sold to outside markets.The products of the Video Cards Division are sold in a competitive market;however,one video card model is also used by the Entertainment Division.The actual costs per unit used by the Entertainment Division follow: (CMA adapted) The Plastics Division sells its commercial products at full cost plus a 25% markup and believes the proprietary plastic component made for the Entertainment Division would sell for $6.25 per unit on the open market.The market price of the video card used by the Entertainment Division is $10.98 per unit.Assume that the Entertainment Division is able to purchase a large quantity of video cards from an outside source at $8.70 per unit.The Video Cards Division,having excess capacity,agrees to lower its transfer price to $8.70 per unit.This action would:

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?

Cascade Cliffs,Inc. ,operates two divisions: (1)a management division that owns and manages bulk carriers on the Great Lakes and (2)a repair division that operates a dry dock in Cheboygan,Michigan.The repair division works on company ships,as well as other large-hull ships.The repair division has an estimated variable cost of $37 per labor-hour.The repair division has a backlog of work for outside ships.They charge $70.00 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 $45.00 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?

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?

Avery Corporation has two divisions,A and B,which are both organized as profit centers;Division A produces and sells widgets to Division B and to outside customers.Division A has total costs of $35,$20 of which are variable.Division A is operating significantly below capacity and sells the widgets for $50.Division B has received an offer from an outsider vendor to supply all the widgets it needs (20,000 widgets)at a cost of $45.The manager of Division B is considering the offer but wants to approach Division A first.What would be the profit impact to Avery Corporation as a whole if Division B purchased the 20,000 widgets it needs from the outside vendor for $45?

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

Which of the following statements is (are)true? (A)If a transfer has no effect on divisional profit,managers will be indifferent between making the transfer or not.(B)If an intermediate market exists but divisions are prohibited from buying or selling from the outside,the intermediate market can be ignored in determining the optimal transfer price.

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

Cohasset Company currently manufactures all component parts used in the manufacture of various hand tools.Hurley Division produces a steel handle used in three different tools.The budget for these handles is 120,000 units with the following unit cost. Ironwood Division purchases 20,000 handles from Hurley Division and completes the hand tools.An outside supplier,R & M Steel,has offered to supply 20,000 units of the handle to Ironwood Division for $1.25 per unit.Hurley currently has idle capacity that cannot be used.If Cohasset would like to develop a range of transfer prices,what would be the maximum transfer price that Ironwood would be willing to pay?

Cost-based transfer prices that include a normal markup to the costs act as a surrogate for:

Given the following information for Division K: Division L would like to purchase internally from Division K.Division L now purchases 5,000 units each period from outside suppliers at $49 per unit.Division K has ample excess capacity to handle all of Division L's needs.What is the lowest price that Division K could accept?

Given a competitive outside market for identical intermediate goods,what is the BEST transfer price,assuming all relevant information is readily available?

Transfer prices would not be used by:

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?