Exam 15: Transfer Pricing

An organization that has significant foreign operations must disclose how its transfer prices are established between domestic and foreign divisions.This is a requirement of GAAP.

In the United States,more companies use cost-based transfer prices than market-based transfer prices.Numerous surveys have shown this to be true.

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.What is the minimum transfer price per hour that the repair division should obtain for its services,assuming it is operating at capacity?

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.It is the opportunity cost of the resource at the point of the transfer.Normally this is the lost contribution by not selling outside.

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?

A company has two divisions,A and B,each operated as a profit center.Division A charges Division B $35 per unit (for each unit transferred to Division B).Other data for Division A are as follows: Division A is planning to raise its transfer price to $50 per unit.Division B can purchase units at $40 per unit from outsiders,but doing so would idle Division A's facilities (now committed to producing units for Division B),Division A cannot increase its sales to outsiders.From the perspective of the company as a whole,from who should Division B acquire the units,assuming Division B's market is unaffected?

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:

Cruises,Inc. ,operates two divisions: (1)a management division that owns and manages cruise ships in the Florida Keys and (2)a repair division that operates a dry dock in Marble Sand Florida.The repair division works on company ships,as well as other large-hull ships.The repair division has an estimated variable cost of $28.50 per labor-hour.The repair division has a backlog of work for outside ships.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?

If the selling division has excess capacity,the transfer price should be set at its:

Transfer prices are not used to record the exchange between two cost centers within the same organization.Transfer prices are used for profit and investment centers.Cost centers are not concerned with profits.

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:

A large manufacturing company has several autonomous divisions that sell their products in perfectly competitive external markets as well as internally to the other divisions of the company.Top management expects each of its divisional managers to take actions that will maximize the organization's goal as well as their own goals.Top management also promotes a sustained level of management effort of all of its divisional managers.Under these circumstances,for products exchanged between divisions,the transfer price that will generally lead to optimal decisions for the manufacturing company would be a transfer price equal to the: (CIA adapted)

In general,if a potential transfer has no effect on divisional profits:

A market price-based transfer price policy allows the selling division to determine the price for transfers between divisions within the same organization.The market determines the price,not the division.

Transfer prices cannot be used for decision making,product costing,or performance evaluation.Transfer pricing is used in decision making,product costing,and performance evaluation.

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 opportunity cost of transferring internally,assuming the division is operating at capacity?

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.Since the divisions are prohibited,the outside price is irrelevant.

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.A per-unit transfer price from the Video Cards Division to the Entertainment Division at full cost,$9.15,would:

You have been provided with the following information for Division Sell of a decentralized company: Division Buy would like to purchase all of its units internally.Division Buy needs 6,000 units each period and currently pays $84 per unit to an outside firm.What is the lowest price that Division Sell could accept from Division Buy? (Assume that Division Buy wants to use a sole supplier and will not purchase less than 6,000 from a supplier. )

Given the following data for Division L: Division N would like to purchase 10,000 units from Division L at a price of $125 per unit.Division L has no excess capacity to handle Division N's requirements.Division N currently purchases from an outside supplier at a price of $140.If Division L accepts a $125 price internally,the company,as a whole,will be better or worse off by: