Exam 7: Transfer Pricing

Opportunity cost should be ignored in setting the transfer price.

The DVD Division of Sound Company makes and sells compact DVD players (DVDP) that it presently sells to outside customers. Budgeted costs next month for the DVD Division are as follows: MaxiSound, another division of Sound Company, would like to buy 1,000 of the DVDPs from the DVD Division. An outside supplier has offered to sell similar DVDPs to MaxiSound for $170 each. -Assume that DVD Division's monthly production capacity is 2,800 units. If the DVD Division sells 1,000 DVDPs to MaxiSound for $170 each, the monthly effect on the profits of DVD Division will be a:

Division X makes a part that it sells to customers outside of the company. Data concerning this part appear below: Division Y of the same company would like to use the part manufactured by Division X in one of its products. Division Y currently purchases a similar part made by an outside company for $70 per unit and would substitute the part made by Division X. Division Y requires 5,000 units of the part each period. Division X can already sell all of the units it can produce on the outside market. What should be the lowest acceptable transfer price from the perspective of Division X?

Using the formula in the text, if the lowest acceptable transfer price from the viewpoint of the selling division is $90 and the opportunity cost per unit on outside sales is $40, then the variable cost per unit must be:

The North Division of Barter Company makes and sells a single product, which is a part used in manufacturing trucks. The annual production capacity is 35,000 units and the variable cost of each unit is $24. Presently the North Division sells 32,000 units per year to outside customers at $40 per unit. The South Division of Barter Company would like to buy 15,000 units a year from North to use in its production. There would be no savings in variable costs from transferring the units internally rather than selling them externally. The lowest acceptable transfer price from the standpoint of the North Division should be closest to:

The Red River Division of Alto Company produces and sells bags of pottery clay which can either be sold to outside customers or transferred to the White Mountain Division of Alto Company. The following data are available for the last year: By selling to the White Mountain Division, the Red River Division will avoid $3 per bag in selling costs. -If Red River can sell only 10,000 bags annually to outside customers, according to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?

The Red River Division of Alto Company produces and sells bags of pottery clay which can either be sold to outside customers or transferred to the White Mountain Division of Alto Company. The following data are available for the last year: By selling to the White Mountain Division, the Red River Division will avoid $3 per bag in selling costs. -If Red River can sell 15,000 bags annually to outside customers, according to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?

The Western Division of Pryto Corporation sells Part D to other companies for $78.50 per unit. According to the company's cost accounting system, the costs to Western Division to make a unit of Product D are: The Southern Division of Pryto Corporation uses a part much like Part D in one of its products. The Southern Division can buy this part from an outside supplier for $78.25 per unit. However, the Southern Division could use Part D instead of this part that it purchases from outside suppliers. What is the most that the Southern Division would be willing to pay the Western Division for Product D?