Exam 22: Transfer Pricing

Stokan Products, Inc., has a Antennae Division that manufactures and sells a number of products, including a standard antennae that could be used by another division in the company, the Aircraft Products Division, in one of its products. Data concerning that antennae appear below: The Aircraft Products Division is currently purchasing 5,000 of these antennaes per year from an overseas supplier at a cost of $57 per antennae. Assume that the Valve Division is selling all of the valves it can produce to outside customers. Also assume that $7 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. What should be the minimum acceptable transfer price for the valves from the standpoint of the Valve Division?

Yearout Products, Inc., has a Valve Division that manufactures and sells a number of products, including a standard valve that could be used by another division in the company, the Pump Division, in one of its products. Data concerning that valve appear below: The Pump Division is currently purchasing 9,000 of these valves per year from an overseas supplier at a cost of $53 per valve. Assume that the Valve Division is selling all of the valves it can produce to outside customers. Does there exist a transfer price that would make both the Valve and Pump Division financially better off than if the Pump Division were to continue buying its valves from the outside supplier?

Division S of Kracker Company makes a part that it sells to other companies. Data on that part appear below: Division B, another division of Kracker Company, presently is purchasing 10,000 units of a similar product each period from an outside supplier for $28 per unit, but would like to begin purchasing from Division S. Suppose that Division S can sell all that it can produce to outside customers. If Division S sells to Division B at a price of $28 per unit, the company as a whole will be:

Shular Products, Inc., has a Valve Division that manufactures and sells a number of products, including a standard valve that could be used by another division, the Division, in one of its products. Data concerning that valve appear below: The company has a Pump Division that could use this valve in one of its products. The Pump Division is currently purchasing 8,000 of these valves per year from an overseas supplier at a cost of $47 per valve. Required: a. Assume that the Valve Division has enough idle capacity to handle all of the Pump Division's needs. What is the acceptable range, if any, for the transfer price between the two divisions? b. Assume that the Valve Division is selling all of the valves it can produce to outside customers. Also assume that $5 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. What is the acceptable range, if any, for the transfer price between the two divisions?

Whenever the selling division must give up outside sales in order to sell internally, it has an opportunity cost that should be considered in setting the transfer price.

Leneau Products, Inc., has a Connector Division that manufactures and sells a number of products, including a standard connector that could be used by another division in the company, the Transmission Division, in one of its products. Data concerning that connector appear below: The Transmission Division is currently purchasing 12,000 of these connectors per year from an overseas supplier at a cost of $52 per connector. Assume that the Valve Division is selling all of the valves it can produce to outside customers. Also assume that $5 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. Does there exist a transfer price that would make both the Valve and Pump Division financially better off than if the Pump Division were to continue buying its valves from the outside supplier?

The transfer price used for internal transfers between divisions of the same company cannot affect the divisions' reported profits.

Wigelsworth Products, Inc., has a Sensor Division that manufactures and sells a number of products, including a standard sensor. Data concerning that sensor appear below: The Safety Products Division of Wigelsworth Products, Inc needs 6,000 special heavy-duty sensors per year. The Sensor Division's variable cost to manufacture and ship this special sensor would be $32 per unit. Because these special sensors require more manufacturing resources than the standard sensor, the Sensor Division would have to reduce its production and sales of standard sensors to outside customers from 89,000 units per year to 79,400 units per year. From the standpoint of the Sensor Division, what is the minimal acceptable transfer price for the special sensors for the Safety Products Division?

Gauani Products, Inc., has a Detector Division that manufactures and sells a number of products, including a standard detector. Data concerning that detector appear below: The company has a Commercial Security Division that could use this detector in one of its products. The Commercial Security Division is currently purchasing 5,000 of these detectors per year from an overseas supplier at a cost of $65 per detector. Required: a. Assume that the Detector Division has enough idle capacity to handle all of the Commercial Security Division's needs. What is the acceptable range, if any, for the transfer price between the two divisions? b. Assume that the Detector Division is selling all of the detectors it can produce to outside customers. What is the acceptable range, if any, for the transfer price between the two divisions?

Two of the decentralized divisions of Gamberi Electronics Corporation are the Plastics Division and the Components Division. The Plastics Division sells molded parts to both the Components Division and to customers outside the corporation. Assume that the Plastics Division is currently operating at full capacity. Also assume that the Components Division wants to increase the number of parts it purchases from Plastics. In order to maintain its current level of profitability, the Plastics Division should not accept any transfer price on these additional parts that is below the:

Ricardo Products, Inc., has a Motor Division that manufactures and sells a number of products, including a standard motor. Data concerning that motor appear below: The Automotive Division of Ricardo Products, Inc needs 10,000 special heavy-duty motors per year. The Motor Division's variable cost to manufacture and ship this special motor would be $35 per unit. Because these special motors require more manufacturing resources than the standard motor, the Motor Division would have to reduce its production and sales of standard motors to outside customers from 87,000 units per year to 69,000 units per year. What is the total contribution margin on sales to outside customers that the Motor Division would give up if it were to make the special motors for the Automotive Division?

Brull Products, Inc., has a Sensor Division that manufactures and sells a number of products, including a standard sensor. Data concerning that sensor appear below: The Safety Products Division of Brull Products, Inc needs 6,000 special heavy-duty sensors per year. The Sensor Division's variable cost to manufacture and ship this special sensor would be $60 per unit. Because these special sensors require more manufacturing resources than the standard sensor, the Sensor Division would have to reduce its production and sales of standard sensors to outside customers from 56,000 units per year to 46,400 units per year. From the standpoint of the Sensor Division, what is the minimal acceptable transfer price for the special sensors for the Safety Products Division?

Division R of Harris Corporation has the capacity for making 40,000 wheel sets per year and regularly sells 36,000 each year on the outside market. The regular selling price on the outside market is $89 per wheel set, and the variable production cost per unit is $56. Division S of Harris Corporation currently buys 6,000 wheel sets (of the kind made by Division R) yearly from an outside supplier at a price of $85 per wheel set. If Division S were to buy the 6,000 wheel sets it needs annually from Division R at $83 per wheel set, the change in annual net operating income for the company as a whole, compared to what it is currently, would be:

Division A of Tripper Company produces a part that it sells to other companies. Sales and cost data for the part follow: Division B, another division of Tripper Company, would like to buy this part from Division A. Division B is presently purchasing the part from an outside source at $38 per unit. If Division A sells to Division B, $1 in variable costs can be avoided. Assume that Division A has ample idle capacity to handle all of Division B's needs without any increase in fixed costs and without cutting into outside sales. According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?

Siegrist Products, Inc., has a Pump Division that manufactures and sells a number of products, including a standard pump that could be used by another division in the company, the Pool Products Division, in one of its products. Data concerning that pump appear below: The Pool Products Division is currently purchasing 12,000 of these pumps per year from an overseas supplier at a cost of $54 per pump. Assume that the Pump Division has enough idle capacity to handle all of the Pool Products Division's needs. What should be the minimum acceptable transfer price for the pumps from the standpoint of the Pump Division?

Delemos Products, Inc., has a Transmitter Division that manufactures and sells a number of products, including a standard transmitter. Data concerning that transmitter appear below: The Remote Devices Division of Delemos Products, Inc needs 6,000 special heavy-duty transmitters per year. The Transmitter Division's variable cost to manufacture and ship this special transmitter would be $66 per unit. Because these special transmitters require more manufacturing resources than the standard transmitter, the Transmitter Division would have to reduce its production and sales of standard transmitters to outside customers from 83,000 units per year to 76,400 units per year. From the standpoint of the Transmitter Division, what is the minimal acceptable transfer price for the special transmitters for the Remote Devices Division?

The Northern Division of Fiscar Corporation sells Part X2 to other companies for $87.20 per unit. According to the company's cost accounting system, the costs to Northern Division to make a unit of Part X2 are: The Southern Division of Fiscar Corporation uses a part much like Part X2 in one of its products. The Southern Division can buy this part from an outside supplier for $79.95 per unit. However, the Southern Division could use Part X2 instead of this part that it purchases from outside suppliers. What is the most that the Southern Division would be willing to pay the Northern Division for Part X2?

Fingado Products, Inc., has a Detector Division that manufactures and sells a number of products, including a standard detector that could be used by another division in the company, the Commercial Security Division, in one of its products. Data concerning that detector appear below: The Commercial Security Division is currently purchasing 6,000 of these detectors per year from an overseas supplier at a cost of $91 per detector. Assume that the Detector Division is selling all of the detectors it can produce to outside customers. What should be the minimum acceptable transfer price for the detectors from the standpoint of the Detector Division?

Wengert Products, Inc., has a Motor Division that manufactures and sells a number of products, including a standard motor. Data concerning that motor appear below: The Automotive Division of Wengert Products, Inc needs 8,000 special heavy-duty motors per year. The Motor Division's variable cost to manufacture and ship this special motor would be $20 per unit. Because these special motors require more manufacturing resources than the standard motor, the Motor Division would have to reduce its production and sales of standard motors to outside customers from 40,000 units per year to 27,200 units per year. What is the total contribution margin on sales to outside customers that the Motor Division would give up if it were to make the special motors for the Automotive Division?

Division S of Kracker Company makes a part that it sells to other companies. Data on that part appear below: Division B, another division of Kracker Company, presently is purchasing 10,000 units of a similar product each period from an outside supplier for $28 per unit, but would like to begin purchasing from Division S. Suppose that Division S has ample idle capacity to handle all of Division B's needs without any increase in fixed costs or cutting into sales to outside customers. If Division S refuses to accept a transfer price of $28 or less and Division B continues to buy from the outside supplier, the company as a whole will: