Exam 20: Transfer Pricing in Divisionalized Companies

Figure 20-8 Pautner Company had the following historical accounting data per unit: Direct materials £60 Direct labour 30 Variable overhead 15 Fixed overhead 24 Variable selling expenses 45 Fixed selling expenses 9 The units are normally transferred internally from Division A to Division B. The units also may be sold externally for £210 per unit. The minimum profit level accepted by the company is a markup of 30 per cent. There were no beginning or ending inventories. -Refer to Figure 20-8. What would be the transfer price if Division X uses full cost plus markup?

Figure 20-1 Universe Industries has two divisions: the Haley Division and the Comet Division. Information about a component that the Haley Division produces is as follows: Sales £120 per unit Variable manufacturing costs £30 per unit Fixed manufacturing overhead £20 per unit Expected sales in units 4,000 units The Haley Division can produce up to 5,000 components per year. The Comet Division needs 200 units of the component for a product it manufactures. -Refer to Figure 20-1. The maximum transfer price that the Comet Division would be willing to pay is

In a negotiated transfer price,

Halber Industries is a decentralized company that evaluates its divisions based on ROI. The Brock Division has the capacity to make 2,000 units of a component. The Brock Division's variable costs are £80 per unit. The Cliff Division can use the Brock component in the manufacturing of one of its own products. The Cliff Division would incur £60 of variable costs to convert the component into its own product, which sells for £300. a.Assume the Brock Division can sell all of the components that it produces for £180 each. The Cliff Division needs 100 units. What is the correct transfer price? b.Assume the Brock Division can sell 1,800 units at £260. Any excess capacity will be unused unless the units are purchased by the Cliff Division, which could use up to 100 units.Determine the minimum transfer price that the Brock Division would be willing to accept.Determine the maximum transfer price that the Cliff Division would be willing to pay.

A selling division produces components for a buying division that is considering accepting a special order for the products it produces. The selling division has excess capacity. The maximum price the buying division would be willing to accept is

In most cases, ____ transfer prices achieve the optimal outcome for both the divisions and the company as a whole.

Negotiated prices transfer prices are:

____ is when the transfer price is computed equal to a sales price received by the reseller less an appropriate markup.

Figure 20-9 Miggs Manufacturing has one plant located in Belgium and another plant located in the United States. The Belgium plant manufactures a component used in a finished product manufactured at the U.S. plant. Currently, the Belgium plant is operating at 70 per cent capacity. In Belgium, the income tax rate is 42 per cent; in the United States, the corporate income tax rate is 35 per cent. The market price of the component is £200 and the Belgium plant's costs to manufacture the component are as follows: Direct materials £20 Direct labour 40 Variable overhead 10 Fixed overhead 30 -Refer to Figure 20-9. Which transfer price would be in the best interest of the overall company?

Figure 20-5 Allied Industries has two divisions: the Bradley Division and the Rommel Division. Information about the component that the Bradley Division produces is as follows: Sales £180 per unit Variable manufacturing costs £80 per unit Fixed manufacturing overhead £50 per unit Expected sales in units 10,000 units The Bradley Division can produce up to 12,000 components per year. The Rommel Division needs 800 units of the component for a product it manufactures. -Refer to Figure 20-5. The maximum transfer price that the Rommel Division would be willing to pay is

When there is an outside market for an intermediate product which is perfectly competitive, the most equitable method of transfer pricing is

Figure 20-2 Klaehn Industries is a decentralized company that evaluates its divisions based on ROI. The Fahl Division has the capacity to make 1,000 units of a component. The Fahl Division's variable costs are £40 per unit. The Melton Division can use the component in one of its products. The Melton Division would incur £50 of variable costs to convert the component into its own product that sells for £160. -Refer to Figure 20-2. Assume the Fahl Division can sell all that it produces for £100 each. The Melton Division needs 100 units. What is the correct transfer price?

Figure 20-10 Gregg Manufacturing has one plant located in Belgium and another plant located in the United States. The Belgium plant manufactures a component used in a finished product manufactured at the U.S. plant. Currently, the Belgium plant is operating at 70 per cent capacity. In Belgium, the income tax rate is 30 per cent; in the United States, the corporate income tax rate is 35 per cent. The market price of the component is £280 and the Belgium plant's costs to manufacture the component are as follows: Direct materials £30 Direct labour 50 Variable overhead 12 Fixed overhead 56 -Refer to Figure 20-10. What is the minimum transfer price that the Belgium division would be willing to accept?

Figure 20-5 Allied Industries has two divisions: the Bradley Division and the Rommel Division. Information about the component that the Bradley Division produces is as follows: Sales £180 per unit Variable manufacturing costs £80 per unit Fixed manufacturing overhead £50 per unit Expected sales in units 10,000 units The Bradley Division can produce up to 12,000 components per year. The Rommel Division needs 800 units of the component for a product it manufactures. -Refer to Figure 20-5. If the selling division did NOT have excess capacity, the minimum transfer price the selling division would be willing to accept would be

The opportunity cost approach to setting a transfer price would set the maximum transfer price as

When an outside market exists for an intermediate product that is perfectly competitive, the ideal method of transfer pricing is often:

Figure 20-9 Miggs Manufacturing has one plant located in Belgium and another plant located in the United States. The Belgium plant manufactures a component used in a finished product manufactured at the U.S. plant. Currently, the Belgium plant is operating at 70 per cent capacity. In Belgium, the income tax rate is 42 per cent; in the United States, the corporate income tax rate is 35 per cent. The market price of the component is £200 and the Belgium plant's costs to manufacture the component are as follows: Direct materials £20 Direct labour 40 Variable overhead 10 Fixed overhead 30 -Refer to Figure 20-9. What is the minimum transfer price that the Belgium division would be willing to accept?

Conner Manufacturing has one plant located in Italy and another plant located in the United States. The Italian plant manufactures a component used in a finished product manufactured at the U.S. plant. Currently, the Italian plant is operating at 75 per cent capacity. In Italy, the income tax rate is 32 per cent; in the United States, the corporate income tax rate is 35 per cent. The market price of the component is £240 and the Italian plant's costs to manufacture the component are as follows: Direct materials £60 Direct labour 40 Variable overhead 20 Fixed overhead 30 Which transfer price would be in the best interest of the overall company?

If the divisions exchanging goods are located in different countries with different tax rate structures, the key determinant of transfer prices could be based largely on:

Figure 20-6 Callahan Industries is a decentralized company that evaluates its divisions based on ROI. The Jones Division has the capacity to make 5,000 units of a component. The Jones Division's variable costs are £200 per unit. The Thomas Division can use the component in one of its products. The Thomas Division would incur £100 of variable costs to put the component in its own product that sells for £500. -Refer to Figure 20-6. The Jones Division can sell all that it produces for £360 each. The Jones Division needs 200 units. What is the correct transfer price?