Exam 20: Transfer Pricing in Divisionalized Companies

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 800 units at £120 each. Any excess capacity will be unused unless the units are purchased by the Melton Division, which could use up to 100 units. The minimum transfer price that the Fahl Division would be willing to accept would be

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 minimum transfer price that the Haley Division would be willing to accept is

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. Assume the Jones Division can sell 4,000 units at £420. Any excess capacity will be unused unless the units are purchased by the Thomas Division, which could use up to 200 units. The maximum transfer price that the Thomas Division would be willing to pay would be

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 minimum price the selling division would be willing to accept is

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 maximum transfer price that the U.S. division would be willing to pay?

Figure 20-7 The Engine Division provides engines for the Tractor Division of a company. The standard unit costs for Engine Division are as follows: Direct materials £600 Direct labour 1,200 Variable overhead 300 Fixed overhead 150 Market price per unit 2,730 -Refer to Figure 20-7. The engine department has excess capacity. What is the best transfer price to avoid transfer price problems?

Which of the following types of transfer prices do NOT encourage the selling division to be efficient?

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 minimum transfer price that the Bradley Division would be willing to accept 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 800 units at £120 each. Any excess capacity will be unused unless the units are purchased by the Melton Division, which could use up to 100 units. The maximum transfer price that the Melton Division would be willing to pay would be

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 maximum transfer price that the U.S. division would be willing to pay?

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. If variable manufacturing costs without a fixed fee are used as the transfer price, Division A's transfer price would be

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. If the selling division did NOT have excess capacity, the minimum transfer price the selling division would be willing to accept is

The optimal transfer price from the viewpoint of the company is

If it is available, the correct transfer price is

Which of the following is a legitimate disadvantage of negotiated transfer pricing?

The Kelly Division of Zimmer Company sells all of its output to the Finishing Division of the company. The only product of the Kelly Division is chair legs that are used by the Finishing Division. The retail price of the legs is £20 per leg. Each chair completed by the Finishing Division requires four legs. Production quantity and cost data for 2011 are as follows: Chair legs £30,000 Direct materials £135,000 Direct labour £90,000 Factory overhead (25\% is variable) £90,000 Operating expenses (20\% is variable) £150,000 Required: Compute the transfer price for a chair leg using: a.market price. b.variable product costs plus a fixed fee of 20 per cent. c.full cost plus 20 per cent markup. d.variable costs. e.full cost plus 10 per cent markup.

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. Assume the Jones Division can sell 4,000 units at £420. Any excess capacity will be unused unless the units are purchased by the Thomas Division, which could use up to 200 units. The minimum transfer price that the Jones Division would be willing to accept would be

British International has a division in the United States that produces tires for automobiles. These tires are transferred to an automobile division in Germany. The tires can be (and are) sold externally in the United States for £60 each. The cost to produce a tire is £40. It costs £3 per tire for shipping and £5 per tire for import duties. When the tires are sold externally, British International spends £2 per tire for commissions and an average of £1 per tire for advertising. An acceptable markup is 30 per cent of costs. What is the transfer price if the cost-plus method is used?

Transfer pricing is used when:

Bernie Manufacturing Company has two divisions, X and Y. Division X prepares the steel for processing. Division Y processes the steel into the final product. No inventories exist in either division at the beginning or end of 2011. During the year, Division X prepared 80,000 kgs. of steel at a cost of £800,000. All the steel was transferred to Division Y where additional operating costs of £5 per kg. were incurred. The final product was sold for £3,000,000. a.Determine the gross profit for each division and for the company as a whole if the transfer price is £8 per kg. b.Determine the gross profit for each division and for the company as a whole if the transfer price is £12 per kg.