Exam 20: Transfer Pricing in Divisionalized Companies

In a negotiated transfer price,

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

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: Which transfer price would be in the best interest of the overall company?

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 20-6 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

Figure 20-8 Pautner Company had the following historical accounting data per unit: 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 20-4 The Simonds Division produces a component that is used by the Allen Division. The cost of manufacturing the component is as follows: ^aBased on a practical volume of 400,000 components Other costs incurred by the Simonds Division are as follows: The component usually sells for £35 in the external market. The Simonds Division is capable of producing 500,000 components per year; however, only 400,000 components are expected to be sold next year. The variable selling expenses are avoidable if the component is sold internally. The Allen Division has been buying the same component from an external supplier for £34 each. The Allen Division expects to use 50,000 units of the component next year. The manager of the Allen Division has offered to buy 50,000 units from the Simonds Division for £22.50 each. -Refer to Figure 20-4. The maximum transfer price that the Allen Division would be willing to pay 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: -Refer to Figure 20-10. What is the minimum transfer price that the Belgium division would be willing to accept?

Figure 20-4 The Simonds Division produces a component that is used by the Allen Division. The cost of manufacturing the component is as follows: ^aBased on a practical volume of 400,000 components Other costs incurred by the Simonds Division are as follows: The component usually sells for £35 in the external market. The Simonds Division is capable of producing 500,000 components per year; however, only 400,000 components are expected to be sold next year. The variable selling expenses are avoidable if the component is sold internally. The Allen Division has been buying the same component from an external supplier for £34 each. The Allen Division expects to use 50,000 units of the component next year. The manager of the Allen Division has offered to buy 50,000 units from the Simonds Division for £22.50 each. -Refer to Figure 20-4. The effect on firmwide income if 50,000 components are transferred internally at £22.50 each instead of purchased from an external supplier at £34 per unit would be a

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: 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 all that it produces for £100 each. The Melton Division needs 100 units. What is the correct transfer price?

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: 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 20-7 The Engine Division provides engines for the Tractor Division of a company. The standard unit costs for Engine Division are as follows: -Refer to Figure 20-7. The engine department has excess capacity. What is the best transfer price to avoid transfer price problems?

Figure 20-3 The Adam Division produces a component that is used by the West Division. The cost of manufacturing the component is as follows: ^aBased on a practical volume of 250,000 components Other costs incurred by the Adam Division are as follows: The component usually sells for £90 in the external market. The Adam Division is capable of producing 250,000 components per year; however, only 200,000 components are expected to be sold next year. The variable selling expenses are avoidable if the component is sold internally. The West Division has been buying the same component from an external supplier for £80 each. The West Division expects to use 40,000 units of the component next year. The manager of the West Division has offered to buy 40,000 units from the Adam Division for £56 each. -Refer to Figure 20-3. The minimum transfer price that the Adam Division would accept is

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: -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: 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

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

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 20-9 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: -Refer to Figure 20-9. What is the maximum transfer price that the U.S. division would be willing to pay?

Figure 21-8 At the beginning of the year, Grant Company initiated a quality improvement program. The program was successful in reducing scrap and rework costs. To help assess the impact of the quality improvement program, the following data were collected for the current and preceding years: -When an outside market exists for an intermediate product that is perfectly competitive, the ideal method of transfer pricing is often: