Exam 20: Transfer Pricing in Divisionalized Companies

If it is available, the correct transfer price is

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. Required: 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.

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

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

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 minimum transfer price that the Simonds Division would accept is

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. What would be the transfer price if Division X uses full cost plus markup?

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: -Refer to Figure 20-9. What is the minimum transfer price that the Belgium division would be willing to accept?

Brown Industries has two divisions: the Hank Division and the Murray Division. Information about a component that the Hank Division produces is as follows: The Hank Division can produce up to 22,000 components per year. The Murray Division needs 1,000 units of the component for a product it manufactures. Required: a. Determine the minimum transfer price that the selling division would be willing to accept. b. Determine the maximum transfer price that the buying division would be willing to pay. c. If the Hank Division did not have excess capacity, what would be the correct transfer price?