Exam 26: Transfer Pricing

(Appendix 11A) Tommasino Products, Inc., has a Motor Division that manufactures and sells a number of products, including a standard motor that could be used by another division in the company, the Automotive Division, in one of its products. Data concerning that motor appear below: The Automotive Division is currently purchasing 9,000 of these motors per year from an overseas supplier at a cost of $72 per motor. -Assume that the Motor Division has enough idle capacity to handle all of the Automotive Division's needs.Does there exist a transfer price that would make both the Motor and Automotive Division financially better off than if the Automotive Division were to continue buying its motors from the outside supplier?

Setting transfer prices at full cost can lead to bad decisions because,among other reasons,full cost does not take into account opportunity costs.

From the buying division's perspective,when a transferred item can be purchased from an outside supplier,the price charged by the outside supplier represents an upper bound on the charge that should be made on transfers between the selling and buying divisions.

Lank 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 company has a Remote Devices Division that could use this transmitter in one of its products.The Remote Devices Division is currently purchasing 11,000 of these transmitters per year from an overseas supplier at a cost of $53 per transmitter. Required: The Transmitter Division is selling all of the transmitters it can produce to outside customers.Also assume that $6 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?

Stibbins Products,Inc.,has a Receiver Division that manufactures and sells a number of products,including a standard receiver.Data concerning that receiver appear below: The company has a Industrial Products Division that could use this receiver in one of its products.The Industrial Products Division is currently purchasing 6,000 of these receivers per year from an overseas supplier at a cost of $79 per receiver. Required: a.Assume that the Receiver Division is selling all of the receivers it can produce to outside customers.What is the acceptable range,if any,for the transfer price between the two divisions? b.Assume again that the Receiver Division is selling all of the receivers it can produce to outside customers.Also assume that $13 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?

Ulrich Company has a Castings Division which does casting work of various types.The company's Machine Products Division has asked the Castings Division to provide it with 20,000 special castings each year on a continuing basis.The special casting would require $12 per unit in variable production costs. In order to have time and space to produce the new casting,the Castings Division would have to cut back production of another casting - the RB4 which it presently is producing.The RB4 sells for $40 per unit,and requires $18 per unit in variable production costs.Boxing and shipping costs of the RB4 are $6 per unit.Boxing and shipping costs for the new special casting would be only $1 per unit,thereby saving the company $5 per unit in cost.The company is now producing and selling 100,000 units of the RB4 each year.Production and sales of this casting would drop by 25 percent if the new casting is produced.Some $240,000 in fixed production costs in the Castings Division are now being covered by the RB4 casting; 25 percent of these costs would have to be covered by the new casting if it is produced and sold to the Machine Products Division. Required: According to the formula in the text,what is the lowest acceptable transfer price from the viewpoint of the selling division? Show all computations.

(Appendix 11A) 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?

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?

(Appendix 11A) Steinhoff Products, Inc., has a Sensor Division that manufactures and sells a number of products, including a standard sensor that could be used by another division in the company, the Safety Products Division, in one of its products. Data concerning that sensor appear below: The Safety Products Division is currently purchasing 4,000 of these sensors per year from an overseas supplier at a cost of $48 per sensor. -Assume that the Valve Division is selling all of the valves it can produce to outside customers.From the standpoint of the Valve Division,what is the lost contribution margin if the valves are transferred internally rather than sold to outside customers?

Manni Products,Inc.,has a Pump Division that manufactures and sells a number of products,including a standard pump.Data concerning that pump appear below: The company has a Pool Products Division that needs 7,000 special heavy-duty pumps per year.The Pump Division's variable cost to manufacture and ship this special pump would be $43 per unit.Making these special pumps would require more manufacturing resources.Therefore,the Pump Division would have to reduce its production and sales of regular pumps to outside customers from 68,000 units per year to 56,100 units per year. Required: As far as the Pump Division is concerned,what is the lowest acceptable transfer price for the special pumps?

Fyodor Corporation has a Parts Division that does work for other Divisions in the company as well as for outside customers.The company's Machine Division has asked the Parts Division to provide it with 8,000 special parts each year.The special parts would require $19.00 per unit in variable production costs. The Machine Division has a bid from an outside supplier for the special parts at $27.00 per unit.In order to have time and space to produce the special part,the Parts Division would have to cut back production of another part-the QR4 that it presently is producing.The QR4 sells for $34.00 per unit,and requires $18.00 per unit in variable production costs.Packaging and shipping costs of the QR4 are $2.00 per unit.Packaging and shipping costs for the new special part would be only $0.50 per unit.The Parts Division is now producing and selling 40,000 units of the QR4 each year.Production and sales of the QR4 would drop by 5% if the new special part is produced for the Machine Division. Required: a.What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 8,000 special parts per year from the Parts Division to the Machine Division? b.Is it in the best interests of Fyodor Corporation for this transfer to take place? Explain.

(Appendix 11A) Royal 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 6,000 of these connectors per year from an overseas supplier at a cost of $65 per connector. -Assume that the Connector Division has enough idle capacity to handle all of the Transmission Division's needs.What should be the minimum acceptable transfer price for the connectors from the standpoint of the Connector Division?

Koppenhaver Products,Inc.,has a Relay Division that manufactures and sells a number of products,including a standard relay that could be used by another division in the company,the Electronics Division,in one of its products.Data concerning that relay appear below: The Electronics Division is currently purchasing 15,000 of these relays per year from an overseas supplier at a cost of $57 per relay. Assume that the Valve Division is selling all of the valves it can produce to outside customers.Also assume that $10 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?

Starcic Products,Inc.,has a Connector Division that manufactures and sells a number of products,including a standard connector.Data concerning that connector appear below: The company has a Transmission Division that needs 6,000 special heavy-duty connectors per year.The Connector Division's variable cost to manufacture and ship this special connector would be $62 per unit.Making these special connectors would require more manufacturing resources.Therefore,the Connector Division would have to reduce its production and sales of regular connectors to outside customers from 45,000 units per year to 38,400 units per year. Required: As far as the Connector Division is concerned,what is the lowest acceptable transfer price for the special connectors?

(Appendix 11A) Oberley Products, Inc., has a Receiver Division that manufactures and sells a number of products, including a standard receiver that could be used by another division in the company, the Industrial Products Division, in one of its products. Data concerning that receiver appear below: The Industrial Products Division is currently purchasing 5,000 of these receivers per year from an overseas supplier at a cost of $58 per receiver. -What is the maximum price that the Industrial Products Division should be willing to pay for receivers transferred from the Receiver Division?

(Appendix 11A) Division P of the Nyers Company makes a part that can either be sold to outside customers or transferred internally to Division Q for further processing. Annual data relating to this part are as follows: Division Q of the Nyers Company requires 15,000 units per year and is currently paying an outside supplier $33 per unit. Consider each part below independently. -If outside customers demand only 50,000 units per year,then according to the formula in the text,what is the lowest acceptable transfer price from the viewpoint of the selling division?

Lumpkins 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 $59 per valve. Assume that the Valve Division is selling all of the valves it can produce to outside customers.Also assume that none of the variable expenses can be avoided on transfers within the company.What should be the minimum acceptable transfer price for the valves from the standpoint of the Valve Division?

Cichy 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 5,000 of these valves per year from an overseas supplier at a cost of $85 per valve. What is the maximum price that the Pump Division should be willing to pay for valves transferred from the Valve 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:

(Appendix 11A) 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: