Exam 22: Transfer Pricing

(Appendix 12A)Setting transfer prices at full cost can lead to good decisions because, among other reasons, full cost takes into account opportunity costs.

(Appendix 12A)The DVD Division of Sound Company makes and sells compact DVD players (DVDP)that it presently sells to outside customers.Budgeted costs next month for the DVD Division are as follows: MaxiSound, another division of Sound Company, would like to buy 1, 000 of the DVDPs from the DVD Division.An outside supplier has offered to sell similar DVDPs to MaxiSound for $170 each. Assume the DVD Division's monthly production capacity is 4, 000 units.If the DVD Division sells 1, 000 DVDPs to MaxiSound for $170 each, the monthly effect on the profits of DVD Division will be a:

(Appendix 12A)In setting a transfer price, which of the following should not be considered?

(Appendix 12A)The Red River Division of Alto Company produces and sells bags of pottery clay which can either be sold to outside customers or transferred to the White Mountain Division of Alto Company.The following data are available for the last year: By selling to the White Mountain Division, the Red River Division will avoid $3 per bag in selling costs. If Red River can sell only 10, 000 bags annually to outside customers, according to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?

(Appendix 12A)The Western Division of Pryto Corporation sells Part D to other companies for $78.50 per unit.According to the company's cost accounting system, the costs to Western Division to make a unit of Product D are: The Southern Division of Pryto Corporation uses a part much like Part D in one of its products.The Southern Division can buy this part from an outside supplier for $78.25 per unit.However, the Southern Division could use Part D instead of this part that it purchases from outside suppliers.What is the most that the Southern Division would be willing to pay the Western Division for Product D?