Exam 20: Transfer Pricing

The Buffalo Division of Alfred Products,Inc.has the capacity to manufacture 10,000 units of a certain part each year.This part sells for $12 per unit on the outside market.The Albany Division of Alfred Products,Inc.buys 3,000 units of this part each year from Buffalo,and thus far has paid the market price.Harlow Company (an outside supplier) has recently offered to sell Albany 3,000 units per year of the same part.Buffalo Division's costs relating to the product are: -Suppose that the Albany Division buys the 3,000 units from the outside supplier at a price of $10 per unit.Also suppose that the Buffalo Division can sell 10,000 units on the outside market.As a result of Albany shifting its purchases to the outside supplier,the yearly net operating income of Alfred Products,Inc.as a whole will:

Part WY4 costs the Eastern Division of Tyble Corporation $26 to make-direct materials are $10,direct labor is $4,variable manufacturing overhead is $9,and fixed manufacturing overhead is $3.The Eastern Division can sell all of Part WY4 they can make to other companies for $30.The Western Division of Tyble Corporation can use Part WY4 in one of its products.What is the lowest transfer price at which the Eastern Division would be willing to sell Part WY4 to the Central Division?

Managers sometimes do not act in ways that are in the best interests of the overall company.What is the term for this?

One advantage of using actual cost incurred as the transfer price is that it provides a strong incentive for the producing division to control its costs.

The Commando Motorcycle Company has decided to become decentralized and split its operations into two divisions,Motor and Assembly.Both divisions will be treated as investment centers.The Motor Division is currently operating at its capacity of 30,000 motors per year.Motor's costs at this level of production are as follows: Motor sells 10,000 of its motors to a snowmobile manufacturer and transfers the remaining 20,000 motors to the Assembly Division.The two divisions are currently in a debate over an appropriate transfer price to charge for the 20,000 motors.Motor currently charges the snowmobile manufacturer $200 per motor.The final selling price of the motorcycles that Commando produces is $7,200 per cycle.This selling price will not change regardless of the transfer price charged between the two divisions.Motor has no market for the 20,000 motors if they are not transferred to Assembly.Variable selling and administrative costs are incurred on both internal and external sales. -According to the formula in the text,what is the lowest acceptable transfer price from the viewpoint of the selling division?

The Vega Division of Ace Company makes wheels which can either be sold to outside customers or transferred to the Walsh Division of Ace Company.Last month the Walsh Division bought all 4,000 of its wheels from the Vega Division for $42 each.The following data are available from last month's operations for the Vega Company: If the Vega Division sells wheels to the Walsh Division,Vega can avoid $2 per wheel in sales commissions.An outside supplier has offered to supply wheels to the Walsh Division for $41 each. -Suppose that the Vega Division has ample idle capacity so that transfers to the Walsh Division would not cut into its sales to outside customers.What should be the lowest acceptable transfer price from the perspective of the Vega Division?

The Vega Division of Ace Company makes wheels which can either be sold to outside customers or transferred to the Walsh Division of Ace Company.Last month the Walsh Division bought all 4,000 of its wheels from the Vega Division for $42 each.The following data are available from last month's operations for the Vega Company: If the Vega Division sells wheels to the Walsh Division,Vega can avoid $2 per wheel in sales commissions.An outside supplier has offered to supply wheels to the Walsh Division for $41 each. -Suppose that Vega can sell 9,000 wheels each month to outside consumers,so transfers to the Walsh Division cut into outside sales.What should be the lowest acceptable transfer price from the perspective of the Vega Division?

The Pump Division of Nord Co.produces pumps which it sells for $20 each to outside customers.The pump Division's cost per pump,based on normal volume of 500,000 units per period,is shown below: Nord has recently purchased a small company which makes automatic dishwashers.This new company is presently purchasing 100,000 pumps each year from another manufacturer.Since the Pump Division has a capacity of 600,000 pumps per year and is now selling only 500,000 pumps to outside customers,management would like the new Dishwasher Division to begin purchasing its pumps internally.The Dishwasher Division is now paying $20 per pump,less a 10% quantity discount.The Pump Division could avoid $1 per unit in variable costs on any sales to the Dishwasher Division. Required: a.Treating each division as an independent profit center,within what price range should the internal sales price fall? b.Now assume that the Pump Division is selling 600,000 pumps per year on the outside.Determine the appropriate transfer price.Show all computations. (Note: Due limitations in fonts and word processing software,> and < signs must be used in this solution rather than "greater than or equal to" and "less than or equal to" signs. )

The Vega Division of Ace Company makes wheels which can either be sold to outside customers or transferred to the Walsh Division of Ace Company.Last month the Walsh Division bought all 4,000 of its wheels from the Vega Division for $42 each.The following data are available from last month's operations for the Vega Company: If the Vega Division sells wheels to the Walsh Division,Vega can avoid $2 per wheel in sales commissions.An outside supplier has offered to supply wheels to the Walsh Division for $41 each. -What is the maximum price per wheel that Walsh should be willing to pay Vega?

A division of a company has idle capacity and produces a part that has a variable cost of $52 per unit and a full (absorption) cost of $87.Another division of the same company uses such a part in one of its products and it can buy an identical part from an outside supplier for $81 per unit.The company will be worse off if the latter division decides to buy exclusively from the outside supplier than if the part is made inside the company and transferred from one division to the other.

Division A makes a part with the following characteristics: Division B,another division of the same company,would like to purchase 5,000 units of the part each period from Division A.Division B is now purchasing these parts from an outside supplier at a price of $24 each. -Suppose that Division A has ample idle capacity to handle all of Division B's needs without any increase in fixed costs and without cutting into sales to outside customers.If Division B continues to purchase parts from an outside supplier rather than from Division A,the company as a whole will be:

Division X of Charter Corporation makes and sells a single product which is used by manufacturers of fork lift trucks.Presently it sells 12,000 units per year to outside customers at $24 per unit.The annual capacity is 20,000 units and the variable cost to make each unit is $16.Division Y of Charter Corporation would like to buy 10,000 units a year from Division X to use in its products.There would be no cost savings from transferring the units within the company rather than selling them on the outside market.What should be the lowest acceptable transfer price from the perspective of Division X?

Division N has asked Division M of the same company to supply it with 10,000 units of part P782 this year to use in one of its products.Division N has received a bid from an outside supplier for the parts at a price of $25.00 per unit.Division M has the capacity to produce 50,000 units of part P782 per year.Division M expects to sell 46,000 units of part P782 to outside customers this year at a price of $26.00 per unit.To fill the order from Division N,Division M would have to cut back its sales to outside customers.Division M produces part P782 at a variable cost of $17.00 per unit.The cost of packing and shipping the parts for outside customers is $1.00 per unit.These packing and shipping costs would not have to be incurred on sales of the parts to Division N. 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 10,000 parts this year from Division N to Division M? b.Is it in the best interests of the overall company for this transfer to take place? Explain. (Note: Due to limitations in fonts and word processing software,> and < signs must be used in this solution rather than "greater than or equal to" and "less than or equal to" signs. )

Division X makes a part that it sells to customers outside of the company.Data concerning this part appear below: Selling price to outside customers $50 Variable cost per unit $30 Total fixed costs $400,000 Capacity in units 25,000 Division Y of the same company would like to use the part manufactured by Division X in one of its products.Division Y currently purchases a similar part made by an outside company for $49 per unit and would substitute the part made by Division X.Division Y requires 5,000 units of the part each period.Division X can sell all of the units it makes to outside customers.What is the lowest acceptable transfer price from the standpoint of the selling division?

Fistman Corporation has a Parts Division that does work for other Divisions in the company as well as for outside customers.The company's Machine Products Division has asked the Parts Division to provide it with 10,000 special parts each year.The special parts would require $15.00 per unit in variable production costs.The Machine Products Division has a bid from an outside supplier for the special parts at $29.00 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 H56 that it presently is producing.The H56 sells for $32.00 per unit,and requires $19.00 per unit in variable production costs.Packaging and shipping costs of the H56 are $3.00 per unit.Packaging and shipping costs for the new special part would be only $1.00 per unit.The Parts Division is now producing and selling 40,000 units of the H56 each year.Production and sales of the H56 would drop by 20% if the new special part is produced for the Machine Products 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 10,000 special parts per year from the Parts Division to the Machine Products Division? b.Is it in the best interests of Fistman Corporation for this transfer to take place? Explain. (Note: Due limitations in fonts and word processing software,> and < signs must be used in this solution rather than "greater than or equal to" and "less than or equal to" signs. )

The Commando Motorcycle Company has decided to become decentralized and split its operations into two divisions,Motor and Assembly.Both divisions will be treated as investment centers.The Motor Division is currently operating at its capacity of 30,000 motors per year.Motor's costs at this level of production are as follows: Motor sells 10,000 of its motors to a snowmobile manufacturer and transfers the remaining 20,000 motors to the Assembly Division.The two divisions are currently in a debate over an appropriate transfer price to charge for the 20,000 motors.Motor currently charges the snowmobile manufacturer $200 per motor.The final selling price of the motorcycles that Commando produces is $7,200 per cycle.This selling price will not change regardless of the transfer price charged between the two divisions.Motor has no market for the 20,000 motors if they are not transferred to Assembly.Variable selling and administrative costs are incurred on both internal and external sales. -Assume that the Assembly Division wants to also purchase the additional 10,000 motors that the Motor Division currently sells to the snowmobile manufacturer.According to the formula in the text,what is the lowest acceptable transfer price for these additional motors from the viewpoint of the selling division?

Division A makes a part with the following characteristics: Division B,another division of the same company,would like to purchase 5,000 units of the part each period from Division A.Division B is now purchasing these parts from an outside supplier at a price of $24 each. -Suppose that Division A is operating at capacity and can sell all of its output to outside customers at its usual selling price.If Division A sells the parts to Division B at $24 per unit (Division B's outside price),the company as a whole will be:

The Buffalo Division of Alfred Products,Inc.has the capacity to manufacture 10,000 units of a certain part each year.This part sells for $12 per unit on the outside market.The Albany Division of Alfred Products,Inc.buys 3,000 units of this part each year from Buffalo,and thus far has paid the market price.Harlow Company (an outside supplier) has recently offered to sell Albany 3,000 units per year of the same part.Buffalo Division's costs relating to the product are: -Suppose that the Albany Division buys the 3,000 units from the outside supplier at a price of $10 per unit.Also suppose that the Buffalo Division can sell only 6,000 units on the outside market.This decision would have no effect on total fixed costs.As a result of Albany shifting its purchases to the outside supplier,the yearly net operating income of Alfred Products,Inc.as a whole will:

When a dispute arises over a transfer price,top managers should intervene to keep divisional managers from making a costly mistake,even though the divisions are evaluated as profit centers.