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Appendix 12A, Transfer Pricing True / False Questions
1. 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. True alse
2. !ne 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. True alse
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Appendix 12A, Transfer Pricing True / False Questions
1. 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. True alse
2. !ne 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. True alse
Appendix 12A, Transfer Pricing True / False Questions
1. 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. True alse
2. !ne 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. True alse
". A division of a company has idle capacity and produces a part that has a varia#le cost of $%2 per unit and a full &a#sorption' cost of $(). Another division of the same company uses such a part in one of its products and it can #uy an identical part from an outside supplier for $(1 per unit. The company *ill #e *orse off if the latter division decides to #uy exclusively from the outside supplier than if the part is made inside the company and transferred from one division to the other. True alse
Multiple Choice Questions
+. anagers sometimes do not act in *ays that are in the #est interests of the overall o verall company. What is the term for this A. trategic approach /. u#optimi0ation . !ptimal motivation . 3esponsi#ility accounting
Appendix 12A, Transfer Pricing %. ivision 4 makes a part that it sells to customers outside of the company. ata concerning this part appear #elo*5 elling price to outside customers $%6 7aria#le cost per unit $"6 Total fixed costs $+66,666 apacity in units 2%,666 ivision 8 of the same company *ould like to use the part manufactured #y ivision 4 in one of its products. ivision 8 currently purchases a similar part made #y an outside company for $+9 per unit and *ould su#stitute the part made #y ivision 4. ivision 8 re:uires %,666 units of the part each period. ivision 4 can sell all of the units it makes to outside customers. What is the lo*est accepta#le transfer price from the standpoint of the selling division A. $%6 /. $+9 . $+; . $"6
;. ivision 4 of harter orporation makes and sells a single product *hich is used #y manufacturers of fork lift trucks. Presently it sells 12,666 units per year to ou tside customers at $2+ per unit. The annual capacity is 26,666 units and the varia#le cost to make each unit is $1;. ivision 8 of harter orporation *ould like to #uy 16,666 units a year from ivision 4 to use in its products. There *ould #e no cost savings from transferring the units *ithin the company rather than selling them on the outside market. What should #e the lo*est accepta#le transfer price from the perspective of ivision 4 A. $2+.66 /. $21.+6 . $1).;6 . $1;.66
Appendix 12A, Transfer Pricing ). ivision A of
(. Part W8+ costs the =astern ivision of Ty#le orporation $2; to make-direct materials are $16, direct la#or is $+, varia#le manufacturing overhead is $9, and fixed manufacturing overhead is $". The =astern ivision can sell all of Part W8+ they can make to other companies for $"6. The Western ivision of Ty#le orporation can use Part W8+ in one of its products. What is the lo*est transfer price at *hich the =astern ivision *ould #e *illing to sell Part W8+ to the entral ivision A. $"6 /. $2; . $2" . $2)
Appendix 12A, Transfer Pricing ivision A makes a part *ith the follo*ing characteristics5
ivision /, another division of the same company, *ould like to purchase %,66 6 units of the part each period from ivision A. ivision / is no* purchasing these parts from an outside supplier at a price of $2+ each.
9. uppose that ivision A has ample idle capacity to handle all of ivision />s needs *ithout any increase in fixed costs and *ithout cutting into sales to outside customers. ?f ivision / continues to purchase parts from an outside supplier rather than from ivision A, the company as a *hole *ill #e5 A. *orse off #y $"6,666 each period. /. *orse off #y $16,666 each period. . #etter off #y $1%,666 each period. . *orse off #y $"%,666 each period.
16. uppose that ivision A is operating at capacity and can sell all of its output to outside customers at its usual selling price. ?f ivision A sells the parts to ivision / at $2+ per unit &ivision />s outside price', the company as a *hole *ill #e5 A. #etter off #y $%,666 each period. /. *orse off #y $1%,666 each period. . *orse off #y $%,666 each period. . There *ill #e no change in the status of the company as a *hole.
Appendix 12A, Transfer Pricing The /uffalo ivision of Alfred Products, ?nc. has the capacity to manufacture 16,666 units of a certain part each year. This part sells for $12 per unit on the outside market. The Al#any ivision of Alfred Products, ?nc. #uys ",666 units of this part each year from /uffalo, and thus far has paid the market price. s costs relating to the product are5
11. uppose that the Al#any ivision #uys the ",666 units from the outside supplier at a p rice of $16 per unit. Also suppose that the /uffalo ivision can sell only ;,666 units o n the outside market. This decision *ould have no effect on total fixed costs. As a result of Al#any shifting its purchases to the outside supplier, the yearly net operating income of Alfred Products, ?nc. as a *hole *ill5 A. decrease #y $9,666 /. increase #y $9,666 . decrease #y $;,666 . increase #y $;,666
12. uppose that the Al#any ivision #uys the ",666 units from the outside supplier at a price of $16 per unit. Also suppose that the /uffalo ivision can sell 16,666 units on the outside market. As a result of Al#any shifting its purchases to the outside supplier, the yearly net operating income of Alfred Products, ?nc. as a *hole *ill5 A. decrease #y $9,666 /. increase #y $9,666 . decrease #y $;,666 . increase #y $;,666
Appendix 12A, Transfer Pricing The 7ega ivision of Ace ompany makes *heels *hich can either #e sold to outside customers or transferred to the Walsh ivision of Ace ompany. @ast month the Walsh ivision #ought all +,666 of its *heels from the 7ega ivision for $+2 each. The follo*ing data are availa#le from last month>s operations for the 7ega ompany5
?f the 7ega ivision sells *heels to the Walsh ivision, 7ega can avoid $2 per *heel in sales commissions. An outside supplier has offered to supply *heels to the Walsh ivision for $+1 each.
1". uppose that the 7ega ivision has ample idle capacity so that transfers to the Walsh ivision *ould not cut into its sales to outside customers. What should #e the lo*est accepta#le transfer price from the perspective of the 7ega ivision A. $2( /. $"6 . $+2 . $+%
1+. What is the maximum price per *heel that Walsh should #e *illing to pay 7ega A. $2( /. $+1 . $+2 . $+%
1%. uppose that 7ega can sell 9,666 *heels each month to outside consumers, so transfers to the Walsh ivision cut into outside sales. What should #e the lo*est accepta#le transfer price from the perspective of the 7ega ivision A. $2(.66 /. $"1.)% . $+1.66 . $+2.66
Appendix 12A, Transfer Pricing The ommando otorcycle ompany has decided to #ecome decentrali0ed and split its operations into t*o divisions, otor and Assem#ly. /oth divisions *ill #e treated as investment centers. The otor ivision is currently operating at its capacity of "6,666 motors per year. otor>s costs at this level of production are as follo*s5
otor sells 16,666 of its motors to a sno*mo#ile manufacturer and transfers the remaining 26,666 motors to the Assem#ly ivision. The t*o divisions are currently in a de#ate over an appropriate transfer price to charge for the 26,666 motors. otor currently charges the sno*mo#ile manufacturer $266 per motor. The final selling price of the motorcycles that ommando produces is $),266 per cycle. This selling price *ill not change regardless of the transfer price charged #et*een the t*o divisions. otor has no market for the 26,666 motors if they are not transferred to Assem#ly. 7aria#le selling and administrative costs are incurred on #oth internal and external sales.
1;. According to the formula in the text, *hat is the lo*est accepta#le transfer price from the vie*point of the selling division A. $"% per motor /. $16% per motor . $12% per motor . $1+6 per motor
1). Assume that the Assem#ly ivision *ants to also purchase the additional 16,666 motors that the otor ivision currently sells to the sno*mo#ile manufacturer. According to the formula in the text, *hat is the lo*est accepta#le transfer price for these additional motors from the vie*point of the selling division A. $266 per motor /. $16% per motor . $12% per motor . $1+6 per motor
Appendix 12A, Transfer Pricing Essay Questions
1(. The Pump ivision of ord o. produces pumps *hich it sells for $26 each to outside customers. The pump ivision>s cost per pump, #ased on normal volume of %66,666 units per period, is sho*n #elo*5
ord has recently purchased a small company *hich makes automatic dish*ashers. This ne* company is presently purchasing 166,666 pumps each year from another manufacturer. ince the Pump ivision has a capacity of ;66,666 pumps per year and is no* selling only %66,666 pumps to outside customers, management *ould like the ne* ish*asher ivision to #egin purchasing its pumps internally. The ish*asher ivision is no* paying $26 per pump, less a 16B :uantity discount. The Pump ivision could avoid $1 per unit in varia#le costs on any sales to the ish*asher ivision. 3e:uired5 a. Treating each division as an independent profit center, *ithin *hat price range should the internal sales price fall #. o* assume that the Pump ivision is selling ;66,666 pumps per year on the outside. etermine the appropriate transfer price. ho* all computations.
Appendix 12A, Transfer Pricing 19. istman orporation has a Parts ivision that does *ork for other ivisions in the company as *ell as for outside customers. The company>s achine Products ivision has asked the Parts ivision to provide it *ith 16,666 special parts each year. The special parts *ould re:uire $1%.66 per unit in varia#le production costs. The achine Products ivision has a #id from an outside supplier for the special parts at $29.66 per unit. ?n order to have time and space to produce the special part, the Parts ivision *ould have to cut #ack production of another part-the <%; that it presently is producing. The <%; sells for $"2.66 per unit, and re:uires $19.66 per unit in varia#le production costs. Packaging and shipping costs of the <%; are $".66 per unit. Packaging and shipping costs for the ne* special part *ould #e only $1.66 per unit. The Parts ivision is no* producing and selling +6,666 units of the <%; each year. Production and sales of the <%; *ould drop #y 26B if the ne* special part is produced for the achine Products ivision. 3e:uired5 a. What is the range of transfer prices *ithin *hich #oth the ivisions> profits *ould increase as a result of agreeing to the transfer of 16,666 special parts per year from the Parts ivision to the achine Products ivision #. ?s it in the #est interests of istman orporation for this transfer to take place =xplain.
Appendix 12A, Transfer Pricing 26. ivision has asked ivision of the same company to supply it *ith 16,666 units of part P)(2 this year to use in one of its products. ivision has received a #id from an outside supplier for the parts at a price of $2%.66 per unit. ivision has the capacity to produce %6,666 units of part P)(2 per year. ivision expects to sell +;,666 units of part P)(2 to outside customers this year at a price of $2;.66 per unit. To fill the order from ivision , ivision *ould have to cut #ack its sales to outside customers. ivision produces part P)(2 at a varia#le cost of $1).66 per unit. The cost of packing and shipping the parts for outside customers is $1.66 per unit. These packing and shipping costs *ould not have to #e incurred on sales of the parts to ivision . 3e:uired5 a. What is the range of transfer prices *ithin *hich #oth the ivisions> profits *ould increase as a result of agreeing to the transfer of 16,666 parts this year from ivision to ivision #. ?s it in the #est interests of the overall company for this transfer to take place =xplain.
Appendix 12A, Transfer Pricing Cey
True / False Questions
1. 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. FALSE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Learning O!ective: " Level: Me#ium
2. !ne 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. FALSE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Learning O!ective: " Level: Me#ium
". A division of a company has idle capacity and produces a part that has a varia#le cost of $%2 per unit and a full &a#sorption' cost of $(). Another division of the same company uses such a part in one of its products and it can #uy an identical part from an outside supplier for $(1 per unit. The company *ill #e *orse off if the latter division decides to #uy exclusively from the outside supplier than if the part is made inside the company and transferred from one division to the other. TRUE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Learning O!ective: " Level: Me#ium
Appendix 12A, Transfer Pricing Cey
Multiple Choice Questions
+. anagers sometimes do not act in *ays that are in the #est interests of the overall company. What is the term for this A. trategic approach B. u#optimi0ation . !ptimal motivation . 3esponsi#ility accounting
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Learning O!ective: " Level: $as%
%. ivision 4 makes a part that it sells to customers outside of the company. ata concerning this part appear #elo*5 elling price to outside customers $%6 7aria#le cost per unit $"6 Total fixed costs $+66,666 apacity in units 2%,666 ivision 8 of the same company *ould like to use the part manufactured #y ivision 4 in one of its products. ivision 8 currently purchases a similar part made #y an outside company for $+9 per unit and *ould su#stitute the part made #y ivision 4. ivision 8 re:uires %,666 units of the part each period. ivision 4 can sell all of the units it makes to outside customers. What is the lo*est accepta#le transfer price from the standpoint of the selling division A. $%6 /. $+9 . $+; . $"6 &ote5 ue limitations in fonts and *ord processing soft*are, D and E signs must #e used in this solution rather than Fgreater than or e:ual toF and Fless than or e:ual toF signs.' rom the perspective of the selling division, profits *ould increase as a result of the transfer if and only if5 Transfer price D 7aria#le cost G !pportunity cost The opportunity cost is the contri#ution margin on the lost sales, divided #y the num#er of units transferred5 !pportunity cost H I&$%6 - $"6' x %,666J %,666 H $26 Therefore, Transfer price D $"6 G $26 H $%6.
Appendix 12A, Transfer Pricing Cey
AACSB: Anal%tic AICPA BB: Critical Thinking AICPA FN: Measurement Learning O!ective: " Level: Me#ium
;. ivision 4 of harter orporation makes and sells a single product *hich is used #y manufacturers of fork lift trucks. Presently it sells 12,666 units per year to ou tside customers at $2+ per unit. The annual capacity is 26,666 units and the varia#le cost to make each unit is $1;. ivision 8 of harter orporation *ould like to #uy 16,666 units a year from ivision 4 to use in its products. There *ould #e no cost savings from transferring the units *ithin the company rather than selling them on the outside market. What should #e the lo*est accepta#le transfer price from the perspective of ivision 4 A. $2+.66 /. $21.+6 C. $1).;6 . $1;.66 &ote5 ue limitations in fonts and *ord processing soft*are, D and E signs must #e used in this solution rather than Fgreater than or e:ual toF and Fless than or e:ual toF signs.' rom the perspective of the selling division, profits *ould increase as a result of the transfer if and only if5 Transfer price D 7aria#le cost G !pportunity cost The opportunity cost is the contri#ution margin on the lost sales, divided #y the num#er of units transferred5 !pportunity cost H I&$2+ - $1;' x 2,666KJ 16,666 H $1.;6 K 16,666 - &26,666 - 12,666' H 2,666 Therefore, Transfer price D $1; G $1.;6 H $1).;6.
AACSB: Anal%tic AICPA BB: Critical Thinking AICPA FN: Measurement Learning O!ective: " Level: &ar#
Appendix 12A, Transfer Pricing Cey
). ivision A of
AACSB: Anal%tic AICPA BB: Critical Thinking AICPA FN: Measurement Learning O!ective: " Level: &ar#
Appendix 12A, Transfer Pricing Cey
(. Part W8+ costs the =astern ivision of Ty#le orporation $2; to make-direct materials are $16, direct la#or is $+, varia#le manufacturing overhead is $9, and fixed manufacturing overhead is $". The =astern ivision can sell all of Part W8+ they can make to other companies for $"6. The Western ivision of Ty#le orporation can use Part W8+ in one of its products. What is the lo*est transfer price at *hich the =astern ivision *ould #e *illing to sell Part W8+ to the entral ivision A. $"6 /. $2; . $2" . $2) &ote5 ue limitations in fonts and *ord processing soft*are, D and E signs must #e used in this solution rather than Fgreater than or e:ual toF and Fless than or e:ual toF signs.' rom the perspective of the selling division, profits *ould increase as a result of the transfer if and only if5 Transfer price D 7aria#le cost G !pportunity cost The opportunity cost is the contri#ution margin on the lost sales, divided #y the num#er of units transferred5 !pportunity cost H $"6 - $16 - $+ - $9 H $) each Therefore, Transfer price D $2" G $) H $"6.
AACSB: Anal%tic AICPA BB: Critical Thinking AICPA FN: Measurement Learning O!ective: " Level: $as%
Appendix 12A, Transfer Pricing Cey
ivision A makes a part *ith the follo*ing characteristics5
ivision /, another division of the same company, *ould like to purchase %,66 6 units of the part each period from ivision A. ivision / is no* purchasing these parts from an outside supplier at a price of $2+ each.
9. uppose that ivision A has ample idle capacity to handle all of ivision />s needs *ithout any increase in fixed costs and *ithout cutting into sales to outside customers. ?f ivision / continues to purchase parts from an outside supplier rather than from ivision A, the company as a *hole *ill #e5 A. *orse off #y $"6,666 each period. /. *orse off #y $16,666 each period. . #etter off #y $1%,666 each period. . *orse off #y $"%,666 each period. Purchasing from outside supplier costs $; more than producing internally *ould &$2+ - $1('. The total for all %,666 parts is $; x %,666 H $"6,666. Therefore, if the company continues to purchase from the outside supplier, it *ill #e $"6,666 *orse off.
AACSB: Anal%tic AICPA BB: Critical Thinking AICPA FN: Measurement Learning O!ective: " Level: Me#ium
Appendix 12A, Transfer Pricing Cey
16. uppose that ivision A is operating at capacity and can sell all of its output to outside customers at its usual selling price. ?f ivision A sells the parts to ivision / at $2+ per unit &ivision />s outside price', the company as a *hole *ill #e5 A. #etter off #y $%,666 each period. /. *orse off #y $1%,666 each period. C. *orse off #y $%,666 each period. . There *ill #e no change in the status of the company as a *hole. ince the company>s selling the units currently for $2%, if they sell internally for $2+, they *ill #e *orse off #y $1 per unit, or $%,666 in total &$1 x %,666'.
AACSB: Anal%tic AICPA BB: Critical Thinking AICPA FN: Measurement Learning O!ective: " Level: Me#ium
Appendix 12A, Transfer Pricing Cey
The /uffalo ivision of Alfred Products, ?nc. has the capacity to manufacture 16,666 units of a certain part each year. This part sells for $12 per unit on the outside market. The Al#any ivision of Alfred Products, ?nc. #uys ",666 units of this part each year from /uffalo, and thus far has paid the market price. s costs relating to the product are5
11. uppose that the Al#any ivision #uys the ",666 units from the outside supplier at a p rice of $16 per unit. Also suppose that the /uffalo ivision can sell only ;,666 units o n the outside market. This decision *ould have no effect on total fixed costs. As a result of Al#any shifting its purchases to the outside supplier, the yearly net operating income of Alfred Products, ?nc. as a *hole *ill5 A. decrease #y $9,666 /. increase #y $9,666 . decrease #y $;,666 . increase #y $;,666 The company *ould pay an additional $" per unit #y purchasing from the outside &$16 - $)', or $9,666 in total &$" x ",666', causing the overall profit to decrease #y $9,666.
AACSB: Anal%tic AICPA BB: Critical Thinking AICPA FN: Measurement Learning O!ective: " Level: &ar#
Appendix 12A, Transfer Pricing Cey
12. uppose that the Al#any ivision #uys the ",666 units from the outside supplier at a price of $16 per unit. Also suppose that the /uffalo ivision can sell 16,666 units on the outside market. As a result of Al#any shifting its purchases to the outside supplier, the yearly net operating income of Alfred Products, ?nc. as a *hole *ill5 A. decrease #y $9,666 /. increase #y $9,666 . decrease #y $;,666 D. increase #y $;,666 ?ncremental revenue on units sold H &$12 - $16' x ",666 H $;,666 increase in net operating income.
AACSB: Anal%tic AICPA BB: Critical Thinking AICPA FN: Measurement Learning O!ective: " Level: &ar#
Appendix 12A, Transfer Pricing Cey
The 7ega ivision of Ace ompany makes *heels *hich can either #e sold to outside customers or transferred to the Walsh ivision of Ace ompany. @ast month the Walsh ivision #ought all +,666 of its *heels from the 7ega ivision for $+2 each. The follo*ing data are availa#le from last month>s operations for the 7ega ompany5
?f the 7ega ivision sells *heels to the Walsh ivision, 7ega can avoid $2 per *heel in sales commissions. An outside supplier has offered to supply *heels to the Walsh ivision for $+1 each.
1". uppose that the 7ega ivision has ample idle capacity so that transfers to the Walsh ivision *ould not cut into its sales to outside customers. What should #e the lo*est accepta#le transfer price from the perspective of the 7ega ivision A. $2( /. $"6 . $+2 . $+% &ote5 ue limitations in fonts and *ord processing soft*are, D and E signs must #e used in this solution rather than Fgreater than or e:ual toF and Fless than or e:ual toF signs.' rom the perspective of the selling division, profits *ould increase as a result of the transfer if and only if5 Transfer price D 7aria#le cost G !pportunity cost The opportunity cost 0ero if there is excess capacity. Therefore, the minimum accepta#le transfer D &$"6 - $2' H $2(.
AACSB: Anal%tic AICPA BB: Critical Thinking AICPA FN: Measurement Learning O!ective: " Level: Me#ium
Appendix 12A, Transfer Pricing Cey
1+. What is the maximum price per *heel that Walsh should #e *illing to pay 7ega A. $2( B. $+1 . $+2 . $+% The maximum price is the price at *hich the purchasing division can purchase the units.
AACSB: Anal%tic AICPA BB: Critical Thinking AICPA FN: Measurement Learning O!ective: " Level: Me#ium
1%. uppose that 7ega can sell 9,666 *heels each month to outside consumers, so transfers to the Walsh ivision cut into outside sales. What should #e the lo*est accepta#le transfer price from the perspective of the 7ega ivision A. $2(.66 B. $"1.)% . $+1.66 . $+2.66 &ote5 ue limitations in fonts and *ord processing soft*are, D and E signs must #e used in this solution rather than Fgreater than or e:ual toF and Fless than or e:ual toF signs.' rom the perspective of the selling division, profits *ould increase as a result of the transfer if and only if5 Transfer price D 7aria#le cost G !pportunity cost The opportunity cost is the contri#ution margin on the lost sales, divided #y the num#er of units transferred5 !pportunity cost H I&$+% - $"6' x 1,666KJ +,666 H $".)% K +,666 - &12,666 - 9,666' H 1,666 Therefore, Transfer price D &$"6 - $2' G $".)% H $"1.)%.
AACSB: Anal%tic AICPA BB: Critical Thinking AICPA FN: Measurement Learning O!ective: " Level: &ar#
Appendix 12A, Transfer Pricing Cey
The ommando otorcycle ompany has decided to #ecome decentrali0ed and split its operations into t*o divisions, otor and Assem#ly. /oth divisions *ill #e treated as investment centers. The otor ivision is currently operating at its capacity of "6,666 motors per year. otor>s costs at this level of production are as follo*s5
otor sells 16,666 of its motors to a sno*mo#ile manufacturer and transfers the remaining 26,666 motors to the Assem#ly ivision. The t*o divisions are currently in a de#ate over an appropriate transfer price to charge for the 26,666 motors. otor currently charges the sno*mo#ile manufacturer $266 per motor. The final selling price of the motorcycles that ommando produces is $),266 per cycle. This selling price *ill not change regardless of the transfer price charged #et*een the t*o divisions. otor has no market for the 26,666 motors if they are not transferred to Assem#ly. 7aria#le selling and administrative costs are incurred on #oth internal and external sales.
1;. According to the formula in the text, *hat is the lo*est accepta#le transfer price from the vie*point of the selling division A. $"% per motor B. $16% per motor . $12% per motor . $1+6 per motor &ote5 ue limitations in fonts and *ord processing soft*are, D and E signs must #e used in this solution rather than Fgreater than or e:ual toF and Fless than or e:ual toF signs.' rom the perspective of the selling division, profits *ould increase as a result of the transfer if and only if5 Transfer price D 7aria#le cost G !pportunity cost There *ould #e no lost sales as a result of this transfer so the opportunity cost *ould #e 0ero. Therefore, Transfer price D &$"6 G $%6 G $26 G $%' H $16%.
AACSB: Anal%tic AICPA BB: Critical Thinking AICPA FN: Measurement Learning O!ective: " Level: Me#ium
Appendix 12A, Transfer Pricing Cey
1). Assume that the Assem#ly ivision *ants to also purchase the additional 16,666 motors that the otor ivision currently sells to the sno*mo#ile manufacturer. According to the formula in the text, *hat is the lo*est accepta#le transfer price for these additional motors from the vie*point of the selling division A. $266 per motor /. $16% per motor . $12% per motor . $1+6 per motor &ote5 ue limitations in fonts and *ord processing soft*are, D and E signs must #e used in this solution rather than Fgreater than or e:ual toF and Fless than or e:ual toF signs.' rom the perspective of the selling division, profits *ould increase as a result of the transfer if and only if5 Transfer price D 7aria#le cost G !pportunity cost The opportunity cost is the contri#ution margin on the lost sales, divided #y the num#er of units transferred5 !pportunity cost H I&$266 - $"6 - $%6 - $26 - $%' x 16,666J 16,666 H $9% Therefore, Transfer price D &$"6 G $%6 G $26 G $%' G $9% H $266.
AACSB: Anal%tic AICPA BB: Critical Thinking AICPA FN: Measurement Learning O!ective: " Level: Me#ium
Essay Questions
1(. The Pump ivision of ord o. produces pumps *hich it sells for $26 each to outside customers. The pump ivision>s cost per pump, #ased on normal volume of %66,666 units per period, is sho*n #elo*5
ord has recently purchased a small company *hich makes automatic dish*ashers. This ne* company is presently purchasing 166,666 pumps each year from another manufacturer. ince the Pump ivision has a capacity of ;66,666 pumps per year and is no* selling only %66,666 pumps to outside customers, management *ould like the ne* ish*asher ivision to #egin purchasing its pumps internally. The ish*asher ivision is no* paying $26 per pump, less a 16B :uantity discount. The Pump ivision could avoid $1 per unit in varia#le costs on any sales to the ish*asher ivision. 3e:uired5
Appendix 12A, Transfer Pricing Cey
a. Treating each division as an independent profit center, *ithin *hat price range should the internal sales price fall #. o* assume that the Pump ivision is selling ;66,666 pumps per year on the outside. etermine the appropriate transfer price. ho* all computations. &ote5 ue limitations in fonts and *ord processing soft*are, D and E signs must #e used in this solution rather than Fgreater than or e:ual toF and Fless than or e:ual toF signs.' a. urrent price #eing paid #y the ish*ater ivision5 $26 - &16B x $26' H $1( Lsing the transfer pricing formula, the minimum transfer price is5 Transfer Price D 7aria#le osts G @ost ontri#ution argin D $11 G $6 H $11 Therefore, the transfer price *ould #e #et*een $11 and $1( per unit. #. ?n this case there is no idle capacity. Therefore, the appropriate transfer price *ould #e5 Transfer Price D 7aria#le osts G @ost ontri#ution arginD $11 G &$26 - $12' H $11 G $( H $19
AACSB: Anal%tic AICPA BB: Critical Thinking AICPA FN: Measurement Learning O!ective: " Level: Me#ium
Appendix 12A, Transfer Pricing Cey
19. istman orporation has a Parts ivision that does *ork for other ivisions in the company as *ell as for outside customers. The company>s achine Products ivision has asked the Parts ivision to provide it *ith 16,666 special parts each year. The special parts *ould re:uire $1%.66 per unit in varia#le production costs. The achine Products ivision has a #id from an outside supplier for the special parts at $29.66 per unit. ?n order to have time and space to produce the special part, the Parts ivision *ould have to cut #ack production of another part-the <%; that it presently is producing. The <%; sells for $"2.66 per unit, and re:uires $19.66 per unit in varia#le production costs. Packaging and shipping costs of the <%; are $".66 per unit. Packaging and shipping costs for the ne* special part *ould #e only $1.66 per unit. The Parts ivision is no* producing and selling +6,666 units of the <%; each year. Production and sales of the <%; *ould drop #y 26B if the ne* special part is produced for the achine Products ivision. 3e:uired5 a. What is the range of transfer prices *ithin *hich #oth the ivisions> profits *ould increase as a result of agreeing to the transfer of 16,666 special parts per year from the Parts ivision to the achine Products ivision #. ?s it in the #est interests of istman orporation for this transfer to take place =xplain. &ote5 ue limitations in fonts and *ord processing soft*are, D and E signs must #e used in this solution rather than Fgreater than or e:ual toF and Fless than or e:ual toF signs.' a. rom the perspective of the Parts ivision, profits *ould increase as a result of the transfer if and only if5 Transfer price D 7aria#le cost G !pportunity cost The opportunity cost is the contri#ution margin on the lost sales, divided #y the num#er of units transferred5 !pportunity cost H I&$"2.66-$19.66-$".66'x(,666KJM16,666 H $(.66 K 26Bx+6,666 H (,666 Therefore, Transfer price D &$1%.66G$1.66'G$(.66 H $2+.66. rom the vie*point of the achine Products ivision, the transfer price must #e less than the cost of #uying the units from the outside supplier. Therefore, Transfer price E $29.66. om#ining the t*o re:uirements, *e get the follo*ing range of transfer prices5 $2+.66 E Transfer price E $29.66. #. 8es, the transfer should take place. rom the vie*point of the entire company, the cost of transferring the units *ithin the company is $2+.66, #ut the cost of purchasing the special parts from the outside supplier is $29.66. Therefore, the company>s profits increase on average #y $%.66 for each of the special parts that is transferred *ithin the company, even though this *ould cut into production and sales of another product.
Appendix 12A, Transfer Pricing Cey AACSB: Anal%tic AICPA BB: Critical Thinking AICPA FN: Measurement Learning O!ective: " Level: &ar#
Appendix 12A, Transfer Pricing Cey
26. ivision has asked ivision of the same company to supply it *ith 16,666 units of part P)(2 this year to use in one of its products. ivision has received a #id from an outside supplier for the parts at a price of $2%.66 per unit. ivision has the capacity to produce %6,666 units of part P)(2 per year. ivision expects to sell +;,666 units of part P)(2 to outside customers this year at a price of $2;.66 per unit. To fill the order from ivision , ivision *ould have to cut #ack its sales to outside customers. ivision produces part P)(2 at a varia#le cost of $1).66 per unit. The cost of packing and shipping the parts for outside customers is $1.66 per unit. These packing and shipping costs *ould not have to #e incurred on sales of the parts to ivision . 3e:uired5 a. What is the range of transfer prices *ithin *hich #oth the ivisions> profits *ould increase as a result of agreeing to the transfer of 16,666 parts this year from ivision to ivision #. ?s it in the #est interests of the overall company for this transfer to take place =xplain. &ote5 ue limitations in fonts and *ord processing soft*are, D and E signs must #e used in this solution rather than Fgreater than or e:ual toF and Fless than or e:ual toF signs.' a. rom the perspective of ivision , profits *ould increase as a result of the transfer if and only if5 Transfer price D 7aria#le cost G !pportunity cost The opportunity cost is the contri#ution margin on the lost sales, divided #y the num#er of units transferred5 !pportunity cost H I&$2;.66 - $1).66 - $1.66' x ;,666KJM16,666 H $+.(6
rom the vie*point of ivision , the transfer price must #e less than the cost of #uying the units from the outside supplier. Therefore, Transfer price E $2%.66. om#ining the t*o re:uirements, *e get the follo*ing range of transfer prices5 $21.(6 E Transfer price E $2%.66. #. 8es, the transfer should take place. rom the vie*point of the entire company, the cost of transferring the units *ithin the company is $21.(6, #ut the cost of purchasing them from the outside supplier is $2%.66. Therefore, the company>s profits increase on average #y $".26 for each of the special parts that is transferred *ithin the company.
