Determining Market-Based and Negotiated Transfer Prices Carreker, Inc., has a nu

Question

Determining Market-Based and Negotiated Transfer Prices Carreker, Inc., has a number of divisions, including the Alamosa Division, producer of surgical blades, and the Tavaris Division, a manufacturer of medical instruments. Alamosa Division produces a 2.6 cm steel blade that can be used by Tavaris Division in the production of scalpels. The market price of the blade is $21. Cost information for the blade is: Variable product cost Fixed cost $9.70 5.50 $15.20 Total product cost Tavaris needs 15,000 units of the 2.6 cm blade per year. Alamosa Division is at full capacity (90,000 units of the blade). Required: 1. If Carreker, Inc., has a transfer pricing policy that requires transfer at market price, what would the transfer price be? 21 per unit Do you suppose that Alamosa and Tavaris divisions would choose to transfer at that price? Yes Now suppose that Carreker, Inc., allows negotiated transfer pricing and that Alamosa Division can avoid $1.75 of selling and distribution expense by selling to Tavaris Division. Which division sets the minimum transfer price, and what is it? Round your answers to the nearest cent, if needed Alamosa $19.25per unit

Explanation / Answer

Market Price 21.00 Variable Cost 9.70 Fixed Cost 5.50 Total Cost 15.20 Requirement 15000 Capacity(90000) Full Capcity 1 At Market Price 21.00 Per Unit Yes Since market Price is minimum and maximum TP 2 Alamosa Market Price 21.00 Less: Cost Avoided 1.75 Transfer Price 19.25 Yes Since It is the relevant cost incl opportunity cost 3 Capacity 90000 Market available 65000 Idle Capacity 25000 Minimum Transfer Price: Alamosa Only VC Cost Minimum Transfer Price: 9.70 (Since Idle Capacity is available) Maximum Transfer Price: Tavaris 21.00 (Price in External Market) Yes

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