Cornerstone Exercise 10.6 Determining Market-Based and Negotiated Transfer Price

Question

Cornerstone Exercise 10.6
Determining Market-Based and Negotiated Transfer Prices

Clanahan, Inc., has a number of divisions around the world. Division US (in the United States) purchases a component from Division N (in the Netherlands). The component can be purchased externally for $24.50 each. The freight and insurance on the item amount to $2.45; however, commissions of $2.00 need not be paid.

Required:

Round your answers to the nearest cent.

1. Calculate the transfer price using the comparable uncontrolled price method.
$  per unit

2. Suppose that there is no outside market for the component that Division N transfers to Division US. Further assume that Division US sells the component for $26.00 and normally receives a 30 percent markup on cost of goods sold. Calculate the transfer price using the resale price method.
$  per unit

3. Now assume that there is no external market for the component transferred from Division N to Division US, and that the component is used in the manufacture of another product (i.e., it is not resold). Calculate the transfer price using the cost-plus method. Further assume that Division N’s manufacturing cost for the component is $18.20.
$  per unit

4. What if commissions avoided were $2.25 per unit?

What would be the comparable uncontrolled price?
$  per unit

What affect would this have on the resale price?
- Select your answer -IncreaseDecreaseUnaffectedItem 5

What affect would this have on the cost-plus price?
- Select your answer -IncreaseDecreaseUnaffected

Explanation / Answer

1. Comparable Uncontrolled price method = Purchase price of product externally + Commissions to be paid

= $24.50 + $2 = $26.50 per unit.

NOTE: Freight and insurance will be occurred in both the cases whether purchase internally or externally and is therefore, ignored.

2. Transfer Price in resale method = Sale per unit to external market - markup on goods sold

= $26 - (26 / 130% x 30%) = $20 per unit.

3. Transfer Price in case of Cost plus method = Cost of Manufacture by related party + Markup on cost of goods sold

= $18.20 + 0 = $18.20 per unit

Since there is no externam demand of product, no Markup on goods is considered for calculation.

4. a. Comparable Uncontrolled Price = 24.50 + $2.25 = $26.75 per unit.

b. Resale Price- Since resale price method does not consider the sales commission, therefore it will remain unaffected.

c. Cost Plus price method - Unaffected.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.