Chapter 11 Handout 3 Examples: Transfer Pricing The Problem: Division A of our c

Question

Chapter 11 Handout 3 Examples: Transfer Pricing The Problem: Division A of our company produces Ratchets and Division B produces Meads. B must have 1 Ratchet to produce 1 Mead. $12/unit $3/unit $28/unit $25,000/year $40,000/year 10,000 units (Ratchets) Division A Variable Production Cost Variable Selling Cost External Selling Price Fixed Selling Expenses Fixed Overhead Production Capacity Variable Production Cost Variable Selling Cost External Purchase Price External Selling Price Production Capacity $60/unit-without ratchet cost $10/unit S26.50 per Ratchet $100 per Mead 3,000 units (Meads) Division B A. Division A transfers 1 ratchet to Division B for $16/unit. What is the Contribution Margin for these transactions (Division A, Division B, Our Company)? B. Now assume that "A" can sell 5,000 ratchets to outside customers. 1) What is A's minimum acceptable transfer price per unit? 2) What is B's maximum acceptable transfer price per unit? 3) What is the range of the transfer price? 4) Is our company better off or worse off? By how much? 5) Suppose the transfer price is $22. How much better off or worse off are A, B and the company? 00 here to search

Explanation / Answer

A. Division A Division B Company 1. Transfer Price 16 Less: Variable production cost 12 Contribution margin 4 2 Trf.price from A 16 External price 26.5 Savings 10.5 3. External purchase priceSaved 26.5 External sale price lost 28 Contribution margin -1.5 B. 1. A's Minimum acceptable transfer price per unit External selling price- seling cost/unit=28-3 25 2. B's maximum acceptable transfer price/unit External purchase price 26.5 3. Range of transfer price 25 to 26.5= 1.5 4. The company will be neither better-off nor worse-off. Ie. Contribution lost as in A 3 above -1.5 Range in internal transfer 26.50-25= 1.5 0 5 A will be worse off by 25-22= 3/unit B will be better-off 26.5-22= 4.5/unit Company will be better off by Ie. Contribution lost as in A 3 above -1.5 Savings in purchase cost26.5-22 4.5 Better off by 3 (per unit) C. 1. A's minimum acceptable trf. price/unit External selling price- seling cost/unit=28-2.25= 25.75 2. B's maximum acceptable transfer price/unit External purchase price 26.5 3. Range of transfer price 25.75-26.5= 0.75 4. A bettet-off by 28-25.75= 2.25 B worse-off 28-26.5= 1.5 Company Ie. Contribution lost as in A 3 above -1.5 Loss in purchase cost 28-26.50= 1.5 Neither Better off nor worse off 0 D. As B 's max. price is 26.5 A can reduce his selling price by (28-26.5)=1.50 ie. From 3 to 1.50 /unit

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