EXERCISE 11A–1 Transfer Pricing Situations [LO5]

In each of the cases below, assume that Division X has a product that can be sold either to outside customers or to Division Y of the same company for use in its production process. The managers of the divisions are evaluated based on their divisional profits.

 

 

 

 

Division X: Capacity in units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	  100,000	  100,000
Number of units being sold to outside customers . . . . . .	100,000	80,000
Selling price per unit to outside customers . . . . . . . . . . .	$50	$35
Variable costs per unit . . . . . . . . . . . . . . . . . . . . . . . . . . .	$30	$20
Fixed costs per unit (based on capacity) . . . . . . . . . . . . .	$8	$6
Division Y: Number of units needed for production . . . . . . . . . . . . . . Purchase price per unit now being paid to an outside supplier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	    20,000   $47	    20,000   $34

 

Required:

1.       Refer to the data in case A above. Assume that $3 per unit in variable selling costs can be avoided on intracompany sales. If the managers are free to negotiate and make decisions on their own, will a transfer take place? If so, within what range will the transfer price fall? Explain.

2.       Refer to the data in case B above. In this case, there will be no savings in variable selling costs on intracompany sales. If the managers are free to negotiate and make decisions on their own, will a transfer take place? If so, within what range will the transfer price fall?