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Problem 1

This document provides information about the costs, capacities, and transfer pricing considerations for 4 problems between divisions of a company. For problem 1, the acceptable range for the transfer price is between the variable cost of Division 1 (P16) and the price Division 2 pays external suppliers (P29). For problem 2, if Division S sells at full capacity the transfer price range is between Division S's variable cost (P21) and what Division B pays external suppliers (P38). For problem 3, Division A's manager should agree to transfer to Division B at P16 since it exceeds A's opportunity cost of 0. For problem 4, the minimum transfer price from Division A to B is P20, and the minimum selling price for

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Bae Rona
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104 views

Problem 1

This document provides information about the costs, capacities, and transfer pricing considerations for 4 problems between divisions of a company. For problem 1, the acceptable range for the transfer price is between the variable cost of Division 1 (P16) and the price Division 2 pays external suppliers (P29). For problem 2, if Division S sells at full capacity the transfer price range is between Division S's variable cost (P21) and what Division B pays external suppliers (P38). For problem 3, Division A's manager should agree to transfer to Division B at P16 since it exceeds A's opportunity cost of 0. For problem 4, the minimum transfer price from Division A to B is P20, and the minimum selling price for

Uploaded by

Bae Rona
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Problem 1

A company has Division 1 that manufactures and sells its product

as follows:

Capacity in units 100,000

Selling price to outside customers P30

Variable costs per unit P16

Fixed cost per unit (based on capacity) P9

The company has Division 2 that could use Division 1's product in its
production. Division 2 is currently purchasing 10,000 units of
Division 1’s product per year from an overseas supplier at a cost of
P29 per unit.

1. If Division 1 has ample idle capacity to handle Division 2's needs,


what is the acceptable range, if any, for the transfer price between
the two divisions?

Maximum transfer price for buyer is 29 per unit.

Minimum transfer price for seller is 16 per unit.

16 ≤ TP ≤ 29
2. If Division 1 is selling all the units that it can produce to outside
customers, what is the acceptable range, if any, for the
transfer price between the two divisions?

Maximum transfer price for buyer is 29 per unit.

Minimum transfer price for seller is 30 per unit.


[16+(30-16)×10,000/10,000]
3. If Division 1 is selling all of the units that it can produce to outside
customers and that P3 in variable costs can be avoided on transfers
within the company due to reduced selling costs, what is the

acceptable range, if any, for the transfer price between the two
divisions?

Maximum transfer price for buyer is 29 per unit.

Minimum transfer price for seller is 27 per unit.

[(16-3)+(30-16)×10,000/10,000]

Problem 2

A company’s Division S produces a product with cost data as follows:

Selling price per unit on the outside market P40

Variable costs per unit P21

Fixed costs per unit (based on capacity) P9

Capacity in units 60,000

The company’s Division B would begin buying this product of Division S.


Division B is currently purchasing 20,000 units each year from outside at a
cost of P38 per unit.

4. If Division S is currently selling 40,000 units each year to outside market,


what is Division 1’s minimum transfer price?
The Minimum transfer price is 40 per unit.
[21+(40+21)×40,000/40,000)
5. If Division S is currently selling 40,000 units each year to outside market,
what is Division 2’s maximum transfer price?
The maximum transfer price is 38 per unit.
6. With reference to #s 4 & 5, and if left free to negotiate, would each
manager reach an agreement to a transfer price? If yes, what is the
acceptable range for the transfer to take place?
Yes, the acceptable range for the transfer to take place is 31: TP: 38 per
unit.
7. If Division S is currently selling all units it can produce each year to
outside market, what is Division 1’s minimum transfer price?
The Minimum transfer price is 21 per unit.
8. If Division S is currently selling all units it can produce each year to
outside market, what is Division 2’s maximum transfer price?
The maximum transfer price is 38 per unit.
9. With reference to #s 7 & 8, and if left free to negotiate, would each
manager reach an agreement to a transfer price? Why?
Yes, assuming that the managers understand their own businesses and
they are cooperative.

10. With reference to #s 7 & 8, and from the standpoint of the company as a
whole, should a transfer take place? Why/not?
Yes, because the cost of the product transferred is only 21 per unit and
the company saves the 38 per unit cost of the product purchased from the
outside market.

Problem 3

A company has two producing centers, A and B. Department A has a


variable cost of P12 per unit for its products, and a total fixed cost of
P120,000. Department A also has idle capacity for up to 50,000 units per
month. Department B would like to purchase 20,000 units of Department
A’s products per month, but is unable to convince Department A to transfer
units to B at P16. Department A has consistently argued that the market
price of P20 is nonnegotiable.
11. What is A’s opportunity cost of transferring to B as opposed to selling to
outsiders?
0
12. If you were Department A’s manager, would you agree to transfer to
Department B at P16? Why/not?
Yes,

Problem 4

A company presented the following information for its 2 departments in


the past month. Department A is the manufacturing department, whereas,
B is distribution.

Production level of A significantly below capacity

Sales price to B P50 per unit

A’s variable cost P20 per unit

Total fixed cost P120,000

B’s marketing cost 10% of selling price

B’s selling price Market value

13. What’s the minimum transfer price of A to B?


The minimum transfer price of A to B is 20 per unit
14. What’s B’s minimum selling price on A’s products?
The minimum selling price on A's products is 55 per unit.
[(50×0.10)+50]

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