EXERCISE 11A–1 Transfer Pricing Situations [LO5] In each of the cases below, assume that Division…
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? Explain.
