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Home / Questions / PROBLEM 11A 5 Basic Transfer Pricing LO5 In cases 3 below assume that Division A has a...

# PROBLEM 11A 5 Basic Transfer Pricing LO5 In cases 3 below assume that Division A has a product that can be sold either to Division B of the same company or to outside customers The managers of

PROBLEM 11A–5 Basic Transfer Pricing [LO5]

In cases 1-3 below, assume that Division A has a product that can be sold either to Division B of the same company or to outside customers. The managers of both divisions are evaluated based on their own division’s return on investment (ROI). The managers are free to decide if they will par- ticipate in any internal transfers. All transfer prices are negotiated. Treat each case independently.

 Capacity in units . . . . . . . . . . . . . . . . . . . . . . . . Number of units now being sold to outside customers . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000   50,000 300,000   300,000 100,000   75,000 200,000   200,000 Selling price per unit to outside customers . . . . \$100 \$40 \$60 \$45 Variable costs per unit . . . . . . . . . . . . . . . . . . . . \$63 \$19 \$35 \$30 Fixed costs per unit (based on capacity) . . . . . \$25 \$8 \$17 \$6 Division B: Number of units needed annually . . . . . . . . . . . Purchase price now being paid to an outside supplier*  . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000   \$92 70,000   \$39 20,000   \$60 60,000   —

Required:

1.       Refer to case 1. A study has indicated that Division A can avoid \$5 per unit in variable costs on any sales to Division B. Will the managers agree to a transfer, and if so, within what range will the transfer price be? Explain.

2.       Refer to case 2. Assume that Division A can avoid \$4 per unit in variable costs on any sales to Division B.

a.       Would you expect any disagreement between the two divisional managers over what the transfer price should be? Explain.

b.       Assume that Division A offers to sell 70,000 units to Division B for \$38 per unit and that Division B refuses this price. What will be the loss in potential profits for the company as a whole?

3.       Refer to case 3. Assume that Division B is now receiving a 5% price discount from the outside supplier.

a.       Will the managers agree to a transfer? If so, within what range will the transfer price be?

b.       Assume that Division B offers to purchase 20,000 units from Division A at \$52 per unit. If Division A accepts this price, would you expect its ROI to increase, decrease, or remain unchanged? Why?

4.       Refer to case 4. Assume that Division B wants Division A to provide it with 60,000 units of a different product from the one that Division A is now producing. The new product would require \$25 per unit in variable costs and would require that Division A cut back production of its present product by 30,000 units annually. What is the lowest acceptable transfer price from Division A’s perspective?

Jun 27 2020 View more View Less