This document discusses transfer pricing, which refers to the price charged for goods or services transferred within a company between divisions. It provides information on different approaches to determining transfer prices, including market-based, cost-based, negotiated, and administered prices. It then presents three problems involving divisions within companies and determining appropriate transfer prices from the perspectives of each division and the overall company.
This document discusses transfer pricing, which refers to the price charged for goods or services transferred within a company between divisions. It provides information on different approaches to determining transfer prices, including market-based, cost-based, negotiated, and administered prices. It then presents three problems involving divisions within companies and determining appropriate transfer prices from the perspectives of each division and the overall company.
This document discusses transfer pricing, which refers to the price charged for goods or services transferred within a company between divisions. It provides information on different approaches to determining transfer prices, including market-based, cost-based, negotiated, and administered prices. It then presents three problems involving divisions within companies and determining appropriate transfer prices from the perspectives of each division and the overall company.
This document discusses transfer pricing, which refers to the price charged for goods or services transferred within a company between divisions. It provides information on different approaches to determining transfer prices, including market-based, cost-based, negotiated, and administered prices. It then presents three problems involving divisions within companies and determining appropriate transfer prices from the perspectives of each division and the overall company.
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TRANSFER PRICING
A transfer price is the
price paid for goods or services transferred within an organization. IMPLICATIONS OF TRANSFER PRICING ON MANAGERIAL AREAS •affects the performance evaluation of divisions •affect division managers' incentives to sell goods either internally or externally. APPROACHES ON TRANSFER PRICING •Market-Based Transfer Prices.
•Cost-Based Transfer Prices
•Negotiated Transfer Prices.
•Administered Transfer Prices.
MARKET-BASED TP
•the transfer price is based
on the observable market price for similar goods and services. COST-PLUS TP
•the transfer price is determined
based on the production cost plus a markup if the upstream division wishes to earn a profit on internal sales. NEGOTIATED TP
•upstream and downstream
divisions' managers can negotiate a transfer price that is mutually beneficial for each division. ADMINISTERED TP
•Administered transfer prices
are set by an arbitrator or by a rule or policy. PROBLEM 1 BDR Company’s Audio Division produces a speaker that is widely used by manufacturers of various audio products. Sales and cost data on the speaker follow:
Selling price per unit on the intermediate market P60
Variable cost per unit 42 Fixed costs per unit 8 Capacity in units 25,000
BDR Company has just organized a Hi-Fi Division that could use this speaker in one of its products. The Hi-Fi Division will need 5,000 speakers per year. It has received a quote of P57 per speaker from another manufacturer. BDR Company evaluates divisional managers on the basis of divisional profits. REQUIREMENTS Assume that the Audio Divison is now selling only 20,000 speakers per year to outside customers on the intermediate market. 1. From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division? 2. From the standpoint fo the Hi-Fi Division, what is the highest acceptable transfer price for speakers purchased from the the Audio Division? 3. If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 5,000 speakers from the Audio Divison to the Hi-Fi Division? Why or why not? 4. From the standpoint of the entire company, should the transfer take place? Why or why not? REQUIREMENTS Assume that the Audio Division is selling all of the speakers it can produce to outside customers on the intermediate market. 1. From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division? 2. From the standpoint fo the Hi-Fi Division, what is the highest acceptable transfer price for speakers purchased from the the Audio Division? 3. If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 5,000 speakers from the Audio Divison to the Hi-Fi Division? Why or why not? 4. From the standpoint of the entire company, should the transfer take place? Why or why not? PROBLEM 2 Division X of Charter Corporation makes and sells a single product which is used by manufacturers of fork lift trucks. Presently it sells 12,000 units per year to outside customers at P24 per unit. The annual capacity is 20,000 units and the variable cost to make each unit is P16. Division Y of Charter Corporation would like to buy 10,000 units a year from Division X to use in its products. There would be no cost savings from transferring the units within the company rather than selling them on the outside market. What should be the lowest acceptable transfer price from the perspective of Division X? PROBLEM 3 Division P of Turbo Corporation has the capacity for making 75,000 wheel sets per year and regularly sells 60,000 each year on the outside market. The regular sales price is P100 per wheel set, and the variable production cost per unit is P65. Division Q of Turbo Corporation currently buys 30,000 wheel sets (of the kind made by Division P) yearly from an outside supplier at a price of P90 per wheel set. If Division Q were to buy the 30,000 wheel sets it needs annually from Division P at P87 per wheel set, the change in annual net operating income for the company as a whole, compared to what it is currently, would be:
