Glendale Manufacturing is organized into two divisions: Fabrication and Assembly. Components transferred between the two divisions are
Question:
Glendale Manufacturing is organized into two divisions: Fabrication and Assembly. Components transferred between the two divisions are recorded at a predetermined transfer price. Standard variable manufacturing cost per unit in the Fabrication Division is $500. At the present time, this division is working to capacity. Fabrication estimates that the units it produces could be sold on the external market for $650. The product under consideration is viewed as a commodity-type product, with no differentiating features or characteristics.
Required
1. What roles are played by transfer prices? That is, why are transfer prices needed?
2. Use the general transfer-pricing rule presented in the chapter to determine an appropriate transfer price. Why (or in what sense) is the amount you calculated considered an appropriate transfer price?
3. What if the Fabrication Division had excess capacity? How would this change the indicated transfer price? Why is the amount you determined considered an appropriate transfer price?
4. Are there any downsides of using the general transfer-pricing rule to determine the transfer price for internal transfers?
Step by Step Answer:
1 Transfer prices represent the amount that one division subunit of an organization charges another division subunit of the organization for services and products transferred internally Transfer prices serve the following roles a They provide price data ie inputs for evaluating the financial performance of profit centers and investment centers In the absence of such price information regarding internal exchanges there would be no way to assess the income generated by these subunits of the organization By extension we would not be able to calculate financial performance metrics such as ROI RI or Economic Value Added EVA b They provide signals to internal units as to when the firm as a whole is better off by having a producing division sell internally rather than externally c They provide the basis for increasing aftertax cash flow by within limits allowed by law helping to minimize incometaxes and in an international sense tariffs and import duties d They motivate divisional managers to put forth significant effort Thus the transfer price ...View the full answer
Cost management a strategic approach
ISBN: 978-0073526942
5th edition
Authors: Edward J. Blocher, David E. Stout, Gary Cokins
