The Pertinent Transfer Price The XYZ Company has two divisions, A and B.

the Sa By ee ee For one of the company’s products, Division A produces a major subassembly and Division B incorporates this subassembly into the final product. There is a market for both the subassembly and the final product, and the divisions have been delegated profit responsibility. The transfer price for “the subassembly has been set at long-run average market price.

The following data are available to each division:

Estimated selling price for final product $300 Long-run average selling price for intermediate product —— > 200 0 Outlay cost for completion in Division B 150 —
Outlay cost in Division A 4207 The manager of Division B has made the following calculation:
Selling price—final product $300 Transferred-in cost (market) $200 Outlay cost for completion 150 _350_ Contribution (loss) on product $ (50)

. Should transfers be made to Division B if there is no excess capacity in Division A? Is market price the correct transfer price?
. Assume that Division A’s maximum capacity for this product is 1,000 units per month and sales to the intermediate market are presently 800 units. Should 200 units be transferred to Division B? At what relevant transfer price? Assume for a variety of reasons that A will maintain the $200 selling price indefinitely;
that is, A is not considering cutting the price to outsiders regardless of the presence of idle capacity.
. Suppose A quoted a transfer price of $150 for up to 200 units. What would be the contribution to the firm as a whole if the transfer were made? As manager of B, would you be inclined to buy at $150? lop1