Transfer Pricing Problem. Volkswerke is a Swiss subsidiary of a German company. In a normal month, Volkswerke produces 100,000 units of product with a variable cost of SFr12 per unit and fixed costs of SFr8 per unit (based on SFr800,000 of fixed costs allocated to production). These units can be sold in Switzerland for SFr26 per unit or transferred to the German subsidiary for additional processing and sold in a processed form. The selling price processed is DM34. The cost to complete the additional processing is DM6 per unit. The fixed cost of processing is DM300,000. The current exchange rate between francs and marks is one Swiss franc to 0.90 German marks. If the product is not transferred, the German subsidiary would have excess capacity.

Required:

1. Should the Swiss production be transferred to the German subsidiary or sold locally? Explain your answer.

2. Explain how a transfer price could be used to move cash from Switzerland to Germany, assuming Switzerland does not like to see money leave the country.