APPLY THE CONCEPTS: Determining benefits of negotiated transfer price

Assume that Selling Division and Buying Division are both owned by Overall Corporation. Selling Division sells a product that is used by Buying Division and outside customers. Selling Division has 50,000 units of excess capacity. Selling Division currently sells the product for $35 per unit and Buying Division currently buys 50,000 units of the product from an outside source for $35 per unit. Variable costs of the product are $7, of which $1.75 is the cost of selling the product to an outside customer.

UsingSelling price less avoidable costsas the minimum price, fill in the following formula for the desired transfer price: $33.25< transfer price < $35

UsingVariable costsas the minimum price, fill in the following formula for the desired transfer price: $7< transfer price < $35

Assume there are no avoidable costs with an internal sale (variable costs equal $7) and that Buying Division buys 50,000 units from Selling Division. Complete the table for each transfer price: $30 $14

Transfer Price Transfer Price

Increase in net income of Selling Division $ $

Increase in net income of Buying Division $ $

Increase in net income of Overall Corporation $ $

• Review the transfer price ranges from the Negotiated Price Method section of the problem above.
• Construct an income statement based on the total revenue and costs of the Selling Division in each scenario.
• For the Buying Division, you only need to consider how much its costs go down to purchase the product in each scenario, from what it is currently paying. Its revenue will be the same in either case.
• The benefit to the Overall company will be the sum of the benefits to the Selling and Buying divisions.