Calculating Transfer Price

Burt Inc. has a number of divisions, including the Indian Division, a producer of liquid pumps, and Maple Division, a manufacturer of boat engines.

Indian Division produces the h20-model pump that can be used by Maple Division in the production of motors that regulate the raising and lowering of the boat engine's stern drive unit. The market price of the h20-model is $684, and the full cost of the h20-model is $540.

Required:

1. If Burt has a transfer pricing policy that requires transfer at full cost:

What will the transfer price be? $______________________?

Do you suppose that Indian and Maple divisions will choose to transfer at that price?

Maple Division	chooses to transfer
Indian Division	refuses to transfer

2. If Burt has a transfer pricing policy that requires transfer at market price:

What would the transfer price be? $____________________?

Do you suppose that Indian and Maple divisions would choose to transfer at that price?

Maple Division	chooses to transfer
Indian Division	chooses to transfer

3. Now suppose that Burt allows negotiated transfer pricing and that Indian Division can avoid $120 of selling expense by selling to Maple Division.

Which division sets the minimum transfer price? Indian Division

What is the minimum transfer price? $________________?

Which division sets the maximum transfer price? Maple Division

What is the maximum transfer price? $_______________?

Do you suppose that Indian and Maple divisions would choose to transfer somewhere in the bargaining range? Yes