Class activities - Transfer Pricing

1. Fragrance Pty Ltd has two divisions: the Cologne Division and the Bottle Division. The company is decentralised and each division is evaluated as a profit centre. The Bottle Division produces bottles that can be used by the Cologne Division. The Bottle Division's variable manufacturing cost per unit is $2.00 and shipping costs are $0.10 per unit. The Bottle Division's external sales price is $3.00 per unit. No shipping costs are incurred on sales to the Cologne Division. The Cologne Division can purchase similar bottles in the external market for $2.50.

The Bottle Division has sufficient capacity to meet all external market demands in addition to meeting the demands of the Cologne Division. Using the general rule, the minimum transfer price from the Bottle Division to the Cologne Division would be:

A.2.00

B. 2.10

C. 2.50

D.2.90

2. Fragrance Pty Ltd has two divisions: the Cologne Division and the Bottle Division. The company is decentralized and each division is evaluated as a profit center. The Bottle Division produces bottles that can be used by the Cologne Division. The Bottle Division's variable manufacturing cost per unit is $2.00 and shipping costs are $0.10 per unit. The Bottle Division's external sales price is $3.00 per unit. No shipping costs are incurred on sales to the Cologne Division. The Cologne Division can purchase similar bottles in the external market for $2.50.

Assume the Bottle Division has no excess capacity and can sell everything produced externally. Using the general rule, the transfer price from the Bottle Division to the Cologne Division would be:

A.2.10

B.$2.50

C. $2.90

D. $3.00

3. Fragrance Pty Ltd has two divisions: the Cologne Division and the Bottle Division. The company is decentralized and each division is evaluated as a profit center. The Bottle Division produces bottles that can be used by the Cologne Division. The Bottle Division's variable manufacturing cost per unit is $2.00 and shipping costs are $0.10 per unit. The Bottle Division's external sales price is $3.00 per unit. No shipping costs are incurred on sales to the Cologne Division. The Cologne Division can purchase similar bottles in the external market for $2.50.

Assume the Bottle Division has no excess capacity and can sell everything produced externally. What is the maximum amount Cologne Division would be willing to pay for the bottles?

A. $2.00

B. $2.10

C. $2.50

D. $2.90