Combination:

Market-Based and Negotiated Transfer Prices

A company has Selling and Buying Divisions. Selling Division produces a finished product, which is a raw material for Buying Division. The market price is 14. Its cost data:

Variable product cost - 2.50

Fixed cost - 6.50

Total production cost - 9.00

Buying Division needs 30,000 units per year.

Selling Division produces 100,000 units at full capacity.

A. If the company has a transfer pricing that requires transfer at market price, what would the transfer price be?

B. Could both divisions transfer at that price?

C. If negotiated transfer pricing is applied, and Selling Division can avoid 3 of selling and administrative expenses:

1. What's the minimum transfer price? Which division sets this?

2. What's the maximum transfer price? Which division sets this?

D. If excess capacity exists in the Selling Division because it produces only 65,000 units:

1. Which division sets the minimum transfer price? What's the price?

2. Which division sets the maximum transfer price? What's the price?

Cost-Based Transfer Prices

A company has Selling and Buying Divisions. Selling Division produces a finished product, which is a raw material for Buying Division. The market price is 14. Its cost data:

Variable product cost - 2.50

Fixed cost - 6.50

Total production cost - 9.00

Buying Division needs 30,000 units per year.

Selling Division produces 100,000 units at full capacity.

A. If the company has a transfer pricing that requires transfer at full product cost, what would the transfer price be? Will both divisions transfer at that price?

B. If the company has a transfer pricing policy that requires transfer at full cost plus 25%, what would the transfer price be? Will both divisions transfer at that price?

C. If the company has a transfer pricing policy that requires transfer at variable product cost plus a fixed fee of 12/u, what would the transfer price be? Will both divisions transfer at that price?

D. If excess capacity exists in the Selling Division because it produces only 65,000 units and the company policy is that all transfers be at full cost:

1. Which division sets the minimum transfer price? What's the price?

2. Which division sets the maximum transfer price? What's the price?

3. Will both divisions transfer at that price?

with solutions please