Cornerstone Exercise 10.6 Determining Market-Based and Negotiated Transfer Prices

Clanahan, Inc., has a number of divisions around the world. Division US (in the United States) purchases a component from Division N (in the Netherlands). The component can be purchased externally for $24.50 each. The freight and insurance on the item amount to $2.45; however, commissions of $2.00 need not be paid.

Required:

Round your answers to the nearest cent.

1. Calculate the transfer price using the comparable uncontrolled price method. $ per unit

2. Suppose that there is no outside market for the component that Division N transfers to Division US. Further assume that Division US sells the component for $26.00 and normally receives a 30 percent markup on cost of goods sold. Calculate the transfer price using the resale price method. $ per unit

3. Now assume that there is no external market for the component transferred from Division N to Division US, and that the component is used in the manufacture of another product (i.e., it is not resold). Calculate the transfer price using the cost-plus method. Further assume that Division Ns manufacturing cost for the component is $18.20. $ per unit

4. What if commissions avoided were $2.25 per unit?

What would be the comparable uncontrolled price? $ per unit

What affect would this have on the resale price? - Select your answer -IncreaseDecreaseUnaffectedItem 5

What affect would this have on the cost-plus price? - Select your answer -IncreaseDecreaseUnaffected