Decision on transfer pricing

Materials used by the Instrument Division of Ziegler Inc. are currently purchased from outside suppliers at a cost of $$255$ per unit. However, the same materials are available from the Components Division. The Components Division has unused capacity and can produce the materials needed by the Instrument Division at a variable cost of $$212$ per unit.

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cost of $$212$ per unit.

a$.$ If a transfer price of $$232$ per unit is established and $38,500$ units of materials are transferred, with no reduction in the Components Division's current sales, how much would Zienlar Inc.$\text{'}$s total operating income increase?

b$.$ How much would the Instrument Division's operating income increase? s

c$.$ How much would the Components Division's operating income increase?

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Decision on transfer pricing

Materials used by the Instrument Division of Ziegler Inc, are currently purchased from outside suppliers at a cost of $$375$ per unit. However, the same materials are available from the Components Division. The Components Division has unused capacity and can produce the materials needed by the Instrument Division at a variable cost of $$311$ per unit.

Assume that a transfer price of $$356$ has been established and that $23,900$ units of materials are transferred, with no reduction in the Components Division's current sales.

a$.$ How much would Ziegler Inc.$\text{'}$s to$$al operating income increase?

b$.$ How much would the Instrument Division's operating income increase?

$ $x$

c$.$ How much would the Components Division's operating income increase?

$

$x$

d$.$ Any transfer price will cause the total income of the company to $x,$ as long as the supplier division capacity is toward making materials for products that are ultimately sold to the outside.

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a$-$c$.$ Determine what "difference" should be computed for each part. Is it the difference between the transfer price and variable cost, or the market price and $.$ variable cost, or the market price and transfer cost. Then, multiply the difference by the units transferred.

d$.$ Consider the effect of setting a transfer price outside the acceptable range.

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