Determining Market-Based and Negotiated Transfer Prices

Carreker, Inc., has a number of divisions, including the Alamosa Division, producer of surgical blades, and the Tavaris Division, a manufacturer of medical instruments.

Alamosa Division produces a 2.5 cm steel blade that can be used by Tavaris Division in the production of scalpels. The market price of the blade is $22. Cost information for the blade is:

Variable product cost	$ 9.40
Fixed cost	5.30
Total product cost	$14.70

Tavaris needs 20,000 units of the 2.5 cm blade per year. Alamosa Division is at full capacity (85,000 units of the blade).

Required:

1. If Carreker, Inc., has a transfer pricing policy that requires transfer at market price, what would the transfer price be? $ per unit

Do you suppose that Alamosa and Tavaris divisions would choose to transfer at that price? Yes

2. Now suppose that Carreker, Inc., allows negotiated transfer pricing and that Alamosa Division can avoid $1.50 of selling and distribution expense by selling to Tavaris Division. Which division sets the minimum transfer price, and what is it? Round your answers to the nearest cent, if needed. Alamosa $ per unit

Which division sets the maximum transfer price, and what is it? Tavaris $ per unit

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

3. What if Alamosa Division plans to produce and sell only 62,000 units of the 2.5 cm blade next year? Which division sets the minimum transfer price, and what is it? Round your answers to the nearest cent, if needed. Alamosa $ per unit

Which division sets the maximum transfer price, and what is it? Tavaris $ per unit

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