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Exercise 11-13 (Algo) Transfer Pricing Situations [LO11-3]

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In each of the cases below, assume Division X has a product that can be sold either to outside customers or to Division Y of the same company for use in its production process. The managers of the divisions are evaluated based on their divisional profits.

	Case
		A		B
Division X:
Capacity in units		91,000		100,000
Number of units being sold to outside customers		91,000		77,000
Selling price per unit to outside customers	$	56	$	33
Variable costs per unit	$	27	$	16
Fixed costs per unit (based on capacity)	$	7	$	4
Division Y:
Number of units needed for production		23,000		23,000
Purchase price per unit now being paid to an outside supplier	$	50	$	32

Exercise 11-13 (Algo) Part 1

Required:

1. Refer to the data in case A above. Assume in this case that $4 per unit in variable selling costs can be avoided on intracompany sales.

a. What is the lowest acceptable transfer price from the perspective of the selling division?

b. What is the highest acceptable transfer price from the perspective of the buying division?

c. What is the range of acceptable transfer prices (if any) between the two divisions? If the managers are free to negotiate and make decisions on their own, will a transfer probably take place?